Rogers Communications Inc Q1 FY2020 Earnings Call

Thank you for holding. Welcome to the Rogers Communications Inc. First Quarter 2020 Results Conference Call. I will now hand it over to Paul Carpino, Vice President of Investor Relations at Rogers Communications. Please proceed.

Thank you, Ariel. Good morning, everyone, and thank you for joining us. Today, I'm here with our President and Chief Executive Officer, Joe Natale; and our Chief Financial Officer, Tony Staffieri. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2019 annual report regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn it over to Joe.

Thank you, Paul, and good morning, everyone. I hope all of you and your families are safe during this unprecedented time. Our country is in the midst of an incredibly challenging moment in our nation's history, where our collective actions and responses are needed to make a difference. It's amazing to think that for the first time in our lives, the phrase, 'what can I do to help?' is now relevant and applicable to all 37 million Canadians. We all have a role to play, and that includes the telecom industry, which has stepped up to the challenges of the new demands in our lives imposed by the COVID-19 pandemic. Our networks provide the foundation for the way we are living today, how we stay in touch, work, learn, stay informed and entertained. And our efforts at Rogers are going beyond our business to new community partnerships to help provide extra help to those who are most vulnerable in this crisis. We are committed to supporting our customers and Canadians through these challenging times now and into the future. Despite a meaningful slowdown in business in March, our overall Wireless and Cable financial results were in line with our expectations going into the quarter, although media felt the pressure associated with the cancellation of all live professional sports. Tony will take you through some details momentarily, but let me give you a broader perspective on how we look at the business during this period. In this environment, near-term monthly and quarterly results are not a reflection of our company's underlying fundamentals, our financial strength, the quality of our assets, the soundness of our strategy and long-term growth prospects or the effectiveness of our daily execution. Results in this environment, business and Canadians doing what is essential now for the long-term needs of society. People are adjusting their day-to-day behaviors to protect their fellow Canadians and the brave frontline healthcare workers who need our support during this crisis. To us, there's nothing more important, and everyone at Rogers is completely focused on this. As you know, we are a financially strong company with a long-term focus. We don't run our business on a strictly quarterly basis under normal circumstances, let alone during extreme exogenous events like the one we're dealing with right now. Nations, businesses and people around the world are tackling this challenge together, and we know the current environment will pass. In the meantime, our energy and resources are focused on protecting our employees and customers and ensuring Canadians remain connected. As you saw in the first quarter, we closed about 90% of our retail stores. The remaining open locations are providing essential services. While this affected our near-term business, we believe it's highly inappropriate in this environment to be offering or responding to aggressive promotions that drive foot traffic into stores that put employees and customers at risk. Let me take a moment to thank our frontline teams that are working hard to deliver essential services to our customers. We are extremely proud and incredibly grateful for what you are doing every day. While we won't be providing specific financial guidance during the short-term period of volatility, you can rest assured that we will be managing the business as responsibly and as efficiently as possible, just as we have consistently demonstrated in the past. While there will be additional pressure in the coming months as Canadians work together to defeat COVID-19, Rogers is a financially strong company. We provide services that matter more than ever before in people's lives. We will navigate through this effectively. We are a trusted brand, and we have a leadership role to play in Canada. We have total liquidity of $3.8 billion, and you can expect strong free cash flow to continue this year. Canadians should feel confident that our world-class networks will be there for them. Analysts and investors should also continue to feel confident in our company. We will remain disciplined stewards of capital and continue to manage the company thoughtfully for the long term as we help our country navigate through the current environment. Let me spend a few moments shedding some light on how we are operating to protect our teams, customers and communities and to ensure Canadians remain connected. As I said, I'm so proud of our teams and how our organization is adapting to new ways of doing business. Our networks have helped power our nation for 60 years, supporting people, communities and businesses. We're working hard to ensure new network usage needs are being met. Throughout the day, home Internet usage, on average, is up over 50%, and our teams have been working hard to manage capacity to meet these rapidly changing needs. Meeting the new needs of customers has required us to quickly evolve the way we do business. Our teams have stepped up to meet the challenge by coming up with new and innovative ways to serve our customers. About 10% of our retail locations remain open to provide urgent customer support for our wireless services, including support for those providing essential services and for our healthcare heroes, who are managing the impossible to keep us safe. We've also adapted our recently launched Pro On-the-Go service. So customers in the GTA and the Greater Vancouver area can still get a new device delivered and set up within hours using contactless delivery and one-on-one support through the phone or video chat. We will be expanding this to other markets shortly. In Cable, we've launched a series of no-contact self-installation programs, so customers can activate TV, Internet, Home Phone safely from inside their homes. Our technicians communicate directly with them for guided support through a video chat without entering the customer's home. In terms of customer care, we've