BCE - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to the BCE Q2 2020 results conference call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos (VP of Investor Relations)

Thank you, Louise, and good morning, everyone. Thank you for joining us this morning. Participating on the call today will be Mirko Bibic, BCE's President and CEO, and Glen LeBlanc, our CFO. Our second quarter results package and other disclosure documents, including today's news release, slide presentation, as well as other documents issued earlier, are available on BCE's Investor Relations webpage. However, before we get started, I want to draw your attention to slide two, our Safe Harbor Statement. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore subject to risks and uncertainties. These forward-looking statements represent our expectations as of today and accordingly are subject to change. We disclaim any obligation to update forward-looking statements except as required by law.

Factors that may affect future results are contained in BCE's filings with both the Canadian securities commissions and the SEC and are also available on our corporate website. With that, over to Mirko.

Mirko Bibic (President and CEO)

Good morning, everyone. Thanks, Thane. We're still in the midst of what continues to be a long journey for all of us, and the Bell team stepped up in Q2 by focusing on the operating principles that have guided our crisis response from the very start: keeping Canadians connected and informed, prioritizing the health and safety of the public, our customers, and of course our team, and supporting our customers and communities. I'm proud of the thousands of team members who have been serving our customers at Bell workplaces and in the field since the crisis began. Against this backdrop, we delivered operating results for Q2 that underscore Bell's broadband network leadership, reinforce the critical nature of our services, and demonstrate our ability to execute effectively under very difficult circumstances.

Despite ongoing heavy demand for all our services, we have maintained Internet speeds and reliability while continuing to operate our networks at a near-perfect 99.99% overall availability. We enabled work from home for about 90% of our employees, which included some 12,000 call center agents. By mid-April, service levels were back to what they were pre-COVID, and our call centers resumed full hours of operation at the beginning of June. In short, in a matter of a few weeks, we pivoted from full crisis mode to the stabilization phase. Now, with Q2 behind us, we are focused on building momentum back into the business. As Canada gradually reopens, our focus has been on ensuring customer access to our retail locations wherever possible, and as of now, 99% of our Bell, The Source, and authorized dealer stores and kiosks are back in full operation.

In Q2, we continued to grow broadband market share with more than 50,000 total net new Wireless retail Internet and IPTV customer additions. We also achieved a noteworthy milestone during the quarter, surpassing 10 million Wireless subscribers. More impressively, despite significant COVID impacts absorbed in the quarter, we maintained our consolidated EBITDA margin essentially stable at 43.5%. In addition, we generated 50% higher year-over-year free cash flow. This contributed to our very strong liquidity position of CAD 5.4 billion at the end of Q2, which provides ample financial flexibility to execute on our capital investment priorities and comfortably sustain BCE's common share dividend for the foreseeable future. In fact, just this morning, we declared as scheduled our common share dividend for Q3 that will be paid on October 15th. I'll now turn to slide four in our presentation.

In the midst of COVID, we've made meaningful progress in advancing our strategic priorities so as to generate continued operating momentum in the near term and ultimately emerge from the crisis in an even stronger competitive position. 55% of our broadband footprint is now fiberized, with 5.4 million homes and businesses able to access the fastest Internet speeds in the market today of 1.5 Gbps. We also fast-tracked our Wireless Home Internet service footprint with 137,000 additional homes passed in April alone, bringing the total number of rural locations equipped with fixed Wireless technology to about 400,000. We're taking this unique technology even further by doubling Internet download speeds from 25 Mbps-50 Mbps to the first 300,000 households starting this fall, while also expanding to rural communities throughout Atlantic Canada.

On June 11th, we launched Canada's largest first-generation 5G network, with service available in five of the country's largest cities, which will be rolled out to more urban centers later this year. Championing the customer experience is a core strategic imperative for us at Bell. To this end, given that our retail stores were closed for an extended period, we accelerated investments on digital platforms and self-serve tools. More and more, these are the channels many customers prefer to use to interact with us. We are encouraging customers to take advantage of online and mobile self-serve options. The MyBell and Virgin Mobile My Account self-serve apps are the clear leaders in their space in terms of app ratings and provide customers best-in-class integrated access to their Bell and Virgin products and services. Since the start of COVID, approximately half of all customer transactions have been executed online.

I'm also pleased to report that Virgin Mobile topped every Wireless carrier in Canada from a J.D. Power ranking perspective for a fourth consecutive year as number one in overall customer service in the eyes of consumers, a very strong result for our Virgin Mobile brand. Bell's strategic focus on customer experience was also reflected in the latest report from the CCTS for Q2, which showed a 26% drop in the number of CCTS complaints by Bell customers. Again, the best performance among national carriers. As part of our ongoing efforts to safeguard the health and safety of the public, we introduced appointment-based selling in retail stores and ramped up our assisted self-installation and repair program. In fact, one-third of all new installs and repairs in Q2 were completed without entering the customer's home.

In short, strong progress has been made on our imperative to champion customer experience, and all these measures position us well in the short and the long term. Underscoring our ongoing leadership and service innovation, we launched Virgin TV a few weeks ago in Ontario and Quebec. Virgin TV is an app-based TV service that does not require a traditional set-top box or install and works on virtually all streaming devices. This new TV platform enhances our multi-brand strategy by offering TV services to Virgin customers who we know are clearly consuming vast amounts of content but who are not subscribed to one of Bell's other TV brands currently. Our latest TV innovation just announced on Tuesday is the Bell Streamer.

