Shaw Communications' (SJR) CEO Brad Shaw on Q2 2016 Results - Earnings Call Transcript

| About: Shaw Communications (SJR)

Shaw Communications Inc. (NYSE:SJR)

Q2 2016 Earnings Conference Call

April 14, 2016 15:30 ET

Executives

Brad Shaw - Chief Executive Officer

Jay Mehr - President

Vito Culmone - Executive Vice President and Chief Financial Officer

Nancy Phillips - Chief Executive Officer, ViaWest

Alek Krstajic - Executive Vice President and President, WIND

Analysts

Jeff Fan - Scotia Bank

Vince Valentini - TD Securities

Philip Huang - Barclays

Drew McReynolds - RBC Capital Markets

Aravinda Galappatthige - Canaccord Genuity

Greg MacDonald - Macquarie

Maher Yaghi - Desjardins Capital Markets

Rob Peters - Credit Suisse

Operator

Thank you for standing by. Welcome to the Shaw Communications’ Second Quarter 2016 Conference Call and Webcast. Today’s call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [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.

Mr. Shaw, I now turn the call over to you. Please go ahead.

Brad Shaw

Thank you, operator. Good afternoon, everyone and thank you for joining us today. With me today are members of our senior management team including Jay Mehr, President, Shaw Communications; Vito Culmone, EVP and Chief Financial Officer; Nancy Phillips, CEO, ViaWest; and Alek Krstajic, EVP and President of WIND.

Our second quarter results marked the beginning of our transformation to a pure-play connectivity company and I am pleased to confirm that we have successfully closed both our previously announced transactions. The WIND acquisition closed on March 1 and we are excited to have Alek join us on the call today. I am sure that there will be a few wireless related questions and we have tremendous confidence in the WIND team to help lead and grow our wireless business. At the end of Q2, WIND had approximately 980,000 subscribers and the business is performing as we expected.

Shaw Media officially became part of Corus Entertainment, effective April 1 and I want to congratulate Doug and his team on the successful closing of this strategic acquisition. We look forward to the benefits of the combined pure-play media company through our 37% equity stake in Corus.

Before Peter reviews the financial results, I want to highlight some key developments over the last quarter. We are committed to providing choice and flexibility for our customers through innovation and value in our products and services. During the second quarter, we introduced a number of options for our video customers, including FreeRange TV. FreeRange is launched on January 6. And as of the end of March, over 210,000 customers activated with their accounts with a total of over 360,000 devices. The FreeRange experience has generated a lot of positive conversations with our customers and the ability to stream live TV in particular is the most popular feature of the app, generating approximately 70% usage.

Last week, we launched the next stage of our next generation video roadmap by expanding FreeRange from mobile device to web access through any connected device such as a laptop or smart TV. This marks another step towards beginning the video experience for our customers. Shaw is also one of the first TV providers to launch the skinny basic package that was mandated by the CRTC. Limited TV provides a basic TV package for $25 along with the ability to include small theme packs, so customers can personalize their TV experience. While there has been some interest in skinny basic at launch, the majority of our customers still take a larger TV package, which allows us to truly differentiate and compete through value-added items such as FreeRange, WiFi, shomi and now CraveTV as well as hardware options that are part of our 2-year value plan that we have recently launched.

We are committed to investing in our broadband infrastructure to lever our significant capital cost advantage and deliver superior Internet experiences to all of our customers. We have deployed next generation converged cable access platforms, or CCAP, in many of our major markets, dramatically expanded our number of Internet carriers, completed a record number of notes flipped this year and have achieved our lowest ever network congestion levels. Our digital network upgrade is now complete in all major markets with no analog video on any of those systems and we will be fully complete everywhere, this fall. All of these investments are in service of delivering a differentiated Internet experience for Shaw customers.

I will now turn it over to Vito to go through the financial results in greater detail. Vito?

Vito Culmone

Thanks, Brad and hello everyone on the call with us today. Q2 results will look a bit different than in the past as media has been reported as discontinued operations. But let me start with a consolidated picture and then I will drill down in deep section.

Revenue growth from continuing operations, which consists of consumer, BNS and BIS, increased 3% and 3.5% for the quarter and year-to-date period, while operating income before restructuring costs and amortization, or EBITDA, increased by just under 1% in the quarter and 2.5% for the first half of 2016. Capital expenditures in the current quarter increased approximately 8% to $274 million. The year-over-year increase is attributed to upgrades and enhancements, including costs related to our TV or NGV initiatives, additional bandwidth upgrades as well as growth related capital in BIS. Year-to-date capital investment of $519 million is also reflective of timing as the back half of the year will moderate slightly.

