Rogers Communications Inc Q2 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Rogers Communications, Inc. Second Quarter 2020 Results Conference Call. I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please proceed, Mr. Carpino.

Thank you, Ariel. Good morning, everyone, and thank you for joining us. Today, I'm here with President and Chief Executive Officer, Joe Natale; and our Chief Financial Officer, Tony Staffieri. Our Chief Technology Information Officer, Jorge Fernandes, will also be available during the Q&A session after the presentation. 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 to begin.

Thanks, Paul, and good morning, everyone. I'd like to cover three topics in my remarks. One, I'll start by talking briefly about our second quarter results, which Tony will expand upon and provide additional detail; two, I will also make a few remarks on our priorities during the quarter as we adjusted our business operations during this anomalous period; and three, finally, I'll share how we're thinking about the business as the economy starts to open up and the critical role our industry and our world-class networks play in Canada's recovery. Firstly, as we fully expected, our second quarter results reflected three full months of the COVID-19 economy. We saw notable impacts across all of our businesses as sales and new business activity essentially ground to a halt. But as we said last quarter, these metrics are COVID-19 specific and do not reflect our underlying fundamentals nor do they diminish our long-term growth prospects. Importantly, as you would expect, we took full advantage of the short-term extreme environment to reexamine each key aspect of how we run our business. We wanted to make sure the decisions we're making would set us up to power out of this difficult period. COVID-19 did not change our plans nor the course we were on. Instead, it greatly accelerated the pace of change. We are doing things today that we thought would take many months or quarters to accomplish, and the business will be stronger as these changes become permanent modes of operating. All business units were impacted in Q2. In Wireless, all metrics reflect the impacts of the economic shutdown as customers isolated and stores remained closed. We estimate that industry sales volumes were down by 80% to 90% in the quarter. Customers shifted from Wireless usage to home Internet usage. While metrics like churn were down to a record 0.77% and phone subsidies were down about 45% on a year-over-year basis, most other impacts put short-term pressure on our results. With roaming, for example, travel simply stopped and roaming revenues were down approximately 95% from a year ago. As we have discussed during the past year, we knew overage fees were coming down as we proactively transitioned to unlimited plans. We saw additional overage declines during this lower usage period. The lack of new activations, as many of our stores remained closed, further impacted service revenue. While we anticipate most of the COVID-19-related impacts will recover as the economy opens up, there were several positives in the quarter that point to the underlying strength of our business. First, subscription revenue is holding up very well and is flat year-over-year. While there were some customers affected by the economic impact of COVID-19, the number of customers moving to smaller plans has been in line with our expectations. Secondly, and supporting this view, the shift to our unlimited plans continues to be strong. We are now at over 1.9 million unlimited subscribers and have the most customers who are not paying overage fees of any carrier in Canada. This is an important accomplishment as Canadians look for value in the current environment as we head into a 5G world. Finally, we started to see some volumes slowly come back as stores began to open up. At the beginning of the quarter, 90% of our stores were closed. Today, nearly 90% of our stores have reopened with modifications to protect the health of our employees and customers. In fact, there were a couple of days in June that were reminiscent of some of the stronger promotional periods we typically see in the back half of the year. It is still early days, and we'll see how customer confidence responds to the economy opening up, but these are encouraging early signs. In Cable, our business was stable but felt some impact as we continued to provide free content and additional support to help our customers through the period. Additionally, our strong presence in the new condo, new home, and Airbnb markets, which slowed during the second quarter, impacted our business. On the positive side, our Cable subscription business remains healthy. We're also seeing reduced promotions and discounting in our Connected Home business. Overall, we expect gradual improvements in these markets in the second half of the year. While representing less than 15% of our revenue and less than 3% of our total adjusted EBITDA, our Sports and Media business saw the most pressure in Q2. The material loss of advertising revenue, with the suspension of live sports, affected the entire industry, including Sportsnet. The lack of game-day revenue and in-stadium promotions from delayed Blue Jays Baseball also contributed to a tough quarter. Similar to Wireless and Cable, we're seeing some positive signs with live sports scheduled to come back, and advertisers are calling eager to participate in the return of live sports. Our sports and broadcasting resources are an incredibly valuable set of assets, and their contributions to our business will recover gradually with this pent-up demand for sports entertainment. Live sports, above all other types of content, drives a loyal and permanent appetite by fans and audiences. This quarter, in particular, during the global pandemic, our focus was on three things: one, keeping our employees safe; two, keeping our customers connected; and three, driving the right priorities and investments for the recovery and the future. To say that COVID-19 has permanently changed how we operate is an understatement. We pivoted in the moment to ensure Canadians can continue to rely on our services, fast-tracking service offerings that we planned and launched in record time. We did this while most of our workforce worked from home. 22,000 of our 25,000 people successfully shifted to a work-from-home model in the second quarter, including all of our Customer Care agents. It was an important quarter for our Customer Care agents. We moved to a permanent work-from-home model for our agents in Ottawa after seeing positive customer