Earnings Call Transcript
BCE INC (BCE)
Earnings Call Transcript - BCE Q4 2020
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the BCE Q4 2020 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.
Thane Fotopoulos, Investor Relations
Thank you, Valerie, and good morning, everybody. On the call with me today are Mirko Bibic, BCE's President and CEO, and our CFO, Glen LeBlanc. We definitely have a lot of material to go through this morning. However, before we begin, let me draw your attention to the Safe Harbor statement reminding all that the slide presentation and remarks made during the call today will include forward-looking information and therefore are subject to risks and uncertainties. Results could differ materially. We disclaim any obligation to update forward-looking statements except as required by law. Please refer to the company's publicly filed documents for more details on assumptions and risks. With that, let me turn the call over to Mirko.
Mirko Bibic, CEO
Thanks, Thane. Good morning, everyone. 2020 marked Bell's 140th year, and it was unlike any other I could have imagined when I began as CEO last January. Our new goal of advancing how Canadians connect with each other in the world, unveiled last January, could not have been more appropriate in the year that saw extraordinary change and challenges that have dramatically impacted the economy, and of course, how we live and work. To route it all, Bell has been on the front line delivering the networks to keep Canadians connected, stepping up every day for our customers and communities as we all continue to navigate the COVID situation. 2021 will be a reset year as we transition towards a return to pre-pandemic levels of financial performance and operating momentum. We can't accurately predict the path and pace of economic recovery, but we know that our business is solid, and we expect progressive improvement through the year, much as we did after coming out of Q2 2020. As a result, we remain cautiously optimistic about our business outlook, as reflected in our financial guidance targets for 2021. Our success in 2021 will continue to be anchored to the priorities we set in 2020. They center on increased investment in core network infrastructure that will lay the foundation for future broadband internet and 5G growth; improving the end-to-end customer experience; the ongoing digital transformation of our operations and a continued sharp focus on our cost structure. We will accelerate capital spending in 2021 to forge ahead even more aggressively on our successful broadband strategy, expanding our all-fiber connections, opening up wireless home internet to even more rural communities and building our wireless 5G network faster. To that end, I'm very pleased to announce that we are putting in place a capital investment acceleration program totaling $1 billion to $1.2 billion over the next two years. This is the right strategic move at the right time for our customers and our company, allowing us to realize the substantial operational benefits of state-of-the-art fiber and low-latency mobile networks sooner. This will put us in an advantageous competitive position, allowing us to keep growing broadband market share and internet revenue and to begin monetizing 5G services, all of which yields very attractive EBITDA and cash flow margins. And I'm equally pleased to announce this morning that our planned financial performance for 2021 enables us to increase BCE's common share dividend by 5.1% for 2021. It's our 13th consecutive year of a 5% or higher dividend increase. This represents an emphatic commitment to our dividend growth approach and to our broadband expansion strategy. Because of the accelerated capital investment we're making this year and ongoing financial impacts during the COVID recovery period, our dividend payout ratio in 2021 will be above our historical free cash flow target range of 65% to 75%. Our strong liquidity position and substantial ongoing cash generation support the execution of this capital expansion program and our higher common share dividend for 2021. So let me unpack the capital acceleration program on Slide 4. As I said, we plan to invest an extra $1 billion to $1.2 billion over the next two years, of which approximately $700 million will be spent in 2021 to accelerate fiber, wireless home internet and 5G. This is the right time for investments of this magnitude. First off, the $1 billion in net cash proceeds from the sale of our data centers in October will fund this 2-year incremental capital investment. Secondly, because the Federal government's capital cost allowance program is in place for another 2 years, allowing for the accelerated expensing of capital expenditures, every dollar of network investment that we make will drive significant cash tax savings that can be reinvested into the business and support future free cash flow growth. Normalized for the capital advancement of $700 million in 2021, our consolidated capital intensity ratio is expected to be in the range of 15% to 17%, consistent with pre-COVID levels. Thirdly, for the moment, we have a stable regulatory environment that makes this type of large-scale investment possible. As COVID has shown us over the past year, this is more important than ever. Now isn't the time for policymakers and regulators to move away from encouraging network investments. Now is the time to collaborate and partner with government to connect more and more Canadians, particularly in rural communities. We're showing that with the right policies in place, we're prepared to make significant investments for the long-term benefit of our customers and the Canadian economy, which will benefit from $2 billion in new activity and 5,300 direct and indirect jobs as a result of this additional investment. Now it's also the right time to make these investments because the strategy is undeniably working. We see it in our results. Essentially what we're doing is advancing the wireline and wireless network build that we have in our long-range plan. However, by making these investments more quickly, not only do we realize the operational benefits sooner, but we also reduce our future CapEx requirements supporting future free cash flow growth and dividend increases for BCE shareholders. There is no longer any debate about the power and value of fiber. Once deployed, we begin to see the favorable impact on both subscriber and financial growth as well as on the overall customer experience. Internet penetration grows much faster as we deploy fiber and wireless home internet. We can gain anywhere from 5 to 25 percentage points of