This is a compact 4K HDR streaming device powered by Android TV that offers customers all-in-one access to live TV and on-demand content from Bell Alt TV, support for the top streaming services, and access to apps on Google Play. As you know, we also announced on June 1 the sale of most of our data centers to global data center operator Equinix in an all-cash transaction valued at just over CAD 1 billion. We will maintain a strategic partnership with the acquirer to provide our enterprise clients with full access to Equinix's advanced hosting and cloud solutions. The transaction is expected to close before the end of this year. As I've said before, and I think it's important to reiterate here again today, this is not the time to pull back on investment in critical network infrastructure and customer service improvements.

They are necessary to keep us competitive in the short term and will definitely benefit our company, our customers, and our economy in so many ways over the medium and long term. The COVID crisis has underscored in a very real way the benefits of Canada's global network leadership, whether that's Wireless or Wireline, all of which has been made possible because of our significant capital spending supported by long-standing facilities-based regulatory policies. It has never been more important for governments and regulators to support policies that encourage continued deployment of high-speed fiber networks, Wireless Home Internet in Canada's underserved rural communities, and next-generation mobile 5G. Also, as I've said numerous times in the past, but again, which merits emphasizing with key regulatory decisions on the horizon, we just can't risk losing our global network leadership.

Canada cannot afford to fall behind in the construction of digital infrastructure, which we all know will power so many segments of our economy as we recover and heal from the impacts of COVID-19. Over to slide five now for a quick overview of some key operating metrics, and I'm going to start with Bell Wireless. COVID did have a significant impact on subscriber and promotional activity due to temporary store closures and stay-at-home requirements that were in place for much of the quarter. This led to a 35% year-over-year decline in postpaid gross adds in Q2. Consistent with this reduction in Wireless sales activity, we also saw a corresponding decline in customer churn this quarter. In fact, postpaid churn was 0.82%, our lowest rate ever, which helped drive positive postpaid net additions of 22,000 for Q2.

Notably, this result is net of a provision we took estimating the number of customer deactivations that would have otherwise occurred in the quarter for delayed or non-payment, if not for the financial support actions we put in place because of COVID. If you normalize for this non-payment churn provision totaling 39,000 subscribers, our postpaid churn rate would have been 0.68% or 14 basis points lower than our reported result. With the introduction of device financing plans on Virgin Mobile in mid-May, Bell Wireless is now 100% EIP-based across all our brands. In prepaid, 13,000 new customers were added in the quarter. It is a good result given the COVID-driven market slowdown and the lapping of our Dollarama distribution agreement in May.

With 99% of our Wireless retail points of sale now reopened for business, we are beginning to see some pickup in demand, although it is still too early to predict when consumers' typical shopping activity will resume. However, when it does, and it will, we will be ready to leverage our industry-leading distribution strength, our Wireless network leadership, our fastest speeds, and the improvements we are making right now to our digital platforms. To finish up on Wireless, blended ARPU was down 8.8% over last year, not an unexpected result given the material impact of COVID on roaming revenue, the ongoing decline in data overage, our increasing prepaid customer mix, as well as the customer accommodations that we put in place during COVID to help those facing financial challenges. Sorry. Okay, I am going to move to Bell Wireline.

Our subscriber results continue to reflect the importance and quality of our connectivity services. Although fewer residential and business customers are installing new services, fewer are also switching service providers. This drove 19,000 retail Internet net adds in Q2, which is unchanged versus last year in what is traditionally a slower quarter for broadband. We also added another 46,000 FTTH subscribers this quarter, bringing the total number of direct fiber customers to more than 1.5 million, up 18% over last year. The broadband footprint advantage that we are building, with the fastest fiber network and Wireless Home Internet speeds in the market today, positions us extremely well in both our consumer and business segments over the long term to grow Internet revenue, which increased a strong 7.5% in Q2. On the TV side of things, we lost 4,000 net IPTV subscribers in Q2.

This was the direct result of reduced sales activity and promotional offers, as well as overall TV market maturity. We also experienced good results in satellite TV and home phone, with customer losses improving 17% in satellite and 34% in home phone as consumers continue to shelter and work from home. While we have not yet experienced any significant changes in customer behaviors or trends to date, some customers have delayed payment as they deal with the economic impacts of COVID. As a result, consistent with the incremental bad debt provision we took in the quarter, we recorded an involuntary customer churn provision for non-payment as we did for Bell Wireless, so as not to overstate our net subscriber additions and overall churn in Q2 for Wireline. The provision for Bell Wireline amounted to roughly 45,000 customers. That's 19,000 in Internet, 14,000 in TV, and 12,000 in home phone.

Going to move now to Bell Media. Although total advertising revenue was down, we have started to see signs of improvement. Some industries like automotive, retail, and food are beginning to spend again. Also, the return of some key sporting events, including PGA TOUR golf, UFC, NASCAR, F1, and MLS soccer, have shown promising results. Most of these events have seen higher-than-usual audiences, and this improvement is expected to continue into Q3 and will be further positively influenced by the return of even more live sports, including, of course, the NBA, which is on right now, golf's major championships, which start today, and the US Open tennis. Impressively, even with the absence of live sports broadcasts, TSN and RDS subscriber deactivations remained minimal in Q2.

