Shaw Communications' (SJR) Management on Q1 2016 Results - Earnings Call Transcript

| About: Shaw Communications (SJR)

Shaw Communications Inc. (NYSE:SJR)

Q1 2016 Results Earnings Conference Call

January 14, 2015, 03:30 PM ET


Jay Mehr - EVP & COO

Trevor English - SVP of Corporate Development & Capital Markets

Vito Culmone - EVP & CFO

Nancy Phillips - Co-Founder & CEO of ViaWest

Barb Williams - EVP & President of Shaw Media


Jeff Fan - Scotiabank

Vince Valentini - TD Securities

Aravinda Galappatthige - Canaccord Genuity

Greg MacDonald - Macquarie

Maher Yaghi - Desjardins Capital Markets

Drew McReynolds - RBC

Tim Casey - BMO

Robert Peters - Credit Suisse


Thank you for standing by. Welcome to the Shaw Communications' First Quarter 2016 Conference Call and Webcast.

Today’s call will be hosted by Mr. Jay Mehr, Executive VP & COO. At this time, all participants are in listen-only mode and the conference is being recorded. Following the presentation, there will be a question-and-answer session. [Operator Instructions]

Before we begin, Management would like to remind listeners that comments made during today’s call will include forward-looking information, and there are risks that actual results could differ materially. Please refer to the company’s publicly filed documents for more details on assumptions and risks.

At this time, I would like to hand the call over to Mr. Mehr. Please go ahead.

Jay Mehr

Great. Thank you, operator, and good afternoon everyone and thank you for joining us today. Regrettably, Brad is unavailable to lead today's investor call as he has this rare case of flu and we wish him a speedy recovery.

In his absence, I'll take you through his prepared remarks and the team will be available for questions. We want to take this opportunity to address this transformational time in our company's journey including the announcement yesterday regarding the sale of Shaw Media to Corus.

We're making some significant advances for all of our stakeholders and I want to discuss Brad's vision for the future. We'll also address the first quarter operating and financial results before we open up for questions.

With me today are members of our Senior Management Team including Vito Culmone, Executive Vice President and Chief Financial Officer; Barb Williams, Executive Vice President and President, Shaw Media; Nancy Phillips, Co-Founder and CEO of ViaWest and Trevor English, Senior Vice President of Corporate Development and Business Planning.

We know from our history that transformation is the result of opportunities and risk coming together and for the past 45 years, Shaw has balanced these elements with more value, more choice and more connectivity to the Canadians.

When you operate in a dynamic, fast pace environment and continuing involving industry, careful consideration must be paid to ensure that we maximize value for all of our stakeholders by creating the proper mix of assets, strategic roadmap and strong execution,

Under Brad's leadership, over the past several months we made announcements and unveiled product initiatives that will enable our customers to thrive in the connected world we live in.

Yesterday we announced the sale of Shaw Media to Corus, a significant milestone for both companies. In conjunction with our WIND announcement, these transactions position Shaw as a leading pure-play connectivity company with a strong growth profile.

Similarly, the acquisition of Shaw Media by Corus creates a powerful integrated media and content company with increased [stay], a strong mix of media properties, significant synergy potential and best-in-class management that is extremely well positioned to succeed and capitalize on opportunities the combination presents.

Through this transaction, Shaw crystallizes an attractive value for Shaw Media representing a significant return since the acquisition of Canwest in 2010.

By maintaining a significant stake in the combined entity, Shaw can also benefit from the upside potential of a much stronger and better positioned Corus. The net proceeds from this sale will be used to fund the WIND acquisition.

If we step back over a year ago, the discussions we're having internally on how to position Shaw for long-term growth. We knew wireless is the part of our future.

The global telecom landscape was quickly evolving, resulting in the convergence between fixed and mobile data consumption. Data has emerged as the key driver for future growth.

The acquisition of WIND was the right decision for Shaw for many reasons, including the substantial and growing wireless opportunity, the improved competitive position of our consolidated business considering the complementary nature of WIND's operating footprint in Western Canada, the addition of an experienced management team and the immediate scale that it provides Shaw.

Scale is an important attribute to succeed in today's competitive landscape not only in wireless, but when you're considering content and media as well. The combination of Shaw Media and Corus provides the additional scale and growth opportunities needed to compete more effectively.

These two transformative decisions were evaluated based on their standalone merit and how to best maximize the value of Shaw's portfolio of assets. This long term and strategic process led to these recent events including the combination of Shaw Media with Corus and our ongoing equity position of bigger and stronger integrated media company.

On behalf of Brad, I would like to thank the members of the Special Committee of Independent Directors of Shaw who own for the Shaw Media transaction to invest a considerable time and effort in the review and negotiation of this transaction.

While these transactions are being evaluated and negotiated, we've not been sitting still when it comes to the rest of our business.

At the Consumer Electronics Show in Las Vegas last week we unveiled FreeRange TV, a breakthrough mobile viewing experience that provides exactly what customers are looking for in a mobile content experience. A visually appealing interface, easy to use navigation and on-the-go access to the same programming choices they have at home.

