Bell Aliant's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Bell Aliant, (BLIAF)

Bell Aliant, Inc. (OTC:BLIAF) Q3 2013 Results Earnings Call October 31, 2013 12:00 PM ET

Executives

Zeda Redden - Vice President, Investor Relations

Karen Sheriff - President and CEO

Glen LeBlanc - Executive Vice President and CFO

Analysts

Maher Yaghi - Desjardins

Vince Valentini - TD Securities

Greg MacDonald Macquarie

Tim Casey - BMO Capital Markets

Jeff Fan - Scotiabank

Glen Campbell - Bank of America

Dvai Ghose - Canaccord Genuity

Drew McReynolds - RBC

Operator

Good morning, ladies and gentlemen. Welcome to the Bell Aliant, Inc. Conference Call and Webcast. To begin this afternoon’s call, I would like to introduce Zeda Redden, Vice President, Investor Relations. Please go ahead.

Zeda Redden

Thank you, [Adriane], and good morning, everyone. And welcome to Bell Aliant’s Third Quarter 2013 Results Call. Earlier today we issued our news release and our Q3 2013 MD&A and supplementary information package, which are posted on SEDAR and also on our website.

Also posted on our website is the slide presentation that Karen Sheriff, our President and CEO; and Glen LeBlanc, Executive Vice President and Chief Financial Officer, will be taking you through on this call.

As always, we caution you that today’s comments will contain forward-looking statements related to the finances and operations of the company. Several assumptions were made by us in preparing these statements and there are risks and uncertainties that could cause our actual results to be materially different from these forward-looking statements.

Additional information of both these risks and assumptions can be found in the 2012 annual MD&A, as well as our Q1, Q2 and Q3 2013 MD&As, the slide deck that accompanies this presentation, and the news release, all of which are posted on SEDAR and also on our website.

Any forward-looking statements made by Bell Alliant representatives represent expectations as of today and accordingly are subject to change after such time, except as may be required by Canadian securities laws we do not undertake any obligation to update any forward-looking statement whether as a result of new information, future events or otherwise.

We have scheduled the call for up to an hour and following the presentation we will have a question-and-answer period.

And with that, I’ll turn the call over to Karen.

Karen Sheriff

Thank you very much, Zeda, and good afternoon, everybody. As you know, I really like everyone to have enough information, so that there are no big surprises in our results and it looks like all of us did pretty good job forecasting our Q3 results as a revenue and EBITDA performance was pretty much bring on consensus and our unit results were even a bit better than my own expectations.

In terms of highlights for the third quarter, we continue to make great progress on our strategy, we have strong customer loads, we continued our steady Fibre-to-the-home footprint expansion, we have solid cost productivity which served to offset rising cost from our growing FibreOP customer base, we made further headway with our FibreOP wireless TV in the home rollout, we saw more upward movement on interest rates to provide further relief to our pension deficits and we are seeing opportunities in our tax planning scenarios that may create some favorable changes for our cash flow outlook. So all in all I’m feeling pretty positive about our continued progress.

Our strong net customer activations were the biggest highlight of the quarter with improvements across the Board. We had good growth in internet and TV and improved year-over-year trends and that NAS declines from what we saw last quarter.

Fibre-to-the-home is a major contributor to this improvement and the performance we are seeing in our Fibre-to-the-home markets continues to significantly outpace our performance in non-fibre markets. I’m very pleased with our commitment to solid execution and continue to gain confidence that our Fibre-to-the-home strategy is the right one to return us to revenue growth.

As shown on slide four, as we expected our financial results in the third quarter we were bit softer year-over-year than our previous two quarters. Pricing activities that occurred later in 2012 and expense recognition timing difference benefited the year-over-year comparisons of earlier quarters and the drove the softer trends in Q3.

While our internet and TV revenues continued to grow, the growth was lower than prior quarters of this year and our migration quarters not enough to total offset declines in our traditional voice business.

Our third quarter results were also slightly affected by continued aggressive competitor promotional pricing in New Brunswick and Newfoundland. As you can guess by looking at our net add, our response in the marketplace during the quarter most certainly helped our customer activation performance, while the extra loads come with some cost, we see this is a necessary upfront investment to ensure we are loading our Fibre-to-the-home network.

As you can see in our FibreOP results on slide five, we added 19,300 net FibreOP internet customers and 16,300 net FibreOP TV customers in the quarter, both showing double-digit improvement over the third quarter of 2012.