Consolidated free cash flow for the second quarter was $119 million and is a combination of free cash flow from continuing operations in the amount of $90 million plus discontinued operations of $29 million. On a year-to-date basis, free cash flow totaled $291 million.

Starting with consumer results, revenue was largely flat over the previous year while EBITDA decreased 1% in the quarter due to lower subscriber revenue combined with higher expenses, including the launch of FreeRange and increased network fees. For the first 6 months of the year, consumer EBITDA has grown by 1.1%. Consumer RGUs decreased by approximately 42,000 in the quarter as video and home office more than offset the gain in Internet.

Business Network Services, or BNS, revenue and EBITDA were up 6% and 1.5% in the current quarter due to continued customer growth. Excluding business satellite services from the results, revenue was up 7.7% and 8.2% for the quarter and year-to-date respectively. The new smart products that we have recently launched continue to appeal to the speed market that we are focused on. SmartVoice is now installed for over 4,000 customers and Smart WiFi had over 830 customers.

Our current method of counting business subscribers is measured at the individual unit level, which was well suited for some of our traditional offerings. However, with the advent of new cloud-based services, subscriber additions are recorded at the customer level versus the individual unit level. The result is that when the new customer subscribes to our services, the RGU impact is minimal even as revenue increases, as it did for the current quarter. The success that we are experiencing as more and more business customers migrate to our new cloud-based services is not accurately captured in the RGU metric that’s currently defined and is becoming less indicative of the performance in this division.

Turning to Business Infrastructure Services, it delivered another solid quarter. Reported revenue and EBITDA were up 48% and 32% respectively. Second quarter results, including the addition of both applied trust and more recently, INetU, which closed on December 15, 2015. Adjusted for the acquisition, organic U.S. dollars revenue and EBITDA increased by 10% and 11% respectively. M&A contributed $9 million to revenue in the quarter and $4 million to EBITDA. And on a Canadian dollar basis, foreign exchange improvements contributed $3.9 million to EBITDA. These positive variances were partially offset by approximately $3 million of additional adjustments that include Calgary data center costs and employee-related costs.

Media or discontinued operations as it’s reported in the financial statements reported revenue of $227 million and EBITDA of $71 million, which includes a $20 million favorable accounting treatment of program amortization. On a tax-adjusted basis, discontinued operations contributed $48 million to net income in the second quarter.

Consolidated net income for the quarter of $164 million or $0.32 per share was down by approximately $4 million over a year ago. The current period includes transaction costs associated with the WIND acquisition, higher amortization and that greater equity loss related to some of our investments such as shomi. Over the past few months, there were a number of financing events related to the transactions as well as some near-term debt maturities. During the quarter, we repaid the $300 million floating rate notes that matured on January 31 from balance sheet cash. And subsequently, we raised $300 million in fixed 5-year notes at a very attractive rate of 3.15%.

Upon closing of the WIND acquisition, we funded the $1.6 billion requirement through a combination of a $1 billion drawn on our bridge facility, a further $300 million from our main FDI credit facility, which was also upside from the $1 billion to $1.5 billion during the quarter and the remaining approximately $300 million from balance sheet cash. Effective April 1, the bridge and the main facility borrowings were repaid in full with cash proceeds from the sale of Shaw Media. The only near-term maturity for calendar 2016 is a 6.15% $300 million dollar notes due in May and we expect to fund this obligation with a fixed existing balance sheet cash.

Our balance sheet remained strong during the quarter with leverage of approximately 2.4 times, almost $1 billion of liquidity available through our credit facility as well as approximately $360 million of cash as of the end of Q2 prior to the previously discussed outflows inflows related to the WIND acquisition and the Shaw Media sale.

With acquisition of WIND and the disposition of Shaw Media, we are updating our fiscal 2016 guidance. Shaw provided fiscal 2016 guidance for Consumer, Business Network Services and Business Infrastructure Services combined is for operating income before restructuring costs and amortization to range between flat to low single-digit growth over fiscal 2015. Consolidated capital investment for Consumer, Business Network Services and Business Infrastructure Services combined is expected to be $995 million. The increase in expected capital spend reflects capital projects acquired in the INetU transaction and the effect of foreign exchange rates relative to plan. We expect to provide consolidated fiscal 2017 guidance, including WIND, in our normal course.

With that, Brad, I will hand it back to you.

Brad Shaw

Great. Thanks, Vito. 2016 is an exciting year with lots of changes and opportunities for Shaw. As we make our way through the process, we begin to execute our strategic plan, we will keep a sharp focus on operational efficiencies and ensure that we continue to build on delivering an exceptional customer experience.

Thank you for joining us this afternoon. I will now turn it over to the operator to open up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jeff Fan of Scotia Bank. Please go ahead.

