BCE Inc. (BCE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. Welcome to the BCE Q1 2021 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.
Thane Fotopoulos: Thank you, Donna, and good morning to everyone. Also joining me on the call today are Mirko Bibic, BCE's President and CEO, and our CFO, Glen LeBlanc. Before we begin, as usual I’ll draw your attention to our Safe Harbor statement reminding you that today’s slide presentation and remarks made during the call today will include forward-looking information and therefore are subject to risks and uncertainties. Results could differ materially. We disclaim any obligation to update forward-looking statements except as required by law. Please refer to the company's publicly filed documents for more details on assumptions and risks.
Mirko Bibic: Thanks Thane. Good morning everyone. In every successive quarter since the onset of COVID, BCE had delivered sequential quarterly improvement in our operating results and Q1 was no exception. Although the pandemic’s effects are still present, we achieved both consolidated revenue and adjusted EBITDA growth for the first time since Q4 of 2019. This is an important milestone that speaks the stability and resiliency of our operations, our ability to operate effectively under challenging conditions, the strength of our leading broadband network and services and our manangement teams focused execution. We continue to grow broadband market share adding a leading 108,468 total mobile phone, mobile connected device, retail internet and IPTV net subscribers this quarter, an increase of 51% over last year. And with $940 million of free cash flow generated this quarter, we have the financial flexibility with $6.5 billion of available liquidity to drive both our national investment strategy and BCEs higher common share dividend for 2021. Now for a quick update on the progress we are making in advancing our strategic priorities in 2021. Our broadband investment acceleration program is in full swing with over $1 billion in new capital spend in Q1. We equipped another 148,000 locations with either direct fibre or wireless home internet technology this quarter, and another 370,000 are currently under construction, keeping us on track to reach 6.9 million total homes and businesses passed by the end of this year. And as part of our overarching goal to advance how Canadians connect with each other in the world, we've also made several announcements recently to expand broadband connectivity to more rural and remote areas of Canada. These include a partnership with the government of Quebec that will see direct fibre rolled out to 31,000 locations and 100 underserved communities. And an initiative enabled by the CRTCs universal broadband funds to bring faster internet to more than 10,000 homes in Yukon and the Northwest Territories, including Inuvik, which just became the first all fibre community in the Arctic Circle. I'll turn now to wireless. Bell’s 5G network is on course to cover more than 50% of the population by year end nationally. However, success in 5G and IoT leadership depends on multiple ingredients beyond coverage. It's about delivering the fastest speeds, the lowest latency, and flexibility that can only be achieved through extensive cell site fibre ideation and slicing of the network and leveraging network points of presence, such as central offices for multi access edge computing, that support product development. Bell is also the largest B2B provider in Canada benefiting from deep relationships with the biggest Canadian companies that we can service almost anywhere in the country.
Glen LeBlanc: Thank you, Mirko. And good morning everyone. Let me begin on slide seven, a very positive start to the year as we have achieved consolidated revenue and EBITDA growth, despite on-going COVID impacts on our business. All Bell operating segments delivered meaningfully better performance trajectories that drove a 1.2% year-over-year increase in revenue. This translated into an EBITDA increase of 0.5% as higher margin wireless roaming and media advertising revenues have not yet recovered to pre-pandemic levels. Despite higher EBITDA, net earnings were down 6.3%. This was due to severance costs recorded in Q1 for workforce reductions undertaken earlier this year, notably at Bell Media, as well as higher depreciation expense driven by growth in capital assets and accelerated depreciation of 4G network elements as we transition to 5G.
Thane Fotopoulos: Thanks, Glen. So before we do start the Q&A period, just want to remind participants that due to some time constraints this morning because of our annual general meeting, shareholders meeting which is taking place shortly after this call, please limit yourself to one question and a brief follow up so that we can get to as many in the queue as possible. Thank you for that. So Donna, we're ready to take our first question.
Operator: Thank you. And the first question is from Jeff Fan from Scotiabank. Please go ahead.
Jeff Fan: Thank you. Good morning, Mirko. Good morning, Glen. Perhaps the big question that we've been getting a lot in the past week is related to the Rogers and Shaw. And I guess the revelation that BCE was involved. Merkel, I just want to give you maybe an opportunity to address that at a higher level, if you will, perhaps the rationale and whether there is a next best option. And then a very quick follow up perhaps for Glen, Q1 revenue and EBITDA grew year-over-year, even with a difficult comp. I'm just wondering if that was ahead of your expectations going into this year, and whether there's any color that you can give on guidance, it's a wider range than usual. And I know you didn't change your guidance, but do you have any color that you can give given the stronger than expected start? Thanks.