In growing proportion of our FibreOP additions are new to our customers, obviously helping our customer activations and revenue growth more than migrations from our legacy internet and TV services.

We passed 45,000 additional premises with Fibre-to-the-home in the third quarter to now stand at 770,000 premises passed. Almost 70% of the households in Atlantic Canada with the cable telephony alternative are now passed with Fibre-to-the-home and we recently announced expansion to several communities in Northern Ontario.

We continue to expect to reach 800,000 premises by the end of the year. Our overall FibreOp penetration is approximately 22% of total premises passed, up slightly from last quarter, so continuing to increase and still with lots of room for customer growth.

Turning to our internet results, revenues grew 4.8% compared to the same quarter in 2012 with the growth coming from both more customers and higher ARPs. Residential high-speed ARPs was up 3.4% from the same quarter year ago, mainly due to price changes over the last 12 months and continued movement to higher tier bundles.

Our high-speed internet net additions were 11,600 up from 7,500 in Q3 2012. FibreOp customer growth, wholesale customer gains and better performance in DSL markets to the DSL footprint expansion and leveraging of our Bell TV bundle offer a non-fibre markets all of those contributed to give us terrific high-speed internet net adds in the quarter.

Similar to recent quarters, TV continued to be the largest area of revenue growth in the third quarter. As I mentioned, we added 16,300 FibreOP TV customers in the third quarter, bringing total FibreOP TV customers to 142,100 at the end of September.

Our overall IPTV net additions in the quarter were 14,500, slightly less than our FibreOP TV additions largely because FibreOP addition includes some migration from our FTTN Bell Aliant TV service. Total IPTV customers were 163,300 at the end of September, up 52% over Q3 2012.

Turning to voice revenues, as shown on Slide 8, our local and long distance service revenues declined 5.6% and 11.5%, respectively, largely driven by NAS declines of 5.7% from a year earlier. Our net NAS results from the third quarter declined slightly from the same quarter in 2012, significantly improving upon year-over-year trend we experienced in the second quarter.

NAS churn and Fibre-to-the-home markets continues to be considerably lower than churn in non-fibre markets and the gap between the two has been gradually widening. This makes us even more confident that our Fibre-to-the-home strategy is the right path to pursue. So to conclude on Q3, I’m very pleased with the results we’re achieving with our Fibre-to-the-home strategy.

So far this year, we have had the best year-over-year revenue performance we’ve had in several years. And although the third quarter typically has relatively strong customer additions, the levels we achieve in Q3 this year were exceptional.

Looking forward, we expect our year-over-year fourth quarter financial results will be a bit softer again than our experience this quarter, for the same reasons I discussed regarding Q3. However, we still expect our year-over-year 2013 revenue results to compare favorably to our 2012 experience and to be within our 2013 guidance ranges on all metrics.

We still believe that loading our FibreOP network with new customers is the way in which we will turn our revenue trajectory around. Offering long-term promotional discounts for new customers is not the route that I prefer to take. However, in areas of deep promotional discounting, we will match our competitors’ promotional discount, if needed, to maintain adequate customer loads while balancing ARPCs, the way we always do.

We saw great success with our customer loads in Q3 using this approach. We will continue to make our offers very competitive and expand our network where it makes sense economically to achieve steady customer growth.

With the Fibre-to-the-home network we will have in place, we believe we will have the best broadband technology available in a significant portion of our territory, giving us a significant competitive advantage, particularly as customer demand for bandwidth increases. We believe that we will be in the best position to meet that demand and we expect to benefit from it.

So as I have said before there will be bumps along the way as we return to revenue growth. So we are on the right track. It may surprise you that we expected over 40% of our revenues in 2013 will come from our growth product lines, Internet TV, data and wireless, quite a change since we first launched our Fibre-to-the-home strategy.

We will continue to expand our Fibre-to-the-home coverage area and add more customers. And we continue to surprise ourselves with the level of cost reductions that our team is able to mine from our operations. And we expect these opportunities will continue to grow as our fibre penetration rates grow. All of this continues to improve our outlook for the future.

The next time we have one of theses calls, we will be providing our 2014 guidance. As we all know in 2014, we will begin to pay full-year cash taxes and 2014 will also have an extra one-time tax payment. We will also at that time be laying out our plans for further Fibre-to-the-home deployment.

