BCE's (BCE) CEO George Cope on Q4 2015 Results - Earnings Call Transcript

| About: BCE Inc. (BCE)

BCE Inc. (NYSE:BCE)

Q4 2015 Earnings Conference Call

February 4, 2016 08:00 ET

Executives

Thane Fotopoulos - Investor Relations

George Cope - President and Chief Executive Officer

Glen LeBlanc - Chief Financial Officer

Analysts

Batia Levy - UBS Securities

Richard Choe - JPMorgan

Simon Flannery - Morgan Stanley

Tim Casey - BMO Capital Markets

Vince Valentini - TD Securities

Jeff Fan - Scotiabank

Phillip Huang - Barclays

Robert Peters - Credit Suisse

Maher Yaghi - Desjardins Capital Markets

Drew McReynolds - RBC

Greg MacDonald - Macquarie

Aravinda Galappatthige - Canaccord Genuity

Operator

Good morning, ladies and gentlemen. Welcome to BCE’s Q4 2015 Results and 2016 Guidance Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead.

Thane Fotopoulos

Thank you, Wayne. With me here today as usual are George Cope, our President and CEO as well as our Glen LeBlanc, our CFO. As a reminder, all Q4 and 2016 financial guidance disclosure documents including the slide presentation today are available on our website in the Investor Relations section.

However, before we get started, I want to draw your attention to our Safe Harbor statement on Slide 2 of the deck. Information in this presentation and remarks made by George and Glen today will contain statements about future expected events and financial results that are forward-looking and therefore are subject to risks and uncertainties. These forward-looking statements represent our expectations as of today and accordingly are subject to change. Results may differ materially. We disclaim any obligation to update forward-looking statements except as required by law. A discussion of factors that may affect future results is contained in BCE’s filings with both the Canadian Securities Commissions and the SEC and are also available on our corporate website.

So with that, I will turn the call over to George to begin with a review of our Q4 results.

George Cope

Hi, good morning everyone. Thank you for joining us. Let me start with an overview on the fourth slide for those reviewing the slides. We had another strong quarter, very pleased with the 204,000 wireless and wireline broadband net additions, highlighted by the 91,000 postpaid net adds, 74,000 IPTV and the strategically important growth in our internet of 39,000 customers. Driving consolidated EBITDA of 2.5% for the quarter and 3% for the year, also very pleased with our consistent performance, the 41st consecutive quarter of year-over-year EBITDA growth.

In the quarter itself, we saw strong cash contributions from all three of our operating segments driving a 10% increase in free cash flow. Our financial leadership in wireless continues with service revenue up 6.3% and really I think I highlighted EBITDA up 6.8% in the usually challenging fourth quarter with the consumer demand we see and so cost controls clearly have paid off.

On wireline, we saw EBITDA growth of 1.5% in the quarter on 3.4% lower operating costs yielding an increase in our overall wireline margin. And we did enjoy our first full year of positive wireline EBITDA growth since the advent of cable telephone competition in 1990.

Thane Fotopoulos

In 2005.

George Cope

In 2005. Thank you, Thane. On the media side, we saw positive revenue growth of 3.4% and simple cash flow growth of 15.9% and we will get into a little more detail on that business in a few minutes and strategically really pleased with the announcement in the fourth quarter of the sole rights distribution agreement for HBO and all of their content in Canada going forward. We met all of our targets for 2015. I believe we are in an excellent financial position. We have strong operating momentum and a very competitive cost structure going into 2016 and will be reflected in the strong guidance that Glen will share with you this morning.

Turning to wireless, as I mentioned another strong quarter, gross adds were up year-over-year as the market was very competitive, particularly with the double cohort first – fourth quarter we had seen through that process. Having said that, we are able to maintain obviously a very strong share of net adds with 91,000 postpaid. Our churn was up as a result of the double cohort. And as a result, of course, cost of acquisition is also increased because of the extra transactions.

Our strong ARPU continued. The mix of clients migrating to two-year contracts and the mix of our subscriber base migrating to LTE, where 68% of our customers are now on the LTE network. From an investment perspective, obviously quite positive, the 32% are still to migrate and also clearly very positive for the customers who will migrate will enjoy speed second to none really in the world in terms of our wireless network. Increase in retention spending to 14% in line with what we would have expected in the double cohort and I think really able to absorb that and see the EBITDA growth I think is one of the highlights of the quarter.

If I turn to our wireless network leadership, it really is beginning to make a difference in the market for us. We will – we did end the year at 96% of the country covered with 4G LTE. We will end ‘16 with 98% coverage. More importantly, 75% of the country at the end of 2016 will have access to enhanced LTE services and through spectrum carrier aggregation we will have customers who have access to speeds that are 25 to 100 mig real speeds versus the effective speeds of over 330. And so the aggregation of three different spectrum bands we believe will give us quite a speed advantage over some competitors in the wireless market going forward.

We also continue to see increased usage as customers migrate from HSPA to LTE. You really see that in the ARPU numbers this morning, but there is a few metrics here on the page so the analysts can take a look at it the literally 50% increase in usage as people migrate from HSPA to LTE. Important as well, this investment will continue. We believe we will also continue that approximately 10% capital intensity for 2016, so a very low capital intensity to be able to migrate to these higher speed coverage across the country. And also very pleased that a third organization just ranked our network as the fastest in the country, we now had three of those recognitions in the last number of months and clearly positioning us as one of the leaders in the country in wireless.