This marks the first major milestone in our agreement with Comcast and is already available to our entire base of 2.6 million video customers. Throughout fiscal 2016, we'll be launching additional products as part of the Comcast and X1 partnership that are focused on significantly changing the video experience to our customers.

Within our business network segment, we introduced additional products for our growing portfolio of services, SmartWiFi and SmartSecurity. The entire Smart suite of products with the power and capacity to manage WiFi and network security solutions to our customers that were previously unavailable to the emerging small and medium sized businesses.

Built on the Cisco Meraki platform, business network services provides innovative products with powerful features and straightforward management tools.

We continue to be excited about the significant growth opportunities in the [SNE] segment and our focus on increasing our market share.

Business Infrastructure Services announced their US$162 million acquisition of our [Net] [ph] which falls on December 15. Net is a customer centric solutions provider for public, private and hybrid cloud environment, coupled with deep managed security and compliant services.

This acquisition strengthened the existing managed and cloud services offering already provided by ViaWest and it also adds additional scale with our [Net Use] [ph] Eastern U.S. and European presence.

We also officially opened the door to our new Calgary data center in December and are having success both to ViaWest and Shaw business customers. We continue to believe the growth profile of the data center business remains attractive and is an intricate part of our growth strategy.

When you bring all these elements together it's clearly got lots of hard work ahead, but it’s a tremendous opportunity for us. [JR], Jim and Brad have provided us a great foundation at Shaw from which to build upon as we enter the next phase of growth as a leading connectivity provider to residential and business customers.

Now let me hand the call over to Vito to provide with more details on the quarterly results

Vito Culmone

Thanks Jay. Good afternoon, everybody. Thanks for joining us. Very exciting times here at Shaw and we look forward to executing on Brad’s strategic vision. Let me first address the Q1 results and then I’ll speak to the financial elements of the Shaw Media sale.

Overall we're pleased with the first quarter results. Consolidated revenue increased over 2% to $1.42 billion and operating income grew 3.3% to $626 million.

Free cash flow for the quarter of $173 million is slightly below the comparable period due mainly to the timing of some capital expenditures in the current quarter.

Our consolidated operating margin also improved by 50 basis points to 44.1% and net income was $218 million or $0.43 a share down by approximately $9 million over the comparable period due primarily to higher amortization and income taxes.

The consumer division posted year-over-year revenue and operating income growth of 1.7% and 3.5% respectively due mainly to continued ARPU growth.

This growth was partially offset by net RGU losses in the consumer segment of almost 44,000 for which home phone accounted for more than half.

Business Network Services or BNS contributed over 7% revenue growth to $136 million and a 5% increase in operating income to $64 million for the quarter. We continue to invest in this opportunity through innovative products, increased sales force and expanding the network.

We remain very encouraged by the early results of SmartVoice which many of you saw during our Investor Day in Denver and with the launch of SmartWiFi and Security we’re excited to have additional Smart products available to our customers.

Business Infrastructure Services reported quarterly revenue of $73 million and operating income of $25 million, representing growth of 33% and 19% respectively. Excluding the favorable impact of foreign exchange, revenue was up over 14% to US$56 million reflecting customer growth, building off their strong sales momentum in Q4.

Also included in the current quarter results is the addition of AppliedTrust, which contributed US$2 million in revenue, continued Canadian dollar investment related to the Calgary data center of $1 million as well as adjustment to some employee related cost of approximately CAD3 million.

On a purely organic basis, the U.S. business grew revenue and operating income by 11% and 12% respectively over the previous year.

We are pleased that despite a challenging quarter, media delivered operating income that was down less than 1%. Shaw Media’s portfolio was strong. Global News maintained their number one position in Western Canada and National Geographic and History hold the top spot in digital and entertainment specialty channel positions.

We truly believe that the combination of Shaw Media assets with Corus will unlock significant potential and we're excited to retain a pro forma equity ownership in Corus.

We continue to maintain a strong balance sheet with total debt of approximately $5.7 billion including ViaWest resulting in a leverage metric of 2.3 times net debt to EBITDA.

As of November 30, 2015, we have a cash balance of approximately $275 million as well as access to over $500 million on our credit facility, therefore providing us with significant liquidity and flexibility to address the $300 million floating rate notes due at the end of this month as well as the $300 million 6.15% senior notes due in May.

Let me now turn to yesterday’s announcement. The sale of Shaw Media for $2.65 billion consists of a cash component of approximately $1.85 billion and an equity consideration of approximately $800 million or roughly $71 million Corus Class B shares.

Shaw has agreed to certain hold restrictions on the shares for a specified period of time and will participate in Corus' dividend reinvestment plan.

Our intention is to use the cash proceeds at closing to fund the previously announced WIND acquisition of $1.6 billion. However, as the timing of closing both transactions may vary, we have a $1.7 billion bridge facility that we can drop on if required.

Considering both the Shaw Media and WIND transactions, on a pro forma basis our net debt to EBITDA metric remains within our target range of 2 to 2.5 times.