And finally I want to be absolutely clear once again that we have no plans to reduce our dividend. We’re building a network which will strengthen our competitive position for the future and will help ensure sustainability of our dividend.

And with that, I’m going to turn it over to Glen to cover off the remainder of the financial items.

Glen LeBlanc

Thanks Karen and good afternoon, everyone. I’m going to cover our CapEx and free cash flow and then give a brief update on where we stand with our pension funded position. CapEx in the third quarter was down $6 million from the same quarter in 2012. The main reason for the declines were the lower startup costs associated with our expansion into Central Canada and the completion of our 2000 -- and completion in 2012 of some large Fibre-to-the-home transport projects.

Our Fibre-to-the-home footprint in connection cost were essentially flat to the same quarter last year. Although we passed 2000 fewer incremental premises with Fibre-to-the-home in the third quarter of this year compared to last, the cost per home pass was slightly higher as we are now in less densely populated areas.

On the connection side, while we loaded more FibreOP customers onto the network in third quarter of this year compared to last, growing insulation efficiencies enabled us to maintain total connection cost flat compared to the same quarter in 2012.

Ongoing efforts to improve installation efficiencies are now being aided by the gradual move to wireless TV installs and reducing our connection cost per premise. Free cash flow in the quarter was up $32 million from the same quarter a year ago, mainly due to changes in -- changes from -- changes in cash and working capital.

As much of this is driven by the timing of payments, we expect this is largely -- this to largely turn around in the fourth quarter. We continue to expect free cash flow for 2013 to be similar to 2012 within our guidance range of $500 million to $560 million.

Just to touch on pensions, we again saw some small increases in interest rates in the quarter, which help reduced our pension deficit. In addition to the increase in interest rates and despite the associated pressure from bond returns, we have experienced asset returns year-to-date in excess of our targets.

We estimate that our solvency deficit is now in the range of $400 million to $450 million, approximately half of where it was at the end of 2012. We continue to expect that with the lump sum contributions we’ve made in prior years and the ability to use solvency letters of credit, we will not be required to make any significant deficit funding contributions through at least 2015. In addition, we continue to look for and investigate tax planning opportunities that could reduce our expected normal annual cash tax outlays.

We now expect that our ongoing annual cash taxes will be in the range of $110 million to $135 million, down $10 million to $15 million from our previous estimates of $125 million to $145 million, beginning with the 2014 tax year.

So to conclude, we are well on track to achieve results within our 2013 guidance ranges. As we’ve said previously, we expect the second half of 2013 to be less favorable year-over-year than the first of 2013. And as Karen has mentioned, Q4 will be a bit softer again than our experience in the third quarter.

We expect our payout ratio for the year will be within our targeted payout ratio of 75% to 85% of free cash flow. We remain confident that we are on the right path to turn our revenue trajectory around with our Fibre-to-the-home strategy. And as Karen has said, we remain committed to maintaining our dividend, as we complete our Fibre-to-the-home build. We expect our investment in the Fibre-to-the-home will strengthen our business and build even further support for our dividend in the future

And with that, I will open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi - Desjardins

Yes. Thank you. When you guys talked about your IPTV footprint and your pricing strategy last quarter, Karen you mentioned that that you were going to lower your pricing to respond to competitive irrational pricing in the market and that seems to be working with the customer additions reaccelerating in the quarter.

However, we are starting to see some pricing pressure starting to show on topline. Can you talk a little bit about, how deep these discounts are affecting your ARPUs and how long it will take for the new place in New Brunswick to start filtering into your topline and what will be the impact when that will happen in terms of ARPU?

Karen Sheriff

Maher, thank you for the question. I can’t give you specifics on this, but let me backup to find out what it is, we have been doing. If you remember in the second quarter, our loads were a little bit soft and I told you we were holding back a bit and trying to hold our pie. That didn’t mean, we weren’t doing any discounting but we certainly weren’t matching the really aggressive offers that are out in New Brunswick and Newfoundland.

We made the decision relatively early in the third quarter, but it actually made more sense to match the pricing than to hold back. And at the same time I would say -- I can’t even tell you how many offers we test in the marketplace in any given time but it’s a lot. We are pretty rigorous about trying to maximize the ARPCs that we get long-term with the load, so as many loads as we can for the lowest possible costs but we did match. And we are ready to match whenever we have to.