penetration in the first 12 months of deploying a market, which has driven steady market share growth and internet revenue acceleration over time. In fact, our internet subscriber base has increased 33% since the start of our fiber build in 2010, and annual internet revenue growth has tripled from 3% to 9% in 2020. Churn is also lower when customers are in a better network. This is key because retention is such an important factor in the customer lifetime value equation. On average, the churn rate for fiber and wireless home internet subscribers is 30 to 35 basis points lower than those on a FTTN or ATM network. This extends the duration of the customer relationship with Bell by approximately 2 years, leading to an improvement in the overall lifetime value of a direct fiber and wireless home internet customer by approximately 50% and 35%, respectively. And of course, our cost to serve a fiber customer is lower. Annual service and support costs per customer are approximately 40% lower on direct fiber links versus copper. Over time, as a greater proportion of our footprint is fiberized, we will see even more meaningful change in our overall cost structure. Let me turn to Slide 5 of our presentation. The accelerated network build-out plan, the one that we have in store for 2021, it gives us 850,000 to 900,000 more homes and businesses across our wireline footprint that are equipped with either direct fiber or fixed wireless technology. This represents an incremental increase of up to 400,000 new locations covered with broadband service than would have been deployed in 2021 without the capital advancement. At the end of this year, more than 62% of our planned broadband build-out program will be completed, representing up to 6.9 million total combined fiber and wireless home internet locations. This is up from approximately 6 million homes and businesses at the end of 2020. And for wireless, our accelerated capital plan will double the reach of our national 5G network to 50%. I'm also very pleased to announce that Nokia and Ericsson have been selected as the suppliers for our standalone 5G core. Our fiber and 5G investments are working symbiotically to drive Bell's continued leadership in next-generation communications technology, paving the way for future service innovation. With a wireline infrastructure that includes high-speed fiber already deployed to more than 92% of our cell sites, over 2,700 central offices that are available for mobile edge computing and a 5G world, a wireline footprint encompassing 76% of Canadian households, and the broadest retail and B2B distribution in the country. No one is structurally better positioned than Bell for true wireless wireline convergence in the most capital-efficient manner possible and to capitalize on the revenue growth opportunities that await. I feel very positive about the power of our business and our ability to execute in 2021, and I'm energized by the accelerated capital program. As always, we'll continue to stay true to our long-term strategy and continue to focus on our strengths, which include a vertically integrated business, the best networks, distribution breadth, a deep customer base, a powerful brand, a growing dividend, and the very best people. I'm going to turn now to Slide 6 for some operational highlights. In every successive quarter since the pandemic began, we've seen quarter-over-quarter improvement across all our segments. Despite the challenges of COVID, we delivered 96% of 2019 EBITDA and maintained our consolidated margin stable at 42%. We generated over $3.3 billion of free cash flow. The ability of BCE to generate this magnitude of free cash flow even during times of extreme uncertainty and economic difficulty is remarkable. We are well on our way to returning to where we were pre-COVID and our results for both Q4 and full year 2020 represent further proof of the continued momentum we're generating from the lows of Q2. Our consistently strong operational execution was in evidence once again in Q4. As we delivered 147,000 total new net wireless, retail, internet and IPTV customers. We also grew broadband internet market share faster than any of our peers this past year with a leading 149,000 retail internet net adds, up 10% over 2019. The broadband footprint advantage that we're building positions us extremely well in both our consumer and business segments over the long-term to grow internet revenue, which increased a strong 12% in Q4. As for our mobile 5G network, it's now operational in over 150 centers, covering nearly a quarter of the Canadian population. On the customer experience front, we've made real progress over the past year and received recognition for the quality of our network and services. Bell's 4G and 5G networks were certified as Canada's fastest by PCMag in this most recent annual study of network performance. Virgin Mobile also topped every wireless carrier in Canada from a J.D. Power ranking perspective as number one in overall customer service in the eyes of consumers for 2020. While my account app was named the best telecom mobile app of the year. We boosted our wireless home internet download speeds for more than 350,000 rural homes, bringing enhanced 50 megabit download and 10 megabit upload speed to Canada's underserved communities that are 2x faster than before. Our strategic focus on customer experience was also reflected in the latest report from the CCTS, which showed a 35% drop in the number of complaints by Bell customers, again the best performance among national carriers for the fifth consecutive year. We've also made it even easier for customers in Quebec and Ontario to transfer their residential services when they move with our new Move Concierge Service. This is just one example of initiatives that put customers front and center. Lastly, the strides we're making in digital transformation are evident directly because of investments to improve online functionality and the app-based sales experience for consumers, 54% of all customer service transactions now are executed online. Let's turn to Slide 7 for an overview of some key operating metrics for Q4. I'm going to start with wireless. Despite reduced retail store traffic and transaction volumes due to the second wave of COVID, we experienced sequential improvement in postpaid net adds. Low churn improved by 17 basis points over last year to 1.11% and the ARPU decline continued to moderate. We added 93,000 total new net postpaid subscribers this quarter. Of this total, 87,000 were mobile phone customers, 27% higher than last year. It's an impressive result that speaks to our focus on driving service