Crave also continued to deliver with strong direct-to-consumer growth as total subscribers increased to 2.8 million at the end of June, which is up from 2.7 million in Q1. Earlier this summer, in keeping with our imperative to deliver compelling content, we expanded Crave and added HBO Max program. While it is still too early to predict what the recovery holds, we believe that BCE's Q2 consolidated results represent a low-water mark. Although we do not expect to return to pre-COVID operating performance in the near term, Q3 is anticipated to show a marked improvement. We remain very confident in the underlying long-term fundamentals and performance of BCE.

We're competitively well-positioned to succeed with a healthy balance sheet and substantial ongoing free cash flow generation that provides us with considerable financial flexibility to navigate through the COVID-19 crisis and to more than meet all our cash requirements for the balance of 2020. I thank you all, and I'll turn it over to Glen.

Glen LeBlanc (CFO)

Thank you, Mirko, and good morning, everyone. I hope everyone is keeping well and staying safe this summer. Let's turn to slide seven. The financial impact of COVID-19 obviously accelerated in Q2, reflecting a full quarter impact of widespread retail store closures and reduced consumer activity as Canadians sheltered at home. This drove a 9.1% year-over-year decline in consolidated revenues. Due to the flow-through impact of lower revenue-adjusted EBITDA, it was down 9.4%.

This result reflects approximately CAD 85 million of costs incurred directly because of COVID, including the relocation of call center agents, employee redeployment expenses, the purchase of personal protective equipment, increased sanitation and cleaning, and incremental provision for bad debt exposure totaling CAD 36 million, as well as donation of masks to healthcare and other frontline workers throughout Canada. Net earnings were down 64% over last year as a result of lower year-over-year EBITDA, lower equity income from MLSE due to COVID, and a CAD 452 million non-cash impairment charge to Bell Media TV to reflect the current market value of its TV and radio assets. Despite the steep earnings decline this quarter, free cash flow grew 50% to CAD 1.6 billion.

One of the reasons for the increase was a slowdown in capital spending during the initial stages of COVID, as our primary focus was on stabilizing the organization and ensuring continuity of critical services. Construction activity has now ramped up considerably. Lastly, I want to bring to your attention a reporting change we made this quarter. As Mirko mentioned, as a result of our agreement to sell substantially all of Bell's data centers, those operating results are now being classified as discontinued operations this quarter, with prior periods restated for consistency. Let's move to slide eight and discuss Wireless financials. COVID-19 had a material impact on Bell Wireless financial results in Q2 due to significant decrease in retail sales activity, reduced travel, and an accelerated decline in data overage revenue driven by optimizing of data packages with increased working from home and greater Wi-Fi offloading.

Customer accommodations introduced to help those facing financial difficulties because of COVID. As a result, service and product revenue decreased 6.2% and 24.5% respectively in the quarter. Although revenue pressures stemming from COVID-19 should begin to moderate as commercial activity picks up, roaming and data overage in particular are expected to remain headwinds for the balance of this year. Consistent with year-over-year decline in revenue, EBITDA decreased 9.2%. However, our Wireless margins improved nearly 100 basis points to 45.7%. This was a result of a 12.5% reduction in operating costs attributable to the slowdown in sales activity, decreased acquisition-related expenses, including device subsidy and other marketing and distribution costs. Let's turn to slide nine, Wireline financials.

Although we experienced lower demand of new residential service installations, waived Internet overage fees, provided pricing concession to our customers, and saw further weakness in the SMB space due to economic fallout of the crisis, the 1% revenue decline in the quarter was similar to Q1, even with the full quarter of COVID impacts. This speaks to the resiliency of our high-quality connectivity services. Combined Internet and TV revenue was up approximately 2% year-over-year, while the rate of voice revenue decline improved 3.8%, driven by increased use of conferencing, higher LD usage, and fewer home phone customer deactivations. However, the business customer spending slowed down in Q2 because of COVID, which drove an 8% year-over-year decline in product revenue and a 4% reduction in business service solution sales.

Despite more near-term financial risk from the aftereffects of COVID in the business sector compared to residential, the impact to date on Bell Business Markets has continued to be relatively moderate. Wireline EBITDA, which was down 5.3%, included CAD 41 million in higher year-over-year OpEx driven by the COVID-related cost impacts I detailed earlier, and an incremental bad debt provision expense to reflect the current economic environment marked by higher levels of unemployment and continued uncertainty in the SME sector. This contributed to an approximately 200 basis point decrease in margin this quarter. Excluding these COVID-specific costs, Wireline margin was relatively stable at around 44%. Over to slide 10 and media financials. Q2 was a tough quarter for Bell Media. On a relative basis, it was our most significant impacted operating segment, but it also represented the smallest part of BCE's revenue and EBITDA mix.

As witnessed by other broadcasters worldwide, we experienced a steep decline in advertising demand this quarter due to the impact of COVID on ad spending across all platforms. As commercial activity was significantly curtailed, major sports leagues suspended, and other live events and TV productions canceled because of this crisis. We also faced a tough comparable from last year's strong growth that included incremental advertising revenue from our Toronto Raptors NBA championship run, the Big Bang Theory series finale, and a surge in Crave customer subscriptions driven by the final season of Game of Thrones on HBO. As a result of these factors, total Bell Media revenue was down 31.2% in Q2, yielding a 31.9% decline in EBITDA.

