BCE - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to the BCE Q2 2023 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos (Investor Relations)

Thank you, Gisele, and good morning everyone, and thank you for joining our call. Today I'm here with Mirko Bibic, President and CEO of BCE, our current CFO, Glen LeBlanc, and our future incoming CFO, Curtis Millen. You can find all of our Q2 disclosure documents on the investor relations page of the bce.ca website, which we posted earlier this morning. Before we begin, I'd like to draw your attention to our safe harbor statement on slide two, reminding you that today's slide presentation and remarks made during the call will include forward-looking information and therefore are subject to risks and uncertainties. Results could differ materially. We disclaim any obligation to update forward-looking statements except as required by law. Please refer to BCE's publicly filed documents for more details on our assumptions and risks. With that, I'll turn the call over to Mirko.

Mirko Bibic (President and CEO)

Thank you, Thane. Good morning, everyone. As our Q2 results released this morning show, Bell's operating performance remains resilient, benefiting from the team's consistent execution and customer-centric approach, our significant investments in broadband infrastructure, product bundling, quality subscriber loading, and disciplined cost management. Against this backdrop, BCE delivered strong 3.5% growth in consolidated revenue for Q2 and a notable sequential improvement in adjusted EBITDA, which increased 2.1% over last year. We continue to front-end load our CapEx, spending a further CAD 1.3 billion in new capital this quarter, which keeps us firmly on track to expand Bell's Pure Fibre network to 650,000 new locations and to grow our 5G service footprint to 85% of the country, while also enabling standalone 5G+ service for almost half of all Canadians.

Bell Wireless and Bell Pure Fibre ranked as Canada's fastest mobile, internet, and Wi-Fi services in Ookla's latest network performance report. With previous recognitions won by Bell, we are Canada's most awarded mobile and internet services provider. Such third-party recognition reinforces both Bell's technology, leadership, and customer value proposition to offer the best networks at affordable prices. We leveraged our leading broadband networks and services to deliver a record Q2 number of total wireless mobile phone, mobile connected device, retail internet, and IPTV net subscriber- additions, which increased 76.5% over last year to 241,516. More specifically now on wireless, we reached a notable milestone in the quarter, surpassing 10 million mobile phone subs on the back of our highest Q2 postpaid net add in 18 years.

Collectively, total mobile phone and connected device net activations were up 86% over last year to 205,076, driving healthy service revenue growth of 4.4%. Going forward, population growth, penetration headroom, the ongoing transition to 5G and bundling wireless with internet service should continue to support strong subscriber base expansion, not just for Bell, but for the entire industry. We're also serving new Canadians more effectively by expanding our retail channel presence in neighborhoods with a large immigrant presence, offering customer care and direct marketing services in more languages, partnering with companies such as Air Canada and the Institute for Canadian Citizenship to provide newcomers with Bell Telecom services, and offering unlimited nationwide data usage plans with 5G access at affordable prices on the newly rebranded Virgin Plus.

Of particular note regarding Virgin, we recently completed the repositioning of the brand, as I mentioned, which includes a fresh new look and new value prop centered around pillars of affordability, member rewards, inclusiveness, and network quality. In residential wireline, as our footprint advantage keeps expanding, we're driving stronger subscriber loadings. We added 52,148 new net fiber to the home customers in Q2. That's up 38% over last year. Of these, approximately 70% subscribe to Gigabit-plus speed tiers. In fact, 20% of all new fiber customers in the month of June activated a 3 Gigabit plan, driven by successful, successful F1 racing campaign in Quebec, all demonstrating once again that speed matters to consumers. This is a major competitive differentiator that keeps us sustainably ahead of our competitors.

Our growing base of fiber customers, which now accounts for more than 60% of Bell's retail residential internet customer base, combined with speed upgrades and an improving tier mix, given fiber's superior customer experience, contributed to 7% internet revenue growth in Q2. Notably, we achieved these wireless and internet subscriber results against the backdrop of declining prices, demonstrating that our industry is delivering the highest quality services at decreasing prices despite persistent inflation. According to the most recent StatsCan data, the price of all goods and services in aggregate across the Canadian economy has increased 2.8% over the past year, while the cost of cellular and internet access services has declined 14.7% and 3.2%, respectively. I'm going to turn to media.