and employee feedback. We'll be applying these lessons learned to other Customer Care sites. We also crossed a very proud moment this quarter with the transition of the remaining Customer Service positions to Canada. Today, all of our customer service teams across our brands are based in Canada. Our Canadian-based team members are experts in our products and services. And as members of their communities, they can relate to the needs of our customers, do a great job of serving them, and better support our lifetime value metrics. Just as our team stretches across Canada, so too does our extensive physical distribution advantage. And while more of our over 2,500 store locations in Canada are now open, we are advancing our digital-first strategy, an important factor in our long-term growth. Digital sales adoption is up over 15% year-over-year. Over 90% of our five most common service transactions at Rogers are now conducted by customers online. Virtual assistants are helping more customers with routine requests. These conversations have grown by 130% year-over-year to over 1 million as AI technology continues to get smarter and better understand customer intent. This digital enablement and our continued customer improvements are why we continue to see fewer calls into customer care, down 20% year-over-year. We've also adapted and expanded a contactless Pro On-the-Go service, a key market differentiator for us. This service is now available to over 10 million Canadians in the Greater Toronto, Greater Vancouver, parts of Southwestern Ontario, Ottawa, Calgary, and Edmonton areas. We will expand to more markets this year. This personalized phone delivery and setup support service brings the store to a customer's front door at no extra cost. In the early days of the pandemic, we also enhanced our TV and Internet self-installation service. This change represents a clear competitive advantage in our market. We already provide a 1 gig capacity across our entire cable footprint to drive greater penetration, and this has significantly removed customer friction, including eliminating the need to schedule an installation appointment. Now we can drive greater efficiency through our enhanced self-install capabilities. This quarter, we also introduced a new virtual assistance tool for our tech support teams. With that app, they can now solve many issues right away without needing to schedule a service appointment. We're on track to save our customers an estimated 400,000 hours of their time and save us approximately 100,000 service truck rolls this year. These changes have been helpful to serve our customers during the pandemic, but they will continue as we move through and eventually out of it. They offer new service advantage to our customers and offer significant cost efficiencies across our businesses. We're proud of these advancements, and our team members are feeling it too. Our recent employee pulse survey shows employee pride is at 93%, an all-time high, an important marker for the strength and resilience of our 25,000 team members across the country. Even during the most disruptive business environment we have seen in our lifetimes, I want to highlight how proud I am of our company and our team members and how they've responded to supporting the needs of our communities. During something as life-altering as COVID-19, our teams felt it was our responsibility to help the most vulnerable in society. We launched Step Up to the Plate with the Jays Care Foundation to help fill 390,000 hampers of food at the Rogers Center to get as many as 8 million meals in the homes of Canadian families in support of Food Banks Canada. We raised over $1 million through the Hearts and Smiles campaign selling t-shirts and masks with all proceeds going in support of the frontline fund to help Canadian frontline healthcare workers. We connected vulnerable Canadians, including providing devices and free wireless plans in partnership with Women's Shelters of Canada, Big Brothers Big Sisters of Canada, and Pflag to maintain vital social connections when people needed them the most. We also recently launched The 60 Project. It's been 60 years since Ted bought his first radio station, CHFI, with an $85,000 loan. To mark this milestone, we evolved our 60th anniversary to focus on ways we are giving back to Canada and investing in others. Volunteerism is more important than ever, and a key pillar of The 60 Project is the 60,000 hours volunteer challenge. Rogers' employees and their families will donate 60,000 volunteer hours across Canada to have a meaningful impact in our local communities. Looking ahead, we're optimistic about the future and the underlying strength of our business and asset mix. If I can recap, we are the largest wireless franchise in Canada, the biggest cable operator in the country. We own and operate our national wireless network. We were the first to launch 5G in Canada and have the largest spectrum portfolio amongst our peers. We deliver the best network experience in Canada. Just last week, Umlaut, a global leader in mobile network testing and benchmarking, awarded Rogers the best wireless network in Canada. This follows J.D. Power, in April, ranking Rogers #1 in the West and Ontario in its Canada Wireless Network Quality Study. Our Media assets are focused on sports, and demand for the return of live sports is high. Pride is at an all-time high with our team members. And we have $5.4 billion in available liquidity and a strong balance sheet. Overall, we have a formidable set of assets and an incredible team activating them. We are very confident in the long-term prospects of our company and for Canada as we work to power out of the COVID-19 period. Just as our resilient networks provide the digital scaffolding during this health crisis, our country's technology infrastructure will underpin Canada's recovery. If connectivity was the lifeline during COVID-19, it will be the bottom line of Canada's recovery. Today, the digital economy is the economy, and our country's tech-driven recovery will require the right investment-oriented regulatory environment. This is one of the most important lessons we can take from this moment. We're part of an industry that has never been more critical to society and to our economy, from powering new stages of innovation on Canadian soil to ensuring more small and medium-sized businesses have a fighting chance with an online presence to receive and fulfill orders. Strong networks are essential to Canada's economic recovery. Thank you. And let me now turn the call to Tony, who will provide more detail on the quarter.