Turning to wireline, the subscriber metrics very pleased again. Our product differentiation on IPTV continues to prove very strong results with 74,000 customers added in the quarter, pulling through 39,000 internet net adds. Of particular note in the quarter was retail Internet was actually up for us whereas wholesale was down. And clearly, the profitability is much better for us on the retail side. Residential NAS losses were in essence stable year-over-year. And I think again the highlight of the last part of the year was we are positive RGU growth, the last three quarters of the year within our wireline footprint driven by the strong IPTV net adds and pull through of Internet.

Turning to our network for 2016, we expect by the end of ‘16 to have about 8.2 million locations that will either have access to fiber to the node or fiber to the premise. The Toronto overlay will continue through 2016 and into 2017. We would expect at the end of 2016 to have about 3 million of our footprint covered with 1-gig services. And on the IPTV product roadmap, we continue to strategically position that product as a leader in the marketplace, the launch of 4K Whole Home PVR, they are trending now the restart features that we launched in the fourth quarter are just tremendous features and used by our customers. If you have an iPhone Watch on, you can actually – if you are in the home you can actually swipe your hand on the watch and change the channel on the IPTV TV set just these very unique technologies. We launched the Netflix and put it available on the set-top box and we were able to make that available to all of our customers overnight without a box migration required. And a very highlight in the fourth quarter was it has become the most recommended TV service across the country based on some independent surveys. During the year, we expect capital intensity to be maintained across the group as Glen will talk about it are approximately the 17% number and about $1 billion of our $3.7 billion approximately will go towards fiber build-out.

Turning to media, I think really quite a strong quarter in terms of revenue growth and cash flow growth. Glen will take you through one particular item in the quarter as to why the EBITDA wasn’t positive. But in terms of market share performance it was excellent. 12 of the top 20 shows four of the top 10 specialty. Strategically important, the new long-term HBO agreement which gives us access to all of HBO’s content and the ability to distribute it on a national basis either on a linear, on-demand or on an OTT platform. And of course with the assumption of some of the content through discussions with our friends at Chorus, we of course will be launching TMN on a national basis at the end of this quarter.

We also launched Crave direct to consumers on a national basis OTT the price point is at $7.99 per month including both HBO and the SHOWTIME content and are also distributing that product through our important distribution partners and they are at a retail price that is lower than the over the top price also recognizing their push of this product and being a part of their overall distribution services.

We in the last couple of months just announced an exclusive partnership with iHeartRadio, more to come on that, but really we think it helps to position us in our music business particularly in the area of streaming and access to vehicles over time. And finally, we did complete a significant cost restructuring in Q4, really reflecting the expectation of the new TV pick and pay rules and putting our cost in line such that we now expect in 2016 that our media business will produce positive EBITDA growth and cash flow in 2016.

Overall, our focus on the strategic imperatives the past 8 years continues to pay off. And one particular highlight I think you can see is the in the growth side $700 million of revenue growth or 4.3% increase on the growth services, now representing 81% of our total revenue. We have been able to maintain margins despite the obvious financial pressures that we feel when we lose local access lines. And we now expect that all three of our business units are positioned to provide positive EBITDA and simple cash flow growth for 2016. Very pleased this morning to raise our dividend 5% to $2.73 per share, it’s the 12th common share dividend increase over the past 7 years, clearly our ability to do that within our free cash flow range of 65% to 75% is very important to investors and as Glen will take you through our guidance that is exactly what our plan is for 2016.

With that let me turn over to Glen and he will take you through much more detail.

Glen LeBlanc

Thanks George and good morning everyone. I will begin with a quick overview of our fourth quarter consolidated results on Slide 13. Overall, these results highlight our continued leading wireless financial performance, steady wireline EBITDA growth and strong free cash flow generation, all of which contributed to another strong year of results that comfortably met all guidance targets. Revenues were up 1.4% as our growth services which now comprise 81% of total consolidated revenues increased as George said 3.2%. Adjusted EBITDA grew 2.5% in Q4 led by Bell Wireless and a 6th consecutive quarter of positive wireline growth. Consistent with this EBITDA growth, margin also improved increasing to 37%. Adjusted EPS was unchanged at $0.72 per share compared to Q4 of 2014 as the favorable impact of EBITDA growth and lower year-over-year impairment charges of Bell Media properties was offset by mark to market losses realized on our equity derivative hedge contracts.

However, higher severance, acquisition and other costs in Q4 which totaled $152 million and related mainly to workforce restructuring and issues across the organization led to a 9.4% decline in statutory EPS this quarter. CapEx investments were in line with plan and we maintained capital intensity at around 17% of revenue. And we had another good quarter of cash generation with positive and growing contributions from all three Bell segments which delivered a 10% year-over-year increase in free cash flow to $916 million.

Turning now to Slide 14, Bell Wireless continued to deliver excellent financial results in Q4. Service revenues grew 6.3% on a higher mix of postpaid subscribers and industry leading ARPU growth. Data revenue growth in the quarter remained strong at 23% reflecting greater LTE data usage as more postpaid subscribers adopt LTE compatible smartphone devices. Wireless EBITDA increased 6.8% yielding a higher service revenue margin of 40.4%, a great result as this was achieved even with $48 million of higher year-over-year retention and subscriber acquisition costs. That’s been the case since the start of double cohort in June. The increased spending this quarter reflected a greater number of off contract customers in the market and richer acquisition offers. Lastly, in terms of cash flow which at the end of the day is what matters most to a dividend growth company like BCE. Bell Wireless provided a strong contribution to consolidated free cash flow in Q4 delivering year-over-year growth of 17.3%. So a great set of financial results overall that we expect led the Canadian industry once again this quarter.