revenue and EBITDA growth through accretive smartphone transactions. This disciplined approach to subscriber growth was also reflected in our promotional offers, where handset subsidies were on average 14% lower than they were in the previous year. In prepaid, because of lower overall market activity from reduced immigration, fewer visitors to Canada during the pandemic combined with greater competitive intensity and discount mobile market, we incurred a net loss of 12,000 customers this quarter. Nevertheless, prepaid service revenue was up an impressive 14% on the back of strong growth over the past year led by Lucky Mobile, which generated higher than average industry ARPU. A couple of notable developments on the retail distribution front that are worthy of mention. We recently renewed our exclusive national distribution agreement with Dollarama for all Bell prepaid products. Giant Tiger, a new distribution channel for us began carrying Lucky Mobile and its more than 250 locations across Canada late last year. And we renewed our contract with PC Mobile, a partnership that has been in place since 2005. So great, great prepaid growth potential ahead. To finish up on wireless, our blended ARPU decreased 3.9%. This results in notable improvement over the 6% decline we saw in Q3 despite persistent headwinds from lower COVID-induced roaming volume and reduced data overage from ongoing customer adoption of unlimited plans. In fact, normalizing for these impacts, ARPU growth was slightly positive in the quarter. Let's turn to Bell wireline. We saw another strong RGU quarter in wireline. We added 45,000 new internet customers, 25% higher than last year, reflecting broad-based growth across all brands. We added another 73,000 fiber customers this quarter, bringing the total number to close to 1.7 million direct fiber customers, and that's up 17% over last year. On the TV side of things, very pleased with 21,000 IPTV net adds, and that's essentially unchanged versus last year despite the impacts of COVID. Q4 was also the first full quarter that Virgin TV was available in the market, and early results are quite promising both from a customer demand and ARPU generation perspective. Satellite net customer losses improved for the fifth consecutive quarter, actually down 5% year-over-year. And we continue to see improvement in home phone customer losses, down 7.5% this quarter. On Bell Media, advertiser demand picked up in Q4 with the start of the new fall TV season and more live major league sports programming. And that drove a meaningful sequential quarterly improvement in TV ad spending. In fact, total TV advertising in Q4 was down only 2%. So that's down 2% compared to last year. Crave also continued to deliver with strong direct-to-consumer growth as total subscribers increased 8% over last year, and we're now at 2.8 million. As for TSN and RDS, they were the top English and French language sports channels in Q4, and both are having a very strong start to 2021, particularly with World Junior hockey and NFL playoffs. Lastly, we continue to see great results from our Quebec media strategy with significant gains in primetime viewership for our conventional French language TV network Noovo, which led all peers with a 6% increase in audience levels this quarter. So to summarize and before turning it over to Glen, great operational execution delivered by the team not just in Q4, but throughout the year with consistent steady improvement that is building momentum back into the business. And that sets us up nicely as we enter into 2021. So over to you now, Glen.
Glen LeBlanc, CFO
Thank you, Mirko, and good morning, everyone. I'm starting on Slide 9. Despite the ongoing impact of COVID, we've seen year-over-year improvements in Q4 service revenue and EBITDA. Adjusted EBITDA decreased by 3.2%, but our consolidated margins remained stable at 39.4%, despite absorbing $10 million in COVID-related expenses this quarter. Net earnings increased by 29% year-over-year, influenced by higher net mark-to-market losses on our equity derivatives and hedge contracts, along with a media asset impairment charge. As we indicated in November's results conference, CapEx significantly increased this quarter to nearly $1.5 billion. This rise was planned, reflecting heightened network construction activity after a slower spending pace earlier in the year due to the pandemic, along with continued investments to enhance our digital capabilities. Free cash flow fell by $782 million in Q4, which was anticipated due to increased capital spending this quarter, higher cash taxes from the timing of installment payments, and a decrease in working capital primarily driven by growth in accounts receivable seen in higher wireless installment sales and the timing of supplier payments. Moving to Slide 10, while COVID restrictions impacted transaction volumes during the quarter, our wireless financials showed sequential improvements. Product revenue remained stable year-over-year, with only a 0.7% decline, reflecting a shift in sales from tablets to smartphones. As expected, roaming and data overages continued to negatively impact service revenues, which declined by 2.5% this quarter compared to 4.3% in Q3. Normalizing for COVID impacts, service revenue growth was actually positive, increasing by about 1% in Q4. Thanks to the improved service revenue trajectory and disciplined device discounting, the year-over-year decline in EBITDA also moderated, improving to 3% from 4.4% in the previous quarter. Now turning to Slide 11, Bell wireline revenue declined by 1.3%, leading to a 2.7% year-over-year drop in EBITDA. Despite COVID, we faced challenging year-over-year financial comparisons this quarter as last year we benefitted from several non-recurring items, including the federal election and bulk sales of international wholesale long-distance minutes. After removing these factors, Q4 represented Bell’s best wireline quarterly revenue performance in 2020, while the year-over-year EBITDA decline was similar to that of Q3. A key highlight this quarter was residential wireline, where revenues grew by a strong 1.5%, marking our best performance in the past two years. In business wireline, quarterly results continued to reflect weak customer demand and spending on business service solutions and data equipment due to the economic environment, but overall performance held up reasonably well. Moving to Slide 12, Bell Media experienced another quarter of improvement, with revenue down 10% year-over-year. This was due to increased advertising demand and continued strong growth in Crave subscribers. Bell Media’s EBITDA