So it’s a pretty blunt instrument and you saw our loads move pretty dramatically in the quarter. Now, one of the big impacts on what you’re seeing on ARPCs in the quarter is actually pricing, because of the pricing profile over the last four quarters. This is our lowest quarter of the year and it impacted Internet, it impacted TV and a little bit on NAS. But mostly, actually was big on local than it was on TV. So that’s the biggest shift you’re seeing in the quarter and if you go back to our ARPCs history over time you will see it bounce around just because of the seasonality and the profile of pricing.

But there is some impact this quarter of the beginning of a bit of softening and a little bit less upward movement on ARPCs. And I expect that -- I can’t tell you how big that is but I expect it to deepen a bit as we move forward and how far it goes will depend on how long those prices are in the marketplace. And we did pull the offer from our advertising in early October and we are out there now often on with different offers, which actually have bigger upfront costs.

We are giving away gifts, which does a number on my cost of acquisition but it’s way better long-term and cost a much less than $99 for 36 months and our loads seem to be holding up as we do that. But I thing, Maher, right now you can expect us to be bobbing and weaving and moving around a lot. I will put $99 for $36 back in ARPC if I think I need it. And we will have to see how it goes.

Maher Yaghi - Desjardins

Okay. Great. And I assume you are going to talk about your capital budget plan in 2014 next quarter, but can you give us a preamble, a little bit about your footprint, how do you see the increase happening in, in terms of pockets of increases during the year? Your initial thoughts about 2014 without being quantitative about it?

Karen Sheriff

I can’t give you much of anything more specific than I have in the past. But I think about it exactly as I have for the last year. The amount of -- we still think the $1 million is the right number, expect to be about $800,000 by the end of this year, not a lot of money required to finish and it’s more operationally driven than anything else. And we’re still working with the operations team and what the optimal thing is to do. And we will let you know a little bit more in February, but this is the same constraint that we had before. How much do we build, how fast we build to optimize our costs, as well as the ability of the team to do what they need to do.

Maher Yaghi - Desjardins

Okay. Thank you.

Operator

Thank you. Our next question is from Vince Valentini from TD Securities. Please go ahead.

Vince Valentini - TD Securities

Yeah. Thanks very much. Two things, one, the commodity tax audit boost you’d mentioned in the MD&A that helped operating costs in the third quarter, is that a big number?

Glen LeBlanc

No, Vince. It’s about 880,000, I think, I actually believe that was unfavorable we mentioned in the MD&A, I believe, there was an audit in the third quarter that costs us about $880,000.

Vince Valentini - TD Securities

Oh! Was negative. Okay. Great. Second, sorry, for a boring pension question, but the value you gave there 400 to 450, that was using what interest rate at what point in time?

Glen LeBlanc

That today’s interest rate, so is up about 70 basis points from where it was at year end. So that’s using today’s September 30th rate. We continue to have strong asset returns and we had another good October.

Vince Valentini - TD Securities

So, is it September 30th or October 31st?

Glen LeBlanc

Well, it would be no material difference, but let say, it’s our quarter end number.

Vince Valentini - TD Securities

Quarter end number. Okay. Last couple things on that, do you have that, obviously, did that factor into new mortality rates that people have been talking about that maybe offset higher discount rates a little bit and do you guys have any indexing for your TV plans?

Glen LeBlanc

We do have indexing and that’s factored as is the mortality rates albeit not very -- it’s not big impact.

Vince Valentini - TD Securities

Okay. Fantastic. Thanks so much.

Glen LeBlanc

You’re welcome, Vince.

Operator

Thank you. Our next question is from Greg MacDonald from Macquarie. Please go ahead.

Greg MacDonald - Macquarie

Thanks. Good afternoon, guys. I wanted to ask a question on access line losses. So generally in line with what the market expected, but what I’m more interested in is kind of the drivers of that, one thing right off the top of my head, is this is a student quarter, September. So could you comment a little bit on whether the numbers themselves, I’m going to draw just a blanket conclusion that you didn’t really see any change in wireless substitution? Can we conclude that, am I safe to conclude that and what else is going on within that line? I’m just trying to get a sense of whether 33,000 is kind of the new norm? Thanks.

Karen Sheriff

It’s a good question, Greg. You are looking for whether or not there is any macro impact in here which is a…

Greg MacDonald - Macquarie

Yeah.

Karen Sheriff

… it’s a good thing to look for, it was a pretty plain normal student quarter, it’s also, the thing that offsets that is when our seasonal outs begin, we have a lot of college folks and it goes in May or June and it starts to come out…

Greg MacDonald - Macquarie

Right.