If we look at Bell Wireline’s financial results on Slide 15, you will see a similar performance trend to previous quarters. Total revenues declined 1.5% reflecting ongoing softness in our business markets unit which continued to cause some variability in quarterly results. Moreover, overall wireline revenue growth in Q4 was impacted by the lapping of September 14 residential price increases. The 2016 price increase just went into effect this week, so these provided no benefits in Q4. Higher sales of international long distance minutes in Q4 of last year also contributed to year-over-year softness. These factors were moderated by continued strong internet and TV results which delivered in aggregate 5.3% higher year-over-year revenue.

Wireline adjusted EBITDA increased a very solid 1.5% this quarter, that represents our 6th consecutive quarter of positive growth. And as George mentioned earlier, our margin for Q4 improved an impressive 1.2% to an industry leading 39.5%. This is attributed to a 3.5% reduction in operation costs that reflected integration synergies with Bell Aliant as well as other operating efficiencies driven by ongoing service improvement and of course the deployment of fiber. But in my view the most notable highlight for Bell Wireline was that 2015 marked the first year of positive adjusted EBITDA and simple free cash flow growth since 2015 when cable telephony was launched. This is a very important milestone for our company.

Moving to our media results on Slide 16, although the broadcasting industry is seeing an overall reduction in advertising spend and a structural shift to online services, Bell Media outperformed in Q4 delivering revenue growth of 3.4%, advertising revenues were up approximately 1% over last year. This was driven mainly by the strength of conventional TV attributable to ad spending for the federal election and the performance of Bell Media’s new shows for the fall season. We also saw good year-over-year growth at Astral Out of Home as a result of the new contract wins over the past year. Subscriber revenues grew 8% versus last year. This is very much a reflection of the growth we are enjoying from CraveTV and our TV Everywhere go products as well as some favorable rate adjustments with a number of BDUs that were applied in the quarter.

However, despite the good revenue growth EBITDA was down 4.2%. Similar to previous quarters in 2015, operating costs were higher year-over-year. The increase can be attributed to higher costs for sports broadcast rights, content investments we have made in CraveTV and a return to normalized spending for Canadian programming expenditures following a one-time benefit in Q4 of 2014. Normalizing for this one-time benefit Bell Media’s Q4 EBITDA was in fact flat year-over-year.

2015 was all together a successful year for BCE as you see summarized on Slide 17. Revenue and adjusted EBITDA growth of 2.2% and 3% respectively were comfortably in line with plan and at the midpoint of our guidance targets for the full year. We finished the year with 5.7% higher adjusted EPS of $3.36 per share which was towards the high end of our guidance and a 9.3% increase in free cash flow to $3 billion, which was driven by organic growth in EBITDA and incremental contribution from the Bell Aliant privatization in Q4 of ’14. And our strong operating cash generation adequately supported 17% capital intensity spending ratio. So, all-in-all our consolidated financial performance and tangible operational progress gives us a really good start and position as we begin 2016.

And that’s it for results. I will now turn to our financial guidance targets for 2016 summarized on Slide 18. I believe the guidance we are providing is evidence of the good operational progress and significant broadband wireless and wireline infrastructure investments that we have made in the last several years. Our 2016 financial targets are underpinned by a favorable financial profile for all three Bell operating segments. With adjusted EPS and free cash flow providing a strong and stable foundation for the 5% increase in BCE’s common share dividend for 2016 as well as the significant capital investments to support future growth. These targets also reflect the confidence we have in the continuing to successfully execute on our business plan within the context of a highly dynamic and competitive marketplace across all of our lines of business.

Slide 19 provides some perspectives on our revenue and EBITDA outlook for 2016. As a result of the continued strong wireless momentum, positive wireline EBITDA growth and improved year-over-year media performance we are targeting consolidated BCE revenue growth of 1% to 3% and consolidated adjusted EBITDA growth of 2% to 4% for 2016. Wireless revenue is expected to benefit from the flow-through of continued strong, but moderating year-over-year ARPU growth. This was driven by a higher postpaid smartphone mix, increasing data consumption on LTE, higher access rates and further postpaid subscriber base expansion. As we focus on maintaining our market share of total incumbent net additions. Offsetting this, we anticipate increased year-over-year subscriber acquisition and retention spending driven by the rising handset cost as well as more customer device upgrades consistent with the higher number of off-contract customers in the market as a result of the double cohort.

For our Wireline segment, we expect a second consecutive year of positive EBITDA growth and back – on the back of further IPTV market share growth with strong pull-through of internet and residential mass as we continue to expand our FTTH footprint, mainly in our Ontario market. Residential wireline revenues in 2016 will benefit from price increases put through on February 1, which should help offset any ARPU leakage we may experience as a result of TV unbundling.