dropped by 7.8% this quarter, but sequential improvements were more notable than the revenue decline, attributed to an 11% reduction in operating costs due to lower sports broadcast rights from postponed major league seasons, as well as TV production shutdowns and delays. Now, I will move on to our financial outlook for 2021, starting with revenue and EBITDA on Slide 14. We are targeting revenue and adjusted EBITDA growth of 2% to 5%, leading to a fairly stable year-over-year consolidated margin. These growth targets indicate a recovery to levels seen in 2019 and are broader than typical to account for potential COVID-related turbulence throughout the year. This outlook is supported by positive top-line and EBITDA growth across all Bell segments. We anticipate a strong financial contribution from Bell Wireless in 2021, driven by a focus on acquiring high-quality smartphone subscribers and disciplined device discounting, which should enhance operating profitability year-over-year. We expect an improving ARPU trend and a partial recovery in roaming volumes in the latter part of 2021, along with a slower decline in data overage rates. Our wireline financial growth profile is also projected to improve progressively over the year. Our expanding broadband presence strongly positions us in both consumer and business segments, as we continue to capture internet market share and revenue more quickly than competitors. We plan to win in the home market by providing the fastest broadband speeds and the best Wi-Fi and TV experiences, thereby increasing internet and TV customer additions. In business wireline, we expect improvements in year-over-year revenue and EBITDA declines due to higher customer spending as the economy recovers, coupled with a continuous focus on cost reductions. For Bell Media, we foresee good momentum in TV advertising entering 2021, especially after we pass the COVID impacts starting in Q1. We also expect to benefit from contract renewals with TV distributors and ongoing growth in Crave. However, rising costs for sports rights and the full resumption of broadcast schedules and premium content for our Crave platforms will temper Bell Media's EBITDA growth in 2021. Now turning to Slide 15, despite a decline in discount rates in 2020 and supported by a solid 14% return on planned assets, the solvency ratio of the Bell Canada DB plan, which is the largest of BCE's pension plans, was 102% at year-end. Given this strong financial position, BCE's regular cash funding for 2021 remains unchanged at $350 million to $375 million. Regarding total pension expense on the P&L, it is expected to decrease slightly in 2021 to $300 million due to the favorable effect of a lower discount rate on our below-EBITDA pension financing costs. Moving on to Slide 16, the statutory tax rate for 2021 remains at 27%. Our effective tax rate for accounting purposes is also projected to be around 27%, with minimal tax adjustments compared to $0.09 per share in 2020. Cash taxes are expected to remain stable year-over-year, between $800 million to $900 million, as tax savings from the federal government's accelerated CCA program will mostly be offset by other increased income taxes. On to Slide 17, we project our adjusted EPS outlook for 2021 to be between $3.05 and $3.20 per share, representing an increase of 1% to 6% year-over-year. This reflects a solid underlying contribution from operations, driven by positive EBITDA growth across all three Bell segments. Depreciation expense is projected to rise by $200 million to $250 million year-over-year due to our accelerated capital investment program, bringing more capital assets into service sooner. Additionally, increased income tax expense will also limit adjusted EPS growth this year. Excluding tax adjustments, adjusted EPS is expected to rise by 3% to 9% in 2021. Turning to Slide 18, as a result of strong EBITDA growth, we anticipate generating between $2.85 billion and $3.2 billion of free cash flow in 2021. This figure is considerable despite approximately $400 million in added capital spending we are absorbing, alongside pressures from working capital tied to growing accounts receivable due to increased sales activity as we recover from COVID, which includes more wireless installment plan transactions. BCE's consolidated capital intensity ratio for 2021 is expected to range from 18% to 20%, with around $700 million of that earmarked as part of our two-year capital expansion program. Excluding this capital advancement, our capital intensity ratio for 2021 decreases to 15% to 17%. We expect free cash flow growth to fall between 6% and 16%, with a payout ratio between 80% and 90%. I would also like to highlight that our definition of free cash flow accounts for all working capital elements, unlike some others' definitions. With the shift to installment plans in the Canadian wireless industry, our receivable balance is growing rapidly. Normalizing for financing of EIP receivables, which over two years will stabilize our dividend payout in 2021, adjusted for all incremental capital spending and device financing, falls below 80%. A few brief comments on our balance sheet and cash resources on Slide 19. We have access to $3.8 billion in liquidity as we enter 2021 and a capital structure that aligns with our investment-grade ratings. Our debt leverage ratio is manageable at 2.9 times adjusted EBITDA and is expected to increase in 2021 due to anticipated wireless spectrum purchases at the upcoming auction and accelerated capital spending. Our balance sheet is well-structured, featuring an average term to maturity on long-term debt of less than 12 years and a historically low after-tax cost of debt of only 3%. Crucially, we have no immediate refinancing needs, as our next significant public debt maturity is not until Q4 of 2022. Additionally, all our major DB plans are fully funded, and nearly $1 billion in annual U.S. dollar spending has been hedged well into 2022, effectively insulating us from free cash flow exposure until then. In conclusion, on Slide 20, we note that 2021 is a recovery year. It focuses on maintaining operational momentum as we aim to return to pre-COVID financial performance levels. While the pandemic's trajectory and economic recovery pace are expected to be uneven, potentially constraining revenue and earnings growth in certain areas of our business in the short term, the fundamental aspects of the industry remain solid. Our competitive position is strong, and the Bell team's proven ability to execute is evident. I will now turn the call back over to Thane and the operator for the question-and-answer segment.