Jeff Fan

Thanks. Good afternoon, everybody. Where do I start? I guess, we will start with WIND since Alex is on the line. You guys gave some numbers on the subscribers on 980,000, but the last time you gave any numbers on the financials was related back to, I think, calendar Q3. So that was a September quarter. So, wondering if you guys can give us some indication of where ARPU is at currently and also the revenue and EBITDA level just to give us some color as to how things are trending since the third quarter last year?

Alek Krstajic

Hi, Jeff. It’s Alek here. Look, things are trending extremely well. The ARPU is about $35. When we look at where things are in terms of gross and churn and net, everything is on track exactly where the business plan calls for it to be. In terms of some specifics, gross came in a tiny bit lower, but churn was substantially lower. So, we overachieved on that, but the momentum that we saw at the end of the year, last year has continued. So, it’s been very, very good.

Jeff Fan

What about the capital that’s required for LTE? I think the number of 250 was talked about before. I wonder if you guys can give us some update on the CapEx that’s required. I guess specifically, upgrading the network to the point that Shaw is comfortable in putting its brand on the network at West?

Brad Shaw

Hey, Jeff. Thank you for giving us the opportunity to talk about WIND. Maybe I will just jump in and flip it over to Alek to give you more details. I mean obviously, our guidance did not include any WIND guidance related to F ‘16. And I reiterate that from an EBITDA perspective, the business is performing in line. It’s not slightly ahead of expectations. So, we are all good on that. And really the reason why we didn’t include any WIND guidance is the timing of capital that you are alluding to? We are very, very comfortable in the $250 million number that we have provided to the Street from a perspective of the LTE upgrade. And what the teams are working through frankly is the cadence of that as it relates to fiscal ‘16 versus fiscal ‘17 and bottom line, we have had – we have been with this business now for 45 days and just didn’t feel as comfortable of putting that number out there as it relates to fiscal ‘16. Frankly, from a timing perspective, we want to get on with this as quickly as possible and the sooner the better. So from an overall end market perspective, we are going to go as quickly as we can, but obviously we want to give the technical teams the appropriate time to make sure that we are spending that money appropriately. And with that, Alek, I will turn over to you.

Alek Krstajic

Thanks, Vito. Jeff, look there is really two parts to this. The first part was the upgrade of the existing WIND network and the swap out of some of the gear that was causing us issues. That has all gone extremely smoothly and is well ahead of schedule. So, Vancouver was done some time ago. As of earlier this week, Calgary is now finished and we are on track to have Edmonton done by the summer. The net effect for customers and we are starting to see it on the blogs and everything else, the net effect for customers is increases of the speed and throughput that are 2 times, 2.5 times what they were experiencing before. We are starting to see in markets like Vancouver where the swap that was finished, 25% more data usage. So, we are very comfortable where that’s going. As Vito indicated, we stand by the forecast, the CapEx forecast for LTE and we are very comparable that that build will also happen on time or ahead of time on a lot of the civil work that can sometimes be lengthy has been completed for a big chunk of it. And we also are starting to some of the benefits of being owned by Shaw, because some of the infrastructure and real estate that they have here that allows us to actually complete that build in an efficient way. So again, Jeff, I am very, very comfortable that everything is on track for that LTE build.

Jeff Fan

And maybe just one last quick thing, I think at the time of the acquisition, the projection for 2015 was $485 million in revenue in ‘15 and $65 million in EBITDA in ‘15. I guess, those numbers were met for calendar ‘15, just so that we can put some numbers around what expectation was?

Alek Krstajic

Yes, we can confirm that, Jeff.

Jeff Fan

Okay, thank you.

Brad Shaw

It’s actually running through $70 million, maybe a tick higher than the $65 million.

Jeff Fan

Okay, thanks.

Brad Shaw

Thanks, Jeff.

Operator

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

Vince Valentini

Yes, thanks. One last thing on wireless and then I have a cable question. But has there been any change since Shaw has taken over in terms of the amount of money being devoted to marketing and the amount of investment in new retail stores?

Brad Shaw

No, not at all. We are still on track with the original business plan and so no change at all there, Vince.

Vince Valentini

Okay, thanks. So on the cable side, I mean, the video subscribers, I certainly found a bit weak this quarter. Can you give any color? I am not sure if your comments, Vito, on the business side in terms of how you count RGUs if that specifically impacted the video subscriber count in the business segment, so maybe you can clarify that? And then more importantly, on the consumer segment, is this sort of Alberta economy weakness or is it Telus being aggressive again or is it more cord-cutting? Any commentary you can give us on the trends there would be great.