In business, our outlook is for gradual improvement in performance as the overall economic and employment growth strengthened. And we have significantly tightened our cost structure going into 2016 to align with revenues, which we expect will continue to be impacted by competitive re-pricing pressures as well as reduced consumer spending – excuse me, customer spending on core connectivity, business service solutions and data products. These cost restructuring measures along with ongoing service level improvements and the realization of further operating synergies with Bell Aliant should enable us to successfully hold wireline margins essentially stable in 2016.

For media, we are projecting positive full year EBITDA growth and margin improvement. This is underpinned by higher year-over-year revenues from CraveTV and the national expansion of the movie network as well as labor savings from the staff reductions undertaken in Q4, which are expected to more than offset higher content cost and the impact of the CRTC’s new pick-and-pay rules coming into effect next month.

Turning to pensions on Slide 20, the funded status of BCE’s defined benefit pension plan remains strong even as interest rates remain at these historical lows. With the decrease in government bond yields, solvency discount rates declined last year. This increase of solvency deficit of BCE’s defined pension plan despite having achieved our target return on planned assets of more than 5%. We made a $250 million special contribution in December 2015 funded from cash on hand to maintain a solvency ratio above 90% and to remove the use of letters of credit to fund the Bell Canada deficit contribution. We believe this is an efficient use of cash given sustained low interest rates we are seeing and the tax deductibility of the special contribution.

Total regular cash pension funding is projected to be marginally higher year-over-year increasing from $391 million in 2015 to around $400 million to $450 million this year. BC’s total pension expense is expected to decrease approximately $40 million to $90 million year-over-year, reflecting the benefit of a higher accounting discount rate at year end of 4.2% in special contribution we made. Our history in managing the pension plan has been a very prudent one. We have stayed will ahead of it and I think we will benefit from that in the years to come.

Moving on to our tax outlook for Slide 21, our statutory tax rate for 2016 remains essentially unchanged at 27%, while our effective accounting tax rate is projected to be similar to 2015 at approximately 26%. This reflects a stable level of favorable tax resolution adjustments of around $0.05 per share for 2016. And we are forecasting a very modest step up in cash taxes for 2016 to the range of $6.75 to $7.25 from the $6.72 in 2015. This reflects higher taxable income for 2016 in line with the growth in earnings and a lower year-over-year tax benefit related to special pension contributions given the higher amount we contributed in the previous year.

Slide 22 summarizes our adjusted EPS outlook for 2016 which we project to be between $3.45 and $3.55 per share or approximately 3% to 6% higher year-over-year. EPS is being supported by strong underlying contribution from operations driven primarily by higher year-over-year EBITDA as I mentioned from all three Bell segments, cost savings from our 2015 workforce reduction initiatives and further service improvement, and lastly the lower pension expense for 2016.

Interest expense is projected to be relatively stable year-over-year, while depreciation and amortization expense is expected to increase by around 100 to 150 as more capital assets get put into service. Adjusted EPS is also being moderated by the dilution of approximately $0.04 per share from the common shares we issued following our 863 million public equity offering last fall.

Lastly, given the recent steep devaluation in the Canadian dollar, I should mention that BCE is close of $1 billion denominated spending for 2016 has been economically hedged at a blended rate of around $1.29. As a result, we have effectively inflated our P&L and free cash flow exposure from U.S. dollar purchases for this year.

A few brief comments on our balance sheet and cash resources. As you can see on Slide 23, our capital structure remains will aligned with BCE’s investment grade credit ratings providing a high level of financial flexibility. Our credit ratings all have stable outlooks and our debt leverage ratio which is the lowest among our peers is projected to improve within target range over the next few years with growth in EBITDA and free cash flow as well as some de-leveraging from surplus cash flow generation. Our recent public equity offering the first by BCE since 2002 was well received by the market. The base equity offering of $750 million and the exercise of 15% over allotment option generated $863 million in gross proceeds, supporting debt reduction through the early redemption of $700 million of MTN debentures maturing in ‘16.

Also highlighted on the slide is BCE’s attractive long-term debt maturity schedule that has an average term of more than 9 years and a very manageable near to medium term debt repayments. We have also taken advantage of these low interest rates over the past seven years to reduce our cost of debt by approximately 250 basis points to 3.38% after-tax.

Lastly, as we enter 2016, we have access to $2.5 billion of liquidity. This reflects a combination of multiyear committed credit facilities, unused capacity under our 3-year accounts receivable securitization program and a cash balance at year end of 2015 totaling $613 million.

Finally, on Slide 24, our cash generation for 2016 will be strong with free cash flow growing 4% to 12% year-over-year to a range of $3.125 billion to $3.35 billion. This is driven by healthy organic growth in adjusted EBITDA maintaining a steady 17% capital intensity ratio and small improvements in our working capital position. Our 2016 free cash flow provides strong support for executing on our business plan as well as the $0.13 per share dividend increase we are announcing today, which maintains a payout ratio within our 65% to 75% target range, while retaining $800 million to $1 billion of excess cash.

Slides 25, 26, 27 are there for your reference. They summarize our key financial, operational and market assumption supporting our 2016 guidance. So to conclude, BCE’s fundamentals are strong as evidenced by our 2015 operation and financial results. In 2016, we expect to build on that progress consistent with the financial guidance targets we have announced today.

And with that, I will turn the call back over to Thane and the operator to begin the Q&A period.

Thane Fotopoulos

Thanks Glen. So before we start the Q&A period just to keep the call as efficient as possible given the volume of material we have to go through this morning, I would ask on behalf of the team to limit your self to one question and one very brief follow-up to get as many people in the queue as possible. So on that, Wayne we are ready to take our first question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Batia Levy from UBS Securities. Please go ahead.