undergone a major transition with great success. We've rapidly deployed thousands of work-from-home technology kits to team members over the past month to enable our customer care agents, virtually all of whom are based in Canada, to serve our customers. Customers can still call us, service levels are strong and our agents can safely answer those calls while working remotely from home. In February, we had 800 care agents answering customer calls from home. We are now nearing 7,000 at-home care agents this week. At first glance, this task seemed insurmountable, but our team's drive and collaboration was second to none. In our Media business, sports-side operations were materially upended as every live professional sports league shut down in a matter of days. As we wait for the return of live sports, our teams have been creative in experimenting with unique formats across TV and digital platforms, featuring beloved historical games. Our media teams are doing what it takes to ensure quality news and information continues to pour into homes across the country. Teams are broadcasting from their basements and living rooms because they know Canadians are counting on us to bring trusted sources of news and insight to them every day. Our engineering and field technicians are also frontline heroes. They're out there working to support healthcare providers, running fiber in parking lots and fields to create new COVID testing sites, bringing more WiFi to hospitals so patients can stay connected with families. We have implemented premium pay for our colleagues who provide these critical and customer-facing roles with the public, and we thank them for their dedication, for their service. But there's a bigger purpose for corporations and individuals in this environment. It requires doing as much as we can to support our customers and our communities at large. We are not immune to the short-term pressures, but we can certainly respond by providing extra support to the best of our abilities. Our customers have chosen us as their communications provider and we take that responsibility very seriously. Here are some of the measures we brought in through the end of June as part of our forward together program. We've lifted data usage caps for home Internet plans so customers don't have to worry about overage charges. We're waiving Canadian long-distance voice calling fees for homes and small businesses so customers can check in on loved ones and keep in touch with customers without worrying about extra charges. We're offering a free rotating selection of channels to keep viewers and families entertained with additional hours at home. We've added more flexible payment options and the commitment that customers will remain connected to the service, so nobody has to worry about losing their digital lifeline. And through our commitment to waive Roam Like Home, Fido Roam and pay-per-use roaming fees from March 16 to April 30 in more than 180 countries, we helped more than 150,000 Canadians to stay connected at no additional cost while they made their way home from abroad. Beyond these customer initiatives, the Rogers team is committed to helping the most vulnerable in our communities that are hit the hardest. Last week, we announced that we're working with the government of Ontario, local school boards in the province and Apple to offer iPads with wireless data at no cost to help students in need who don't have the tools for online learning. In addition to this and many local efforts in communities across the country, we've launched three national partnerships with community organizations to help deal with additional crises brought on by COVID-19. We partnered with Food Banks Canada to donate over 1 million meals and are leveraging the power of our radio and TV assets to reach over 30 million people every week in an awareness campaign to help fill the shelves with food. Our customers and employees have opened up their hearts and their wallets and raised funds for an additional 500,000 meals. We're providing smartphones in collaboration with Samsung and offering six months of free wireless service to Big Brothers Big Sisters of Canada, so vulnerable young people, the littles, can stay connected to their mentors and their schoolwork. And with domestic violence on the rise, we've partnered with Women's Shelters of Canada to help make devices and plans available and help raise awareness of sheltersafe.ca services available through ads all across our digital and social platforms. I couldn't be prouder of our team; to a person, each has accepted their leadership role and is committed to just doing the right thing. We are all part of Canada's national fabric that makes our country thrive in good times and survive through times of crisis. And now, like never before, we all appreciate the importance of staying connected. Canadians across the country and governments have recognized that telecommunications is an essential service. We serve as the lifeline that binds our nation together. We take our responsibility seriously and are proud to be working closer than ever with our government partners to support Canadians through this challenging moment. And that won't change. Our networks power the business and the services that are getting Canadians through these difficult times. When we come through the other side, we will still be there for Canadians. Our shareholders and all of our stakeholders can rely on our resilient networks and our leadership in supporting the inevitable economic recovery. During this crisis and moving forward, our disciplined and balanced approach to capital allocation remains unchanged. Our priority continues to be investing in technology and capabilities that will ensure Canadians remain leaders in the global digital economy over the long term. And as we've demonstrated in the past, we will also focus on returning healthy levels of capital to shareholders over the long term through dividends and stock repurchases. Our track record with this balanced model has proven to be effective for both our business and for shareholders alike. We want our customers and all Canadians to know our entire Rogers team, over 25,000 across the country, our Board, the Rogers family stands shoulder to shoulder with Canadians and Canadian businesses to get through this together and come out stronger together. Let me now turn the call over to Tony. Tony, will you please provide your comments and some more detail on the quarter? Thank you.