Karen Sheriff

… in September and then more of them will come out in October, so one goes one way, one goes the other, I don’t -- we did not see a big change in wireless substitution. And a lot of our NAS churn as I said before is driven most heavily where we don’t have fibre and those trends will continue until we can get more fibre out there.

And the real key for us, which I know you guys do as well is to really look at total RGUs and the balance between the new TV and the new internet and the declining NAS. So that’s where we are really focused right now.

Greg MacDonald - Macquarie

Okay. Thanks, Karen. And just a quick follow-on on pricing power, I see revenue slightly missed relative to subscribers on local voice and on long-distance voice and I think that that’s a function of the cable competition dynamic, but could you help me on that?

Karen Sheriff

Keep talking, I’m not sure where you are going.

Greg MacDonald - Macquarie

Okay. So, sorry, it was a slight miss on consensus for local revenues and for long-distance revenues, despite the fact that the access lines were kind of almost exactly in line. If there is a miss on my model, if there is a, like a miss just on rounding error so to speak that could describe it. But I’m wondering if the pricing power is declining in local voice because it’s a legacy product relative to what you have seen in previous quarters?

Karen Sheriff

Got it. Got it. No. There is no -- there is three dynamics in there. First is our, I’ll reiterate what I said before about pricing profile, this was our low quarter and the biggest impacts were on internet and on locals. So, when you are doing -- our price increases don’t come in on all products annually, this is the lowest quarter of the year. So there is an impact there.

The other impact is certainly a bit of pressure from the pricing environment that we are in for sure. And the other thing that happens, Greg, as we push more people in the bundles particularly for the early parts of that when there is a promotion, it depresses ARPs across the board, you get them back later but in a period of high growth there is pressure.

So all that to say there is some pressure on upward movement on ARPs that we expect to continue going forward. But this was an off-pricing quarter which had just as bigger or bigger impact on local.

Greg MacDonald - Macquarie

Okay. That’s very helpful. Thanks, Karen.

Operator

Thank you. Our next question is from Tim Casey from BMO Capital Markets. Please go ahead.

Tim Casey - BMO Capital Markets

Thanks. Karen, just, pardon me, just following up on your comments about how it is a low pricing quarter, you are speaking to the timing of price increases I assume, because if the competitive activity remains robust, we will continue to see this pricing pressure going forward, will we not?

Karen Sheriff

Yeah. That’s correct. We do our price increase in odd months during the course of the year and they are not all annual at the same time. So, every so often like this quarter, we haven’t budget it that way. This is the quarter where the flow-through ended last quarter and new stuff doesn’t start for another quarter.

Tim Casey - BMO Capital Markets

Got it. And just on the competitive dynamic out there, are you able, when you are, I guess, promoting to customers or matching promotions, are you able to determine if you have somebody who is just a program -- a promo hopper, are you able to not bring them in because obviously they would be a lower value customer?

Karen Sheriff

When I -- in my younger days, I used to call them plate spinners. The people that just kind of jump from one thing to the next. They are hard -- they are hard to pick out and we do have cancellation penalties and for some of the offers we put terms in there. So that’s how we try to manage it.

Tim Casey - BMO Capital Markets

Thank you.

Operator

Thank you. Our next question is from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan - Scotiabank

Thanks very much, and good afternoon, everyone. I have got a couple of questions. First, regarding the level of competition, I guess, we all know Rogers is the one that’s really causing this. Given that it’s a relatively small part of their overall footprint, question probably for Karen. Are you concerned that they are kind of subsidizing and using their Ontario businesses essentially to try to put pressure on you guys to slow things down or put some financial pressures on you guys? That’s my first question, then I will go on with the second one after.

Karen Sheriff

Thank you for giving me a break in between the two, Jeff. It’s very hard for me to figure out what it is trying to do because I can’t imagine what they are trying to pressure me to do. This is our bread and butter. We built an extensive really wonderful best-in-class network and we’re now loaded.

So we’re loaded at 140 or we’re loaded at 99. Is it likely that they can hide what happens here within their total numbers, absolutely. Just because this is so small compared to everything else that they do but you guys are all really, really smart and whether you ask me if I think we’re doing well, ask them if you think they are doing well, you guys are really, really smart.