Batia Levy

Great. Thank you very much. One question definitely on the highlights of the quarter we think was the good cost control measures that you showed across the segments, can you provide a little bit more detail on the divers for that, I think about it going-forward into ‘16 especially on the wireline side, with some pressure that you might potentially see on the revenues?

George Cope

Sure. Thank you for the question. Well, as we talked about – Glen addressed the restructuring cost across the board does a number of things that we are seeing, again the steady almost dramatic improvements that we are seeing as our service metrics improve, the dramatic reduction we are seeing in calls that come inbound particularly as people, again as I have said in every call use our online services. To give you one metric 6 million reduction in calls year-over-year from ‘14 to ‘15 we would expect to see similar numbers again going forward this year. We are seeing that we have got 2.2 million customers on wireline, on fiber what we would call service calls or assurance calls, the difference between fiber and FTTN, not just DSL is about a 50% reduction in service calls. As we migrate that footprint out, you can imagine a lot less repairs, that will provide us operating cost savings. The overall restructuring we have done across media and wireline going into ’16, we think it saves us approximately $100 million on the year. All of that is not in wireline, part of that is in the media restructuring that we talked about as well. And so we feel obviously quite confident in our guidance. And we will continue our strategy of making sure we have a competitive cost structure.

Batia Levy

Got it. Thank you. Maybe just one follow-up on the wireline side, you mentioned that the recent price increases were reflected in February and if you could provide some color on what percent of the base saw the increase and do you think this will be enough to offset the pressure that you expect from unbundling?

George Cope

Well, I am not going to give that level of detail. Our prices were announced a number of weeks ago. Our customers are seeing that. I think the important thing with the analyst community, last year we did it November and this year we did it in September. Thank you, Thane. We did it in September. This year we wait until February, we try to go as long as we would possibly can, obviously from our customer perspective that was delayed for them for a number of months. And so as a result, that’s really the reason for the softer overall wireline revenue, but that will obviously play itself out into the coming months. But it was just across our entire customer base.

Batia Levy

Okay. Thank you.

George Cope

Thank you.

Operator

Thank you. The following question is from Richard Choe from JPMorgan. Please go ahead.

Richard Choe

Great. Thank you. Just wanted to touch on the wireless side, when do you think that double cohort pressures might ease, should we expect that to kind of ease mid-year or do you think it might last longer than that?

George Cope

I think the math would say we will see some easing of it in the second half of the year. But there will be a tail on it for sure, because we – not all customers are migrating within that window because there is not necessarily from their perspective the handset they may have bought 24 months ago and given what’s gone on in the marketplace, it has the service capabilities they need. So we won’t be through it completely, but certainly once we have lapped June, you would expect it to moderate and over time probably we see it improve.

Richard Choe

Great. Thank you.

Operator

Thank you. The following question is from Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery

Thank you. Good morning. George, I think a follow-up to that question just the churn up at 1.38, can you just talk about the competitive environment more broadly and the drivers of that churn and what was a less success or kind of a mid-cycle iPhone rather than a picking form factor change, do you think as the double cohort eases that that will settle down as well and can we see some improvements in churn in ‘16 over ‘15? Thanks.

George Cope

Yes. Possibly in the second half of the year, we will see that. I would say for sure, it was a very competitively intense fourth quarter as I know other people mentioned on some of their calls and the double cohort, the math for us just says that there is more base off contracts, so more movement. We also are extremely disappointed in our organization on consistency of pricing across our base. And so sometimes maybe that causes a little bit of movement as people are off contract. But clearly it’s the amount of volumes of transaction we saw that saw some of that bump up in churn. Sorry, go ahead.

Simon Flannery

So there is no bad debt spike there or anything like that?

George Cope

No, it was completely structural as a result of more people off contract in our case migrating, of course having to drive gross adds to do that. As you can saw where we had to spend to make that all happen in I think competitive fourth quarter. But you would think just in terms of the math, you would see some improvement on a year-over-year basis second half simply again because we moved through that base of double cohort being so much available all at once to migrate.

Simon Flannery

Great. Thank you.

George Cope

Yes. Thanks for the question.

Operator

Thank you. The following question is from Tim Casey from BMO Capital Markets. Please go ahead.

Tim Casey

Thanks. George, could you give you a little more color on how you are thinking about the economy, your economic assumptions imply you are expecting a gradual improvement, but obviously there is lots of data points coming out now and lots of headlines suggesting that the Canadian economy or concerns over the economy are growing, how are you thinking about the overall market you are selling into and maybe a comment on your regional exposure and how that will impact your thinking? Thanks.

George Cope

Yes. First of all, clearly we are tougher, because as you know our world is mainly certainly being economist. But clearly just because of our structure of our historical structure being so much more Ontario, Quebec East, there is some more what we would see and read some arguments that the weaker Canadian dollar, we did see some strengthening obviously on the jobs side in the Eastern part. We are obviously national, but our exposure to be a little less than probably some of our peers on the Western Canada side. And so our – overall what we see it’s still is a strong consumer marketplace for our products and a lot of increased usage of our products. And on the business side as Glen said B2B continues to be soft albeit, we have continue to see slight improvements there and we have restructured our costs there going into ’16 as well to reflect that. That’s really what we are seeing. And then the one thing we will just have to watch which may in one sense be – turn out to be a benefit for investors on the wire side. Of course, the Canadian dollar weakness does probably foreshadow some price increases from our manufacturers at some point which obviously in the end get passed through the consumer. And that might slow some of the upgrades as well and the industry will just have to wait and see how that unfolds.