Despite an advertising recession across North America that continues to affect advertiser demand and spending, we've weathered near-term pressures relatively better than peers as a result of our leading platforms and content and focused execution of our digital-first media strategy. Digital revenues were up 20% over last year and now comprise 33% of total Bell Media revenue, compared to 27% last year. That's an encouraging result, especially given current market conditions. More notably, at our upfront presentation in June, we announced a number of major additions and expansions to our ad offering, including the launch just last week of an ad-supported subscription tier for Crave, and the introduction of addressable advertising later this year, initially for viewers on our Fibe TV app. We're the first Canadian broadcaster to bring addressable TV on linear channels to market through a BDU.

This will enable advertisers to target ads to specific households or devices based on demographic and behavioral data across on-demand, live streaming, and linear content. In addition to Crave and addressable TV ads, we've also introduced a new analytics product, Bell Attribution Insights, which provides advertisers with interactive reporting on campaign effectiveness across Bell Media platforms, as well as further enhancements to our SAM sales tool, which grew revenue 30% this quarter. On the customer service front now, we leverage innovative Bell apps and online support tools, including MoveValet, Self-Install, and Manage Your Appointment, to deliver improving customer experiences, particularly during the very busy July move period in the province of Quebec.

These digital low-touch and low-cost solutions are a big reason why Bell customer satisfaction scores continue to improve and why our suite of customer service apps continue to be the most awarded and highest-rated telco apps in Canada. I'm going to turn over to slide 5, for those following the deck, for an overview of some key operating metrics for Q2. Let's begin with Bell Wireless, where you see we've added 111,282 new net postpaid mobile phone subscribers. That's up 30%, 34%, excuse me, up 34% from last year. As I mentioned a little bit earlier, that's our best Q2 performance in 18 years, and it's a clear highlight in the quarter. That result was driven by 30% higher gross activations.

That reflects robust immigration growth, continued 5G and multi-product bundling momentum, increased penetration of second-line subscriptions, we effectively executed on promotional offers in what was a competitive market. You'll see that our customer churn was up year-over-year, that reflects greater market activity with a step-up in competitive intensity. Our churn remains well below pre-pandemic levels at 0.94%. Our ARPU was essentially unchanged compared to last year, that's a good result, given some of the competitive pricing pressures we saw in Q2, particularly on larger capacity data plans, which drove lower overage revenue and the financial impact of more customers on installment plans. Roaming was a positive contributor again this quarter, as expected and as we mentioned earlier, the year-over-year lift wasn't as significant as during the post-COVID recovery period.

Notably, the monthly recurring charge portion of ARPU remained stable, the direct result of more subscribers on premium 5G rate plans. At the end of Q2, 47% of postpaid customers were on 5G-capable devices, and that's up from 30% just last year. For mobile connected devices, we realized 79,537 new net activations, and that's a year-over-year increase of nearly 80,000, showing strong customer demand for Bell IoT solutions, including business solutions and connected car subscriptions. Let's move to wireline. We delivered. Again, we delivered our highest Q2 retail internet net add since 2007. That's up 10.2% over last year to almost 25,000, and that reflects a higher number of legacy DSL subscriber losses in our copper service areas.

However, as I mentioned earlier, if we look just at the performance within our FTTH footprint, you'll see the net add at 52,000 demonstrates very, very clearly the market share gains we're making wherever we have fiber. It was also another very good quarter for Bell IPTV, which added 11,506 net new subscribers. That's 3 times higher than last year, as we continue to benefit from the pull-through effect of Bell Pure Fibre internet and, of course, our TV product leadership. Satellite TV net customer losses increased, as you see, driven by higher competitive promotional offer intensity, and home phone net losses improved 6%. Now with back to Bell Media, just for a brief moment. As I referenced, advertising market remained difficult again in the quarter, while digital growth was strong.

Underpinning the digital growth was Crave and TSN streaming subscribers, as well as a 30% increase in revenue from our SAM sales tool. With respect to Crave specifically, our subscribers were up 5% over last year to approximately 3.2 million. That was supported by a 27% increase in direct-to-consumer streaming subscribers, while TSN Direct and RDS Direct collectively grew subscribers by 85%, thanks in large part to the 2023 Formula 1 Canadian Grand Prix, which had the highest F1 audience on record across all Bell Media platforms. As far as CTV goes, it continued to perform ahead of plan, marking its 22nd consecutive year as the number 1 network in prime time, and expanding its audience advantage in the spring broadcast season by approximately 30% over our closest competitor.