However, we maintained Bell Media's margin stable year-over-year at approximately 30% due to expense reductions driven by programming, production cost savings, the elimination of discretionary costs, and amounts received under the federal government's employment wage subsidy program as we met eligible criteria for parts of our media operation during the initial April-May measurement period. Over to EPS on slide 11. Slide 11 summarizes, at a high level, the main components of adjusted EPS for Q2, which was CAD 0.63 per share, down CAD 0.30 versus last year. Lower EBITDA drove two-thirds of this decline, while the other third was attributable to lower year-over-year tax adjustments and higher other income expense. The increase in other expense reflected a reduction in equity income received from MLSE due to the effects of COVID and a loss recorded on a write-down of certain TV platform assets in the quarter. Over to slide 12.

Despite the COVID-driven decline in consolidated EBITDA this quarter, we grew free cash flow 50% versus last year to just over CAD 1.6 billion. The year-over-year increase was due to substantial improvement in working capital that can be attributed to the decrease in sales activity because of COVID, higher bad debt provision that drove reduction in accounts receivable, a decrease in contract assets reflecting a higher mix of customers on installment plans, fewer new subscriber activations, and the amortization of deferred acquisition costs from prior quarters, and a lower Wireless device inventory. Now, it's important to note that a large portion of this favorable change in working capital is temporary in nature and will reverse as accounts receivable and inventory levels grow with a pickup in sales activity we're expecting.

This quarter, strong free cash flow results also reflected an upside from a number of timing-related factors that were reversed in the second half of the year. Notably, CapEx, which I referenced earlier, and cash taxes, which benefited from the government relief measures allowing for the deferral of tax installment payments until later this year. I am going to wrap up on slide 13. As Mirko said, but it is worth repeating, we ended the quarter with CAD 5.4 billion of liquidity, which positions us well given the financial challenges being faced by so many other companies and industries. This does not even take into account the close to CAD 1 billion in cash proceeds that we will receive from the sale of our data centers at the end of the year.

We have successfully accessed the debt capital markets once again in May with a CAD 1.5 billion MTN offering at a very attractive rate to shore up our already strong liquidity position. Our net debt leverage ratio remains very manageable at 2.86 times Adjusted EBITDA. More importantly, we have no near-term refinancing requirements as our next public debt maturity does not occur until the end of Q3 2021. Bell Canada's defined benefit pension plan continues to remain virtually fully funded despite a modest decline in the estimated funded position this quarter due to the impacts of lower interest rates in Q2. With that, I'll turn the call back over to Thane and the operator to begin Q&A.

Thane Fotopoulos (VP of Investor Relations)

Thanks, Glen.

Before we start the Q&A period, to keep the call as efficient as possible, I'd ask you to limit yourselves to one question and a brief follow-up so we can get to everybody in the queue with the time we have left. With that, Louise, we're ready to take our first question.

Operator (participant)

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register, and we thank you for your patience. Our first question is from Jeff Fan from Scotiabank.

Please go ahead.

Jeff Fan (Managing Director and Equity Research Analyst of Telecom and Media)

Thanks, and good morning to everyone. First question is just on the Wireless. Glen, wondering if you can help quantify for us some of the roaming and overage and waive fees impact just so that we can start to make some assumptions about the ARPU service revenue or ARPU recovery as we go through the second half and into 2021 as the economy starts to open up. A quick follow-up perhaps for Mirko. On the customer experience, I recall that was clearly one of your strategic imperatives coming into your new role. It sounds like there was quite a bit of accelerated efforts related to that, maybe things that would have been done later in the year or later on in your tenure, perhaps pulled all into Q2.

Wondering if you can just identify some of those and maybe even if you can, quantify for us how much was pulled into this year or this quarter versus what could have been done later in later years. Thanks.

Mirko Bibic (President and CEO)

Okay. Thanks, Jeff. Glen, I'll start first, and then I'll hand it over to you to unpack the ARPU a bit for Jeff. Thanks for the question, Jeff. I'll start first on Wireless, your question on that. I'll just give you some high-level comments on the ARPU or the service revenue impacts from COVID. I break it down into three, four categories. There was a roaming decline clearly with a halt in travel, and you can kind of quantify that in the range of CAD 60 million. Then there were COVID-related overage decline impacts as customers were staying at home and were offloading data usage to Wi-Fi.

Of course, there was data overage decline due to the migration to unlimited plans. On that one, I have to say the team, I've said this every single quarter that I've been on these calls, the team has continued to manage that migration really, really well. We've been doing that since the launch of unlimited plans last summer. There has been the impact of customer accommodations that we offered to help our customers during the COVID crisis. You put all those together, Jeff, and they are more than the overall service revenue decline. I'll answer the customer experience question now, and then, Glen, you can unpack ARPU a little bit more if you think necessary. On customer experience, you're right. I mean, it has been a focus since I've come on board as CEO on January 6th.