Thane Fotopoulos, Investor Relations
Thanks, Glen. So given the volume of information we covered this morning, and sensitive to the time we have left, please limit yourself to one question and a brief follow-up if you must. Thanks for your cooperation. Valerie, we're ready to take our first question.
Operator, Operator
Thank you, Mr. Fotopoulos. Our first question is from Jeff Fan with Scotiabank. Please go ahead.
Jeffrey Fan, Analyst
Hi. Good morning, everybody. So lots to talk about, I guess, around the investment plans for '21 and '22. My question is, if you look beyond this accelerated plan, after the 2 years, do we get back to the CapEx intensity around that 15% to 17% CI, the level that you would be at without these accelerated plans? Or do we need to think about additional sources to help fund further expansion like what you're getting from the data center? And my quick follow-up again with the investment plan is, these are very strong statements and plans supporting network investment. But we do have a couple of regulatory decisions coming plus spectrum auctions, how could those events and maybe they won't impact your investment plans for the next couple of years? Thanks.
Mirko Bibic, CEO
Thanks, Jeff. To briefly summarize, the $1 billion to $1.2 billion investment over the next two years is intended to accelerate our capital spending that we would have typically spread over a longer duration. Regarding our broadband footprint initiative, we aim to reach around 10 million households with fiber or wireless home internet, and we are currently 60% towards that goal, leaving 40% remaining. By moving forward more rapidly, we gain greater flexibility in our future capital expenditures and technology deployments. To answer your question directly, yes, we expect to return to normal capital intensity ratios. Last year, we received $1 billion from our data centers, and the best way to utilize that capital is through our expansion strategy, which is already proving effective for shareholders. On the regulatory front, there are significant issues at hand, including pending decisions on wholesale internet rates and MVNO. Good signals from the federal government last year, especially in August, indicated concerns that the rates established by the CRTC might hinder investments in high-quality networks, particularly in rural areas, and emphasized the need for policies that foster investment. The importance of these networks has become clear, and we cannot afford to delay further investments. I am moving forward with this bold investment plan, the largest in our history, with confidence that policymakers and regulators will recognize the need for a stable regulatory environment. If any decisions are notably negative, it will be our responsibility as a management team to respond and adjust accordingly.
Jeffrey Fan, Analyst
Thanks, Mirko.
Glen LeBlanc, CFO
And the only thing I'll add to that, Jeff, was on your question regarding spectrum. The capital investment decision we made today to fund the additional $1 billion to $1.2 billion was funded by the data center divestiture, and it plays no role in our intention around participation in spectrum auctions.
Jeffrey Fan, Analyst
Thank you both.
Operator, Operator
Thank you. Our next question is from Vince Valentini with TD Securities. Please go ahead.
Vince Valentini, Analyst
Yes, thanks very much. A couple on the same topic. Glen, your slide shows $700 million of extra CapEx for this accelerator program in 2021. I just want to make sure I didn't see that anywhere else. So I want to make sure I'm clear on that. Of the $1 billion to $1.2 billion, most of it is actually in 2021 and there would only be between $300 million and $500 million left in 2022. So call that a clarification thing. And a bigger picture question would be in terms of the fiber to the home incremental spending, can you give us any color on geographies here? I mean, I know Toronto and Montreal are largely done. Does this mean a bit of an accelerated rollout into the 905 areas, and then maybe some of the smaller cities you cover? Thanks.
Mirko Bibic, CEO
Glen, I'll kick it off and you can fill in. So, Vince, just think about the $1 billion to $1.2 billion like this, roughly two-thirds in '21, one-third in 2022, roughly two-thirds in wireline, one-third in wireless kind of, I would say that will be a kind of high-level benchmark for you. On fiber, it's going to be pretty much across our operating footprint. We're going to get the job done, finished in Montreal, Toronto is largely done. Montreal is well on its way, but we're going to finish that. Winnipeg which we announced, Hamilton, we're going to kind of extend in the suburban areas and on wireless home internet as well. It's going to be continuing and Atlantic continuing, and Quebec launching wireless home internet in Manitoba, and of course continuing the pace in Ontario in rural areas. Glen, I think it was a clarification you want.