On the French language TV front, Noovo saw a significant 17% increase in full-day audiences in the key 25 to 54 demographic in Q2, even as the overall French conventional TV market declined 10%. Net net, that drove a 5-point market share gain for Noovo over our competitors, and RDS was once again the top-ranked non-news specialty channel among all viewers, benefiting, as I mentioned, from the Canadian Grand Prix, as well as the Memorial Cup hockey tournament. In summary, I want to thank the Bell team for their efforts in Q2. Our performance demonstrates that the game-changing investments that we've been making over the last several years, together with a laser-sharp focus on our core business, where further meaningful growth opportunities await, are bearing fruit.

That said, we need to continually focus on day-to-day execution, which includes, in particular, aligning our cost structure with the revenue profiles of each of our operating segments. At the same time, we'll closely monitor developments in the regulatory arena as they relate to policy decisions regarding our fiber investments and further developments regarding Bills C-11 and C-18. Further on the media front, more needs to be done by the CRTC faster. The ecosystem in Canada is under severe stress and requires urgent government assistance. When massive U.S. companies with global scale and global footprints are having extreme difficulty contending with the difficult advertising markets, you have to ask how Canadian broadcasters are expected to navigate it when the regulatory playing field does not present an environment where the same rules apply to all.

Though it's encouraging to see the federal government trying to help out on the news side of things and the industry at large pushing back against the very aggressive moves by Meta and Google, more needs to be done. Before closing, I wanted to address recent media reports out of the U.S. concerning lead-covered cables and legacy telco copper networks. This makes up a very small percentage of Bell's overall wireline infrastructure, with only 0.36% of our network still containing lead. Bell transitioned away from installing lead-covered copper cables in the 1960s, when we began to deploy plastic co-polymers in place of lead for the majority of our cable deployment. Since the mid-2000s, Bell has also been replacing these copper cables with fiber.

As we upgrade our network from copper to pure fiber, we have been removing any lead-containing components in active construction areas, where feasible and safe to do so, in line with established safe handling protocols. With that, and for the last time before he retires as CFO at the end of the month, I'll turn the call over now to Glen, who'll provide more details on our Q2 financial results. On behalf of all members of the Bell team, I'd like to thank Glen once again, and to extend my heartfelt gratitude for all your contributions, your leadership, Glen, and your invaluable counsel in helping this great company, you know, move forward year after year. You'll be sorely missed.

Glen LeBlanc (CFO)

Good morning, everyone, and thank you, Mirko, for your kind words. I'm proud and honored to have been part of such an amazing organization for 30 years. I have witnessed the transformation of this great company from a legacy telco into a tech services powerhouse, the best is yet to come. I will be keenly watching from the sidelines as the next generation of leaders take Bell to the next level. Now, for the last time as CFO, on to the results. In what has become a hallmark for the company, another quarter of consistent and focused execution that delivered strong 3.5% consolidated revenue growth and 2.1% higher adjusted EBITDA.

This was achieved despite ongoing media advertising headwinds Mirko Bibic mentioned, a step up in competitive intensity across all our consumer product lines, a B2B sector that is not yet fully recovered from the global supply chain disruptions experienced over the past 2 years. Despite the positive EBITDA contributions from operations, net earnings and statutory EPS were down year-over-year due to a CAD 377 million non-cash loss on BCE's share of an obligation to repurchase, at fair value, the minority interest in a joint venture equity investment. As profiled in our quarterly budget for 2023, adjusted EPS was also down this quarter, decreasing 9.2%. This was driven by an expected increase in interest expense due to higher rates, as well as higher depreciation and amortization, reflecting the rapid growth in our broadband capital assets.

As for free cash flow, it was down approximately CAD 300 million year-over-year, mainly on the timing of working capital, which, as I mentioned last quarter, will largely reverse out by year-end, and higher CapEx as we advanced some spending earmarked for later in the year, given favorable construction conditions this past spring.