Jay Mehr

Hey, Vince. It’s Jay. Maybe I will start with the business RGUs, because it’s a little bit simpler to get your head around. For sure, there is some economics to the video losses on the business side but they are not as material as some of the other things are going on with just under 4,000 disconnects, because the business wasn’t there anymore. But the majority of the disconnects were related to packaging changes. We used to include video with a bunch of our legacy Internet packages. And as we moved our way through the digital network upgrade, it no longer made sense to include video and give up customers the option to move to video. So, as a result, about 10,000 of that RGU loss is just a repackaging issue. The good news about that repackaging issue is it doesn’t come with any revenue loss. And in fact, we lower our network fees, because we are not paying video network fees on that revenue. So, the business was a little bit easier to expand.

As you move over to the – and there are really economic issues on business and is well reported in terms of what’s happening in our economy here, but we continue to be quite bullish about where we are headed. On the consumer side, obviously, we are not happy with our video, our RGU numbers in this quarter as well. For sure, you are seeing some economic issues on video. We did see disproportionate losses in Edmonton, Fort McMurray, Calgary and Saskatoon vis-à-vis British Columbia and most specifically, Vancouver. In Internet, it was really more Fort McMurray and Saskatchewan that actually saw declines, but bigger increases in British Columbia for sure. And informed and interesting of the main outlier was actually in Calgary. So, we are seeing different markets in the economy react in slightly different ways. But I would say, if you are looking at the trend of quarter-over-quarter, certainly, the differences in consumer RGUs are primarily economic. That being said, we are being very active in the marketplace and things like FreeRange TV and hoping for and driving towards improvement in the future, but early for those to show improvement in Q2.

Vince Valentini

So nothing changed in terms of competitive intensity from Telus, Jay?

Jay Mehr

Yes. It’s fiercely competitive, but it’s been fiercely competitive for a long time. I wouldn’t say there has been any – we get the odd desktop from time-to-time, but I think the competitive balance remains in place.

Vince Valentini

Okay, thank you.

Operator

Our next question is from Philip Huang of Barclays. Please go ahead.

Philip Huang

Hi, thanks. Good afternoon. I just want to clarify go back to wireless for a second. On the equipment upgrade that you just mentioned, was that – so are we done for Vancouver and Calgary now in terms of upgrading the harbor for LTE or what was the equipment upgrade for?

Brad Shaw

So what we were doing was swapping out some 3G gear. We had Alcatel-Lucent 3G gear in those markets and some of that gearhead software that wasn’t being fully supported, it was causing us issues. This is something that I inherited a year ago and we put a plan together to actually swap out that 3G gear. So, we put in new Nokia 3G gear, so that is the 3G swap-out different from the LTE upgrade.

Philip Huang

Got it. So, when you eventually upgrade to LTE, do you need to swap that out again or is that compatible with LTE?

Brad Shaw

No, the two will – the two types of gear will coexist. You are going to have LTE riding on AWS-3 spectrum and this is the gear that’s running AWS-1 spectrum.

Jay Mehr

Philip, it’s Jay. Just to make sure that we are transparent about the two things that are going on here, the 3G radio upgrades that’s happened in Vancouver, finished in Calgary last night and it’s happening in Edmonton as we speak also allows us to enable the AWS-1 spectrum that WIND picked up as part of some of the spectrum transactions. So, it’s not only a radio improvement, but it’s a spectrum improvement. And we have built all those costs into the $250 million number that you have. So, while it’s not directly related to LTE, it’s certainly related to the performance of our network.

Brad Shaw

It’s a very good combination. So, it is – we are literally in those markets going from having 10 megahertz of AWS-1 to 20 megahertz of AWS-1, which is obviously helping in terms of the big capacity increase. And yes, 100% of that swap-out cost is already budgeted in the numbers that have previously been given to you.

Philip Huang

Got it, okay. That’s very helpful. And then another question on WIND, I don’t know as you guys were on the call earlier with Cogeco, but we heard it loud and clear this morning that Louis said on the earnings call that they would be delighted to discuss any potential partnership opportunities on WIND. What are your thoughts on that? I mean, on the surface, it does seem like it could make sense for you, right? I mean, just given that it could allow you to focus more of your investments in the Western Canadian footprint versus the Ontario footprint, which arguably would be less relevant for your fixed line footprint?

Brad Shaw

Yes, Phil, this is Brad. We certainly have chatted with Louis a little bit and know he is – there is some interest there. I think it’s a little early for us to be determining how far and what type of partnerships we have. We are so excited about the opportunity in Ontario, believe there is options for us as we go forward either in partnerships or not, but we are going to be talking to everyone. We are looking at all options and what makes best sense for the business and for Shaw and we will see where it goes, but it’s never a phone call away.