Glen LeBlanc, CFO
Yes, just to clarify, Vince, and good morning. I get you to turn to Slide 4 of our deck, you'll notice that the $1.0 billion to $1.2 billion as we state there, and as Mirko said about a third, 60%, to 70% is our intention. So you are correct, and approximately your number of 700, but that's over baseline as we note in the footnote. So baseline normalized capital spending, not the higher spending level that you've seen in 2020. So that's the clarity.
Vince Valentini, Analyst
Thank you.
Glen LeBlanc, CFO
Thank you, Vince.
Operator, Operator
Thank you. Our next question is from David Barden with Bank of America. Please go ahead.
David Barden, Analyst
Hey, guys. Thanks so much for taking the question. I guess the question is related to the guidance, Glen. A lot of companies are highlighting the kind of transformation on the cost structure around digital channel adoption, remote work, etc. and how the revenue leverage might lead to higher margins. You also called out, I think, a 14% reduction in handset subsidies in the quarter. And it looks like in your expectations on a go-forward basis that there's going to be lower subsidies. So could you talk about kind of why we aren't going to see better margin improvement over the course of '21 versus '20? Thanks.
Glen LeBlanc, CFO
Good morning, David. Many organizations across various industries have opted not to provide guidance due to the uncertain environment we’re in. However, we have chosen to showcase our confidence moving forward, believing that the guidance we present today represents achievable goals, incorporating all the factors you've mentioned. We expect to see digital transformation and will continue to prioritize adding value. Our focus remains on reducing handset subsidies for wireless subscribers, and these elements are accounted for in our guidance. The challenge we face is that we are still navigating the pandemic, with ongoing situations in retail and curfews in several areas of our market. The guidance provided today reflects a positive outlook and strong performance expectations for 2021, but it takes all these factors into consideration. We are aiming for higher margins, but the recovery of roaming, which is a significantly high margin revenue source, will take time and is likely to be in the latter half of 2021. I will stop here unless Mirko wishes to add anything.
Mirko Bibic, CEO
No.
David Barden, Analyst
Thanks, guys.
Operator, Operator
Thank you. Our next question is from Drew McReynolds with RBC. Please go ahead.
Drew McReynolds, Analyst
Thank you very much. Good morning. Mirko or Glen, could you elaborate a bit more on the long-term strategy regarding fiberizing the cost structure? Glen mentioned wanting to improve margins over the medium and long term. Can you provide an update on how you expect the cost structure to evolve during this period? Also, is there any new timing regarding the decommissioning of copper? As a follow-up, Mirko, there has been a lot of news about satellite broadband influencing the global telecom narrative with increased investments. What are your current thoughts on how that type of competitor fits into the Canadian landscape? Thank you.
Mirko Bibic, CEO
Thank you, Drew. We remain very aware of the competitive landscape in our industry, constantly adapting to changes in technology, market conditions, and pricing. This applies to potential satellite launches as well, but I feel optimistic about our position. We set a goal to reach a million households with our wireless home internet, and we are about halfway there and accelerating. We currently have a strong lead in product availability. Our speeds are 50 Mbps download and 10 Mbps upload, which are quite fast and offer a reliable service. Customers can expect to receive those speeds. It's important to note that when you subscribe to our wireless home internet, a Bell technician will come to your home to install it for you. If any issues arise, there is a support service available to assist. This level of service is not typically available with some early low Earth orbit satellite options we are seeing, where installation requires climbing onto roofs, and troubleshooting can be problematic. We are continuing to focus on enhancing customer experience, and I feel confident about our competitive position in this market. As we gain access to more 3.5 gigahertz spectrum, we will upgrade our service to 5G, enhancing it further. Regarding our cost structure, I've touched on this in my earlier remarks. The benefits of fiberization are clear, including positive impacts on our revenue, reduced churn, fewer service visits, and fewer customer calls. As we expand fiber, these cost advantages will become even more significant. Additionally, we have previously mentioned the flexibility in our capital expenditures for the future years of our expansion program. We are effectively managing costs in the short and long term. This includes our fiberization and wireless home internet expansion strategies, managing handset costs and subsidies, and closely monitoring total labor costs. Our digital acceleration efforts also contribute to cost control. As we expand broadband services, we expect to see increasing margins.
Drew McReynolds, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Sebastiano Petti with JPMorgan. Please go ahead.
Sebastiano Petti, Analyst
Hi, thanks for taking my question. I would like to know more about the fiber build-out. You mentioned a penetration rate of 5% to 25% within the first 12 months of new expansions, but considering the 1.7 over your current fiber passings, it seems to suggest a penetration rate of around 30%. I'm unsure if I'm interpreting this correctly, but I'm curious about the potential for further penetration gains within your existing areas beyond just the new home builds. Additionally, could you comment on the level of competition in both the fiber markets and your traditional non-fiber broadband markets? Thank you.