Thank you, Joe, and good morning, everyone. Q2 was undoubtedly the most volatile quarter we have seen in our business as we went from a hard stop standstill economy that required us to focus on the safety of our employees, customers, and communities to the start of what we hope is a sustainable recovery for our country. Canadians are doing the right thing to help each other get through this, and we're glad to see that hard work paying off. I'll provide some of the COVID-specific impacts we have seen in each of our businesses, which were significant in Q2. We have not adjusted our reporting numbers for these impacts, but we wanted to give you the transparency on some of the dynamics during this quarter. Let me start with our Wireless business. In Wireless, service revenue declined 13% year-on-year, driven by approximately 90% lower roaming revenue due to global travel restrictions, the waving of roaming fees, as well as a decline in new activations for both postpaid and prepaid services during the COVID-19 pandemic. On a year-over-year basis, these reduced volumes and the resulting reduction in various fees we typically earn, combined with the roaming decline, contributed to 7% of our year-over-year revenue decline. These declines are COVID-specific items, which we anticipate will recover as we move out of the pandemic environment. Additionally, we saw a $60 million decrease in overage fees. Over $50 million of the decrease was a result of strong customer adoption of our Rogers Infinite unlimited data plans, and the remaining reduction was related to the COVID-19 pandemic as people stayed home and relied on Wi-Fi for data usage. Unlimited plans have done well and continue to have strong underlying fundamentals. COVID-specific items noted had a direct flow through to ARPU, which was down 13% on a year-over-year basis. Loading was essentially flat as we maintain our discipline by avoiding aggressive price reactions to some of our peer promotions. We matched where needed, but felt there was no need to drive aggressive promotion when our employees and customers were still concerned with the safety of their families and communities, and in particular, when total market volumes were down substantially. With the lower activity, churn dropped dramatically to 0.77% for the quarter. While this is lower than normal, we don't view any subscriber metric during this period as being meaningful to the long-term franchise value of our Wireless business. Wireless EBITDA was down 19% for the reasons noted, as well as a significant majority of the total $90 million incremental provision for potential bad debt exposure is reflected in this segment. We will continue to evaluate the economic environment and performance of our customers in the second half of the year to assess the need for any future bad debt provisions. Based on our current assumptions, we feel this quarter's provision will capture the vast majority of the impact based on what we see at this time, but we will provide any future updates if required. On the handset subsidy front, total net handset costs on a cash basis were down $80 million compared to last year, or about 44% year-over-year. Let me now turn to Cable. Revenue was down 3% due to lower ARPA associated with some bundling packages as well as the continuation of providing select free video and Internet overage services to customers during the pandemic environment. Additionally, we have delayed some price increases. Homes passed and customer relationships grew 2% and 1%, respectively. We remain focused on our Connected Home roadmap driven by our Ignite TV and Internet product. Despite low activity levels in our markets, Internet net additions were 5,000, and Ignite TV grew by another 18,000. With the flow-through items noted above, Cable adjusted EBITDA declined 5%. We estimate that excluding the COVID-specific impact items, as well as the additional incremental provision in Cable bad debt, adjusted EBITDA would have been approximately flat year-on-year. Our Media results continue to be significantly affected by the COVID-19 pandemic environment. Revenue was down 50% and associated with lower advertising revenue due to the economic shutdown. We also have significantly lower sports revenue, including at the Toronto Blue Jays. Adjusted EBITDA was down approximately $100 million, reflecting the flow-through of lower revenue and some lower costs. Moving to consolidated results. Total service revenue was down 16% and adjusted EBITDA was down 21%. Adjusted EBITDA includes $90 million of incremental bad debt provision related to COVID-19. This provision represents approximately 2% of our receivables and is at the lower end of the $50 million to the $250 million range we referenced last quarter. We estimate the total COVID-related impacts in the quarter on revenue were approximately $725 million or 19%. For adjusted EBITDA, we estimate COVID impacts in the $300 million range or about 18%. To be clear, we have not adjusted our numbers for these impacts. We're just providing some transparency that may be helpful going forward. We invested $559 million in CapEx for the quarter, which was a year-over-year decrease of 25% and reflected a CI ratio of 17.7%. The decrease in capital expenditures was driven by delayed expenditures and permitting associated with access due to the pandemic. We also continue to see improvements in Cable CapEx efficiency associated with self-install Internet and Ignite TV. We generated free cash flow of $468 million this quarter, a decrease of 23% year-on-year. The notable decrease in free cash flow is associated with the lower EBITDA flow-through and some incremental interest payments this year. Our cash tax rate, as a percentage of adjusted EBITDA, was 5.8% in the quarter and should be in that same range for the full year 2020. Despite the short-term economic impact of COVID, the company's liquidity is very healthy at $5.4 billion available. 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 4.23% with an average term to maturity of 13.6 years. We recently strengthened our position with an additional $1 billion of 2-year funds at an effective interest rate of under 1%. We ended the quarter with a debt leverage ratio at a comfortable 2.9x, and we see our leverage position continuing in the range of 2.5 to 3.0x for the next few years. We believe this is sound and reasonable given the spectrum auctions on the horizon and the continuing downward pressure on interest rates. While Q2 was unique and had several short-term challenges, we have responded and emerged in a very strong position. Our business execution was disciplined and very responsive to the needs of our customers in this complex environment. We continue to have exceptional network reliability at a time when demand has never been higher, and we pivoted our operating models to adapt to the new and evolving environment. As the economy moves forward, we are well prepared and highly engaged to assist our customers and the nation as we gradually and positively move out of this environment. In terms of an outlook, let me provide you the same level of transparency we used in our Q1 call and provide a snapshot of how we are trending on some key forecast variables. We won't provide specific guidance because it's still too difficult in the short-term to predict the various combination of factors that could impact our financials, but this color should be helpful as to how we are thinking about Q3. In general, we anticipate modest sequential financial and operating improvements in Q3 for each of our businesses as the economy starts to open up and live sports slowly resume. Additionally, we expect to see some gradual cost efficiencies materialize in the third quarter from efficiency initiatives learned through this period as well as benefiting from continued year-over-year reductions in CapEx and handset subsidy savings. More specifically by business. In Wireless, June saw a notable recovery in loading as most stores were starting to open, and July is trending a little bit better as well. We do not know what back-to-school will look like as customers are only now slowly getting back to shopping, but the economy is opening up, and that should help in our and the industry's recovery. We believe ARPU in Q3 will be in the same dollar range as we saw in Q2. We were down almost $100 million year-over-year in roaming, which significantly impacted ARPU, and we expect the same year-over-year dollar decline in Q3. We do not anticipate roaming to recover in the near term, but as travel opens up, our roaming will benefit from the recovery. In terms of overage revenue, Q3 will be our first full quarter of year-over-year comparison since launching unlimited. We anticipate overage will be down $60 million on a year-over-year basis, as we have previously highlighted. Even in a COVID environment, we have seen no material impact on the underlying fundamentals of our unlimited plans. Impressively, we are very close to the 2 million customer mark in unlimited plans. These plans continue to have higher ARPU, lower churn, and higher customer satisfaction. In less than a year, we have become Canada's largest provider of unlimited plans, with customers enjoying access to our premium national network. Canadians love these plans, and we anticipate ongoing leadership in this area as customers continue to resume their mobile activities. Offsetting some of the roaming and overage pressure on ARPU, we expect to see some benefit in Q3 as economic activity and activation revenue picks up. However, it is still difficult to predict how active customers will be in the back-to-school period. In both our Cable and Wireless businesses, we continue to work with customers to manage bill payment terms if needed. We will continue to monitor the environment to see if additional provisions are required, but we do not expect any additional provisions in Q3 to be substantial. We continue to see positive demand for our Internet and Ignite TV offerings in this work-from-home environment. Loading should remain positive in Q3 as new condo and housing builds start to recover and self-installation in both Internet and Ignite TV continue to grow. OpEx and CapEx-related installation and upgrade costs should also improve. Capital intensity for our Cable business should continue its steady downward trajectory as reduced volumes, self-installation, and construction delays continue, although, to a lesser extent than Q2. In our Sports and Media business, we will likely incur losses in Q3, but the restart of the MLB and other leagues will translate into the resumption of some advertising revenue at Sportsnet. However, we expect adjusted EBITDA to remain negative for Sports and Media until fans can return to watch the Jays live and drive game-day revenue and advertising. Overall, cash flow and liquidity remain strong, and maintaining this financial strength will remain our priority for the rest of the year. Based on the current run rate for the first six months, CapEx for the year will likely be down approximately $500 million. However, I want to be clear that this reduction is primarily based on projects that have been delayed in the current environment. Our network and 5G development spend are full steam ahead. As the economy resumes its gradual recovery, we are positioned very well to drive growth with the best assets, a very strong balance sheet, and a highly passionate and engaged workforce. As we have demonstrated in the past, we will use our leading market position, largest wireless company, largest cable company, and largest sports assets to create long-term value for shareholders. 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.