As it all relates to our fiscal 2016 guidance, Shaw will continue to operate its current businesses until such time as the WIND and Shaw Media transactions close and we confirm at this time that there are no changes to our previously issued guidance.

Operating income before restructuring cost and amortization is expected to range between flat to low single digit growth over 2015, capital investment on a consolidated basis is planned to be approximately $980 million and free cash flow is anticipated to range between $665 million and $680 million.

In addition the Board has approved our current annual dividend rate of $1.185 for Class B Non-Voting share. However, in the long term, we continue to believe our enhanced growth profile strengthens our ability to deliver on our commitment to growing our dividend.

Jay Mehr

Thanks Vito. On behalf of Brad and the entire Leadership Team, I want to conclude the call with a special thank you to our employees who work tirelessly in support of all of our business pursuit and the Shaw Media employees for their passion that puts the need of Canadian viewers first.

As the Shaw Media and Corus teams unite, there is no doubt that this combination creates a truly talented back-in-the-class Management Team. We're pleased to confirm that Barb Williams has accepted a Senior Leadership role with Corus. Barb your incredible work ethic; professionalism and in-depth knowledge will be integral -- integral to Corus’s ongoing success.

We have a very exciting and busy year ahead and we're off to a solid start. The future is right with opportunities for both Shaw and Corus and we look forward to enhancing our leadership positions and delivering maximum shareholder value.

Thank you. And we would now like to open up the phones to answer any questions.

Question-and-Answer Session


We'll now begin the question-and-answer session. [Operator Instructions] The first question comes from Mr. Jeff Fan with Scotiabank. Please go ahead.

Jeff Fan

Thanks and good afternoon and congratulations on the media sale yesterday. More of a bigger picture question on the media transaction, I guess in the past, when you look at the Canadian market it’s quite vertically integrated and if we look back a number of years ago on the Canwest acquisition, there were certainly benefits that one could envision by being vertically integrated, although some of those benefits may have gone away.

Just wondering if you can talk around what maybe some of the potential vertical integrated benefits that you might be given up as part of this transaction that you are proposing with Corus?

Jay Mehr

Yes thanks Jeff, it’s Jay. I’ll start with that. I think if you acknowledged in the way you asked your question, since our acquisition of Canwest in 2010, the media regulatory environment has really evolved to reduce the strategic benefits of vertical integration between BDUs and content providers.

And at the same time, we believe the regulatory protections are in place and certainly our strong relationship with Corus, we think we’re in a position to ensure that there is no negative strategic consequences that will result from the sale of Shaw Media to Corus.

We kind of think of it as a vertical relationship instead of vertical integration. And I would add to that, that it’s important to note that we have concluded expensive multiyear carriage agreement with both Shaw Media and Corus Services that's actually are called a [indiscernible] arrangement for the years ahead as well.

Jeff Fan

Does this have any implications for Shomi and as a product and as a joint venture with Rogers?

Barb Williams

Hi it’s Barb. I can start and Jay may want to add. I can speak to the advantage that Shomi had by having Shaw Media as part of Shaw arm in its ownership with Shomi because we at Shaw Media had access to as far our right to be able to contribute to Shomi and that was an important piece of Shomi’s ongoing success.

What we have agreed in go-forward is that Corus will continue to support and is obligated to continue to support the access of those as far rights portion on these over Shomi. No interruption at all in the flow of programming via Corus and on into Shomi just the way it did when Shaw Media was owned by Shaw.

Jeff Fan


Trevor English

Jeff its Trevor, just clearly there was a lot of -- there is a lot interaction between Shaw Media and Shaw Communications and throughout this as we separate the company, there is a number of situations and a number of commercial agreements that we made sure that stayed between the two organizations post the sale we did in and Shomi is one of them.

Jeff Fan

Okay. And then I want to ask about the FreeRange TV launch. I guess having seen the Comcast service, it’s quite similar in many ways, but specific to you guys because of the fact that you have Shaw Direct outside of your cable footprint, you’re offering FreeRange as a service to Shaw Direct customer.

What prevents you from offering the service as a bit of a standalone subscription service almost similar to what Sling TV offers by addition to U.S.?

Trevor English

Sure. Jeff, let me take that two ways. One is FreeRange TV itself is a product and a consumer experience that by its fundamental design is an extension of your video subscription in the home and either that being a Shaw Cable subscription or a Shaw Direct subscription.

So by its very nature, the FreeRange product itself is free to consumers and allow -- has the guiding principle that you can take the services that you subscribe at your home and at no extra charge, consume them on other devices in your home to running your smartphones into additional TVs and other devices on the go whether it’s on the Shaw Go WiFi network or anywhere in Canada.

So FreeRange is as a first deliverable and a product and experience absolutely an extension of your home subscription. I think where you're correctly heading though is without the application and experience, the back office that has been built to support FreeRange is the single IP, all in the cloud video back office that will support all of our IP cloud based video applications and executions going forward.

So there is certainly nothing technical to prevent us from using that same back office infrastructure to provide video to say wireless data customers or some other kind of application.

What does need to be worked out in there aren’t any media plans in this regard and as you can presume, it's probably little premature, which does need to be worked out is just the go-to-market considerations.