Mirko Bibic: Thanks. Thanks, Jeff. Morning, and thanks for the question. I'm going to keep it I will keep it high level given the nature of the issue. Let me start by saying I feel and I've said this, since I became CEO, I feel good about our current asset mix. And we're well positioned to win in, in a converged era of fibre and 5G networks, 5G IoT mec use cases, the revenue opportunities are going to come with that. I'm really excited about our digital shift in media and digital ad spend monetization that will be able to generate and monetizing big data insights. So I think that's important to mention. I did, I have also said consistently, since I became CEO, because I've been asked this, that we will always look at opportunities that come up and capitalize on the opportunities that makes sense for our shareholders. So the transaction that you referred to in your question, Jeff, it came up, we looked at it, and we decided not to proceed. I'm not going to add really anything beyond what's already in the public domain. Some of the reasons were some of the reasons why we didn't proceed have been reported on, and at this point, it's not our deal. The merging parties have a regulatory process to go through first instance. And while they're doing that, like I've also said, we'll continue to build and we'll continue to position ourselves to be a formidable competitor. I'll leave it at that, Jeff.
Glen LeBlanc: Good morning, Jeff. It's Glen, and your question on Q1, revenue and EBITDA performance in any color I can provide. Look, we're very, very pleased to have had growth in both revenue and EBITDA and if we remember back we are really laughing a quarter where there was minimal COVID impact in Q1 of 2020, it was really Q2 and we started to feel the, the extreme impacts of this pandemic. So to be able to deliver positive top line revenue growth and, and earnings growth. Yes, we're extremely pleased. And I wouldn't say it changes our outlook. We look to the next, three quarters for the remainder of 2021. And we know we're going to face uncertainty and volatility during this pandemic. And let's hope that each and every quarter, our country begins to heal and then our economy starts to perform better. And with that, I think the confidence in, in our operations in the form in our performance of our company is underpinned by the fact that we actually provided guidance this year. Others may not have, but we were very confident in our ability to continue to see sequential improvement, and operational excellence. And I think that's underpinned by firstly, providing guidance, but more importantly, reconfirming it today. So, I think, Jeff, we are extraordinarily pleased with the, with the first quarter and how we came out of the gate and the momentum we can carry into the rest of the year.
Jeff Fan: Great, thank you.
Operator: Thank you. The next question is from Vince Valentini from TD Securities. Please go ahead.
Vince Valentini: Thanks very much. Glen first, can you confirm the 12% internet growth? That would all be service revenue? Correct? None of the product revenue would be in that?
Glen LeBlanc: Yes, correct. That? Yes. That is correct, Vince, I'm just double checking. But yes, no, you're right. That is all service.
Vince Valentini: Okay. I mean, that's an amazing number. I mean, we can see what the subscriber growth is in their ad. So clearly, there's a pretty healthy ARPU gain there. Can you break that down a bit for us? Is there any particular skew by any region, or any particular skew to sort of pricing gains versus people tearing up, versus maybe just less promotional discounting that's flowing through that revenue number?
Glen LeBlanc: You did a pretty damn good job there, Vince. That's exactly. It's all of the above, it's a little bit less promotional activity. I think we're truly seeing consumers realize the value of our products now in this pandemic, and how important it is to have world class internet speeds and, and upgrading to better performance products. It is happening across our entire footprint. Wherever, we're offering services. So yes, we're extremely pleased with the 12%. But it is I can't give you any more granularity than the areas that you hit on. But there it's all of the above.
Vince Valentini: Good enough. Thank you.
Glen LeBlanc: Thank you, Vince.
Operator: Thank you. The next question is from Drew McReynolds from RBC Capital Markets. Please go ahead.
Drew McReynolds: Yes, thanks. Thanks. Good morning. Mirko, I love to get your thoughts on the outcome of the wireless review while we have you here. And maybe as a follow up completely different the digital transformation at Bell Media, you alluded to 70% of revenue now digital. Is there, some kind of roadmap or, kind of forward looking digital contribution to revenue that you're willing to share? If not just maybe talk to, some of the key leaders of driving that digital contribution higher. Thank you.