Thank you, Joe, and good morning, everyone. Our first quarter results captured the initial stages of the COVID pandemic issues that we experienced as a company. And as a result, in and of themselves are not reflective in the usual sense of the run rate of our business. In fact, the impacts were only experienced in the last several weeks of the quarter, and we've learned a lot more in the three weeks following our quarter end. As a result, my comments will provide more color on the first quarter results with a view to how they were impacted specifically in the final month of the quarter. And then I'll expand these comments to include some context on trends we are seeing post-quarter end. Before I do get into some of those details, however, I wanted to take a moment to thank our entire Rogers team for continuing to deliver and doing the right thing for our customers and for each other. While these are difficult times, the attitude of our entire workforce has been inspirational. I also want to give a big thank you to our entire finance team who achieved a major milestone in closing our Q1 books, all remotely from home this quarter. Even more impressive, they did it in the same time frame they would have completed this task if they were all at the office. Out of necessity, we are all learning creative and innovative ways of working and collaborating to get things done. And as you heard in Joe's remarks, we are seeing this across all lines of our business, and these learnings will make our organization stronger and more productive going forward and will no doubt help shape our operating models going forward. Our operating cadence has changed quickly during this pandemic with widespread store closures, the shifting of thousands of team members to work from home and assisting customers in new ways with their most urgent needs, we pivoted our operational priorities far beyond traditional operations and sales growth metrics. Our overriding priority was to ensure our customers were being served, and our employees were being kept safe. This was a time to ensure we just did the right thing. And so with that guiding framework and with the inability to know how the issues relating to the pandemic would unfold, we shifted our overriding financial barometer in this environment to cash flow and balance sheet liquidity. While we entered this crisis with a solid balance sheet, cash flow and liquidity position as a result of our prior capital allocation decisions, we wanted to ensure we remain prudent and prepared on this front so that we could maintain flexibility in our business for whatever comes next. In short, we remain financially strong and are here to meet the needs of Canadians and our customers. We currently sit with $3.8 billion of available liquidity, the highest in the company's history. We recently strengthened our position with a successful debt issuance of seven-year funds at an effective yield of 3.7%, and we ended the quarter with a debt leverage ratio at a comfortable 2.7x. We see our leverage position continuing in the range of 2.5x to 3x for the next few years, and we believe this is sound and reasonable given the spectrum auctions on the horizon and the continuing downward pressure on interest rates. We ended Q1 with free cash flow of $462 million, up 14% year-over-year. In terms of our first quarter results, I'd summarize the COVID impacts to our financials and our business as falling into a few key themes. In Wireless, our revenues were impacted by the rapid decline in roaming activity and related revenue drop as well as the impacts of some customer supportive initiatives such as free long-distance calling. As well, subscriber activity substantially slowed in Wireless with much fewer new customer activations, but conversely, churn dropping dramatically. This lower volume translated to material reductions in handset investments, thereby adding to our overall wireless net cash flow growth. Our business revenues were much more stable and continue to see strong Internet performance as speed and reliability became essential in a work-from-home environment. The impacts of growing unemployment rates did not surface in the quarter in terms of planned downgrades but I'll have more comments on this factor in a few moments. We have moved our cable operations to 100% self-install, and this cash savings will show more materially in future quarters, again, assisting in maintaining cash flow stability overall for our Cable business. Our Media business saw the most immediate impacts of the pandemic in our Q1 results as sporting events were suspended. These declines were offset to a limited extent by suspended content rights costs and player salaries. Our capital expenditure programs only slightly declined in the final few weeks of March as a result of lower volumes and slowed ability to get work done. Our results in Q2 will see more material impacts from these items, but we remain confident in our financial strength and ability to efficiently manage the business during this transitional COVID pandemic period. Along with the immediate health issues relating to the pandemic and the more direct and immediate impacts to our financials, we're also paying close attention to the direction of macroeconomic indices and their potential impact to us and the industry. In particular, with elevating unemployment levels, we anticipate bad debt costs could increase in the second half of the year. In addition, we are seeing the early signs of customers looking to downsize their packages with us in both wireless and cable as they rightsize their spend to their new cash flow realities. We expect this volume will pick up depending on the depth and duration of the economic downturn and will ultimately impact recurring ARPUs and revenue. All of these items, as well as others that may arise, are difficult to estimate at this time. And as a result, we are withdrawing our annual guidance that was originally provided in January. Turning now to some specific numbers in Q1. In Wireless, service revenue declined 2% year-on-year. The slight increase in year-over-year decline and compared to Q4 was specifically as a result of COVID impacts experienced in the month of March. As expected, revenue continued to be impacted by the reduction in overage revenue associated with the transition to our Infinite unlimited plans. We saw about a $40 million reduction in year-over-year overage revenue in the first quarter and currently have over 1.6 million customers on these unlimited plans. During March, we saw a sharp decline in roaming volumes, both inbound and outbound, as international travel significantly scaled down. As well, we also offered free roaming and free long distance to ensure Canadians could stay connected at a time when speaking with family, friends and customers was never more important. Revenue from these programs was approximately 15% lower than the same period last year and amounted to $14 million in the quarter. Excluding these specifically identifiable COVID impacts, our wireless service revenue would have otherwise declined 0.8% year-over-year, the same as Q4. The COVID pandemic also caused the subscriber market to essentially halt during most of March, an otherwise high-volume month in the quarter. Postpaid gross additions were down a notable 13% for the quarter and then more dramatically in the final weeks of March. Shopping malls were closed, and we shut down over 90% of our retail stores for all but emergency services, as this was essential to protect our employees and customers. In this environment, we chose not to engage in pricing incentives that would encourage customer traffic to stores or stimulate loading. We just did the right thing and did not match many promotional activities that occurred in the last month of the quarter. Conversely, churn dropped dramatically in the month of March. We posted 0.93% churn for the quarter, but again, churn was even lower in the last few weeks of the quarter. As a result of the market essentially being frozen with no or very limited growth in March, we posted net postpaid subscriber losses of 6,000. This was an abnormal result and due solely to the COVID-related decision to substantially wind down competitive offer activities in the final weeks of the quarter. We don't view any subscriber metric during this period as being meaningful to any long-term franchise value of our Wireless business. Notwithstanding the softness in revenue, Wireless EBITDA still grew 1% this quarter, up from negative 3% in Q4 once normalized for the lease accounting impact. This was primarily driven by lower call center volumes, lower handset subsidies, ongoing efficiencies from our transition to unlimited plans and some naturally lower expenses associated with the overall business environment. On the handset subsidy front, you saw that we eliminated all subsidy plans from our offerings, moving to a full installment plan financing model early in the quarter. Prior to COVID, we saw notable improvements in the amount of handset discounting being offered. Combined