What it means competitively and then also the rights issues, because the rights that are on FreeRange TV have been acquired sometimes at an additional cost as an extension to the home subscriptions.

And so we -- there is rights in business stuff that would need to be sorted out, but this is Shaw’s IP cloud based video delivery infrastructure that we'll be using for all of our applications going forward.

Jeff Fan

Okay. Okay. Thanks guys.

Jay Mehr

Thanks Jeff.

Vito Culmone

Thanks, Jeff.


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

Vince Valentini

Yeah, thanks very much. Your internet subscribers on the business network services side were we’re slightly negative, which shocked me a little bit. Is there any re-categorization of maybe how you -- you treat the data revenue being sold to business customers that they're not a discreet internet subscriber are more or is this actually -- you actually lost subscribers this quarter?

Jay Mehr

Yeah, I think what you’re seeing is the one, well I shouldn’t call it a onetime impact. The impact of losing a significant number of internet subscribers at the work facilities in Fort McMurray and that was one competitive losses, those were just camps actually closing down.

So, they come from as we've talked about in the past, those deals are all have been negotiated with significant -- were significant supply chain organizations. So they're not necessarily huge margin deals and the good value is provided to them.

But as you look at our views, I think you'll see a continued directional trend as just the business population of Northern Alberta decreases.

Vince Valentini

Okay. That’s good color. Thanks Jay. So on the consumer side, your revenue growth continues to be better than your RGU growth. Can you give us any more color on what’s going on with the mix shift to your customer base and may be most importantly in the Home Phone side given how dramatically you changed your bundling policies and your pricing strategy?

Are you starting to see the customers you’re keeping, generating a lot more revenue than the ones you’re losing?

Jay Mehr

Yeah, you're seeing in the mix or new focus on lifetime value of customers and a lot greater segmentation. So I think we're -- we are certainly headed in the direction aspirationally where you suggest.

We’re not totally there today because of the way that the packaging and bundling and competitive dynamic -- competitive dynamic works. We weren’t disappointed with the trend Q4 to Q1 in internet and video subscribers.

We’ve got a little bit more work to do on phone to get that back to where we want to go and then as you can tell, it's not business as usual around here. We're making very concrete moves to try and shift the RGU trajectory in the consumer business.

And I guess as you work your way through, the execution of these transactions that's where it becomes our next big challenge.

Vito Culmone

Vince, its Vito here. The only other thing I’ll add is of course the Q1 results on the consumer side reflect the benefit of the two price increases last year. So you might recall both on video on internet, we had increases in January 15 and August 15 and obviously as we move through the balance of the year here, we lose the benefit of at least the January year-over-year increase.

Vince Valentini

Okay, thanks. And one last one bigger picture. So lot of people are pointing out that the media division generate more free cash flow then your wireless business will likely generate in the couple of years. So your dividend payout ratio is going to be in the range of 100%.

Can you talk holistically how you guys view this do you think of all the proceeds from Shaw Media including the eventual monetization of Corus shares that fully funds all of your wireless initial acquisition, plus the CapEx, plus any of the spectrum you may have to buy over the next couple of years? Do you view that as sort of one funding the other so the payout ratio wasn’t really relevant short term?

Vito Culmone

Yeah Vince its Vito. Definitely a lot of moving pieces here over the next several years. When you look at the Corus dividend, when you look at our shareholding restrictions on the Corus shares, we believe long-term in that investment at this time and the ability for that investment to grow and the prospects as you’ve heard us consistently refer to.

But there is no doubt about it that with the media business coming out of numbers and wireless coming in, we’re very excited about the long-term growth prospects.

I think these trends actually has really set us up for dividend growth on a long-term basis. You hit the nail on the head. Over the next couple of years the payout ratio is going to be at elevated levels.

When we look at all the levers we have available to us, some of which you describe, we don’t see that as an issue whatsoever to continue to maintain our dividend and it’s been 13 straight years for us of dividend increase and we’re focused on getting that -- getting back to those here as we move into the short term period beyond the next couple of years.

Vince Valentini

Okay. Thanks guys.

Jay Mehr

Thanks Vince.


Our next question is from Aravinda Galappatthige. Please go ahead.

Aravinda Galappatthige

Good afternoon. Thanks for taking my questions. Obviously the Shaw sale ensures that you maintain a very steady balance sheet.

But I was wondering given that there is an approval process to go through and I’m thinking more specifically about the Corus Class B shareholder vote, is there some other contingency options that you can fall back on?

I know that you've talked about real estate sales, non-core sales etcetera. In terms of contingency, I was just wondering what other options are on the table?

Jay Mehr

Well you know we do have a bridge in place. Obviously the timing of these -- first of all let me just say, we have a high degree of confidence that these two transactions will close. Clearly there is regulatory approvals that need to take place and will let that obviously move forward.

But we have a high degree of confidence in the event that there is a timing issue. We do have a bridge in place, which we are -- has been secured from the entire proceed of $1.7 billion, $1.6 billion bridge and beyond that as we talked a little bit earlier about, we can take our leverage up, but we don’t think that we need to do that in any way, shape or form. So we’re in good shape and we’ve got our basis covered.