Philip Huang

Right. Do you foresee any potential complications to such discussions just given that there is existing roaming agreements that WIND has with the incumbents? And I would imagine that BC, for example, would probably – would probably not be happy if you strengthened one of their direct competitors?

Jay Mehr

I think they are two separate things. I think strategically, BCE may not think that was in their interest if there was a strengthening in one of their competitors, but the roaming agreements are obviously completely separate, the roaming agreements that are in place and some of the changes in the roaming rates are all being mandated. So I think the two are unrelated.

Philip Huang

Right, okay. Maybe one final one for me, with respect to Mobilicity, we observed some increased marketing of the Mobilicity brand in Western Canada by Rogers. And just given the positioning of Mobilicity’s offering, it seemed like the brand is aimed at gaining some market share back from WIND and certainly from the numbers that you guys just talked about today, it doesn’t seem like it’s having much of an impact, but I was wondering if that’s something that you guys observed as well some increased marketing by Mobilicity? Thanks.

Jay Mehr

Look, our friends at Roger seemed to have a lot of brands going on there. They have got Fido, they’ve got Chatr, they have got Mobilicity. We see some of those brands coming in and out of the market. I am a bit confused to be honest with you. I really don’t know what they are doing with that one. But I think that they – we saw some aggressive pricing at the end of the calendar first quarter and it all changed and it’s been pulled out of the market. We haven’t really felt any of that. So, we are very good with that.

Philip Huang

Great, thanks very much.

Operator

The next question is from Drew McReynolds of RBC Capital Markets. Please go ahead.

Drew McReynolds

Yes. Thanks very much. Just a couple of follow-ups. I guess first on just around the FreeRange TV and some of the success you are seeing there. I am just wondering if you can kind of frame it for us. In the absence of the Alberta headwind, which obviously is – and hopefully clearly cyclical, would you otherwise feel that you are gaining some real traction with FreeRange TV? And then secondly, Brad, just to follow-up on your skinny basic comment where you have seen some interest, I am just wondering if you can elaborate in terms of the take-up for skinny basic and unbundled channels or packages, maybe what type of subscribers are coming into the market to take these kinds of offerings? Thank you.

Jay Mehr

Drew, it’s Jay again. Yes, for sure. I mean, if you look at the marketplace, there is no question we can feel positive momentum in the marketplace. We continue to see already industry leading customer satisfaction and likely to recommend to friends and family growing and we hope to be able to report churn results on FreeRange TV as we go into our next quarter obviously a little early with the mid-January launch. I want to reinforce so that the 360,000 devices that were activated by February 29 were a value-add to our customers to return 360,000 smartphones in Western Canada into TVs. And this past week as we made it available to laptops, we are turning our customers’ laptops into TVs at no extra charge to consumers, which we think is going to have great medium-term financial results both in terms of churn and also allow us the pricing power to do the things we typically do with rate adjustments coming up this summer. So, we are pleased with our momentum in the marketplace and obviously wish we also could be able to show you numbers that are consistent with that, but happy with how the response we have been getting from our consumers.

In terms of skinny basic, we have seen, as you would expect, little flurry of activity right around – we got out ahead of everybody else, which we think was good. The flurry of activity around all the press and all the talk it slowed down after that, very much as expected. Customers are taking limited TV plus a couple of other packages, as you would expect, skewing a little bit more on the multicultural side, which we certainly saw, lots of value for consumers in it. There is small number of customers have moved. They are saving a little bit of money or saving a little bit of network fees. In general terms, we think it’s achieving the objectives that the commission had with what they are doing and it’s certainly a plus for our customers and manageable well for us.

Drew McReynolds

Okay, that’s great, Jay. And maybe a third one if I can squeeze it in, maybe for you, Nancy, just on ViaWest, obviously, you continue to perform quite well on an underlying basis. I guess, across the data hosting space, there continues to be a lot of noise. There continues to be really mixed performance and I am just wondering if you could just characterize how the market is changing. Obviously, you are doing well, but just curious to know what exactly is changing out there as you go quarter-to-quarter here?