Mirko Bibic: Thanks Drew. So on the on the regulatory decision. Everyone knows what our position has been quite consistently over time and including throughout this kind of last proceeding. Evidence and the facts on the ground, easily would have supported the decision to state of course, with no envy and overtime mandate. So I think is important to say that. But, that said, given the range of potential NVNO approaches that had been considered, the CRTC did at least lay out in a decision and approach that is, in a sense, consistent with our traditional facilities based policies. A lot of details to work through, though, Drew so we'll do that, of course over time, and we're going to continue to, to assess implications of the decision. And like we said, the first day, right out of the gates when the decision came out, as we do the regulatory work that we need to do. First and foremost, we're going to continue to be focused on our customers, and that's about delivering the highest quality networks by delivering a wide variety of plans and continuing to deliver ever better customer experience that we can continue to generate the results that that we're seeing. On media, I'm really, really pleased with, with how well we're pivoting towards a digital first approach to the business. And really, I can’t really unpack at this at this stage for you Drew too much of the key drivers there, it's early stages. But I think, really, it's about bypassing the suite of digital ad inventory that we can make available to advertisers and providing an easy to use one stop platform for advertisers to engage with as they're developing their campaigns. And we talk a lot about SAM, Strategic Asset Management, I think. I think that would be key driver right now of the success in the in the early days of our strategic pivot.
Drew McReynolds: Okay, thank you.
Operator: Thank you. The next question is from David Barden from Bank of America. Please go ahead.
Unidentified Analyst: Good morning, guys. It's Matt sitting in for Dave, thanks for taking the question. Just two if I could. I was wondering if you could talk about some of the underlying trends in financing for wireless as service revenue. And if we should expect going through we're leaving aside roaming. Obviously, everyone can make an assumption about when that will come back. And how strong but, should we assume that service revenue growth is going to be driven going forward both by subscriber growth and by underlying ARPU growth. And just secondly, on the comment, Glen, about the contribution holiday on the pension being imminent, is that are you referring are you leading us to believe that this is a 2021 event and is a holiday contemplated in the guidance range that you provided for free cash flow?
Mirko Bibic: So okay, Glen, I'll start first on the on the wireless question. You could supplement as you as you wish on that and then go into the pension question. So about on the wireless side, you can see the that our focus on smartphone loadings is bearing fruit. You can see them in the results there with 33,000 postpaid net ads and up 31,000 year-over-year and, as we de-emphasize tablets, we haven't walked away completely from tablets, but we're focused on profitable tablets and the profitability of our tablet sales have gone up 90% year-over-year. So that's, that's an impressive number. The digital transformation is working, while store traffic continues to be down pretty appreciably given the restrictions, you've seen the gross add numbers, there are other factors speaking to the growth in wireless here, promotional intensities, been fairly rational in Q1, January and February were especially stable. I think handset discounting, acceptable. So positive trajectory there. That's a good sign. And where I see growth going forward, obviously, roaming will come back. Immigration and population growth will continue. When we get through this, there is pent up demand. And with that comes penetration growth. I mentioned the mobile phone strategy 5G monetization on the horizon. And prepaid as well, as I mentioned in my opening remarks, prepaid will come back some of these other factors that I've mentioned improve as we get through COVID. Glen, anything to add and then pension?
Glen LeBlanc: Good morning, Matt. I'll touch on the pension contribution holiday that I alluded to earlier. Look, there's many on this call will know it's been probably 15 or 16 years, I've been coming on these calls talking about the state of our pension deficit, whether that be at Bell Alliance, or here at BCE and all of our plants and to reach this historic milestone where they're all fully funded with something that I wondered if I'd ever seen in my career. When I say imminent, I do not I am not referring to 2021 it will not be this year. It is not in the targets or the guidance we provided. But I see it now in our planning horizon, meaning, in the next 12 months to 24 months, so post 2021. This is now real and it's gone from being a sizable cash flow burden of having to make special contributions for into our pension plan for well over more than a decade to an opportunity that is going to present itself in our planning horizon. So not this year, Matt, but it’s pretty exciting after all of these years to see it literally on the horizon.
Unidentified Analyst: Right, great. Thanks so much.
Glen LeBlanc: Thank you.
Operator: Thank you. The next question is from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.
Aravinda Galappatthige: Good morning. Thanks for taking my question. I wanted to go back to the international revenue growth number obviously very impressive. And you alluded to sort of the upgrade cycle, the trend as subscribers tearing up in terms of the highest speed products just to sort of help us understand how much more running room there is, with respect to that trend, either Mirko or Glen, I was wondering if you can talk about sort of the proportion of subscribers that, perhaps have taken that up still taking speeds under 50 megabits or 25 megabits in particular, your fibre customers, that can obviously easily sort of tear up to its 100, even up to 500. Wanted to get a sense of sort of that upside? Thank you.