Tim Casey

Thank you.

Operator

Thank you. The following question is from Vince Valentini from TD Securities. Please go ahead.

Vince Valentini

Yes, thanks very much. I want to ask about the rate increase on the wireless side of – there are approximately $5 that you put through, do you see that having much impact in 2016 or because it’s only on new customers and not the whole base, is it more of a fiddly impact in the short-term?

George Cope

I would – a few things. You are right, it’s not a base, so we will not have a lot of impact there. I think it has the ability to over time in the industry you may see some reduction in churn to the double cohort process as a result of that. And a lot of that work really was how competitive it was in the fourth quarter making sure adjustments in pricing reflected what we need to get on a return to make the capital investments we are making going forward. That’s really what that price change was in the market. It won’t have a huge impact in ’16, but it certainly will help stabilize impacts that you would see follow through in ’17 and ’18.

Vince Valentini

Thank you very much.

George Cope

Thank you.

Operator

Thank you. The following question is from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan

Thanks. Good morning. I want to ask a question on the internet side, George you talked a little bit about the lower wholesale activity that you saw, I am wondering if you can just give us the sense of maybe a rough sense of what the size of your wholesale base is and just maybe describe what’s happening in that market, what you are seeing is it some of your cable competitors that’s going after some of your wholesale customers, just wondering if you can elaborate on that a little bit?

George Cope

Yes. I won’t get into market shares, because I just wouldn’t disclose that, it’s a competitor distribution issue. But clearly on the retail side, we saw very strong quarter that’s driven by I think our leadership on the network side of the retail piece. Combining that also with the great differentiation of our IPTV product pulls through for us internet adds and on the wholesale side, I think there was competitive intensity with our cable competitors in that front. So, our instincts might be we lost some wholesale market share to them. We can’t confirm that, because we only know what we saw some movement, but it obviously was offset by our retail growth. And clearly, the financial growth of the company is much stronger on the back of the retail internet adds than wholesale.

Jeff Fan

Okay. And then maybe just a quick follow-up on the price increase question from Vince. From a regional perspective, you increased prices pretty much across all your markets. The only exception I think is Manitoba, wondering if you can just elaborate maybe what you are seeing there, why you haven’t gone there, when you have gone pretty much all across Canada?

George Cope

Well, I am not going to target on one region other than that’s probably I think we were the last player in that market and by far the smallest player in that market and so we are in the midst of growing share so in all the other markets where we have led, I think you have seen our pricing actions.

Jeff Fan

Okay, thank you.

Operator

Thank you. We have one more question remaining in the queue. [Operator Instructions] The following question is from Phillip Huang from Barclays. Please go ahead.

Phillip Huang

Hi, thanks. Good morning. A question on the wireless ARPU, so Bell now has the highest blended ARPU and also the fastest growing one amongst the three national wireless players. And we have seen continued rapid data usage growth and also the recent price increase in the market. I was wondering what level of ARPU growth assumption should we assume into 2016, we obviously saw a very strong one in 2015, what kind of momentum can we continue into this year?

George Cope

Yes. So look, I am not going to go that granular and I know that doesn’t surprise you, we appreciate the question. Glen added in his notes his comment that we would expect an increase in ARPU year-over-year as a result of customers continuing to migrate to LTE, but not at the pace we would have seen this year simply because of the base that remains to migrate. And so I am going to leave it to the analysts to try to interpret our guidance on what a reasonable ARPU increase is other than to say we do expect it to be higher year-over-year and that’s really driven by people using these products more and more. And to a small extent the price increase, but as was mentioned on the call really that price increase is a flow-through of net new customers, it’s not a base impact on us.

Phillip Huang

Got it. That’s helpful.

George Cope

Probably it’s not as granular as you want, but we just won’t go that far.

Phillip Huang

Right. No, that’s helpful. And maybe just a quick follow-up on the fibre-to-the-home footprint expansion, particularly in Toronto, I know you guys have just given us a target on 3 million footprints for 1-gig service by the end of the year. Maybe on – because I know you mentioned that the folks the next couple of years will be in Toronto. I was wondering if you could elaborate a bit on what stage we are in now and how soon we could start to see certain neighborhoods?

George Cope

Yes. We have started with some neighborhoods are just starting to see the service. For competitive reasons, we won’t get into exactly that, but I can tell you we are really pleased with the pace that we are on. And I know a lot of the fibre through – all the manholes in that has now been laid and so we are now starting in two neighborhoods. It looks like we will end Ontario in total somewhere around 750,000 subs in our total Ontario footprint, but not going to break the rate down by city here, particularly because I know my friends who I compete with will be listening pretty attentively to the call.

Thane Fotopoulos

Location not subs...

Phillip Huang

Got it.

George Cope

And not subs, I mean location, I am hoping on subs.

Phillip Huang

Right. Alright, thanks very much.

George Cope

Good catch, Thane.

Operator

Thank you. The following question is from Robert Peters from Credit Suisse. Please go ahead.