Let me ask you a couple of questions on ARPU, if I can. First off, if you're down another $60 million year-over-year in the third quarter on overage revenue, correct me if I'm wrong, but you should be basically at 0 by then. Should you not so that will stop being such a big headwind as the crisis and then the migration to unlimited gotten you down to sub-1% of service revenue coming from overage now? And the second question, I'll just throw it out to you first, so you can think about both of them. Thanks for those numbers. If I do the adjustment on the 7% impact you mentioned from roaming and activation fees and sort of COVID direct things plus the $60 million impact from overage in Q2, I still come up with almost a 3% decline in Wireless service revenue on a year-over-year basis, even backing up both of those items, which would suggest the underlying trend is still not great. And I thought we'd been talking about higher MRR for people moving to the unlimited plans, plus maybe some benefits from lower equipment subsidies gradually flowing through ARPU numbers. And of course, you've had positive sub ads on a full year or trailing 12-month basis. So if you can flesh out a bit more why that underlying service revenue growth is still minus 3%, even with the two adjustments, that would be helpful for everybody, I'm sure, because I'm sure, everybody is a little bit surprised that, that ARPU and service revenue growth number this quarter.

Thank you for the questions. To start with the overage, we initially projected that the number of customers on unlimited would be slightly higher compared to pre-COVID figures. We expected around 2 million, but we currently have about 1.9 million customers on unlimited. Consequently, some of the overage drag will carry into Q3. The more significant factor to consider is the seasonality. While we are seeing some customers transition to unlimited, there are also those who would have continued to incur overage during the summer months based on their existing plans and usage, which we will not see this time. In Q2, I mentioned a $50 million impact related to unlimited plans, with $10 million being a secondary factor. As we look to Q3, we expect the lost revenue to be more significant than this overage melt, which will be less than the $50 million. Regarding the ARPU declines, the net number is just under 3%, and there are a few COVID-related impacts, particularly the freebies provided. This moves the negative 3% to about minus 1%, which aligns with our expectations. We anticipated entering the second half of the year with positive ARPU growth, and we always expected Q2 to show a slight negative in underlying ARPU, which is where we currently are. It's less than 1% off what we expected. We are experiencing some pressure on ARPU because we didn't see the volume coming in from higher plans as anticipated. Additionally, customers seeking to optimize their plans had a minor impact. Overall, the underlying subscription revenue remains solid and flat year-on-year in dollar terms, with the ARPU showing a slight decline, but it's not a cause for concern.

Our next question comes from Dave Barden of Bank of America Merrill Lynch.

I guess the first one for you, Joe. If we go back to the decision you guys made about the dividend policy and choosing not to have a growth policy, but rather have more of a tactical approach to the dividend, is there anything about the degree of uncertainty that you're facing this year that makes you want to potentially reconsider the amount of capital you're allocating to dividends in the short term? And then a second question for Tony. As you kind of gave us those numbers, thank you so much for the color, as we kind of headed out of June into July. What kind of visibility do you have on kind of the mix of EIP versus subsidy customers? And if that's been affected at all by maybe the economy or the aftermath of COVID? Just some kind of color on where we stand in that transition?