Mirko Bibic: I'm not going to break, I'm not going to break down the tearing of our fibre customers on, the various plans, but let me leave it at that this Aravinda there is definitely upside in having customers tear up from the plans they currently are on to plans all the way up to one 1.5 gigabits per second. And, that would come with quite clearly an ARPU bump. And so there we are focused on that. On 90% of our internet subscribers are on unlimited plan. So really the move is to encourage subscribers who are on plan below a gig, let's say that to tier up to higher rate plans and therefore drive higher ARPU.
Glen LeBlanc: Yes, and Aravinda, it’s Glen, just to build on what Mirko said, Our fibre strategy is clear. And that is, is advancing our network, and our fibre to the home footprint faster, 1.7 million total Bell fibre to the home internet subscribers at the end of Q1. That's up 17% year-over-year. And so as we continue to make the necessary investment in rolling fibre out and to bringing world class connectivity to our customers, naturally, they're going to migrate to a better, better speed tier. And that's where a big opportunity still remains for us is to continue to roll out fibre and offer world class internet speeds. So there's I think there's a significant runway in front of us and why this fibre infrastructure investment is so critical.
Mirko Bibic: What factors? I mean, there's three components to it. Right? There's one that Glen just mentioned, as we roll out more fibre, just a natural growth opportunity there for our current fibre subscribers, encouraging them to migrate up to higher rate plans. And of course, there is a cost side. And just the customer experience churn and cost benefits that come that we've talked about before with a broader fibre footprint.
Aravinda Galappatthige: Thank you.
Operator: Thank you. The next question is from Simon Flannery from Morgan Stanley. Please go ahead.
Diego Barajas: Hi, good morning. This is Diego Barajas, filling in for Simon, thank you for taking the questions. Just to follow up on that fibre point, can you just speak to what penetration levels you're seeing in the fibre markets in year one and how you see that trending over time. And then on wireless, you spoke to traffic being down materially in the stores, but still had solid postpaid gross and net ads? And you also spoke to the direct channel? Can you just speak to how you expect that direct channel or online sales? What percentage, you see that making up over time? And maybe any cost benefits there? Thank you.
Mirko Bibic: Okay, thanks. On the fibre question. Again, when we enter when we enter a market and overly fibre, where we didn't have fibre before, so might have had FTTN or ATM, lower speed, DSL technology. And by the way, the same thing goes with wireless home internet, we're seeing we're seeing rapid penetration gains. I'm not going to unpack that. But you can see you can see kind of the top line numbers of the sub games that Glen shared with you the top line revenue gains that we're seeing that, Vince asked us about. So clearly the fibre strategy is working. We're taking strong revenue share. We're taking strong net add share quarter after quarter where we have fibre, I mean, it's the right thing to do to accelerate that plan. When we announced that in February, I was confident than I'm more confident than ever that this is the right strategy. On the wireless side and digital, that we have, we're a lot better than we were a year ago at direct channel sales. So that would be online in the apps and through our call centers. And again, I pointed to the gross increase year-over-year in my opening remarks. That's going to continue. I mean those direct sales are going to continue to be a growing portion of our overall sales and therefore our overall channel mix and it definitely comes with lower COA. It allows us to be more competitive. It does provide a better customer experience in the sense that those customers who want to deal with us in those channels can now do it easily intuitively. And they're happier customer at the end of it. And then of course, the customers who want to continue to deal with us, the retail stores will continue to, to have that benefit, because we're going to continue to lead and traditional retail store distribution. And, the omni channel journey is going to be important that seamless, transitioning between channels is going to be top of mind for us. And we'll give you an exact number. But I will say Diego that year-over-year, total cash channel cost has gone down. And that's largely a function of direct sales and the mix. Now, as retail stores reopen the mix is going to rebalance a bit, but direct sales are going to continue to be a meaningful component of that and growing.
Glen LeBlanc: Just to build on, said Diego, just one brief comment. I've said it before, and I continue to remind everyone again, where we build fibre, we take a disproportionate share of net new ads. It is that simple. It's an every footprint where we build fibre, we have the opportunity to take share, and that continues. So although I won't share with you specifically, what the penetration rate is in the first six to 12 months as is difference by region. What is important is we continue to take a disproportionate share of net new.