In line with our internal forecast and consistent with our guidance target for 2023, we expect a much stronger free cash flow trajectory in the back half of the year, with a minimum $600 million favorable year-over-year swing coming from just CapEx alone. Let's turn to our Bell CTS segment on Slide 8, where total revenue was up a very healthy 4.3% this quarter, a strong result that was driven by a 7% increase in residential internet revenue and a 4.4% higher wireless service revenue, which were fueled on the back of some of the best Q2 mobile phone and retail internet subscriber metrics, as Mirko mentioned, in well over 15 years.

The year-over-year growth in revenue also reflected a much improved B2B performance trajectory, supported by the increased project spending by large enterprise customers, which strengthened as a result of the improvement in data equipment availability compared to the shortages that we experienced last year, as well as the financial contribution from our recent acquisition of cloud services provider, FX Innovation. The ongoing recovery in the business data equipment sales, together with increased sales of higher valued mobile phones, yielded a 21.5% growth in Bell CTS product revenue this quarter. The combined impact of the continued consumer strength across our wireless and residential home services, together with improved business wireline results and lower year-over-year weather-related pressures, drove improved EBITDA growth of 2.8% this quarter. Let's move over to Bell Media on Slide 9.

Against the backdrop of the ongoing ad recession in North America, Bell Media's revenue decline in Q2 was still only 1.9%. This represents a much better performance than our media peers, which is a testament to the team's strong execution, our diversified asset mix, programming strength, and the success of our digital-first media strategy. Advertising revenue was down 9%, owing to a continued soft advertiser demand and spending across all traditional media platforms. This was moderated by a robust digital advertising growth of 19%. Subscriber revenue increased 3.9% year-over-year, driven by continued strong Crave and sports direct-to-consumer streaming growth. Consistent with the year-over-year decline in advertising this quarter, EBITDA decreased 5.3%.

Although that may appear to be a decent result under current economic conditions, we in our industry continue to be greatly impacted by a number of challenges, including operating losses across our news divisions, a prolonged advertising slump with no signs of immediate recovery, the shift of advertising revenue to foreign digital platforms, content cost inflation, and a more challenging regulatory environment that is not adapted to the new realities facing media. This has required us to rightsize our operating cost structure and asset portfolio to align with the expected revenue potential of our media business. Going forward, we will need to continue doing so in order to deliver for our shareholders in this unconstructive economic and regulatory environment. Let's turn to Slide 10 for a brief update on our balance sheet and our liquidity position.

We remain quite well positioned with more than CAD 4.4 billion of available liquidity at the end of Q2, which is bolstered by a $850 million public debt issuance during the quarter. Our debt maturity schedule also remains well structured, with an average debt to maturity of approximately 12 years and an after-tax cost of debt that is well below prevailing interest rates at just under 3%. We have no outstanding financing requirements for the balance of this year, as all 2023 debt maturities have already been pre-financed.

With a strong pension solvency surplus of totaling CAD 3.5 billion in free cash flow that is growing organically year-over-year, we have the financial strength against the current macroeconomic backdrop to execute on our strategic and capital market priorities for 2023, including the C-band spectrum auction later this year. Lastly, I wanted to highlight Bell's continued leadership in ESG financing structures with the launch of our first sustainability-linked derivative this past May. This follows the announcement of our sustainable financing framework in April of 2021, Bell's inaugural CAD 500 million sustainability bond offering in May of 2021, and the conversion of our CAD 3.5 billion committed facilities to a sustainability-linked loan last November. We look forward to a follow-on sustainability bond issuance in the future when the right mix and, and size of eligibility investments within our framework are available.

Let's wrap up on Slide 11. With consolidated financial results delivered in the first 2 quarters that are in line with budget, together with the strong projected EBITDA and free cash flow trajectories in the second half of the year that are underpinned by our strong operating momentum across the business and our consistent proven execution in a competitive marketplace, I am reconfirming all our guidance targets for 2023. On that note, I'll turn the call back over to you, Thane.

Thane Fotopoulos (Investor Relations)

Thank you, Glen. To keep the call as efficient as possible, please limit yourselves to 1 question and a brief follow-up, so that we can get to as many of the questions in the queue as possible with the time we have left. Before I hand it over to the operator, I just wanted to take the opportunity to say to Glen what a privilege and pleasure it's been to work with you. You are a great leader and mentor, and I'm grateful for all the guidance, support and encouragement you have provided. Above all, what I have valued most is your kindness, trust and friendship. With that, Gisele, we're ready to take our first question.