Nancy Phillips

Yes, I mean, obviously, we are very pleased in terms of how we have done in terms of new customer acquisition. We are excited about the investments we have made over the last several months. We think those are really critical to how we think about infrastructure in the future. We believe that a company that’s been very much linked to the customer and they have been telling us that as much as it’s important to have a platform in our datacenter product, it’s important to have a path forward in terms of other platforms and those include our cloud, our managed services, And now with the Applied Trust acquisition, certainly, our professional services approach to high-touch, high-security applications. So, what we are really seeing, I think it’s resonating tremendously is that we are filling a gap that maybe the pure-play companies in the industry have been challenged in trying to bring to market. So, our hybrid multiplatform strategy is definitely resonating. We are seeing great uptick and it’s even resonating here in Canada. I mean, the Calgary operations literally been open end of November, early December and we are seeing tremendous takedown rates and feel very, very good about how we are progressing. As you mentioned even in a tough Alberta market, we see our products resonating when there are certainly financial downturns. Companies are looking to outsource IT and we fill the bill through those organizations. So, I think it’s a breadth of products we bring to the market clearly have a phenomenal customer service reputation in the industry and I think the combination that’s here is the winning formula.

Drew McReynolds

That’s great. Thank you.

Operator

The next question is from Aravinda Galappatthige of Canaccord Genuity. Please go ahead.

Aravinda Galappatthige

Good afternoon. Thanks for taking my questions. I will start with the question on WIND. I was wondering maybe for Alek, if you could maybe outline your strategy in Ontario, I mean apart from the LTE rollout, which will happen I guess in the next year or so. Maybe just touch on where you are looking to sort of drive changes whether it’s investments in customer service, changes in pricing strategies, any sort of strategic changes that you can maybe disclose?

Alek Krstajic

Thank you for the question. Look, I think it’s going to be a continuation of a strategy that we started about a year ago. And so along with improving the network, we want to make sure that we make some improvements in customer service. I think that there was a rigidity in the customer service approach that was originally there a year ago and we started changing that. When it comes to pricing, I think you are going to continue to see us have a very disciplined approach to the market. We think that there is an implicit discount that we operate at compared to some of the incumbent pricing and that should continue. And at the end of the day, we are trying to just make sure that value equation for the customer is good in terms of what they are getting and how much they are paying for it. And then most importantly, I think, when all of the things are equal, we want to be that company that people look at and they say if we buy from people we like and trust. And so we really need to grab that higher ground. There is no secret that a lot of the customers in this country in wireless don’t – they are not in love with the three incumbents and we would like to – I would give them a reason to at least like us.

Aravinda Galappatthige

Great, thanks for that. And just switching gears on to the cable side, on the consumer front, I think in the MD&A, you have indicated some higher programming cost around annual rate renewals. I was wondering if you can provide a little bit of color on that. I was wondering whether there were any sort of changes on the affiliate agreement side that may have ticked up the subscriber fees that you pay to the net, so that played a role as well and whether that could potentially spillover to the following quarters as well? Thank you.

Brad Shaw

Yes, I think if you look at the network fee increases, you are just seeing the contracted increases that are on multiyear agreements. And we have one of our major providers who has – you can imagine one of which too, who has a January 1 rate increase. It’s built into a multiyear deal. It’s the final year of that deal. And so, it’s the normal increase in cost that was contracted certainly as we look in the Talk TV world and we look at affiliate agreements and we look at the new regime under the Commission’s new rules. We think we are in a better position than ever to be able to negotiate for flexibility. We will see it as that unfolds. As you can appreciate, the biggest programming pressure is sports and we are going to do what we can to mitigate that.

Aravinda Galappatthige

Great, thank you. I will leave it there.

Operator

The next question is from Greg MacDonald of Macquarie. Please go ahead.

Greg MacDonald

Thanks. Good afternoon, guys. The Alberta economy, there has been a couple of questions on it, but I would like to ask a question this way. When you look back at the major impacts within your business that the economy – that the weakness in the economy is having, notwithstanding trying to make any forecast to what future job losses might be. Are you comfortable saying that there is stability now on the trend of the economic impact or is there still volatility there that represents risk?

Jay Mehr

Yes, stability is a challenging word. Look, as we talked about on the last call, the economic conditions and what’s happening although it’s different in various markets in Alberta and Saskatchewan, they are certainly real and visible to the naked eye. We think we have got good visibility in terms of the changes in Fort McMurray and we think the Fort McMurray economic changes are perhaps front-ended compared to some of the other economic changes. We are hopeful in terms of trying to provide as much value to consumers. It’s interesting the flexibility that we have in our pricing, including Limited TV and the new flexibility in packaging is giving people landing places as they try and find value and they are out of work and staying in the marketplace. So, we are – I really don’t have a crystal ball beyond that. I can tell you that on a month over month basis, if you look at most recent results, we haven’t seen the deterioration on a month over month basis. But to predict that in the future months would be I think bolder than we would be prepared to be at this moment.

Greg MacDonald

So, Jay, maybe I can ask it in a different way, one of the risks of economic weakness is for re-price, particularly on the business side of things or your business customers. Do you think we have seen the worst of the ask for re-price type of trend that you would normally get in a weaker economy?