It is a journey on the improvements to our online platforms. It is clear that our mission is going to be to serve customers the way they want to be served. The vast majority of transactions, especially in Wireless, continue to be in traditional retail stores. As I mentioned in my opening remarks, as the economy reopens and we are 99% open on the stores, that advantage swings back our way. We will continue to be best in class on that. Other customers want to be served in the call centers, and we need to be best in class there and online as well. We are upping our game each and every day. It is a journey. It is things like allowing customers to change their TV programming online, make online payments, change their rate plans online, upgrading their smartphones online.

It's those kinds of things, Jeff, that we continually work on, the buy flows. I'm not going to quantify how much we pulled into Q2, but it will be a core category of CapEx spend this year, and that's going to continue. Over to you, Glen.

Glen LeBlanc (CFO)

Thanks, Mirko. Good morning, Jeff. Yeah, I'll give you a little more color here on the ARPU decline. As Mirko said and explained, the biggest bucket is roaming and data overage. That accounts for 60% of the ARPU decline that you see. Customer accommodations that we put in place temporarily to help those facing financial challenge, that accounted for about 10% of that ARPU decline. The remaining 30% year-over-the-year decline was mainly due to the higher prepaid customer mix that is in our subscriber base. Hope that's helpful, Jeff.

Jeff Fan (Managing Director and Equity Research Analyst of Telecom and Media)

Okay. Thank you both.

Operator (participant)

Thank you.

Our next question is from Richard Choe from JPMorgan. Please go ahead.

Richard Choe (VP and Executive Director of Equity Research)

Just wanted to ask about broadband is doing well, but video, the IPTV was lower. Just wanted to get a little more color on those trends there. What are you seeing in broadband and why TV is lower?

Mirko Bibic (President and CEO)

Thanks, Richard. On TV, I'll start there. I think sales were clearly disrupted because of COVID. There was an impact on the commercial side, obviously, so think small businesses, bars, hotels, that kind of thing. We are seeing the effects of high penetration of TV in our current five markets. We're lapping strong Alt TV growth. Certainly in Q2 anyway because of initially the impacts of COVID, we did have slower new service footprint growth, which I think will pick up in the back half of the year in terms of service footprint growth.

Now, on Internet, you're right. I mean, performance was quite resilient during what we all know is a pretty difficult period of time. That speaks to the importance and the quality of our Internet. We have the fastest download and the fastest upload. Upload is pretty important right now. We have the best Wi-Fi in the marketplace. That too is very important. On that, I mean, I think those would be the primary reasons why Internet is so resilient. We've had the acceleration of footprint on Wireless Home Internet. Of course, as we enter a community, particularly a rural community that hasn't had high-speed broadband with Wireless Home Internet, we accelerate that footprint. That just is a boon for the community and, of course, leads to the subscriber growth. We expect the resilience in the Internet to continue over the rest of the year.

Richard Choe (VP and Executive Director of Equity Research)

Great. Thank you.

Operator (participant)

Thank you. Our next question is from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.

Aravinda Galappatthige (Managing Director of Institutional Equity Research)

Good morning. Thanks for taking my question. My question's on B2B. I believe it was Glen mentioned that Bell Business Markets have held up fairly well thus far considering the conditions. I wanted to get your sense, Mirko and Glen, in terms of what you're seeing in terms of feedback from the larger enterprise customers. Conceivably, the pressure on that end would come later in the year as some of those contracts kind of come up for renewal and reprice. Wanted to get some color around that. Do you expect incremental pressure as that plays out?

Then secondly, as my follow-up, with respect to free cash flow, I hear your point about a lot of the factors that help free cash flow in Q2 sort of reversing potentially later in the year. I was wondering if you can size up the potential cash saving from the handset cost this year. That should obviously help the full year free cash flow number. I'll leave it there. Thank you.

Mirko Bibic (President and CEO)

Okay. Thanks, Aravinda. I'll take the enterprise question. Glen, why don't you take the free cash flow question? On the business side, the puts and takes are the following. Customer spending did slow down in things like product revenues and service solutions. On the other hand, there was traction in connectivity, remote collaboration, conferencing services, those types of things. It kind of intuitively makes sense, right, given what we were going through in Q2.

Those are the broad categories of puts and takes. I have to say, I mean, as I look forward to the rest of the year, I think it's still too early to predict how all that's going to shake out for the rest of the year on the enterprise side. A little bit the same answer on SMB, small business. Again, really too early to predict what's going to happen. On the SMB, as you know, it's a very small part of our overall business markets exposure. Glen.

Glen LeBlanc (CFO)

Thanks, Mirko. Yeah, free cash flow strength, I think you kind of unpacked it a little bit and touched on the caution that I was giving going forward.

As I said in my opening remarks, CapEx was lower certainly in the early months of March and April and May as we focused on organizational stability and ensuring that we propped up or secured our critical services. Now we're moving back to more construction and footprint expansion. We will see capital increase in the second half of the year. The working capital I mentioned earlier will reverse. Now, on the handsets, it's hard to say how this will shake out. I certainly am not going to try to predict second waves and third waves. Do we have potential store disruption again with slowdown in sales activity? Obviously, it's going to be down because, as Mirko mentioned in his opening remarks, we're 100% EIP now. When I look at the quarter alone, EIP plus the reduced sales activity, I mean, handset costs were down 25%, CAD 140 million.

I certainly hope sales activity is stronger in the second half of the year. I would not think you can just extrapolate that. Hard to see how it is going to shake out. Let us just keep our fingers crossed that we see sales activity remain strong in the second half.