Aravinda Galappatthige

Thanks very much for that and just with respect to the earlier question about the free cash flow impact of the sale of Shaw Media, I was wondering if you can clarify the CRTC benefit obligation, which runs through you guys every year. Would that pass on to Corus with the sale or will that stay with Shaw Communications?

Trevor English

Hi it’s Trevor. That does pass along with the sale. So that obligation which actually runs out at the end of that 2017 for Corus but that does go along with the transaction.

Aravinda Galappatthige

Okay. Great. Thank you. I’ll leave it there.

Trevor English

Okay. Thank you.


Next question is from Greg MacDonald with Macquarie. Please go ahead.

Greg MacDonald

Thanks. Good afternoon, guys. Question is on rating agencies. I believe it was S&P that has a negative outlook. Like Vince think of this deal as wholly funding the WIND acquisition and Vito you made comment on the fact that pro forma your leverage ratios are within the guidance range that you have.

This is actually if you think about this deal funding, WIND relative to an all debt financing for WIND, your leverage is actually lower and that’s not including the $800 million in Corus stock. Is it safe to say that rating downgrade risk is lower or there stay off the table?

Or I guess another way is have you spoken to the rating agencies about this deal or had you spoken to them about this deal before it’s closed.

Vito Culmone

Yes Greg clearly the rating agencies rode after the WIND transaction and that’s what you’re referring to. At that time, we couldn’t give them entire picture because we weren’t there yet and so they were reacting to the information that was in the public marketplace and that was appropriate for them to react to.

Pre-transaction here pre the Marina announcement, we obviously briefed them on this update. I’m not sure if you caught up to it. Moody’s reported yesterday, they've confirmed our rating. DBRS has -- I don't want to put words in your mouth.

You read the report as confirmed that we will likely come out of this close at investment grade. We haven’t seen S&P’s update yet as the time of this call, but we've had very constructed dialogue.

The credit market has reacted very favorably to the announcement of the media sales and I think you hit the nail on the head. Leverage is down. There obviously is an earnings free cash flow delta versus the existing business footprint that the agencies got to get their head around, but we have a high, high degree of confidence where an investment grade entity here and we’ll continue to manage that way.

Greg MacDonald

Okay. So for clarity, you hadn’t spoken to S&P and…

Vito Culmone

We have spoke to S&P, we have spoken to S&P and I think if not, I don’t want to speak for them, but I am sure there will be something out if not by end of day today, probably tomorrow.

Jay Mehr

I think to be clear as the day winds up, to let everything told through along with the Q1 results and we released this morning before they released their news release tonight.

Greg MacDonald

Okay, thanks Trevor.That makes a lot of sense. Second question that wasn’t too long though this company was talking about the maritime vertical integration and I know a lot has changed.

Regulation and tech in particular impacts on, on bundling and what not and that’s certainly part of the equation. Is that entirely what drove the decision to sell media in addition to the fact that it’s a benefit to moving more toward a peer broadband focused company or were there other things that affect, just help us understand all that. Thanks.

Jay Mehr

Yeah, hi Greg its Jay well walk you through the -- these deals have landed kind of on top of each other. They really have come out of a 12 to 15 month very detailed and careful consideration of the kind of Shaw Communications that we're trying to build and what your appropriate way to optimize our asset mix was.

And I think you can over-read the symmetrical nature of the cash and put them in causal relationships with each other.

We're really trying to find the best way forward. Clearly we knew there had to be a play to create a ubiquitous network both smart and down with some of Shaw experiences on it and then also to provide connectivity to all of those experiences.

And when we looked at the media assets, these assets belong together and it was our view that the assets belong together being owned by a media company and that there be a level of focus of the pure play nature both of these two next entities that make sense and it was really that strategic rationale in terms of the proper spot for the assets, the pure play focus with management that took us through the sale.

In terms of the benefits or non-benefits of vertical integration, those have gone away gradually over time. I wouldn’t overstate the drivers. Vito will add some more.

Vito Culmone

Yeah, Greg and Jay that’s well said, I think this review that we went through that started 14, 15, months ago, we really looked at the value that Shaw Media had done created for our shareholders and we're thinking well what's the next stage of that.

And we felt like the two companies combined to make one pure play leading integrated media company was the best way to continue to create value for our shareholders going forward.

And I think we were very comfortable, taking a smaller equity stake in a larger company and participating in that value creation for shareholders through that mechanism versus otherwise.

Greg MacDonald

And how important is the continued relationship with Corus? You can get access to content, I don’t want to say in a non-commercial way. It will be commercial it will be a commercial deal if you decide that you want to continue to leverage media, but how important is it that you have that relationship with them and would it have been as easy to sell the asset if you didn’Thank you.?

Vito Culmone

Yeah, listen, I think we're excited about the upside with the company going forward. We’re excited about that we continue to have a relationship, the strong relationship with the company that we've got commercial relationships in place.