Sure, Dave, thank you for your question. To begin with, our cash flow expectations for the year remain unchanged, and we anticipate finishing the year with around $2 billion in cash flow as expected. This is supported by improved CapEx efficiency related to our soft install activities and better unit prices in the market. However, we are experiencing a slowdown in housing starts, which has caused some project delays. Tony mentioned a reduction of approximately $500 million in CapEx, but this does not affect our overall cash flow position. Regarding our capital allocation policy, there are no changes. Our top priority remains investing in the business, particularly in 5G and its future, as the fundamental aspects are still strong. If we have excess cash, we do have an NCIB available to us, which would be our second priority. Our third priority is to evaluate dividends periodically, but there have been no changes to our dividend policy.

Yes, I apologize. I think what we saw kind of creep into the competitive landscape was that the subsidies were creeping into the EIP plan, and that phones were not being sold at full price but rather at subsidized price. And I was wondering if you could kind of comment on how that's evolved what appears to be evolving as we get into the third quarter?

All right. Got you. So a couple of things on that. When we introduced, if you rewind the clock way back in July when we introduced EIP plans, the intent was to be on a roadmap to substantially reduce the amount of promotional discounting on handsets. We knew it wasn't going to be a quick turnaround. And as we fast forward to Q2, what we saw is promotional discounting down circa 20% to 25%. Keep in mind, some of the numbers you see in terms of discounting are relative to MSRP, and there have been some changes to MSRP for some devices. And secondarily, there are incentives provided by OEMs, as you're aware. And so that provides or pays for some of that discounting that you might see in the marketplace. So overall, we're pleased with the way that's trending overall for where we're at.

Our next question comes from Tim Casey of BMO.

A couple for me. Tony, could you talk a little bit about the seasonality of roaming and how should we think about that going forward, given, as you mentioned, travel and certainly, business travel doesn't look like it's kind of going to come back anytime soon? Just wondering how we should think about that, both from a risk revenue and EBITDA impact over the next four quarters, both maybe from a relative perspective and also seasonality? And then second question, probably more for you, Joe. How are you thinking about your cost structure going forward? And I guess where I'm going is, one side would be just keep it as is and wait it out and wait for things to return to normal. But I'm just wondering if you think the new normal is going to be significantly different that you are going to have to make changes to your distribution base or other big cost items? How is your thinking evolving on that?

Regarding the first question about roaming and profiling, we previously mentioned that roaming contributes about $400 million annually to our business. Q1 is typically our lowest quarter, followed by Q4, while Q2 and Q3 tend to be the peak periods, with Q2 generally seeing the highest volume of business-related roaming. As summer comes, consumer roaming increases and reaches its peak. In Q2, I indicated that roaming revenue had decreased by $100 million, and we expect a similar, possibly slightly larger decline in Q3 year-on-year, estimating roaming revenue will be around $100 million to $110 million for that quarter.

And on the second question, we have a very active cost management program underway that has been developed throughout COVID in recent months. There are several activities that I would consider normal operations, such as margin improvement and cost reduction, driven by various factors already being optimized in our business, like a 20% decline in call volumes or an increase in digital adoption. We largely paused these initiatives during Q2 and the COVID period, focusing instead on managing discretionary spending. Some of this came naturally as travel and similar activities ceased, but we remained vigilant about discretionary expenses. However, some of the structural cost programs we had in place were also put on hold as we prioritized the safety and well-being of our employees, keeping our customers connected, and considering how to utilize these ideas and opportunities moving forward. The second category of cost improvement initiatives that have been expedited due to COVID is significant; for instance, we have adopted tools and apps to support field service, such as video chat and analytical monitoring. This change is expected to save us 100,000 truck rolls annually, which represents a considerable expense. Additionally, we transitioned from minimal self-installation in January to achieving 100% self-install. Our aim is to maintain this level of self-installation, leveraging the benefits not only from a cost perspective but also enhancing customer flexibility.

Our next question comes from Maher Yaghi of Desjardins.

Thank you for the information regarding the COVID impact. I wanted to ask about the Cable side, where it seems you took longer than usual to implement some price increases on Internet home services, which contributed to your 3% year-over-year revenue decline. You also mentioned the lower pricing environment for Home Phone. What is causing these pressures right now? Are you experiencing economic challenges at the customer level that you're trying to address with your new pricing promotions? Additionally, regarding government funding, we've seen other companies in the Media sector benefit from government support. Have you been able to access any of this funding for your Media business or any other segments?

Thank you, Maher. To address the Cable question, we had planned a price increase but decided to pause it completely. We are now considering when to implement that increase, which will likely occur later this year. There's no doubt this decision contributed to the overall decline in revenue. Additionally, there were some temporary pressures in the Cable business. During the COVID period, we provided concessions, including removing overage caps on Internet and Wi-Fi usage and offering free content, which we believed were the right choices at the time. Those concessions are no longer in play, and their absence will help improve our results. Tony, could you provide more detail on this, and then I’ll discuss the funding situation.

Sure. If I could add to Joe's comments, the price increases are affecting all our products, not just Internet. As we implement these in the fall, you'll see not only an improvement in ARPA, but if we had done this in Q2 as originally planned, the results would have been much better. Looking ahead for our Cable service revenue, we expect to see sequential improvements in Q3. By the end of the year in Q4, the full impact of the price increase and the removal of some of the freebies from Q2 will be apparent. You'll observe a healthier growth profile, though modest, in Q4, marking the start of a return to strength in Cable revenues.

Regarding the funding, we qualified for and obtained some support for our Media business, which had effectively come to a standstill. We utilized that funding as expected. The decision was between furloughing employees and allowing them to seek individual subsidies or retaining staff and leveraging the support, all while preparing for the eventual return of the games. This decision proved beneficial, as the games are now returning rapidly and simultaneously. Having staff on standby was advantageous compared to needing to recall those on furlough. Essentially, it was a strategic choice to keep them ready for the upcoming games.