with the drastic reduction of handset volumes in March, our total net handset costs on a cash basis was down 19% or about $90 million year-over-year. Let me now turn to Cable. Before getting into the financial specifics, I want to spend a moment to highlight two additional KPI metrics we are providing to replace some metrics that have become much less relevant in how we manage the business. We have removed the revenue split by cable product and introduced metrics at the household level: the number of customer relationships added in the quarter, household penetration rates and household cable ARPA or average revenue per account. This change aligns our reporting to how our team manages the business. Our focus in Cable is to maximize the penetration of all homes and businesses passed as well as the revenue and margin per household. For competitive reasons, we won't be disclosing the margin per household. Cable revenue was approximately flat compared to Q1 last year, while adjusted EBITDA grew by 2%. While these are solid results in the current environment, our Cable business also felt some COVID-related impacts in Q1. Similar to offering support programs to help our wireless customers, we are also helping our Internet customers with capped data plans by eliminating data overage charges and providing access to certain free premium video content to TV customers. This impacted revenues by less than 0.5% in the quarter. In Q1, we reported 17,000 Internet subscriber net additions, 3,000 more than the first quarter last year, and Internet penetration increased 90 basis points. Ignite TV has also performed solidly in this challenging environment, adding 91,000 subscribers to reach a base of 417,000, more than 4.5x higher than 1 year ago. In addition, we reported 2,000 new customer relationships in the quarter with ARPA of $129, slightly below last year, and our penetration now sits at 55.8% of homes passed. EBITDA margins were 47%, up 100 basis points year-on-year and Cable CapEx intensity declined further to 25.8%. As Joe noted, we launched self-installs in Internet and Ignite TV in March, which should help both of these metrics going forward. In Media, the COVID pandemic had a more dominant impact on revenue but less so on EBITDA. Revenue was 12% lower year-on-year. This was driven by lower advertising revenue associated with the suspension of live TV broadcasting for all sports, the postponement of Blue Jays games in late March and the sale of our publishing business in 2019. Despite the large decline in Media revenue, EBITDA was down only 1% due primarily to not incurring the significant broadcasting rights costs for NHL and NBA live programming, lower Blue Jays salaries and a one-time impact relating to player salaries in the prior year's first quarter. Moving to consolidated results. Total service revenue was down 3% and adjusted EBITDA was flat. We invested $593 million in CapEx for the quarter, which was a year-over-year decrease of 4% and reflected a CI ratio of 17.4%. The decrease in capital expenditures was largely driven by the continued improvements in Cable CapEx efficiency and by the initial stages of slowed CapEx spending as a result of COVID. We expect CapEx for the year to come in well below the guidance range we previously provided. It is too early to provide more specific guidance at this point but we will continue to focus our CapEx spend on network coverage and capacity. We generated free cash flow of $462 million this quarter, an increase of 14%. The notable increase this quarter was a result of lower capital spending and lower cash tax payments. Our cash tax rate as a percentage of adjusted EBITDA was 7% in the quarter and should be in that same range for 2020. As I've already noted, even with the current pressures associated with the impact of COVID, we expect strong free cash flow to continue. Additionally, our balance sheet is well structured with long-term maturities and low interest rates on our outstanding debt. Our weighted average interest rate at quarter end was 4.24% with average term to maturity of 13.5 years. In terms of an outlook, we've withdrawn guidance because it's too difficult in the short term to predict the various combinations of factors that could impact our financials. However, here is a snapshot of how we are trending on some key forecast variables. In Wireless, ARPU will continue to be impacted by declines in roaming revenue. In the last 30 days, roaming volume has declined 80%, and this will translate to a loss of roaming revenue of $80 million in Q2. Although our pacing of migrations to our Infinite unlimited plans has slowed recently, we will continue to experience the overage year-on-year declines from previous migrations. This is expected to be approximately $50 million in Q2. We are seeing increasing numbers of customers looking to downgrade their wireless price point, and this will have a downward pressure on ARPU as early as Q2. As you would expect, we do not anticipate the subscriber market to reactivate in any material way until the public is allowed to safely return to malls and our stores. While the market was previously growing at approximately 4% on an annual basis, this lack of subscriber growth rate will impact our revenue growth. As a result, postpaid nets will continue to be down on a year-on-year basis and churn will continue to decline. Conversely, handset cash expenditures will continue to come down meaningfully in this environment. Last year, we spent $2 billion on handsets. In Q1, handset expenditures were down 25% and down 60% in the last few weeks of March on a year-on-year basis. This will yield material cash savings that has already started. In both our Cable and Wireless businesses, we have given customers the opportunity to extend bill payment terms if needed. While our receivables metrics have not yet been impacted by these extended terms, we do anticipate that cash collections on AR may start to slow in Q2. We're starting to see early increases in number of calls relating to bill payments and expect this will increase as unemployment rises and persists and business customers continue to be impacted. This will likely show up in rising bad debt costs in the back half of the year, but again, difficult to predict the quantum at this early stage. We continue to see positive demand for our Internet offerings, particularly as in-home bandwidth and reliability takes precedence in a work-from-home environment. In this business, we are seeing subtle improvements in Internet ARPUs and household ARPA. However, this is being offset by an increasing level of calls to our agents as some customers look to reduce their monthly bills, similar to what we see in Wireless. On balance, we see household ARPA being negatively impacted as early as Q2. Notably, in moving 100% self-installed on our Internet and TV products, we are seeing significant improvements in OpEx and CapEx-related installation and upgrade costs. Our current assisted self-installation approach reduces our cost by 30% compared to traditional technician-enabled installations. And these savings will get higher as we move to full self-install models at a later time. Capital intensity for our Cable business continued its steady downward trajectory to 26% in Q1. This was largely the result of our targeted efforts to drive more efficiency in Cable CapEx. However, reduced volumes and self-installation, together with delays on certain projects, will drive this lower in Q2 and for the rest of the year. Our Media business will likely continue to incur losses in the near term as the start-up of live sporting events continues to be delayed. While reduced content costs offset some of the revenue loss, certain of the fixed costs will cause us to be EBITDA negative for a period of time. To summarize, while we expect the revenue impacts in our industry to be much milder than other industries and do anticipate offsetting costs and cash flow savings naturally arising, we will see shorter-term pressure on our financial results during this period. As I stated at the top, overall cash flow and liquidity is strong and will be our focus during these times. While we don't foresee major issues on that front, we will continue to ensure we are prepared for the various scenarios that may unfold. We do not see any reason to cut or reduce our dividend. We continue to have a low payout ratio as a percentage of foreseeable cash flow, so no action is needed at this time. On balance, we're pleased with our results and how the company is operating in this environment. Our culture at Rogers is about doing the right thing. We're proud of the corporate social responsibility actions we've taken to support our customers, keep our nation operating digitally and protecting the safety of our employees and customers. We entered this crisis from a position of strength, and you can count on us to maintain our disciplined financial stewardship as we help Canadians navigate through this period. Let me now turn the call back to the operator to commence with our Q&A.