If somebody in the market place is willing to pay $140 to $150, why would you ever charge $99. It just doesn’t make sense to me. And I think overtime -- overtime, I think rationality in pricing and getting what the market will bear will return.

So again I would prefer not to do long-term deeply discounted promotional offers but we’re going to load the network. And I think at the end of the day, the superior product will prevail and we’re going to have one of the best networks in North America.

Jeff Fan - Scotiabank

That makes sense. My second question, probably more bigger picture. When we look at Verizon’s consumer results, they are starting to see some real sustainable decent level of growth…

Karen Sheriff

Yes. Don’t you love it?

Jeff Fan - Scotiabank

…driven by files, especially, but I guess when you look at their mix, over 70% of the revenue is coming from files. I guess, trying to tie it back to you guys, what level of revenue mix from FibreOP, do you think you need to get to in order to get to a sustainable level of revenue and EBITDA growth for the overall business?

Karen Sheriff

Well the -- assume we hit our million and assume we have somewhere around 1.8 million, so right to see about 1.8 million homes that are ultimately competitive, you got to have more than half. 70% would be great but I think you got to have more than half and a million over there. Does that mean it will be easy?

No, but the other benefit they have obviously, they are three years ahead of us, four years ahead of us on penetration. So its not just the footprint, it’s the amount of loads and they are driving, not only really nice revenue growth, they are getting all the cost savings that we all knew, we we’re getting get from fibre and that’s what help sustain us long term. It’s really powerful and they are further ahead on that than I’m.

Jeff Fan - Scotiabank

Right. And just roughly, current mix of FibreOP revenue relative to your total is roughly 25%. Does that sound about right?

Karen Sheriff

Yes, I can’t -- I can’t help you there but if you do some simple math using our loads and kind of average pricing, which you can get of the website, you’ll come close to it.

Jeff Fan - Scotiabank

Okay, thank you.

Karen Sheriff

Its was startling to me, Jeff, when I took a look during the planning process that we’ve been underway now for a couple months getting ready for the under the year that we really are up to 40% gross products, which is a wow, compare to where we were five years ago.

Jeff Fan - Scotiabank

All right. That’s great. Thanks very much.

Karen Sheriff

Thank you.

Operator

Thank you. Our next question is from Glen Campbell from Bank of America. Please go ahead.

Glen Campbell - Bank of America

Yes. Thanks very much. Karen, you said 1 million homes is still the right number, but you’ve also talked about the divergence in churn rates, about wireless TV bringing your install costs down and about the cost of passing homes being really quite well controlled. So why is it the right number? Why isn’t it closer to the 1.8 million?

Karen Sheriff

There comes a point, it’s what happens on some of the areas, Glen, with more buriage. See that’s -- that’s the issue and -- right now we’re in the upper 500’s on cost for home pass and we can offset that with improving cost to connect to stay flat. But as you start to flip the territories that are very heavily buried, the cost of pass -- the cost to pass really starts to explode.

So maybe you can get someday a 1.1 million or 1.2 million, getting to a 1.8 million is going to require some pretty big changes in the way we do buried and in the cost.

Glen Campbell - Bank of America

Okay, fair enough. Thanks. A related question, I mean, the government is pushing towards pick-and-pay, we will call it unbundling of TV channels. You’ve a, I guess, a different kind of bundling than others, with your good/better/best, where the Internet speed, if I understand, is actually tied to the level of programming people want. I mean, do you see an issue in that the level of ARPU you can sustain in a -- let’s say, an unbundled environment might not be the same as what you can sustain with bundling?

Karen Sheriff

Not really. Yes, I don’t -- it’s -- we’re going to wait and see where the government lands. EastLink has already come out with pick-and-pay operationally. We’ve all been through it before. Operationally, it’s kind of brutal. It tends to lead to long phone calls, customers end up not really liking it and maybe the right thing is re-bundling of pick-and-pay, if you know what I mean. I’m not really sure where this will end up.

Frankly, that’s not the highest margin part of my business. The TV part of the business is as long as we keep the code, we’re good.

Glen Campbell - Bank of America

Okay. Thanks. And one last one, if I might. Can you see a point where portions of your network might make sense to actually shut down? I’m thinking of rural areas that might be better served by wireless. I mean, I gather there is some subsidy there, but I’m wondering, does the subsidy actually cover your costs there? And if you extrapolate what’s happening on line trends. Would it make more sense to hand those territories essentially off to Bell and not operate a wireline network there?