Mirko Bibic, CEO
When we enter a wireless home internet market, it’s typically one where we have either not offered services before or the service quality has been inadequate, such as very low-speed DSL. This creates opportunities for significant penetration gains. In fiber markets, we're focusing on areas where we previously provided DSL, which is no longer competitive. Fiber is currently the leading internet service across the country, and when we launch fiber speeds between 1 to 1.5 gigabits per second in a DSL market, we face strong competition, which drives our product's growth and increases customer penetration. In FTTN markets, if we transition a customer to FTTH, it enhances our average revenue per user while reducing service costs. Overall, this strategy contributes to our growth. The 1.7 million subscribers I mentioned represents a penetration rate of 50%, not 30%, when considering our retail internet services.
Glen LeBlanc, CFO
Yes, Sebastiano, it goes without saying I've said it many, many times before, wherever we construct fiber to the home, we take a disproportionate share of net adds. And that ultimately is going to lead to us having a significant increase in our existing internet market share. And that just bodes well for the future and speaks volumes to why we want to accelerate the investment today, fiber testate debates over of the value that it brings to our customers and to our shareholders.
Mirko Bibic, CEO
Okay. Thank you. Next question.
Sebastiano Petti, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Batya Levi with UBS. Please go ahead.
Batya Levi, Analyst
Thank you. Can you provide more insight on wireless trends since the start of the year? Have volumes decreased further due to the extended lockdowns, and has there been any change in competitive intensity? Additionally, regarding your comments about stable margins for the year, does that apply to both segments, especially if roaming picks up in the latter half of the year for both wireline and wireless? Thank you.
Mirko Bibic, CEO
Okay. I'll take the first one, Glen, and then over to you for the second one. Look, on the lockdowns and the new lockdowns that hit us in November, December, and are continuing today, clearly they've had an impact on the volume of transactions that is certainly the case. There is a lot of churn benefit just in terms of improved customer service and just the nature of buying patterns given the lockdown. So there's been a benefit there as well. Our approach is the following though. We are focusing on high-quality loading. So, I mean, you see it in the results. While the transaction volumes may be down, the fact that we're focusing on high-quality loadings is actually providing a lot of goodness in terms of service revenue growth, or if you want kind of the improvement in the service revenue decline and lag, as I mentioned at the beginning, if you normalize for the overage impacts in the roaming impacts, our ARPU would have actually been positive. So, if we take the approach that we're always going to be competitive, we're going to be very disciplined on discounting and on promotions, again, while being competitive and responding in a competitive marketplace, but we're going to focus on those high-quality smartphone loadings, we're going to deemphasize tablets and other connected devices, except where they're accretive, and it's paying off and you see it in the Q4 results. Glen?
Glen LeBlanc, CFO
Thanks, Mirko, and I'll tackle the question on margins. And the short answer is yes. We believe we will have stable margins in both our wireline and wireless business headed into 2021 here. The cost discipline actions we're taking will protect our margins. What I can't predict is the pace of recovery on things like high margin things, like roaming. Obviously, like everyone on this call, I am optimistic and hopeful that coming through the back half of 2021, we're going to see the vaccine taking hold and allowing Canadians to travel once again. And should that happen, obviously, those roaming revenues are extremely high margin, but our focus in the meantime will be ensuring the cost that we take the necessary cost actions to protect and ensure stable margins in both of those lines you alluded to. Thanks for your question.
Batya Levi, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Tim Casey with BMO. Please go ahead.
Tim Casey, Analyst
I have a couple of questions. Glen, how should we approach Media for the year? I know you shared some insights on the guidance, but what are your thoughts on the pace of media? You mentioned that programming costs will rise, so I'm curious if you can share any additional details on that. And Mirko, can you discuss the competitive landscape regionally? Are there any notable differences in wireless competition between the key Ontario and Quebec markets? Thank you.
Glen LeBlanc, CFO
I'll jump in first as Mirko thinks about the second part, Tim. As I said in my opening remarks, I expect all of our business units to provide a positive contribution to both revenue and EBITDA in 2021. Media is part of that. I expect it to return to positive. What I said is that it could be moderated and will most likely be moderated because if the year plays out the way we envision, we will return to all live major sports returning, which will increase programming costs. We expect to see an increase in advertising revenue as people start moving around. You think about our out-of-home business that's been so heavily impacted as there's people not moving through airports and downtown foot and car traffic is down so much. Billboard advertising is down. I expect all of that to recover. But I also expect programming costs to increase. So it will be a positive contribution to EBITDA. It's one of our most volatile business units when you think about how this pandemic affects it. But I also want to remind you it represents 8% of our EBITDA. So feeling confident, it will return positive and will be a contributor to the overall guidance that we've provided today.