I look at the overall ecosystem within distribution and content being important and they’re all one of the same system, but there is lots of safeguards in place, but I don’t know Jay if you have anything else to add?

Jay Mehr

Yes I think the vertical relationship is important and I would certainly add though that Shaw is a relationship-based company and we've pretty good relationships with all of our content providers VI and Nod and so we’re an organization that can get deals done and we've see that as a track record.

So I think the relationship is actually important. Speaking plainly too I think -- I think it’s emotionally important too. This is a business that we built together. Our colleagues on Shaw Media and our colleagues on Shaw have a lot more working together and has a tremendous sense of what's been creative and accomplished.

And so I would make the argument even without a significant ownership position, we’re somewhat aligned just from shared experiences and relationships.

Greg MacDonald

Got it. Okay. Thanks guys.


Our next question is from Maher Yaghi with Desjardins Capital Markets. Please go ahead.

Maher Yaghi

Yes thank you for taking my question. I want to discuss something you talked about in your MD&A about the conversion of all your video signals in major cities in Western Canada to digital from…

So in terms of dis-conversion, can you talk about what this will mean in terms of bandwidth gains and as you add on top of that, the 2.1 conversion, can you talk a little bit about your bandwidth run rate here and when do you expect to have gig and 1 gig internet speeds in the market?

I know this is sensitive information, but can you talk a little bit about your technology platform here and I have another question to follow-up?

Jay Mehr

Sure Maher. We'll be happy to give you some color here and by the way we’ve been doing everything you've told us to do for the last number of quarters too. I would just like to point that out as well.

Maher Yaghi

I noticed what you did on wireless yes.

Jay Mehr

Yes all right, thank you. We've got a multiyear plan in terms of our network and it’s really -- it’s not unlike a capital allocation process, it's really a spectrum allocation process in terms of our cable networks.

And so our digital network upgrade went through two phases and removed all the Tier special channels off analog. A couple of years ago nationally and then last year we removed all the basic services of analog in Vancouver and the Lower Mainland.

This year we'll be removing all the analog services from the last -- this fiscal year and the vast, vast, vast majority of our customers certainly everywhere that's a city. So going down to communities like Cranbrook and Capital Garden and so forth.

And some of the really rural areas we will do it in the next fiscal year. We actually have a need for the bandwidth in those areas. That’s all about moving through fully exploiting DOCSIS 3.0 to DOCSIS 3.1 and creating the right mix of carriers in order to enable that.

I should say as well that with the use of the launch of X1 and the move to the IP cloud based platform, first on VOD that will also allow us as we convert those boxes over to eliminate VOD capacity digitally on the network to reposition from managed internet and super high speed internet and ultimately this IP platform that has been built.

Over time replace analog services, replace digital services in Quam also and while that may seem a long ways away as you think through specialty services, multicultural services, there will be lots of opportunities with our hybrid boxes to reclaim bandwidth.

So there is a multiyear plan that has been funded and it’s very clear in terms of managing that migration towards super high speed services.

What’s terrific about DOCSIS 3.1, is it allows us to bring all of our customers super high speed services at once and it allows us to step into those super high speed services as we continue to upgrade the plan.

So we will be continuing to do significant speed increases for our mainstream products as we move forward and you'll probably see our mainstream, mainstream product be in the hundreds of Migs first before being a Gig, but none of that is too far away and we have confirmed publically that we will roll our DOCSIS 3.0 modems and network in this calendar year.

Maher Yaghi

Okay. And the follow up question I had is in Ontario and Quebec there was, there were rate increases that are taking place in February and between $4 to $6 in Quebec and $6 to $8 in Ontario, can you talk about the rate increases you're seeing taking place in Western Canada in 2016 and on your side and from the competition?

Jay Mehr

Yeah. So let me get caught up certainly for more reference. The rate increases you're talking about are competitive rate increases.

Maher Yaghi

In terms of internet Home Phone and video combined.

Jay Mehr

Got it. Yeah, if you look at what we've said to our consumers, we postponed one rate increase from September to January and it's up with two in the same year and you can see some of that even in the comparative RGU numbers as Vito were suggesting.

We said to our consumers for simplicity, we’re going to look at rates once a year and we’re going to do it in the summer time. And so I think you'll see us make some adjustments to our rates in the summer time.

Some of this really is FX related in terms of where we land there too. Of course number of our expenses are in American dollars and our revenues in Canadian dollars. So that may impact the blend of rate increases that we do and rate adjustments we do over the summer.

I would think you can think about our summer rate adjustment in a similar quantum as what we did last August.

Maher Yaghi

Okay. Great and just one last question to Vito, maybe it was discussed before on the call, but certainly you're focusing organization on telecom and in terms of CapEx, I just wanted to get a little bit more clarity on when the -- how you're spending the $250 million of spending on wireless to start with on the WIND side?

When this heavy CapEx spending is going to taper off so that you get back on this dividend growth model that you have spoken about having had for 13 years in a row?

Vito Culmone

Yeah, we've obviously $250 million of incremental capital on the WIND side of the business to upgrade to the LTE. That will take approximately a two-year timeframe, commencing sometime during the course of that '16 leaking through that '17.