Karen Sheriff

Hand them off to Bell. Well I’m dreaming for the day when I can shutdown something. And my focus right now is the thing is we can shutdown within fibre footprint. As you start to move some of the equipment on the edge-out, you start closing down boxes. In slightly more dense areas, I think there is even an opportunity for skipping COs. Glen.

Glen Campbell - Bank of America

Okay.

Karen Sheriff

And then may be not fully shutting them down but significantly scaling them back, the problem in rural is, is it’s not just residential, its business. We’re a full service provider everywhere that we are. I don’t see wireless as a substitute for all of that. The other thing that we have done over the last five years we firmly started treating our remote areas as a segment and I think we’ve done a really good job of slightly improving profitability.

We don’t make a lot of money there but we’re not getting killed quite as badly as we use too. We’re doing it by managing the cost to serve, some of the prices have gone up a little bit. And the other thing that has occurred, I think, appropriately is some of the subsidies that various other governments have provided to help expand Internet footprint. It has helped us to modernize our network.

In fact, this week we finished our Pickle Lake build which is, I don’t, 2000 km of fibre which replace really old awful microwave stuff. And now it’s a great little network that is far more reliable and can actually help us drive a little bit of growth revenue. So my obsession on cost and there will always be a concern in the remote areas but I think our real opportunity just like it is for Verizon is, is underneath fibre.

Glen Campbell - Bank of America

Okay. That’s very helpful. Thank you.

Operator

(Operator Instructions)Our next question is from Dvai Ghose from Canaccord Genuity. Please go ahead.

Dvai Ghose - Canaccord Genuity

Thanks very much, Karen. You were talking about pricing, and you asked why would you price $99 if the family is prepared to pay $140. I’m not saying that Rogers is smart or that their strategy is well thought out, but the obvious answer to your rhetorical question is a regulator, right. Imean, J.P. Blais, the CRTC chair, said just last week, the average Canadian household pays an average of $52 a month for TV services. It looks like nearly $70 for you.

Before factoring telephone, Internet, and wireless, that adds up to $185 a month or over $2,200 annually. TV prices went up by 5% last year when inflation rose by just 1.5%. Look until now you could dismiss regulatory as being really just a wireless risk. I’m wondering whether in light of his comments and comments from Finance Minister Flaherty, you says that TV may have to be regulated because of lack of competition whether you can really expect that sort of pricing going forward?

Karen Sheriff

I think that’s a good question, Dvai, and I’m certainly not enough position to predict what the government wants to do. I think the point I was trying to make which I actually made with the minister was there is a whole lot of room between 99 and 150, and nobody in this country is going to get the kind of technology from fibre. And we won’t be able to afford to expand tons more if you have horribly suppressed prices. Somebody’s got to pay for. We have to pay for it.

And so I don’t think Roger’s motivation in doing what they’re doing has anything to do with whether government may or may not go. I think that’s kind of irrelevant to the discussion and at some point there maybe some regulation that occurs but in the meantime the kind of gap that’s out there is kind of not smart, I don’t think.

Dvai Ghose - Canaccord Genuity

No. Sorry, I was not at all suggesting that Rogers was being smart for the regulator, it is a separate point, I totally agree. Thank you.

Karen Sheriff

You’re welcome.

Operator

Thank you. Our next is from Drew McReynolds from RBC. Please go ahead.

Drew McReynolds - RBC

Yeah. Thanks very much. Just a clarification for you, Glen, just the new annual run rate cash taxes that starts in 2015 you said?

Glen LeBlanc

Yeah. That’s in 2014. So let me just offer some clarity here for you, Drew. We’ve said before that we expect a normal tax here to be in the range of $125 million to $145 million. And we’ve said that ‘14 will be a double taxation year and we given guidance that for ‘13, ‘14 combined will be in the vicinity of $250 million to $300 million range.

The new guidance we’ve provide today is that we -- through some additional tax planning and utilization of CCA classes. We see the future taxes being in the $110 million to $135 million range or an annual $10 million to $15 million savings or lower taxes than we had predicted that will begin in ‘14, but because the range I had out there of $250 million to $300 million is $50 million broad, it doesn’t change that range.

Drew McReynolds - RBC

Okay.

Glen Campbell

But I think the important finger is for us. It’s a great news story. It was $50 million of cash annually that we see taxes -- the cash taxes being lower by.