Aravinda Galappatthige (Managing Director of Institutional Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question is from Vince Valentini from TD Securities. Please go ahead.

Vince Valentini (Managing Director of Institutional Equities)

Yeah, thanks very much. First, a clarification if I can. The 39,000 and 45,000 subscriber provisions, can you just clarify if that would have been zero in the second quarter last year, or is this something you always do, but it just got elevated this quarter? The second one, a bigger picture question. I see a huge arbitrage opportunity and strategic opportunity for BCE emerging here. I mean, your cost of debt has never been lower. You are flush with cash.

You got another billion coming from the data center sale soon. We're looking at a media industry that's just imploding when Stingray's revenues are around 60%. Yesterday in radio, I think Corus Radio was down 52%. I mean, there's a big need here for the government to step in and allow some consolidation or regulatory relief. It seems to me that BCE should be the leading candidate here to arbitrage your incredibly strong scale in media and cost of capital to try to sort of save the industry and help yourself and your shareholders at the same time. I'm just wondering if you have any comments on thoughts about strategic growth opportunities in media. Mirko, thanks.

Mirko Bibic (President and CEO)

Thanks, Vince. Why don't you go first, Glen, on the first question on provisions?

Glen LeBlanc (CFO)

Of course. Good morning, Vince. Look, the customer provisions, and this is what's transpired.

In any normal quarter, what would happen is when customers reach certain points of non-payment, then we activate what we refer to as an involuntary churn or involuntary disconnect. What we had agreed to do during this difficult time is we would not deactivate customers. We would ensure that they had their Internet and their Wireless connectivity that became so critical at this difficult time. That said, we know that we have to one day return to normal. We are going to see an escalation or a requirement for involuntary disconnects. What I did is ensured that the provision that we took from the customers, 39,000 you alluded to in Wireless, 45,000-46,000 in Wireline, mirrors exactly what historical experience would have been on disconnects. As you see an aging into 30, 60, 90, 120 days, we ensured that the provision mirrors historical performance.

The important thing to remember, Vince, is now if you take revenue credits, if you take bad debt increase in bad debt provisions, you have to ensure that your nets and your churn are all aligned. That is what a customer provision does. It does not overstate one metric.

Mirko Bibic (President and CEO)

Okay. Thanks. Vince, on the second question, I am always open to good ideas. Let me tell you that. I think we have shown a strong track record over the years at being opportunistic and very strategic on the M&A side. We will always keep looking. I am not going to comment specifically on the precise example you put forward, but always looking to be opportunistic. I mean, whether or not it is in media or in telecom, I mean, you do raise a point about scale. It is pretty obvious that we ought to be encouraging scale in the country.

If you just take media, which is the example you brought forward, just look who are we competing against. It's a rather silly notion to still think of the media industry as a domestic media industry with three players competing with each other. I mean, we're competing with global Internet giants, really, at this stage in the game. I'm happy with our asset mix right now. I think it positions us well strategically and always looking to be opportunistic. It's hard for me to comment on this call on the specific idea, but it was a good question.

Vince Valentini (Managing Director of Institutional Equities)

Fair enough. Thank you.

Operator (participant)

Thank you. Our next question is from Drew McReynolds from RBC Capital Markets. Please go ahead.

Drew McReynolds (Managing Director of Global Research, Telecommunications and Media)

Yeah. Thanks. Thanks very much. A couple of housekeeping questions for Glen, and then one bigger one for you, Mirko.

Glen, on the pension exposure, doing a great job keeping the solvency fully funded, essentially. Are there kind of any scenarios here where that changes kind of going forward? Maybe just remind us on sensitivities. And on the bad debt expense, can you break that down between Wireless, Wireline, and media? Then over to you, Mirko. Just bigger picture, satellite broadband services around the world are getting a lot of attention. Love to hear your thoughts on, at least in Canada, sizing up either that opportunity or threat for your broadband strategy over the longer term. Thank you.

Mirko Bibic (President and CEO)

Okay. I'll go first, Glen, on the second question. Drew, on the satellite broadband services and the competitive implications, I'll put up our fiber Internet network up against anything. I mean, with fastest speeds in North America, we got customers that want—what do they want? They want download speeds.

We can't be beat. Certainly, satellite can't beat that. Upload speeds, that's what they want. That's more and more important, as I said in my opening remarks. Can't beat fiber. Certainly, satellite broadband cannot. The in-home Wi-Fi, the services that we have, the time to market advantage, whether on fiber generally as compared to satellite. If you think about our Wireless Home Internet expansion, 25 download, 1 meg up, that's going to 5, 50, 10 soon. That's going to be hard for satellite to beat. We've already got 400,000 homes that have the ability to purchase that product. I think we're in a very good position. I think we're in a great position if you even compare us to your traditional cable competitors, let alone satellite broadband that hasn't launched yet.

Obviously, it will be well received, I think, in some very, very deep rural areas at some point. I think that's kind of my reflection on that question, Drew. Over to you, Glen.

Glen LeBlanc (CFO)

Thanks, Mirko. Good morning, Drew. Pension exposure, great question. It's hard to believe that discount rates continue to drop. At a time when we were looking at discount rates at the end of 2019, between our plans, they were running around on average 2.8%. Now, at the end of the quarter, we were bouncing around 2.23%-2.37% between our multiple plans. Significant decrease in the discount rate. All of that said, we remained at 99. We're bouncing 99-100 on any given day from a solvency ratio perspective, which is just remarkable. I'm incredibly proud of what our team has done to put us in this position.