Our first question comes from Vince Valentini of TD Securities.

Congrats for all the hard work you're doing to help your employees and society through this. A couple of questions on costs. The $90 million reduction in your cash costs for equipment subsidies in Q1. Tony, can you talk to us a little bit about how much of that translated into an EBITDA benefit? And under IFRS 15 with the more significant reductions in Q2, will we see like a quarter of that or 40% of that benefit EBITDA in 2020? Or does it really get stretched out over two years?

Thanks for the question, Vince. It's a combination of both factors, actually. So we saw $90 million in Q1, as you said. The volumes of handsets that we see today are running 50% to 60% lower year-on-year. You're going to see two aspects. Some of it will flow through right away under IFRS accounting as we allocate some of the total contract revenues to hardware revenue. You'll see some of that in better margins in Q2. You saw some of that in Q1. We expect to see slightly more in Q2. So of the handsets that are being sold and offered, there's much less of a discount than you would have seen previously. And so that's a continuation of trend that we saw in January, February, and comes together with installment financing and that piece of it seems to be going well. The second piece of it will be seen over 24 months of the contract term. And so that one is a lot harder to predict. But all of that to say is between those two items, the number will be higher in Q2.

Okay. I have a couple of quick questions about costs. First, I'm not sure I understand your comment about the Blue Jays' salaries. Are you saying you intended to have lower salaries this year compared to last year, and that’s reflected in the figures? Or are you indicating that players aren’t being paid during games that aren’t taking place? Lastly, could you confirm that there was no bad debt allowance in Q1? Are you not setting aside any reserves to estimate potential bad debt right now, and planning to do that in the second half? That’s all from me.

Okay. On both of those, Vince, in terms of Blue Jays player salary costs, that's correct. The players aren't paid if there aren't games, except for a very small amount that are put in the category as immaterial. And so those are costs that are suspended, if you will, until games are actually played. The second piece of your question, we did not increase our bad debt allowance in Q1 as we go through our typical processes of quarter end estimation. We didn't see and continue to see very limited default during collections. And so we are calling out a potential risk that may arise in the second half, we think likely will arise as unemployment continues to rise and the period seems more extended than we might have originally thought. And so you should expect to see that likely increasing in Q2.

Our next question comes from Jeff Fan of Scotiabank.

I hope everyone is doing well on the call. I have a question regarding the Internet side and then a post-pandemic inquiry. One of the significant advantages of DOCSIS is the rapid expansion of your network to offer 1 gig service throughout your footprint. What is the current market demand you're observing? Additionally, considering your capability for 100% self-installation, are you noticing an increase in demand for your services due to this consistent availability of 1 gig across your footprint? For my second question, looking beyond the pandemic, some of your revenue streams related to wireless and Internet services, such as overage and roaming, are likely decreasing. Do you believe that the current pricing structure will persist long-term? I'm curious because Rogers has been a leader in transitioning to unlimited plans. Are there opportunities post-pandemic to move away from these revenue sources?