Drew McReynolds - RBC

Okay. No, no understood. Thanks for that and then just two other questions maybe for you Karen. When people are looking at kind of the -- kind of pending ARPU pressure from promotional activity out there, can you just kind of characterize what kind of cushion you have on the cost structure to absorb some of that pressure? I’m just interested to hear, is it a matter of taking cost out of the legacy cost structure? Or are you beginning to see some of that Fibre-to-the-home related cost efficiencies kick in as well?

Karen Sheriff

Great question. I think we continued to surprise ourselves, because you push us hard as we have on cost. You listen to my buddy, Glen, for a while well who’s team keeps telling me, boy we are getting to a point where, what we do in the future might be small, what we do in the past and we are really starting to see the promise of what fibre is going to do, it’s real. And that is going to help us to reduce our costs.

I think the -- especially if you think about the structural changes as we start to get close to completing or close to completing builds in certain parts of the country, we can deal with the costs underneath that help us to the build. And I think the other thing that’s very clear within our -- just overall overhead structure is there is room, so we continue to surprise ourselves and we may continue to surprise you guys going forward.

Drew McReynolds - RBC

Okay. And then -- my final question. Just you alluded to -- and I think we saw it in the numbers, where outside of fibre-in-the-home footprint you certainly lost less Internet subscribers, and I think in your remarks you alluded to the effectiveness of the DSL and satellite bundle. Can you just kind of elaborate on those comments? And is this kind of lower rate of loss somewhat sustainable going forward?

Karen Sheriff

Well, don’t ever take a single point and project it, never a good idea and always look at the profile. Third quarter, as I said in my comments is always the biggest. We used to call it back-to-school but now call it fall rush, so third quarter is usually our biggest quarter of the year. We may bounce around a little bit as we play with offers and make sure we get the right amount of loads. So you may not see numbers as big as this for sure every single quarter.

The high-speed and satellite bundle continues to do well where we don’t have fibre and all of the offers we are putting together on fibre and the attractiveness of the product itself is continuing to drive it as well. So, I think you should assume, it’ll continue to bounce around. But we are going to be heavily incented to keep our loads in the right direction and make sure we load up the network.

Drew McReynolds - RBC

Okay. Thanks for that, Karen.

Operator

Thank you. We have a follow-up question from Maher Yagi from Desjardins. Please go ahead.

Maher Yagi - Desjardins

Yeah. I just wanted to go back to maybe this pricing environment. I’m just asking you, Karen, maybe, if you can help me out in this. I mean, if I look at what Rogers is doing, could it be because of your own success in gaining the market share quickly in their territory. They’re basically saying -- my downside here, by pricing lower, I’m not going to lose much because I already lost the market share. I’m going to try and push them not to expand their footprint as fast as they were doing. So basically they are protecting future losses in their territory by delaying your investment in extra -- in additional Fibre-to-the-home deployment.

Karen Sheriff

Yeah. It’s hard for me to project what they’re trying to do. Clearly, we had a big impact. We did really well with fibre loads early on and clearly we heard them. But prospectively going forward, it doesn’t matter what happened at the past, it matters what happens going forward.

In fact, I think each of the competitors has said as networks become loaded over time, the rate of loss that they will experience can drop naturally, because at some point we are going to start to decelerate out there in the future.

Additionally, as our churn rates go up where we don’t have fibre the business case gets better. So we actually just opened up some new territories in Newfoundland and they were areas where we are probably going to do anyway but we pulled them forward, because of the delta between what’s happening at fibre and where there’s is not fibre and they are very attractive. So if that were a strategy to try to keep us from doing more foot print, it actually incenses to do more because of the churn rate differences.

Maher Yagi - Desjardins

Would you have expanded those or pushed more quickly those territories, if the pricing in Newfoundland was $99 dollars?

Karen Sheriff

Well, the pricing in Newfoundland is $99 for the competitor.

Maher Yagi - Desjardins

No, but for your own pricing, I mean.

Karen Sheriff

I would’ve done it no matter what because they were territories, they were good territories left to do. And again, I think over time we are going to have a really profitable network. I would’ve done it anyway.

Maher Yagi - Desjardins

Okay. Thank you.

Operator

Thank you. There are no further questions registered at this time, Ms. Redden.

Zeda Redden

Thank you, everyone for joining us today. And if you have any follow-up questions, you know how to get in touch with me and hope you have a good rest of the week.

Operator

Thank you. And the conference call has now ended. Please disconnect your line at this time and we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!