Operator: Thank you. And the next question is from . Please go ahead.
Unidentified Analyst: Yes, thanks for taking my questions. Two questions on ARPU growth. We saw we saw a slight change in the methodology for reporting subscribers. It's easier to see the impact on the subscriber front, but so maybe if you can quantify the impact on the ARPU growth, possibly and also on the transition to unlimited. What are where are you in your plans to to transition in terms of where you want to be?
Mirko Bibic: Glen, you want to start first on ARPU?
Glen LeBlanc: Sure. So the ARPU growth that we show now has changed due to our reporting change and removing the connected devices or items like tablets from the from the ARPU calculation, you would have seen historically. If you look back, we restated all of calendar 2021. So that it is comparable, so that the growth rates were not skewed by that, you'll notice that the ARPU jumped I think it's saying it's in the roughly $5 or $6 on an ARPU… Yes, it's about $7 excuse me, but all of that was restated so as to give you clear comparability.
Mirko Bibic: if you go to last year, supplementary versus this year you can see the differences.
Unidentified Analyst: And on, overage, we continue to manage that nicely. I know like I've said before, I'm base management is something we're particularly good at. We're not forced migrating customers, if customers and unlimited plans are available, they're there for those who want them, know that it's there. With 5G, you have to get, you have to take an unlimited plan. We see 60% of those, as I mentioned, who migrate to unlimited plans are migrating up, which is good. And we're well positioned for 5G. I think, I think really for us the spike in transitions from capital plans to unlimited plans will happen when there's a spike in adoption of 5G handsets.
Glen LeBlanc: And as I said in my opening remarks when we look at ARPU and the fact that if you normalize for the sizable impact roaming continues to have in that number is our service revenue number is positive and therefore, big impact on our ARPU is the is the impacts of roaming.
Unidentified Analyst: Thank you.
Glen LeBlanc: You're welcome.
Operator: Thank you. The next question is from David McFadgen from Cormark Securities. Please go ahead.
David McFadgen: Oh, great. Thank you. So you talked earlier, about 60% of your customers have migrated to unlimited data plans. I was just wondering, actually then got higher rate plans. But I was just wondering, where do you stand on the whole journey of getting your postpaid customers over and unlimited plans and just wanting to be give us some ideas to know 50% migrated over to unlimited plans and just sort of some idea there. And then secondly on the pension plan hiatus when you talk about a hiatus and funding in 12 months to 24 months I was just wondering could this be something material, and really help you free cash flow to help you deliver faster? Thank you.
Mirko Bibic: Well now on the first question again with unlimited plans very similar to the answer I gave to -- I have no set target in terms of the pace of migration to unlimited that we're seeking. I'm actually trying to manage the data overage decline in the entire kind of portfolio of services we’re providing now of course, we do have to provide unlimited plans it is, it is good consumer initiative and positions as well for 5G. So that migration at in terms of the Bell subscriber base, that migration will evolve naturally, as customers migrate over to 5G. I did I did say that it's positive that when a customer migrates to unlimited 60% of those are on higher kind of higher rate plans but there is that's parking for a second the data overage impacts, so I’m really trying to manage the data overage decline. I think it's the right thing to do for our shareholders. That data overages, high flow through revenue. And, other than other than providing the suite of plans enhances that customers want no set target. it'll come when it comes, and it'll come when 5G arrives for real.
Glen LeBlanc: Thanks Mirko. And I'll take the pension plan funding question. The size of the prize is your annual current service cost. And if you look at what it tends to be for us of all plans, it's $200 million to $250 million dollars annually. Now, if there's a monthly test, and each plan has to be tested individually, so one plan could be in a contribution holiday state where another may not be but the size of the prize is absolutely material if we consider that. If you were able to have all plans in a state of a contribution holiday it could be upwards of $200 million to $250 million in any one calendar year. So fingers crossed. For now we're just we're extremely pleased that it's no longer requiring cash to be put into the plan and to think about that size opportunity in the future is pretty exciting.
David McFadgen: Okay. Thank you.
Operator: Thank you. There are no further questions registered at this time. I’d like to turn the call back over to Mr. Fotopoulos.
Thane Fotopoulos: Thank you Donna. So, thanks again to everybody for their participation on the call this morning. As usual, I’ll be available throughout the day for any follow up clarifications. So on that, have a great rest of the day and take care, stay safe. Thank you.
Mirko Bibic: Thank everyone. Thank you.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.