Our next question comes from Drew McReynolds of RBC.

First, a clarification, I guess, for you, Tony, on the bad debt expense in the quarter, the $90 million. Did I hear that correctly? The bulk of that is in Wireless?

That's right, Drew. The bulk of it is in Wireless. And just to clarify, it's the incremental provision that we booked in the second quarter.

And just for modeling purposes, are you able to just give us the numbers maybe offline or now broken by segment on the incremental $90 million?

Yes, roughly $80 million for Wireless and just slightly above $10 million for Cable.

Okay. Perfect. I have two other questions. First, regarding the back-to-school dynamics, could you remind us about the typical seasonal variations, so we can better understand what might occur this year? Secondly, Joe, with the delay of the 3,500 auction, how does that impact your goals for 5G in the upcoming year, both positively and negatively, in relation to that delay?

I'll start with back-to-school. In terms of whether volumes remain low, we will still see savings related to handsets. Additionally, some fees like activation fees that we typically receive and others that are significant impacted us in Q2, and they will continue to affect us year-over-year in Q3. Based on the volumes we are observing, we expect a slight improvement over Q2 as volumes rise. However, if volumes decrease, that will keep impacting service revenue and ARPU. I'm not sure if I answered your question.

Drew, on the 5G, I'll make a few comments. 5G is full steam ahead in terms of our focus and development in the area. As you know, we're the first to launch, and we also have a very advantageous position with 600 megahertz spectrum across the country. Jorge can talk about the deployment plans on that spectrum. And yes, the 3,500 auction regrettably has been delayed. But bear in mind that we have other spectrum available to us in the mid-range frequency, and Jorge will kind of cover our plans on that front, including the tranche of 3,500 we already own.

Drew, thanks for your question. As you would have heard me talk about this before, 600 megahertz is indeed our foundational spectrum that we're using for rollout. And given that this spectrum has now mostly been cleared across the geographies for usage, we're rolling that out as we speak. So we expect to have very good coverage using the 600 spectrum that we acquired. And as you know, in Southwestern Ontario, we have a particularly good advantage in that sense as well. As Joe mentioned, the fact that we have Ericsson as a single vendor, that allows us to use the dynamic spectrum sharing that I've talked about before as well. This is a great advantage for us because, one, some of the important flagship devices will support both 600 and spectrum sharing, which allows us to use some of our existing 4G spectrum to provide coverage and capacity for 5G without having to do major work on our network. And over time, as Joe mentioned, when the 3.5 becomes available for wireless usage, we will then add that on to our strategy. So this doesn't really change any of the plans that we've already communicated in the past, and we feel very good about the plan that we have in place, and we're executing.

Just one more quick comment on that. 5G is about the network. 5G is also about the commercial construct. I mean part of our decision to go to unlimited, as we said earlier, we're close to 2 million customers on unlimited, is that we need a consumer construct that complements the capability and availability of 5G. It would be a shame to have a 5G network and have a 3G or 4G pricing construct with the overage considerations around it. So the two go hand-in-hand. And then 5G developed markets across the world. That's an essential pairing of capability, network, and customer construct.

Our next question comes from Simon Flannery of Morgan Stanley.

This is Diego Barajas filling in for Simon. Going back to the incremental bad debt provision range you provided, can you just speak to some of the trends you're seeing both on the consumer side and at the SMB side recently?

Sure. Early on, we anticipated significant amounts of deferrals or inability to pay that would lead to disconnects. However, what we are observing in reality, particularly over the last few weeks of July and in Q2, is much lower volume in delayed payments or suspended accounts. This trend is more favorable than we initially expected. In establishing our provision, we aimed to be prudent and conservative, capturing the vast majority of the risk. Therefore, we see the incremental exposure as being very minimal as we approach Q2 and Q3. We will need to monitor specific developments, but overall, the situation is improving more than we had anticipated.

That's very helpful. And then secondly, on the media side, can you maybe give some color on what the financial impacts may be with timing changes to the leagues as well as related to Media, what you're seeing in the advertising market and the outlook for the rest of the year?

The games have just recently been announced in terms of scheduling, etc. And so as Joe mentioned in his opening remarks, bookings have been solid in terms of advertising revenue. On the Media side, subscription revenue continues to be solid. And so if the resumption of advertising, we're quite optimistic about the revenue profile in Q3, and we'll see what Q4 brings. But to be clear, we still expect, when you think about the broadcast fee costs and the loss of game-day revenues at the Jays. Just overall, we still continue to expect a loss overall in Media in Q3 and probably Q4 as well.

Our next question comes from Jeff Fan of Scotiabank.

Hope everyone is doing well. My first question is just a clarification on the free cash flow being intact for this year, regarding $500 million of CapEx being down and free cash flow is intact. It sort of assumes that your consolidated EBITDA decline would materially improve as we get into the second half of the year. I'm wondering if that's correct, especially compared to the minus 20% in the quarter. And then my second question is probably for Joe, regarding the Wireless retail environment. I'm wondering, given what we're seeing so far, whether you've seen retail traffic actually pick up as you reopen stores through June and maybe in the early part of July. And if physical retail traffic doesn't pick up, and yet, there is some pent-up demand regarding phone upgrades and so forth, how do you feel about your digital platform to be able to enable activations? And I'm not talking about just queries or customer support, but actual customer activation going from start to finish and being able to address that potential pent-up demand?