Robert Peters

Hi, thanks for taking my question. Maybe just switching over to CraveTV given the – you launched it as an OTT service this January. I was just wondering – I know its early days, but wondering how that’s been received so far? And then maybe on a strategic side of things how you balance the continued expansion with Crave and kind of the new contents you are adding there with the national rollout of TMN?

George Cope

Yes. Well, first of all everything that is on Crave, of course, is available through our BDU distributors in Western Canada. So, they will have Crave and TMN all available and some of them will package together. So, that will be up to them in the marketplace. In terms of the early launch that we have just done OTT, we are thrilled with where it is. We will have to see how it plays out. It’s very early days. We continue to see subscribers’ subscriptions through our BDU business. And really what we are really trying to do is recognize it as viewership changes with some of the consumer markets we have got obviously through our media business participate in that and at the same time, make sure that our BDU distributors of our products have the best content available within their ecosystem and that’s why many of them are now picking up the Crave product. Quite frankly it’s why we added Netflix to our BDU distribution product, so that a customer subscribes, for instance, to our five TV product now has every possible piece of content available to them through that ecosystem. And so we are really targeting a strategy of both – both methods of distribution and then leveraging where we have some of that content. As a result of regulatory rules, some of that content within our own IPTV footprint where Crave is available to our BDU business, but not through some of our BDU competitors directly in the Ontario market.

Robert Peters

Perfect. Thank you very much.

Operator

Thank you. The following question is from Maher Yaghi from Desjardins Capital Markets. Please go ahead.

Maher Yaghi

Yes, good morning and thanks for taking my question. Over the last couple of years, the proportion of prepaid to postpaid has significantly decreased with prepaid now about 10% of total subs, down from 25% a few years ago. And that helped a lot your ARPU. George, I wanted to ask you when you look forward into this metric, how much additional migration could we continue to see, can Canada handle similar rates, let’s say, what we are seeing in the U.S. would rise in that 5%? And I have a follow-up question on the wireline business.

George Cope

So, I mean, our strategy is we are in all segments. Historically, of course was previous to the team that’s running mobility now, there was probably a disproportionate focus on prepaid. Our focus is on the postpaid segment. All of our channels have prepaid products within their portfolio to sell. And so as the consumer has the demand for that we sell it, but our real focus is in through all of our channels is in the postpaid segment. So, we have long-term customers but we plan the prepaid. Well, I think the mix will continue for us to be stronger on the postpaid side. But we are in that segment, but it’s not an absolute heavy focus of ours, but the economics don’t really payout very well in our view.

Maher Yaghi

Alright. And do you see that Canada can withstand or grow lower rates, let’s say in the 5% range we are seeing in the U.S. or is there anything different in the Canadian market that can prevent that from happening?

George Cope

Well, I mean, the fully competitive market different people will focus on different segments of the market. So, the market itself is served. As I said we are absolutely serving that overall marketplace. But if you look at the ARPUs of prepaid, which in the country probably run, let’s just estimate under $20 probably that range. If you look at our total operating cost plus depreciation – or proxy of depreciating for our CapEx intensity, it’s about $43 a month per customer just to breakeven. So, we probably have a hard time with the financial community justifying a focus on an ARPU like that and so that’s really why our focus continues to be most in the postpaid and consumers of course want the products that are on postpaid because of the incredible access to the networks they get.

Maher Yaghi

Okay, great. Thanks. And just on the wireline side, very strong cost control. But over the last two quarters we have seen an acceleration in the NAS losses on a year-on-year basis and percentage basis. Definitely a lot of wireless substitution taking place, but how do you see that metric going into 2016?

George Cope

Yes. I am glad you asked the question. It’s a good question. I would say on the consumer side, pretty stable maybe flat to a little bit better on the consumer I think if you get underneath the numbers. On the business, you are correct. Part of that’s been some continual migration for sure on the enterprise side to customers to IP and that doesn’t count on the one-to-one NAS basis, but we saw certainly saw some of that in the fourth quarter. That’s for sure. And secondly, more competition from the cable side and the small business side, I mean, it’s clearly there. And the other side which is I know it’s a broken record for our investors, but obviously job growth in core markets creates small business growth, which creates a volume growth. So not as much on the consumer side that seems to be declining as we all know on a consistent basis, but on a stable basis year-over-year almost as a percentage. And if I am off a little bit, but we really haven’t seen much change there. It’s mostly on the business side.

Maher Yaghi

Okay. Thank you very much.

George Cope

Thanks for the question.

Operator

Thank you. The following question is from Drew McReynolds from RBC. Please go ahead.

Drew McReynolds

Thanks very much. A question for you Glen, it seem the ratings agencies more recently scrutinized I think that the Canadian telecom and other Canadian sectors out there, a little bit more closely, so just wondering if you can update us on priority uses of excess free cash flow between obviously dividends or priority, but between pensions, debt repayment and acquisitions and whether really anything has changed just given what appears to be a just a little bit more scrutiny on the sector?

George Cope

Thanks Drew. No, I think history is – speaks for itself. We have always taken a very prudent balance sheet management. The actions we have taken shows our commitment to investment grade. And we believe that’s important to BCE. The recent equity issuance that we did showed our commitment to that. Now, you will see these – those proceeds of the small acquisition we did with Corus and the injection into the pension plan early redemption of some MTNs. But we believe that the credit rating that we hold today and the stable outlook will remain and it’s important to us. When you look at the proceeds or the excess free cash flow we have that I mentioned between $800 million and $1 billion each year we make decisions on how we spend that strategically. Whether that be as it has been historically and investments in spectrum or injections into the pension plan are managing our balance sheet. And I can assure you that the future is not going to surprise anybody. We are committed to that and I think a balanced responsible approach to all stakeholders.