We didn't get here by accident. We got here by following a very prescriptive glide path, ensuring that over 70% of our assets are now invested in fixed income. That gives us a natural hedge against this declining discount rate. Remarkable job. On a sensitivity, if you saw a discount rate drop another 25 basis points and reach 2 or sub 2, it's around CAD 125 million-CAD 150 million. When you consider a pension plan of over CAD 25 billion in total, that's pretty manageable. I feel like we've positioned ourselves incredibly well to mitigate this risk. Never in my wildest dreams did I think we'd be looking at discount rates at this and still have a fully funded plan. Over to bad debt exposure. As I mentioned in my remarks, I think I'll unpack this a little further.

I took an extra provision of CAD 36 million as a bad debt expense. I also took a provision of CAD 28 million through revenue. A total of CAD 64 million additional provision related to COVID. Through revenue, a provision of revenue, that is really accommodations we gave customers, customer credits we gave, waiving late-paid charges, and making arrangements for folks who were struggling during this difficult time. In total, if you look at the P&L impact of COVID, bad debt, and revenue impacts, it is about CAD 64 million. If I broke that down by BU, 45% Wireless, 45% Wireline, about 10% media.

Drew McReynolds (Managing Director of Global Research, Telecommunications and Media)

Okay. That is perfect, Glen. Thank you both.

Operator (participant)

Thank you. Our next question is from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi (VP, Managing Director, and Analyst of Technology, Media and Telecom)

Yes. Thank you for taking—

Mirko Bibic (President and CEO)

Hey, Maher. We cannot hear you. Sorry. You cut out.

Operator (participant)

Hello. Can you pick up? Oops. He dropped off his line.

I'll just go to the next person. Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery (Managing Director)

Thanks a lot. Good morning. Mirko, I wonder if we could talk about 5G for a minute. You rolled out the service to some of the key cities here. Any early learnings, any early observations? Where do you see the biggest opportunity for the company? Is it really around the B2B type use cases? What sort of conversations are you having that we should be thinking about for the future? Thanks.

Mirko Bibic (President and CEO)

Thanks, Simon. Yeah. We did launch on June 11th. You know that. The cities were Montreal, the GTA, Calgary, Edmonton, Vancouver. We will be expanding to about 28 additional markets in 2020. All that's going according to plan.

I mean, I'm really pleased at our competitive positioning here on 5G because our speeds are 1.7 Gbps, which is fastest in the industry. We're going to be even faster than that next year when 3.5 GHz spectrum becomes available for mobile. I'm also quite pleased that we have a 3.5 GHz spectrum advantage going into the auction given our Inukshuk holdings. Just generally on the network side, we have so many advantages, including our network sharing arrangement with TELUS, as you know, and the number of cell sites that we have, which are fiberized, which will be so important for the service attributes customers will be looking for for 5G. So far, look, it's early days.

I'm quite pleased with how well it's going in the context of having just launched, having launched kind of still with stores having not been completely and fully opened at the time that we did. I'm really pleased with how well positioned we're going to be to capture growth in 5G. To that question, which is the last part that you asked me about, Simon, I mean, I see growth potential in the consumer space. Just kind of like on the consumer side, when we upgraded from 2G to 3G, 3G to 4G, etc., there's always a spike in penetration, smartphone adoption, especially usage, and that drives revenue. You're right.

There are going to be a multitude of use cases on the enterprise side and on the IoT side, which we will be in a great position to capitalize on, especially when you think about our distribution advantage with BBM, Bell Business Markets, and our enterprise strength.

Simon Flannery (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. Next question is from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi (VP, Managing Director, and Analyst of Technology, Media and Telecom)

Thank you for taking my question and getting me back in the queue. I wanted to take Vince's question and flip it. Other side with CapEx expected to increase, I guess, with 5G. You have spectrum auctions coming up next year. You also have increased volatility in the markets that you are operating in. Do you think you have other assets that could be divested of? I am thinking here real estate, potentially. You always, in the past, talked about the importance of owning cell towers.

In the world of 5G, do you think that dependency and importance is to the same extent, or you could get capital out of the market, out of your assets from that portion of your asset mix and redeploy it somewhere else? Thank you.

Mirko Bibic (President and CEO)

Okay. Thanks, Maher. Nice to hear you come back on the line. I'm going to, in some respects, reiterate some of the things I said in response to Vince's question, which is I'm quite happy with our asset mix, but we'll always be looking to optimize that as things develop. On the specific question you asked in terms of divesting cell site or tower portfolio, I am of the view that that is a very competitively important asset. I think it's especially important in the world of 5G. Owning that infrastructure remains an important part of our core business.

I do not see that changing in the near term, that's for sure. In terms of just more general, your point about cost savings with respect to real estate, if I take the real estate question a bit more broadly, clearly with what we have gone through in the last few months, we are going to put a sharp focus on real estate optimization, particularly from an office space point of view. That is something that we are going to be looking at as others across the Canadian economy surely are.

Maher Yaghi (VP, Managing Director, and Analyst of Technology, Media and Telecom)

Thank you very much.