Thanks, Jeff. Those are good questions. I'll begin with the current state of Internet demand. When we first assessed network load around early March, we observed an increase in Internet demand of about 20% to 30% on average. In the past two weeks, there's been a significant year-on-year rise of 60% in Internet demand from customers, particularly among households. The network has handled this well. Our team has excelled at adding capacity on the fly, utilizing spectrum reallocations in our DOCSIS network and exploring various methods to adjust data load. This adaptability has proven effective under the increased pressure. To put it into perspective, this represents about two years of growth compressed into just a few weeks. Regarding advertisements, we aren't actively promoting our services right now for several reasons we've previously discussed. We're waiting for a more suitable time to stimulate demand. However, we are observing spontaneous interest from customers at home, as they are using their networks more than ever, especially for remote work. The top bandwidth consumers currently are Netflix, followed by various video conferencing platforms like Zoom, FaceTime, Skype, and WebEx. YouTube and social media browsing closely follow. This surge has created a heightened sense of demand for faster speeds, driven by families spending more time online. We're seeing customers eager to upgrade their speed tiers, as well as those dissatisfied with their current providers seeking to switch to our services. We operate a 1-gigabit per second speed profile serving 4.4 million homes and businesses, which gives us the flexibility and capacity to meet this demand. Our self-serve model has also been effective; we service around 6,000 homes daily, primarily handling any external work and guiding customers through the internal setup, which has been well-received. In emergency situations, we have volunteers who wear protective gear to enter homes when absolutely necessary, such as nursing homes or shelters, though these cases are rare. There's now a clear recognition of the essential role of home Internet. Recent customer insights indicate that people's confidence in home Internet and its significance have risen to levels comparable to that of drug stores and pharmacies. This represents a notable increase from just a few months ago. I hope this provides more clarity. Lastly, keep in mind that most of our channel activities in cable occur in the field rather than in stores, where the impact is more significant on the Wireless side.

Great. Thank you, Jeff. Next question, Ariel. Sorry, Joe, go ahead.

Well, there's another part of the question, sorry, Paul, sort of post-pandemic. And I think, Jeff, you had a question post-pandemic around some of the constructs around price plans and will they change. We decided last June that some of the constructs in the business were ripe for change. It was time to make the move towards unlimited. It was time to make the move towards overage protection on Fido. Our views have not changed. And I do think as there are certain behaviors that are being set right now with consumers in general, some of them will stick and some of those behaviors are very positive, we believe, for the future of the industry from a productivity point of view and from our relationship with stakeholders and government as a whole. And we're going to look at each one of these on a case-by-case basis. I do think that, as we said last year, overage will continue to kind of diminish until it becomes immaterial, for that matter, over the course of time as more and more people move to Infinite. We have stepped back from stimulating the market in terms of promotional activity for all the reasons that we talked about. So therefore, you've seen some of the Infinite migration continue, but really slow in terms of pace as a whole. I think the roaming constructs will remain intact once people feel comfortable again traveling. I think that the getting on an airplane and traveling will be one of the last steps in terms of resumption of the economy. Personally, I believe that's one of the very last steps. And that's probably the furthest out in terms of resumption as a whole. But we're seeing good resiliency in the core subscriber business. Any challenges we face will really be a reflection of the economy in terms of unemployment or business defaults.

Our next question comes from Drew McReynolds of RBC.

I have two broad questions. First, for you, Tony, regarding visibility—not just looking at the 2020 outlook, but when we might return to normal after shifting focus to serve customers and society. When do you think we will gain better visibility on that, and what milestones are you looking for? Could they emerge in Q2 or Q3? Just a high-level comment on that would be appreciated. Second, Joe, I'd like to know how the initiatives you've launched in 2020 influence your plans for 5G deployment moving forward.

Okay, Drew, why don't I start with the first part of your question? As I've said, we focus on overriding cash flow because the short-term impacts are difficult. I think the two pieces we look to, one is when will people be able to be out and about, malls open up and have confidence to be out there shopping, etc. And so for our Wireless business, that's going to be the key factor in terms of that market starting to resume in terms of subscriber volumes and growth. And then the second piece of it is as well, even on our Cable business, that they're comfortable looking at alternatives and have time to consider best Internet, best TV and things like that. And so we think that's going to be a while in terms of whenever that happens. But the second piece of it is equally important, which is when do the macroeconomic factors like unemployment rates and our government's assistance programs, how long do those go for? How deep is it? And those will have an enduring impact for a while. Our business is a momentum business. And so even after those happen, it will take a while for that momentum to start picking up again. And so we don't see it something that happens in the very short term, but rather, it's going to take many months and probably several quarters, but that's what we look to as kind of the key factors that will get the momentum in our business going again.