Operator (participant)

Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please leave your handset before making your selection. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. The first question is from Maher Yaghi from Scotiabank. Please go ahead.

Maher Yaghi (Managing Director and Analyst)

Great, thank you for taking my questions. I do want to say, Glen, thank you for all your support over the many years that we've known each other. You'll definitely be missed. Maybe I'll start with my first question. Mirko, I recognize that BCE is in the middle of an FAO regarding MVNO with Quebecor, I'm interested in getting your reaction to the announced MVNO ruling by the CRTC on the Rogers and Quebecor MVNO tariff. More specifically, on the basis and precedents that the CRTC has chosen to arrive at this tariff calculation and its costing analysis. Just a follow-up question on free cash flow to Glen, I guess.

you know, BCE has delivered year after year on its guidance targets, so I'm not implying any issues here, but when I observe your free cash flow generation, it's down 46% in the first half, and your outlook is for growth of 2%-10%. Lots of moving parts, I'm sure. CapEx, as you mentioned, is a big, big, big point here in the recovery. Could you help us bridge the results to date and how we're going to get to the 2%-10% growth? Thank you.

Glen LeBlanc (CFO)

Yeah, I'll start, Maher, thank you for your remarks. As I said in my, in my opening statement, we will spend more than CAD 600 million spending in the back half, but less than last year. If you look at our spending trend in 2022, we spent over CAD 3 billion in the back half of 2022, and that'll be more than CAD 600 million lower. Add to that, the associated impacts to working capital that, that lower spend will do. We have lower cash tax installments in the back half. Like, we are confident that we will deliver on the guidance provided.

I know that, historically, we probably have a smoother free cash flow profile than, than we have this year, but it really was a product of us taking the opportunity to spend heavily in the front half of this year to really, you know, you've heard me say it before, you make hay in this business when the sun shines. That's where we're at. I remain confident, Maher, and, over to Mirko for the second part of the question.

Mirko Bibic (President and CEO)

Okay, thanks, Glen. Good morning. On the, on the MVNO decision, I think you're probably referring to the. Well, I know you're referring to the MVNO decision recently handed down relating to two other providers. It's hard, Maher, it's hard to comment because, I mean, we obviously don't know the rates that were at play or the offers that were made in that final offer arbitration, because the details are, are confidential. It's kind of hard to, to kind of make any predictions as to what, what comes next. I, I would say there were some, I'll, I'll call it attention-grabbing references in the decision on how costing was arrived at or how the, the, the winning offer was chosen.

I think they're attention-grabbing in my mind, because they, they do break from kind of how things have been done in the past. My sense of it is that those comments must have been made within the confines of the facts presented to the CRTC in the sense of the offers made. If we're to read those comments on appropriate costing as a signal for what will more broadly come in the future, I think the implications of that could be pretty far-reaching. Again, I now am veering from... I'm going to pivot from wireless to wireline.

You know, we spent so much time, quarter after quarter after quarter, and in all our public communications, talking about our accelerated CapEx program and trying to get to the, you know, close to 9 million fiber locations done by 2025. You know, if you kind of repeat that over and over again, it almost kind of start thinking that the job is done at the end of 2025. And I think the problem here is the job is not done at the end of 2025, because even when we have close to 9 million locations done, there will be 5 million locations, mostly households, in Bell's operating footprint. That's just from Manitoba to Newfoundland, 5 million locations left to cover. That's what really worries me, and that's what's at risk.

I'll fundamentally, I mean, I'm veering off on a bit of a tangent here, Maher, but I think the public policy, government and regulators in Canada are really going to have to decide what, what the priority is. Is it to get the job done for all Canadians in terms of coverage, or is it to continue to implement decisions with the view of driving down pricing even further, but in an overall environment where pricing has been well handled by market forces, frankly, if you look at the direction of pricing and quality over the last very short period of time. I'll, I'll stop there. No, you actually veered right where I wanted you to veer, veer, 'cause fiber to the home is essential for your future growth. Thank you for those remarks. Thank you.

Stephanie Price (Executive Director and Equity Research Analyst)

Next question, please.

Operator (participant)

Thank you. Next question is from Drew McReynolds from RBC. Please go ahead.