So, it's a two year time period, but there’s significant cash capital expenditure in the WIND business and then once we move beyond that, I think we have a high degree of confidence. We're back into free cash flow growth and then we'll evaluate dividends as we move forward through that period, but it's very, very exciting to have on a pro forma basis 30% of our revenue in a growth timeframe in order to have dividend increase and EBITDA growth.

And I think we definitely feel like we're in a stronger position on closing of these transactions moving forward then we've been in a long time.

Maher Yaghi

Great. Thank you for the clarity.

Jay Mehr

Okay. Thank you.


Next question is from Drew McReynolds from RBC. Please go ahead.

Drew McReynolds

Yeah, thanks very much for taking my questions. Just a few first for you Vito and then maybe one for Barb. So just back to the ratings agency dynamic just Vito, based on your comments there, can you just kind of confirm, then coming out of the WIND transaction free cash flow coverage was a little bit in the spotlight.

Are you saying after this Shaw Media transaction that you should be fine on free cash flow coverage relative to the concern prior to the transaction?

Vito Culmone

Well, I don’t think it’s the free cash flow. I think it’s the leverage that we've given clarity to. When you look at the two transactions its effectively leverage neutral and then obviously it's not free cash flow neutral.

So what the rating agencies are digesting obviously with the recent transaction and two of them have reported, so I encourage you to read through the reports and as Trevor mentioned we'll probably see S&P there in the today or tomorrow morning is at exact FCF free cash flow implication, which as we've said over the next two years is going to be reduced relative to where we have been, given the capital -- primarily the capital of WIND and the loss of Shaw Media business.

So that’s clearly what the rating agencies are looking through and assessing the quality of their earnings against that capital expenditure profile. They again don’t want to be speaking for them and I encourage you to read their report.

They love this strategy. They understand why we made these moves and they’re just assessing obviously their short term implications from a purely rating agency and from a credit profile perspective.

Drew McReynolds

Okay. No, that’s great and then just sticking with the free cash flow theme, just in terms their press release -- in terms of sticking or committing to the drip with your Corus shares with fiscal 2017, can you just clarify is that on restricted stock only or would that be on your full stake?

Trevor English

Yes that’s on the full stake and its related to thinking about the direct fees related to whenever it's on the restricted stock. So as the third fold off after the first year that we have the flexibility to take cash dividends versus stock dividends, it mirrors the restricted shares directly.

Drew McReynolds

Yes, that's great, Trevor thanks. And tax implications on the transactions from Shaw’s perspective?

Vito Culmone

You're allowed to defer the taxation on the share consideration you take back and so we estimate approximately $25 million to $30 million short term tax implications on closure of the deal or shortly thereafter.

Drew McReynolds

Okay. Okay, no that's helpful. Thanks Vito and then one for you Barb, I think we’re all kind of wondering looking for an update on anything you can say on share negotiations heading into the end bundled environment.

Both from a Shaw Media perspective and maybe from a distribution perspective, I don’t see a lot of kind of clarity around this but it does seem as if there has been some settlement of carriage negotiations from your perspective.

So I was just wondering where are we in that whole process first on Shaw Media’s standpoint and then maybe from Shaw TV's standpoint with the other broadcasters?

Barb Williams

So just to the larger question I think Jay already referenced that we have carriage agreements in place for Corus in the new combined company out a number of years. So that piece of the puzzle is solved.

We know Shaw Media as it exist today has agreements obviously with the other BDUs that have their own timelines and timeframes on them and we are negotiating those agreements as they come up for renewal.

I think as far as unbundling as most top TV is concerned I think we as a broadcasters we believe in our channel, believe in our brand, believe in strong carriage and strong viewership going forward and we're planning at the moment for significant change from that point of view and we’re looking to renew our agreement as they come up.

But clearly as the year unfolds and we see what the impacts are that may affect future negotiations with our other carriers, but a lot of these things are going to kind of come together once right. We’re going to see what the impact is of let's top TV we will hopefully see this transaction close and put the channels together for future negotiations and some of this is going to have to foot itself out over this next year or so.

Vito Culmone

Okay. Thank you.

Drew McReynolds

Great, thanks.


Our next question is from Tim Casey of BMO. Please go ahead.

Tim Casey

Thank you. Good afternoon. I just wanted to revisit a couple items. One just on the overall economic situation in Alberta you've indicated that there was some subscriber losses from the origin, the camps in Northern Alberta and that's obviously been reflected in your numbers on a lagged basis.

Are you seeing any early signs? Are you expecting any consumer slowdown just on in terms of broadly the economic situation in Alberta or as a consumer side from what you can see as that holding up?

Jay Mehr

Yes Tim its Jay. The economic situation in Alberta is real for sure and we have seen some trending that certainly suggests certainly if you look on a year-over-year basis, remembering on a year-over-year basis, you’re kind of comparing to boom times in Alberta like when it was hot, it was pretty hot.

We've certainly seen a trend in churn and disconnects and fewer gross ads in the Alberta market. Is it -- we're fortunate to be in a big base, we're fortunate to have geographic diversity with Columbia doing terrific.