Jay Mehr

For Shaw, yes. For Shaw, yes. So, when you think about the business space, the enterprise space is going to reprice, but we are not a big player in the enterprise space. And quite frankly, that re-price works in our favor. Lots of what you have seen is actually direct shutdown of oil and gas, where the operation is actually shutdown. I think lots of that has happened on an immediate basis. And in the smooth world, just the nature of it, you don’t necessarily see re-pricing and in fact, with all of our next generation services, we are well positioned there. So, we think we are in good shape in answering your question on that. Others might still face challenges on the enterprise side.

Greg MacDonald

Okay, that’s helpful. Thanks. And one quick one for Alek, is it feasible that you could have LTE product in the market, certainly in the Western markets by Christmas?

Alek Krstajic

A lot of – the answer to that question will be driven by the ecosystem that comes out of the handset manufacturers. We don’t have visibility yet on exactly which handsets will be available, so difficult to say right now.

Greg MacDonald

Okay, thanks very much guys.

Operator

Next question is from Maher Yaghi of Desjardins Capital Markets. Please go ahead.

Maher Yaghi

Yes, thank you for taking my question. I have a follow-up question on your CapEx allocation on the wireless, the $250 million for LTE. How about increasing the coverage of your current network to improve over the coverage of your major cable operations in Western Canada? So basically, my question is could we look at potentially increasing that amount of $250 million beyond the recurrent CapEx in the next couple of years?

Vito Culmone

Well, look the $250 million that’s been budgeted is to overlay LTE in all of the WIND territories. If I understand your question correctly, you are asking whether there could be a plan to build a broader network that would cover some incremental markets that Shaw served to cable and the answer is we are going to definitely look at that. But again, we are very early. As we said earlier, I think 45 days after close, so it’s going to be a while before we can actually do some of that planning.

Maher Yaghi

Okay. And how about your spectrum position, are you comfortable or are you – you never have enough spectrum, but to operate at a – offer a certain speed and coverage that is comparable to the competition in Western Canada again I focus on that area, is there any need for additional spectrum in the next year or so?

Jay Mehr

Well, look there is an old rule of thumb that you will never find a group of wireless operators that sat around one day over lunch and said, my God, we have too much spectrum. So, we are always going to be hungry to find every kind of applicable spectrum and try to get our hands on it. I think we are very comfortable with this spectrum. We have got that we can continue to operate this year. There is no question that question of 600 megahertz is looming if we want to make sure that the government is going to do the right things in terms of making sure that they equalize the amount of low band spectrum that is available to all the new entrants.

Maher Yaghi

If I look at then following on to these questions about capital allocations and you have budgeted or gave some indication that the dividend is stable for this year. As you look more and more about your capital needs to build and operate a quality wireless network and you look at your cash production now that media is sold, how do you regard your current dividend rate and how sustainable it is in an environment where you need to potentially buy some additional spectrum, deploy larger areas of network and wireless and continue to improve your cable operations? Could those be together, put together enough free cash flow production to support your current dividend at the current rate?

Vito Culmone

Well, I am going to start that before Alek answers any dividend related question. But kidding aside, a great question of course and we have been pretty transparent to the market from this perspective. We clearly understand that over the next year or so and through that ‘17, our payout factor is going to be well in excess of 100% if you will when you look at the cash dividend clearly that assist us. There is a cost for that from an equity perspective, but it effectively funds 30% of our dividend. So, we are going to be really, really measured in that. We are in this for the long-term and then all the repositioning that we have made clearly is about dividend growth going forward. And we will obviously have an eye to that as we move forward. And at the same time, we won’t be shy of making the appropriate strategic investments for our company going forward for the benefit of our shareholders longer term. Keep in mind, obviously, when you think about free cash flow, we have got the Corus dividend that’s also going to be there for us as we move forward and we have got some of our other assets related opportunities as well as we move forward, so no changes to long-term plans about a dividend growth company and taking a pause here over the year or two.

Maher Yaghi

So sorry, go ahead, sorry.

Alek Krstajic

Yes, no problem. And I just wanted to fill in your assumptions around the wireless space. That $250 million is the markets that we serve today, which includes increasing coverage in the market. It’s including increasing the number of sites in the market. You have raised a point in terms of larger areas, areas that we don’t currently really serve today, but I wouldn’t put too much of an overhang on that, like if you look at the economics of growing wireless in the call, where we have 50 megahertz of spectrum and none of it used for 3G, or Vancouver Island, or Cranbrook or Lethbridge we have already got transferred fiber into those communities and we have got a heavy fiber network. When you think about the multiyear horizon, there is nothing in that capital investment that’s scary when you think about the Cranbrooks and the tuck-ins. Obviously, the success of our business will be in the GTA. It will be in the lower mainland. It will be in Calgary. It will be in Edmonton. It’s where our $250 million is.