Drew, regarding the 5G question, over the past few weeks, we have reviewed all our capital projects and initiatives that are currently underway or about to begin. We organized them into three categories. The first category is volume-oriented capital, where volumes are currently in flux. For instance, we expect a number of new homes to be added to our area soon, specifically subdivisions that will soon welcome residents. However, housing starts have declined, and we anticipate a decrease in future housing starts as well. Historically, we've added between 60,000 to 80,000 homes annually, so we are adjusting our volume-oriented plans accordingly. The second category pertains to initiatives that require or do not require permission. If we have diligently obtained permits for projects like tower construction, we will proceed with them. However, if we still need permission, especially since many building departments are closed and roadwork has halted, that capital will remain unspent. The third category, which relates to 5G, involves identifying strategic priorities that are still viable and can be executed efficiently and effectively, while also being tied to our revenue expectations. We want to avoid investing capital in projects that remain dormant for an extended period. In terms of 5G, we were early to launch in this space and have established a strong partnership with Ericsson. We've rolled out 5G in four cities and plan to continue expanding throughout the year. The exact number of cities—whether we reach 20, 15, or 10—will depend on obtaining necessary permissions and maintaining our strong relationships with contractors to complete the work. We believe 5G is a crucial strategic focus for our organization, offering significant advantages in bandwidth delivery and spectrum efficiency for future capabilities. Therefore, we view our investment in 5G as prudent. We anticipate that at some point, opportunities will arise to undertake these projects at lower unit costs, as suppliers may be more willing to negotiate favorable deals to secure work for their businesses. 5G remains a significant priority, as do other related initiatives. We also see this as an opportunity to further advance projects already in progress. Given that certain projects cannot proceed and certain capital will not be used, this will help reinforce our cash and liquidity position, which Tony mentioned. During this time, we can also focus on smaller initiatives like digital evolution. These are strategic choices we feel confident in making. Although we expect to experience revenue and EBITDA pressure, we are equipped to navigate this through various strategies and adjustments. We have the capacity to reprioritize our capital based on strategic importance and required permissions. I hope that provides clarity.

Our next question comes from Tim Casey of BMO.

Tony, could you help us understand what the baseline for bad debt expense would be and how an increase in that might affect reported EBITDA and cash flow? What are the factors we should consider as we analyze this? Also, regarding the roaming impact you mentioned for Q2, is that entirely from Roam Like Home? Would that figure represent a typical quarterly run rate? Business travel may decline in the summer, but vacations tend to rise. Do those trends balance each other out, or does that figure typically peak during other times of the year?

Thanks for the question, Tim. In terms of bad debt, we usually see it around 3.8% of revenue on a normalized basis, which amounts to roughly $130 million annually. If that figure were to double, we would be looking at a potential impact of $130 million. We have various models that consider different factors, but our estimate for bad debt ranges between $50 million to possibly $250 million at the most. While this is a significant amount overall, it's manageable, and we view it as a one-time occurrence rather than an ongoing issue. It's still early, and we are only beginning to see minor indications of this now. We will continue to monitor the situation closely. The figures I shared are intended to provide context; although there is a risk, it is not unmanageable. Please proceed with your next question, Tim.

And that's directly on EBITDA, Tony, that flows directly through the income statement?

That's correct. The second question you had was about the accounting treatment for that. We'll determine whether it’s classified as EBITDA or a one-time item at the appropriate time, and we will ensure transparency in that process. Ultimately, that will be the figure that affects cash flow, Tim.

Our next question comes from Maher Yaghi of Desjardins.

Yes, I wanted to ask you on your Cable business related to SMBs and enterprise. We talked a lot about bad debt, etc., but can you maybe talk a little bit about what you've seen so far in terms of collection and maybe a reduction in services related to enterprise customers in your Cable business? Knowing that it's not a big exposure for you, but still maybe it's interesting to know what's going on there. And maybe a bigger picture-type question related to the spectrum auctions that are coming up. Given all the efforts you guys are doing to continue to support Canadians with their demand for connectivity, but still facing quite a bit of pressure on the revenue and EBITDA, would you say at this point would be a better thing to push out the spectrum auction that is coming up late this year, early next year? And just on the free cash flow, when you say you continue to expect strong free cash flow, is that a qualitative assessment that it will be positive in terms of growth year-on-year? Is that what you're meaning by that?