To address the first part of your question, I have a few comments. Firstly, we expect EBITDA to be stronger in the second half for several reasons. Certain revenue profiles, which we discussed, are anticipated to improve across all three of our businesses. Additionally, the bad debt provision that impacted EBITDA in Q2 is not expected to occur at the same level in Q3 and Q4, which will be advantageous. When combined with our CapEx outlook, the estimate stands at $500 million. Looking at the broader picture, we had initially projected a free cash flow of just above $2 billion, and we continue to see a stable path to achieving that. The dynamics might slightly shift within EBITDA or CapEx, possibly being a little more or less than $500 million. However, we prefer not to pin down a precise figure given the current fluid environment. The main takeaway is that we are on track for consistent and strong cash flow delivery.

And Jeff, on the Wireless retail environment, as I said, in the last part of June, early part of July, we've seen a lot of good retail traffic. And we've had some volume days that are reminiscent of sale periods in the back half of the year as a whole. Mall traffic has been good given the circumstances. I would say to you that our factory capacity is down a bit just because of the conditions we're employing to keep customers safe and hygiene intact, etc. Think of it this way, depending on the size of the store footprint, we limit the number of people in the store. So in some of the mall locations, we actually have lineups when people kind of come in as 1 person goes out. Just the nature of COVID right now, we have to work through that sort of trade-off. So at the end of the day, our goal is to continue to execute well on the physical bricks-and-mortar side. And as you recall, we have a strong advantage on that front with 2,500 locations across the country, at the same time to continue driving and investing on the digital and direct side of things. And I think, on that front, we've got a good capability and a growing capability. The one issue we have been managing effectively is customer authentication eligibility. I'm not referring to service transactions, but rather to online purchasing transactions. The challenge in our business has always been verifying the customer and ensuring they are eligible. Our teams have been focused on this since before COVID and have been making significant progress. When dealing with a transaction that involves providing an expensive phone to someone, it is crucial to get authentication and eligibility correct. The teams have performed well in this area and have been handling the daily challenges effectively, leading to positive results. Alongside our other direct capabilities beyond the web, we believe we have a strong position. Pro On-the-Go offers a significant advantage, in our view.

Our next question comes from Aravinda Galappatthige of Canaccord.

I have two questions. First, you've mentioned before the inbound calls from subscribers facing financial stress who are looking to adjust their plans. It seems like this started in Cable and is perhaps also noticeable in Wireless. Can you provide an update on how significant this issue is and if it contributed meaningfully to the decline in Q2? Secondly, could you discuss the promotional activities as volumes begin to recover? There appear to be some aggressive promotions, particularly for 20 gig plans around the $65 mark or even lower. Is there anything significant you can share on this?

Aravinda, I'll start with the first question about call volumes in re-rating. As I mentioned earlier, we anticipated the worst but were surprised by much lower volumes regarding repricing. This is evident in both Cable and Wireless as customers aim to optimize their plans or take advantage of promotional pricing that they may have encountered previously in the market. However, these instances were minimal. While they did have a minor impact on ARPU in both Wireless and Cable, the effect was very small—less than 1%, and in fact, even below 0.5 percentage points in each category. So, there was some activity, but it was quite limited.

Aravinda, in terms of the promotional intensity, our general stance during Q2 was this is not a sales quarter. When you're facing the fact that 90% of your stores are closed and you've got thousands of people with nothing to do because they work in those stores, it seems counterintuitive to be aggressive around promotion. There were some promotional skirmishes in the quarter led by our competitors. And of course, we matched and we were right there every step of the way. But our stance is very much, let's focus on the basics, let's work on our operating model, cost efficiencies, and managing cash flow and liquidity, managing the health and safety of our people, all the things we've talked about. And we're ready for the competitive environment to whatever degree it evolves.

Our next question comes from Richard Choe of JPMorgan.

I wanted to ask about the cost structure in the Wireless business. The drop-off in service revenue has been an impact, but it seems like the overall cost structure has stayed the same. Is this something that could change over the next few quarters, or how long would it take, and how do you view it?

Sure. If you examine our operating expenses excluding the equipment subsidy aspect we've discussed, you will notice year-on-year declines after accounting for the roughly $80 million in bad debt I mentioned. Some of this decrease is due to reduced variable commissions linked to lower volumes. However, the majority pertains to genuine reductions in the overall cost structure year-on-year. As Joe mentioned earlier, we are planning to implement efficiencies across all of our businesses, including Wireless, which we believe will lead to significant year-on-year benefits. You can expect to see some of these improvements in the latter half of the year, particularly in Q4, with some impact also in Q3.

You have about 2 million customers on unlimited data plans out of your 9.4 million postpaid subscribers. What are the targets for that segment? Have we already seen the worst of the ARPU pressure from transitioning to unlimited plans, or should we anticipate additional pressure moving forward?

In terms of the transition, a couple of things if you were to ARPU profile. We've talked about the COVID impacts, and I would call those sort of variable revenue pieces of it. And then, Richard, if I think what you're getting at is the underlying sustainable subscription ARPU and what that profile looks like. I talked about us continuing to be impacted by overage in the third quarter. But we are fairly confident, we'll continue to see good improvement in underlying subscription ARPU, especially as we head into the second half. So I think we've covered those pieces of it. Maybe I'll leave it there.