Maher Yaghi

That’s very helpful. And just one last question on BNS, if the usual KPIs that we are looking at are not relevant anymore in terms of – or less relevant in terms of subscriber numbers, could you provide some metrics that could be more useful to portray the current performance of the business and how to forecast that business?

Vito Culmone

Yes, absolutely. I think ultimately, revenue is the bigger one. We frankly did contemplate whether we were going to pull RGUs as far as our Q2s, but we wanted to give an opportunity to evaluate that. Your point is well noted and that’s an area of focus going forward, but I take you back just to the revenue line at this point in time. We know EBITDA is lagging a little bit here over the Q2, but we are – we have confidence that the EBITDA line here will catch up to the revenue growth finally over the next few quarters.

Maher Yaghi

Okay, thank you very much.

Operator

[Operator Instructions] Our next question is from Rob Peters of Credit Suisse. Please go ahead.

Rob Peters

Thank you very much for taking my question. Just maybe talking on FreeRange and the success you have kind of seen in terms of adoption so far, I was wondering does that impact your timeline for kind of future integration of the X1 technology and maybe what should we think about for the next major milestone on that deployment?

Jay Mehr

Hey, Rob. Jay again. Thank you. We are tremendously excited by, as the Comcast team is as well by the success of FreeRange. We think we have really hit the market with a unique go-to market that is actually unique to Shaw even on the X1 platform and having great headway. We are excited to be already in market with our second launch. There is five or six different go-to-markets in our roadmap over the next 24 months. And I don’t know that it provides us a lot of upside and sort of sharing target dates and test market dates and launch plans from there except to say that we couldn’t be happier. We are greatly exceeding our expectations for FreeRange adoption and we will continue to invest heavily in regaining getting the video space.

Rob Peters

Perfect. Thank you very much. And maybe switching to the Limited TV offering for a second, when we think about the Limited TV and obviously you have seen some people taking advantage of it to reduce their cost, but I was wondering is there a situation you could see happening in the future depending on how the economy goes where you may see people who are currently on your lower tiers taking out or switching to that to pickup channels to go to kind of a more choice environment or do you really see it more as a cost saving tool?

Jay Mehr

Yes, I mean, we think the way Limited TV has been packaged and we are packaged I think in a more friendly way than some others. We think it adds choice to our consumers. And certainly, what we have seen so far is we have seen consumers move to Limited TV that maybe the current packaging wasn’t the right mousetrap to serve them. So, whereas in the past Shaw has included as a competitive differentiator sports on personal and basic things. We are seeing Limited TV appeal to customers who are choosing not to take sports. We are seeing a skew to multicultural and third language programming, which is a customer who used to have to take 50 or 60 channels of English language programming before they could subscribe to programming for services in their language of choice. And we have seen a number of those customers adjust. We have seen some take-up of shomi from customers that – one of our highest subscribed add-ons to Limited TV is shomi. So in some ways, it’s kind of complementary to the package that we have giving more choice to consumers and filling in some gaps that our previous packaging didn’t quite meet the needs.

Rob Peters

Perfect. That’s fantastic color. Thank you. Maybe one last question if I could squeeze it in. In terms of the participation in the DRIP of the Corus shares, I just want to clarify, I believe that ends in August 2017, but I also know that it kind of expires as the lockup expires. So, how should we think about when those shares would be eligible for dividends?

Vito Culmone

So, the first third actually expire in April a year from now and then the complete expiry of the whole thing is at the end of August. So it’s a staged...

Brad Shaw

So, the DRIP is consistent with the hold on the shares.

Vito Culmone

Correct, but then the DRIP commitment is over at the end of August 31 ‘17.

Rob Peters

So, the DRIP commitment is ahead of the lockup expiry, that’s correct?

Vito Culmone

Right. With the lockup for the first third, we dripped the whole thing for the first year. And then after that, a third comes off immediately and then the rest comes of comes off in August 31, ‘17.

Rob Peters

Perfect. Thank you.

Operator

This concludes the time allocated for questions on today’s call. I would now like to hand it back over to Mr. Brad Shaw for closing comments.

Brad Shaw

Great. Thank you, operator. And just a short comment to say how excited we are as a team about the new transformed Shaw and how committed we are to drive this business on a whole new level. I can tell you coming out of our board meeting we have never had so much excitement, so much opportunity as a company. And when it comes down, it’s about execution. That’s what we do. And we really look forward to the future. So, thanks everyone and have a great day.

Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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