Operator (participant)

Thank you. Our next question is from Batya Levi from UBS. Please go ahead.

Batya Levi (Managing Director and Communications, Media and Infrastracture Analyst)

Great. Thank you. Can you also provide some color on how the CAD 85 million COVID-related expenses were allocated in each segment? How do you think about Wireless margins in the second half with activity picking up? One follow-up in media.

Does adding HBO Max change your profitability of the segments in any way? Thank you.

Mirko Bibic (President and CEO)

Why don't you go ahead, Glen? Yeah.

Glen LeBlanc (CFO)

Okay. I'll start on the first part on the CAD 85 million. Look, I gave of that CAD 85 million, I said that operating expense, the CAD 36 million of that was bad debt. And I gave you a breakdown of how that affected the BUs. I'm not going to unpack the rest of the details. The CAD 36 million represents a substantive portion of the CAD 85 million. I gave you the color on what it was with PP&E and the donation, the increased sanitization costs, the donation of PP&E that we gave to our frontline workers, the cost we incurred trying to ensure that we were able to move our contact center employees home to work in a safe environment.

As far as the split of that, the 45, 45, 10 is pretty accurate on the whole envelope. Mirko, over to you.

Mirko Bibic (President and CEO)

Yeah. Look, on the media question, the HBO Max content, I mean, that's over a longer-term horizon over which we'll be monetizing that content. What it really does is it makes the Crave that much more compelling in terms of an SVOD service to subscribe to and will allow us to scale the service even more. We saw some good progress in Q2 going from 2.7 to 2.8 million subscribers. Just adding more compelling content makes it that much more attractive, which allows us to increase our sub base and basically leverage that contract over the longer term.

Glen LeBlanc (CFO)

I think you had another question on margin looking forward.

Frankly, as Mirko said in his opening remarks, it is our belief that Q2 was the low-watermark and that we will continue to see consecutive quarter improvement, Q3 over Q2, and let's hope Q4 over Q3 as we get control of this pandemic. It's difficult for me to predict margins because I can't predict how this pandemic is going to affect us. As I said earlier, wave two, is there additional waves beyond that? Is there shutdown of commercial activity and, heaven forbid, closure of stores, etc., etc.? Our focus right now is to serve the customers with the stores we have open now to ramp up our sales activity and fingers crossed that that continues well into the fall and we have this under control.

Mirko Bibic (President and CEO)

Look, sales are growing week after week, month after month.

While traffic is clearly down in our stores, we're seeing strong conversion from the traffic that is in stores. I mentioned this last time we were on a call like this together, and we're seeing that trend continue. It all points towards positive momentum off of Q2.

Batya Levi (Managing Director and Communications, Media and Infrastracture Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our next question is from David Barden from Bank of America. Please go ahead.

Hi. It's Matthew sitting in for David. Thanks for taking the question. I just had to—Mirko, in your prepared remarks, you mentioned you expect sequential improvements in Q3. I was just wondering if you could elaborate on what you see as the main drivers of that expectation.

Just secondly, if I could, with the acceleration in the self-serve and online channel, is that leading to any change in how you see the physical distribution network, whether its size or its reach and maybe some cost savings that you could extract from there? Anything would be helpful.

Mirko Bibic (President and CEO)

Good questions. Thanks, Matthew. On Q3, kind of I'll pull from different comments we've made over the last hour. On Wireless, I just previously mentioned what we're seeing in terms of continued strength week after week. I won't repeat that, but we will reiterate it. On Internet, as I mentioned earlier, performance is quite resilient, and we expect that to continue over the rest of the year. On home phone, no significant sales, but really strong churn. I called out the results in my opening remarks, and we've seen a material improvement in the pace of decline.

We expect continued improvement in the pace of decline throughout 2020. TV, I called out a little bit earlier, and the enterprise side. On media, I had not talked about what we are seeing in media. We are seeing gradual improvement and momentum slowly building. Cancellations have stabilized. Some segments are advertising again, and we are seeing bookings month over month accelerating. We are seeing strong demand for the fall season. I mentioned F1. Just take F1, for example, just to point out the pent-up demand for sports. We are up over 20% over the first three races, and we are on pace for new audience records for that property. UFC, NASCAR, very strong viewership year over year. I think the Raptors are going to be very strong in terms of viewership.

In fact, the U.S. versus U.S. team matchups that we've had on TSN since the NBA has come back have been triple our normal audiences for matchups featuring U.S. teams. All that bodes towards progressively improving loadings or bookings on media. Self-serve, like I said earlier, I still think that the predominant way Canadians are going to want to shop for telecom services, particularly Wireless, over the near term is in store. That natural advantage we have swings back our way. Yes, we're going to need to scale self-serve, and you kind of see it in our results. When we direct activity online, it does lead to a lower COA, which is a lot of goodness. The footprint, we'll be optimizing that as we go. That's a function of consumer behavior, consumer patterns, our readiness online.

We will continually be evolving that mix between online and traditional retail store footprint.

Thane Fotopoulos (VP of Investor Relations)

Great. Thanks, Mirko, on that. Unfortunately, we have timed out. I do thank you for your participation on the call this morning. I will be available for the balance of the day for any questions, follow-up questions, and clarifications. With that, take care and stay safe.

Operator (participant)

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.