Mirko Bibic, CEO
Thank you, Glen, and I appreciate your question, Tim. I have consistently mentioned that our industry needs to monitor the rising handset subsidies, especially when we differentiate rate plans from handset costs and offer devices for various affordability levels. There's really no justification for subsidizing handsets to the same extent as in the past. This is one aspect to consider. Additionally, promotional intensity varies throughout the year. The good news is that we made progress in Q4, with handset discounting improving by 14% year-over-year. We also observed positive product margins that improved year-over-year, mainly as a result of our emphasis on higher quality smartphone offerings. The holiday season was promising in terms of promotional intensity, though it did peak significantly for flanker brands, which impacted the prepaid segment. Overall, we are making good strides here, with promotional activities being less intense year-over-year and milder than in Q3 2020, except for the flanker brands. We are on the right path to appropriately monetize the substantial investments we are making in wireless, particularly with the increased spending on our 5G networks and spectrum. This needs to translate into real value for consumers, while also being conscious of affordability since prices are decreasing. Recent statistics show that wireless prices have dropped significantly from 2019 to 2020, particularly in key segments where the Canadian government requested price reductions. I believe we're managing this well and maintaining discipline. We are focused on monetizing our investments and fulfilling our commitment to the government by providing more value to customers at the right prices. Thank you. Next question, please.
Tim Casey, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.
Aravinda Galappatthige, Analyst
Good morning. I have a couple of quick questions for Glen. You mentioned a service revenue growth of 1%, excluding the COVID impact, compared to the 2.5% decline reported. Could you provide some breakdown regarding roaming overage and other factors, especially considering Rogers discussed the significant other impacts? Is Bell experiencing a similar hit in terms of activation fees? Additionally, regarding handset costs, you mentioned a 40% decline. With the rollout of EIP, do you anticipate seeing a more substantial improvement in that area as we move into 2021? Thank you.
Glen LeBlanc, CFO
Okay, on service revenues, yes, I'll give you a little bit of insight. What we've experienced in roaming has been extremely consistent since Q2. I told you in Q2 that the implications to the pandemic resulted in almost a 70% reduction in roaming in that quarter, it was around $60 million I reported. That same dollar value roughly identical continued through Q3 and into Q4. So that is the biggest driver on what's challenging service revenues. I say challenging service revenues, but I will take a victory lap that we're very pleased with the performance that we had on service revenues in the quarter compared to our peers. Short answer, no, I don't have anything to unpack on other because there isn't another. And as Mirko said in his opening remarks, we continue to manage the data overage declines. That's happening. It's something that we've done a very good job. You've heard us speak about historically managing that. So the trend continues. It is declining as overage, and people move to unlimited plans, but our focus is ensuring that that's a managed approach, and it's not a race to the bottom. And I don't recall the second part of the question.
Aravinda Galappatthige, Analyst
It's with respect to the subsidies. You talked about handset discounts have fallen 40%.
Glen LeBlanc, CFO
Yes, we are very pleased with the handset discounting we are observing. The shift to installment plans is achieving exactly what we intended. There are times when market discipline is lacking, and we hope to see improvement. The installment program provides customers with the flexibility to choose the handset that best fits their needs and to finance it in a way that makes it affordable. This approach also encourages the industry to be more mindful of the increasing costs of these handsets and to manage discounts and promotions more effectively. Early indicators are positive, and I anticipate this trend will continue as it plays a significant role in our strategy for managing margins. Therefore, we will focus on this area and work to instill greater discipline.
Mirko Bibic, CEO
Yes, we have time for one more quick question.
Operator, Operator
Thank you. Our next question is from Simon Flannery with Morgan Stanley. Please go ahead.
Simon Flannery, Analyst
Good morning. Thank you for the question. Glen, could you discuss your medium-term thoughts on the payout ratio and the leverage target? It's encouraging to see the dividend increase, but considering the CapEx guidance and potential auctions, particularly with C-band beyond 3.5, it seems that leverage may not lead to substantial free cash flow after dividends until 2023 and later. How should we consider your comfort level with staying in the low 3s for some time before attempting to return to current levels within a 3 to 5-year timeframe? Is that an accurate way to view this?
Glen LeBlanc, CFO
Yes, I believe so, Simon. First, we are in unprecedented times due to a global pandemic that no one predicted. Forcing our organization to quickly return to a historical target payout ratio would be harmful to the business. We know that the industry is stable long-term, and we will eventually return to historical earnings levels. Currently, in this low-interest-rate environment, the best approach is to invest the proceeds from the data center back into the network. This investment will lead to growth in internet and TV subscribers, which will generate future cash flow. That cash flow will help manage the payout ratio and support dividends moving forward. In the short term, we acknowledge that we are outside the payout ratio, and we are aware of that. In the medium term, as you mentioned, after 2022, once the investment is complete and hopefully the pandemic is over, we will return to more normalized levels. Regarding leverage, we are currently above our stated objectives, but in this low interest rate environment, we find that the leverage is manageable. The company's free cash flow generation in the medium to long term will definitely help us manage leverage. We believe this is the right strategy for the present moment.
Mirko Bibic, CEO
Right.
Simon Flannery, Analyst
Thank you.
Mirko Bibic, CEO
Thank you, everybody for your participation this morning. I am available throughout the day for any follow-up questions and clarification. So have a great rest of the day. Take care and stay safe.
Glen LeBlanc, CFO
Thank you.
Operator, Operator
Thank you, everyone. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.