Yes. Just, Richard, when we did the move to unlimited, we did it on the basis of a number of key opportunities: one, to reduce churn; two, to have a net ARPU positive impact, when you look at downgraders versus upgraders; three, to drive likelihood to recommend or advocacy from customers; and four, to diminish the calling patterns and the impact on our operations because they'd call less overall. All four of those items are exactly intact in terms of where we expected them to be around the move to unlimited. On top of that, yes, there's been more pressure on overage, people who stayed home, but the behaviors that they're building inside the house around video conferencing, Zoom calls, online shopping, all these things, we've already seen a trend in the last few weeks of June and July. Those behaviors have moved outside the house into the wireless and mobile world. So we think it actually plays very well into both the strategic decision to go to unlimited, but also in terms of the value economics of going to unlimited, and that's all completely intact. Where we go north of 2 million, we're going to keep pressing on the point. I mean, it's Rogers only. It's not available on our flanker brand Fido. So it will just naturally progress over time as people want to rise up to the $75 price point and as they have a greater appetite that we are moving through the thickest part of the overage melt through Q3, and then we'll see that really ameliorate in the quarter as a follow.

So it's fair to say, outside of COVID, after Q3, you’re on the other side of this?

It's fair to say that outside of COVID, it was going to happen in the Q3 period. COVID has made that a little more complicated because of the additional pressure on the overage that we talked about. So all things being equal, yes. The question, if your hesitation is I don't know what's going to happen with COVID in the second half of this year, right? I'm looking at what's happening in different parts of the U.S. economy with, I said, the see-saw around, let's go out, let's come back in, etc. And I don't know how that's going to play into this dynamic. But if you were to hold the current conditions constant, absolutely, we see coming out of this somewhere in the Q3, Q4 time period, as we've said before.

Our next question comes from Batya Levi of UBS.

I have two questions. First, regarding the Wireless segment, can you share your thoughts on churn expectations for the second half of the year, given the recent increase in activity? Secondly, on capital expenditures, can you elaborate on future CapEx plans? Specifically, will the approximately $500 million lower CapEx this year due to delayed projects be added to a normal run rate next year? Additionally, how do you view the normal run rate intensity for Cable and Wireless moving forward?

Batya, I'll take the churn question, and then I'll ask Tony to cover the CapEx question. On the churn front, no question, we've seen a massive improvement in churn this quarter, and going from 0.99% postpaid churn in Wireless to 0.77%. I mean, that's not sustainable in an open market as a whole. Yes, we'll continue to improve churn because we've been on that path for the last few years. We'll continue to see the right sort of march to better churn over time, which is great. But also bear in mind that gross additions were down, as I said earlier, for us, about 38% or 135,000 year-over-year. So as gross additions come back, we'll see more froth in the marketplace and therefore, churn will get back to that normal improving trajectory that we've seen in the last few years, but just not sustainable at 0.77% in that range outside of COVID.

Batya, on your question related to CapEx, the $500 million less this year, some of it, much of it will flow through to future periods. How much of it ends up being in 2021? Difficult to predict, again, sort of how the whole pandemic plays out. And the second part of your question on CapEx maybe is more helpful. We continue to see, throughout the period and probably into next year, Wireless capital intensity in the 12% to 14% range. You may see it 13% or below this year, but resuming back up to 14% and maybe even slightly above next year. Again, it's really around how much work we can get done, but those are kind of the ranges. And then on Cable, we had a previously stated goal of getting to 20% to 22% capital intensity by Q4 of 2021. We are tracking ahead of that. And as we push forward some of the investments into next year, that's probably still the right goal to think about for us for the exit rate in 2021.

Our final question comes from David McFadgen of Cormark Securities.

Just a couple of questions. So when I look at the 7% impact to the Wireless service revenue, you said about $100 million was lower roaming and then I guess the balance was lower activation fees that should come back as customer activity picks up, right?

That's correct, David.

Okay. And then just on the roaming revenue, can you give us an idea, I don't know if you have this or you're willing to share it. But can you give us an idea how much of that would be business versus personal? Just trying to understand as the world returns to normal, how that could come back?

We don't provide that specific breakdown. In some respects, it's somewhat arbitrary. I think the better indicator to consider is overall travel, since both business and personal travel eventually reflect in expenses. We should focus on total travel as a more relevant measure. However, we don't anticipate any significant movement in that area for a while.

Yes. Okay. And then just lastly, just a clarification, maybe just on the Jays. If the Blue Jays are not playing live games with people in attendance and decent attendance, does that mean that, that would keep the EBITDA for Media from going positive because it would just be such a drag?

It would make it very difficult for Media to be net positive without the game. So I mean it's possible depending on the amount of advertising revenues. And so we don't want to stretch ourselves in terms of trying to forecast that too far out. But the Jays loss of revenue, game-day revenues, is a material amount for the Media business.

Thanks, David. I'll turn it to Joe.

I want to make a few final remarks. It's crucial to understand how we view the business. We have a solid operation with a strong foundation of recurring revenue. In Wireless, for instance, 90% of our revenue comes from this robust recurring base. We focused a lot on the remaining 10%, most of which has been affected by COVID but will eventually recover, particularly from activation fees and other sources. We're progressing through the changes in our unlimited and overage revenue in line with the schedule we've previously discussed. Wireless possesses a strong base of recurring revenue, and the same holds true for Cable. When we look at the overall trajectory of the Cable business, we've been enhancing our cash margins and building resilience. We opted not to increase prices for sound reasons while continuing to drive cost efficiencies and improve our revenue metrics. That sector still has significant potential, similar to what we highlighted before the COVID crisis. Regarding the Media segment, it represents a smaller portion of our overall valuation, but we expect recovery, especially due to the continued relevance of live sports. Finally, you can rely on us to adjust our cost structure and operating model to meet new realities. We are examining all facets of the business to grasp what the operating environment will look like in the short, medium, and long term, making necessary adjustments as needed. We have confidence in our growth prospects and the industry overall, given how essential our services are to individuals and businesses in the long run. Thank you for your time and your questions, and we'll speak again soon.

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