Thanks, Maher. I'll address the first two questions concerning the B2B sector and the spectrum auction, and then I’ll let Tony explain the free cash flow details for Maher. Regarding Rogers for Business, our enterprise division is indeed a smaller segment of our overall business compared to our competitors, and in some cases, significantly so when looking at revenue proportions. Currently, the most challenging area within the enterprise business is Alberta, where it represents a minor fraction of our revenue, mainly in wireless services. We are starting to receive more inquiries from the business sector, particularly from small main street stores and independent operators who have had to suspend their services. We have implemented a mechanism that allows them to temporarily suspend their services while keeping their accounts active, facilitating an easy reactivation when the economy begins to recover. We believe we are relatively well-positioned regarding our exposure to the sector. Our analysis by industry codes indicates a varied impact across different sectors in the short to medium term, and we feel confident in our mix of operations. Additionally, we are identifying growth opportunities, particularly in WiFi and internet connectivity for the healthcare sector, and our team is dedicated to expanding these capabilities. Once established, these customers tend to remain with us long-term. Furthermore, our support for government with communication services and bandwidth is opening new opportunities to provide telecommunication network solutions across various government levels. Regarding the spectrum auction, we have been anticipating the mid-band spectrum, which is crucial for 5G. As I mentioned previously, 5G requires a combination of spectrum types. We performed well in acquiring 80% of the low-frequency spectrum. We are looking forward to the upcoming auction for mid-frequency spectrum and eventually the millimeter wave spectrum. We're prepared to move forward with this auction as we have a clear understanding of our needs and sufficient capacity to proceed. However, if the auction begins in December, it may extend into the new year, and its timeline could change. We’re unsure about potential delays. The timing for auction proceeds is also a consideration, and currently, discussions with the government suggest some flexibility in payment timing. While I won't guarantee changes, some preliminary discussions indicate there could be room for adjustments to smooth cash flow across various sectors. Now, I'll pass it over to Tony to clarify the cash flow aspect.

I would like to share some insights on free cash flow. To summarize its impacts, we observe different effects across our business segments, with Cable being the least affected and Media experiencing the most significant impact. This makes prediction challenging. While some costs will decrease naturally, they won't align perfectly with revenue changes. Generally, there’s about a 50% to 60% flow-through rate on a business level, which you should expect to see reflected in the future. Consequently, there will also be an EBITDA impact. We define free cash flow as adjusted EBITDA minus substantial cash items, with CapEx being the largest. Based on current trends, we anticipate CapEx will significantly decline from the initial guidance due to reduced volumes in capitalized items, lower unit costs, and the timing of work execution, which has become more complicated due to permit acquisition challenges and our focus on essential projects in this environment. Therefore, we expect CapEx to decrease. Notably, if we balance everything we see now, it's likely we'll generate free cash flow that is not significantly different from our prior guidance. However, many variables are still in play. We do not factor in working capital adjustments, particularly regarding account variations tied to lower handset volumes, which could contribute positively to cash flow if the market remains stagnant or declines year-over-year. This could add to free cash flow depending on the definition you use. I hope this clarifies our perspective on the matter.

Our final question comes from David Barden of Bank of America Merrill Lynch.

It's Matthew sitting in for David. Just two quick ones, if I could. To start off with just on Wireless. You mentioned, if I understood correctly, that you're seeing some downgrade in the service packages that people have. And I was wondering if you were able to kind of put some color to that comment. Are you seeing that, do you think, mostly because people are at home and they're offloading to WiFi? Or is this kind of the beginning signs of perhaps some financial distress that, that group of customers is facing? And then the other thing that I wanted to ask is, obviously, the self-install has been positive and something that you were pursuing even before this pandemic kind of changed everyone's way of living. I was wondering if the acceleration of self-install has kind of changed your previous outlook for the kind of achieving a 25% cash margins in the Cable business. I believe it was by the end of 2021 previously. If you think now looking past this crisis that, that might be accelerated or be able to achieve earlier. Just your thoughts would be helpful.

Matt, I'll address your questions. Starting with the second one about self-install, we see promising progress in transitioning to 100% self-install, which enhances customer experience and reduces costs. Currently, we are using an assisted self-install model where technicians provide support to customers. Over time, this will evolve to complete self-installation. While this shift will help operational expenses to some extent, it will significantly benefit capital expenditures in the long run. I've mentioned a potential 30% reduction in costs in the short term, but the more significant factor is the decrease in volumes we're experiencing with migrations to different tiers and new activations. This reduction in volume will affect Cable capital expenditures for a while. However, we anticipate that volume will eventually rebound. All these factors raise the possibility of achieving 25% Cable cash margins sooner, but I want to be cautious. Even though we foresee some promising cost savings, revenue may be pressured due to downward migrations in tiers. The overall outcome remains challenging to predict. While it's possible we could meet our goals earlier, several variables make it hard to say definitively. Regarding your first question about tier migrations on the Wireless side, as Joe mentioned, actual usage at home has notably increased, with some statistics showing a year-on-year rise of 50% to 60%. Conversely, Wireless usage appears to be stable or slightly declining. This decline does not indicate a significant reduction in wireless utility. We believe we are witnessing early signs of broader economic impacts, though I don't want to exaggerate this. The number of inquiries we're receiving is quite minimal, and we are approaching this situation with caution. History shows that higher unemployment and challenges for small businesses often lead to migrations to lower tiers, and we are proactively addressing that risk. I hope this information helps, Matt.

The only thing I would add, Matt, is that fundamentally, we are a barometer of the economy with respect to unemployment and business losses, and that's the biggest thing that will drive that phenomena. I don't think we're getting some sort of fundamental switching behavior. We know that people are relying on both wireline and wireless services more than ever. And if you add them both together, it's still up dramatically year-over-year, including voice services that have peaked to record highs.

Great. Thank you, Matt. Thank you, everyone, for joining us. Today, we will be following up as needed. Just a reminder that our Annual General Meeting is this morning as well. You can listen to Joe's remarks shortly after 11:00 a.m., and we will make those remarks available on our website as well. Thanks for joining us, and everyone stay safe as well. Thank you.

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