Drew McReynolds

Okay, that’s great. And just maybe related one for you George, just a big picture on – when we would look at the telecom revenue growth outlook, just with maturation and what have you, I mean that the revenue growth seems to be decelerating a little bit across the board, I am just wondering, would you agree with that, are we missing any kind of unidentified kind of future revenue streams. And does it at all kind of influence BCE’s decision to stay in Canada or potentially look outside of Canada for growth?

George Cope

Well, yes, certainly it has no bearing on our willingness to stay in Canada. We love this market and we think it’s got an incredible future. And I would say a lot of that is driven by clearly our strategic focus on broadband. Where we do see strength in the underlying part of the market is both the business and the consumer demand for broadband services be a wireless or wireline. They want faster speeds. We are doing in wireless, we have speeds, I know everyone on the line knows second to none in the world. And with one gig services we probably have one of the highest penetrations of footprint already with one gig services. And I think that’s where the underpinning of revenue growth for telecom in the country will come on those two core pieces. And then on the media side, I think our media performance on revenue is it really speak strong for the assets we have created and there really it is just as consumer behavior changes and how we wants to access content, we just have to move in that direction. I think the underpinning – one thing we all have to watch obviously on our cost structures, the weak Canadian dollar is tough, I think handset prices and that we have some hedging in place as Glen said, but clearly we would prefer a little stronger dollar going forward.

Drew McReynolds

Thank you.

George Cope

Great. We have time for two more questions.

Operator

Thank you. The following question is from Greg MacDonald from Macquarie. Please go ahead.

Greg MacDonald

Thanks. Good morning guys. George, just a quick question on the media side of the business, I wonder this was the potential year of potentially increased volatility. We don’t know, but potentially increased volatility on the IPTV side and on the media side because of that CRTC and bundling decisions. I want to try and get a sense of how much risk there is to the estimates that you have set earlier, the guidance that you set on a media for this year, has anything changed in terms of negotiations that you have had with ad buyers relative to the decision coming in. And to what extent is the ability for you to say look I have got an online platform in CraveTV, I have the ability to have some flexibility in offsetting some of that risk, if you are nervous about that, how important is that or are we underestimating that? Thanks.

George Cope

A couple things, we – clearly it’s about making sure you have the content that people want to view is what’s driving our advertising and a lot of positioning. I think you saw some of the work we do with major launches here in the country on some brands. For now, we are finding the portfolio of having the radio, the strong outdoor, it’s why keep investing there. And our an overall TV position in the marketplace, let’s just put in front the corporations in Canada, something that’s second to none in terms of our advertising capability that’s really there. And then clearly the second thing is the amount of work we did on cost structure. It was a very painful process to go through and impacted a lot of people unfortunately in terms of what we had to go through. But our view was we wanted to get our cost structure in line so that we could have a growth EBITDA business and cash flow business that were ready for this change in behavior. So our cost structure has changed dramatically in Bell Media and that is what you will see reflected in our EBITDA numbers going forward. How positive it will be, that will be a function of how we execute during the year. But at this point we expected to be positive from an EBITDA perspective.

Greg MacDonald

And have the negotiation – thanks.

Operator

Thank you.

Thane Fotopoulos

It’s the last question?

Operator

Thank you. So the last question is from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.

George Cope

Good morning.

Aravinda Galappatthige

Good morning. Thanks for taking my question. George I just wanted to get your thoughts on Crave, with the HBO SHOWTIME deal and the ability to include some of that content, shows like billions into Crave, that programming slate looks even stronger. Is there a temptation to maybe use that as the sort of a sweetener on the wireless side as well, similar to what Rogers has done with Show Me and Next Issue, etcetera, is that a place where you would consider going?

George Cope

Yes. I think all those things are on the table, absolutely. The key to us is to make sure we can monetize any of those – the content of that people access of course now because Crave is available OTT and only if you are an OTT subscriber of course on LTE, you can access it already. But as the market evolves there is more product portfolio rollouts required. We are certainly in the position to be able to do those sorts of things. And we are just – we always as usual either follow or leave the market on different ideas that look to us to be effective or not. It’s clearly the premier content. I mean to have HBO and SHOWTIME content, as the broadcaster in the country, I mean I think you could last almost anyone in the media business around the globe of those two strategic relations for us, we think put us in an excellent position make sure our BDU partners TV business is in an excellent position. That’s not just talking about our own TV businesses, everyone else’s. And we had put Marian’s business from an OTT perspective in a great spot against any of the global competitors in terms of that content. And that’s why, we have been making such an investment there and it will be accretive overall for the company as a result of putting in place the right cost structure for Bell Media.

Aravinda Galappatthige

Great. Thank you.

George Cope

Great. Thank you.

Thane Fotopoulos

So on – thanks on behalf of George and Glen, thanks for your participation this morning. I am available throughout the day for follow-ups and clarification as usual. So, thanks again. Have a good day. Bye-bye.

Operator

Thank you. That concludes today’s conference all. Please disconnect your lines at this time and we thank you for your participation.

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