I’m not sure it’s a big factor in the numbers that you can see when you look to consumer business holistically, but it’s absolutely real.

Tim Casey

All right, so in terms of your fiscal planning, are you expecting a slowdown as we progress through the year in terms of go-to-market strategies in Alberta?

Jay Mehr

We were kind of thinking about the context in terms of the external context and being like it is and certainly there is a slowdown in Alberta. If you're asking whether not we see a deterioration in our current RGU trends from the trends that we've had in the past, we think we’re doing more than enough moves in the market to offset whatever impact that could have until we're certainly not planning for a deterioration in RGU trends in the consumer business from where they are today.

Vito Culmone

Yeah Tim its Vito. I’ll just add of course anytime you've got the situation it's really hard to pinpoint the RGU losses and where they're coming from and what the contribution is, but I agree whole hardly with Jay there is an impact here.

And as we get together as an Executive Team going forward we're always, you deal with the realities of the short term and you have right at the long term as well and there is lots of trade-offs in that decision making process, but we obviously love our asset base and we're prepared to invest where we believe the long term benefit is.

Tim Casey

Sure, it’s great. Thank you for the color. The other question I had was more of a big picture question to you Vito and Jay and with respect to capital priorities, you’ve got a core network business that requires capital, but it's self funding.

And you're going to layer in a wireless business that will require an initial spend and then I’m sure there will be spectrum and more spending down the road as you fill out and then you’ve got ViaWest in the U.S. which is still in a free cash flow deficit position.

How do you think about the demands on your overall capital pool and how will you prioritize that as you address the needs of the three businesses and I understand that two of the businesses are really going to be run as one almost other in Ontario, but how do you think about that?

Vito Culmone

Maybe I’ll start off and then Jay and Trevor as well. Well Barb just let me note and she said she would really like a ring side see here as we as an Executive Team make those decisions and everybody advice for it.

I actually think it’s a bit of an embracement -- I won't say embracement of riches. Maybe that’s the wrong word, but it’s a great position to be in frankly and I think that back to the growth profile that they we're dealing with.

There is interconnectivity between these three businesses if you will, the core and wireless and what not. So I am not sure that are all totally distinct, definitely distinctive as we’re reporting them, but as we think about our connectivity platform, there is definitely overlap and how we can leverage those investments.

Return on investment capital, we’re going to get focused on exactly what does that look like and what each of the business units are delivering to some extent and there just going to have to be some choices.

But from where I sit I definitely believe we can continue to fund those three business units if you will the base, wireless and ViaWest as required, but like any other business quite frankly, you got choices to make along that.

And Nancy is here and we haven't heard from Nancy and both how ViaWest is going. We'll have a great quarter but very, very excited about how that business is progressing. So Nancy why don’t you just?

Nancy Phillips

Yes, no listen I think we certainly ended the year strong with the bookings momentum we had and as we enter the first quarter and we do have the Calgary datacenter up and operational and we’re seeing some very good early traction.

Plus there is a positive maybe in Alberta we do see enterprise accounts definitely moving towards an outsource model for both our datacenter and cloud base services there.

But we’re continuing to move very progressively in terms of plans for '16 and have seen continued positive bookings impact in the first quarter in December as well, but will too obviously staying on track in terms of our plan for '16.

So yes, I think we've had very disciplined approach to our return on invested capital and obviously take a look at the optionality in terms of our geographic expansion both from a cloud and data center perspective.

I think our movement towards hybrid as we’re seeing some of the customer demands change, certainly is starting to see more movement towards our cloud based service and not the data centers aren’t important but we do see the platform starting to evolve a little bit and certainly our capital priorities will follow soon.

Jay Mehr

Thank you.

Tim Casey

That is all I have. Thanks.


The next question is from Robert Peters of Credit Suisse. Please go ahead.

Robert Peters

Thanks very much for taking my question. Maybe stepping back to Shomi for a second, we saw the investment in that tick up a little bit in the quarter in terms of kind of loss at the JV I was just wondering can you give an update on the progress and how things are going at Shomi?

And maybe are we getting to the point where we're getting to the high watermark in terms of investment there or is it still a few more quarters to go?

Jay Mehr

It’s Jay, I think when you look at the new digital properties it's the nature of this kind of investment that you’re going to see, the – proceeding in terms of the startup and investments are up.

We're working through with our partner with the right level and approach is and when we'll start to see things level off for sure the highest expenditures are at the front end and I think you'll see some trends in the medium term. We haven’t really disclosed the elements. I don’t want to go too much farther than that.

Trevor English

We will obviously venture with another partner that from the economics point of view it is an investment that we are carrying and we'll continue to talk about it as an investment going forward.

Robert Peters

Great. Thank you very much.

Trevor English

Thanks Rob.


Mr. Mehr, there are no more questions at this time. This concludes the time allocated for today's conference call as well. You may disconnect your lines. Thank you for participating and have a pleasant day.

Jay Mehr

Thanks everyone.

Trevor English

Thanks everyone.

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