Drew McReynolds (Managing Director)

Yeah, thanks very much, good morning, and all the best, Glen. I wish you well. Couple for me. Just first on Bell Media, actually. Mirko, you've made a lot of progress digitizing this asset, and the asset clearly, you know, punches above its weight, certainly in the media landscape here in Canada. When you look at the digital revenue contribution, how do you, how do you want that to kind of trend, let's say, over the next two to three years? I know there's a ton of moving parts, just what, what are your expectations there? Secondly, shifting to wireless, we've seen, and you mentioned a bunch of initiatives to better service immigrants into the country.

Just wondering what your expectation there is in terms of incremental traction and success in doing that, and whether we saw some of that in Q2. Thank you.

Mirko Bibic (President and CEO)

On the, on the wireless side, clearly, there's a population surge in Canada that's not about to abate anytime soon. You know, we, we, we certainly do well in the premium segment. You know, in terms of, that's one category we do really well in. We do quite well in the switcher market, for lack of a better way of putting it, you know, customers who are going to switch from one provider to another. We, I think we do quite well in that segment. On the, the newcomers to Canada segment, it's we're, we're doing okay. I think we need to do better, and we will do better.

You know, we've, we've been pretty open about some of the initiatives we've put in place to get a bigger share of that segment of the market. That's just the early days on some of those new initiatives. I don't think you're really seeing, in the, in the very strong results we presented in Q2, of, you know, really the cruising... We're not at cruising altitude, let's just say, on those initiatives, so there's more upside there. Part of that is the, the kind of the relaunch of Virgin Plus. While it's early days, it's only a couple of weeks, you know, some positive momentum in just 2 weeks on the Virgin relaunch, although that's a, that's a Q3 phenomenon because it was, was done in July.

I'll, I'll leave it at that, Drew, on, on those elements. On media, look, I mean, I think, I think the direction is, you know, where do I want to end up here? We wanna continue to pivot very strongly towards digital. I, and I like, you know, we've been talking about this for about three years, and I really like the momentum we're delivering, we're driving here on that strategy. The pillars, really, where do we derive our revenues? We derive our revenues from subscription, and advertising. On the advertising front, we, we've put in place a lot of tools to enable advertisers to choose us for their, for their digital and targeted ad needs, and that's only going to get better with addressable TV.

On the subscription side of things, again, it's, it's making sure we always have the very best premium content and making sure those, that content is available on the digital platforms that we have, that we're going to continue to improve from a user experience perspective. So the growth pillars for Bell Media going forward are really going to be Crave, the CTV and Noovo apps, and TSN and RDS Direct. Those are the growth pillars.

Drew McReynolds (Managing Director)

That's great. Thank you.

Operator (participant)

Thank you. The next question is from Stephanie Price, CIBC. Please go ahead.

Stephanie Price (Executive Director and Equity Research Analyst)

Hi, good morning. Hoping you could talk a little bit about the sustainability of service revenue growth as we head into the back half of the year. Just curious how you think about the more competitive back to school and holiday periods? My follow-up, just curious about how we should think about the enterprise piece of the business heading into the back half of the year. It sounds like the equipment availability has maybe started to improve a bit here.

Glen LeBlanc (CFO)

Yeah, I'll handle the, the back half on enterprise. Stephanie, it's Glen. Yeah, we're feeling pretty good. We're, we're actually starting to see projects from our large enterprise customers, get back into full gear again. As you said, part of that is because we have the availability of product, albeit not what it was pre, pre-pandemic, a heck of a lot better than it's been in the last number of years. We're feeling pretty good about the momentum we're seeing there. I, I don't see any signs of slowdown that would, you know, the, the canary in the coal mine things you see and when people start talking about recession. We're not seeing any of that. Projects are, are, are kicking off. You're seeing it in our product revenue, growth that we had in this quarter.

I remain pretty confident that, that the back half will see some additional momentum that the first half, it didn't. Yeah, then on the broader kind of competitive landscape and, and, and, and revenue growth, which, I'm going to interpret as service revenue growth, Stephanie. Look, I think if you look at, at what we delivered in, in Q2 with the very strong mobile phone and retail internet, subscriber growth, you'll see that that came with, you know, quite healthy service revenue growth on residential internet at 7% and wireless service revenues at 4.4%. Those, those are strong, numbers and in fact, quite similar to the past 3 quarters, which is really a good result if you think about some of the more intense promotional pricing that we saw in, in Q2.

Mirko Bibic (President and CEO)

You know, won't repeat what Glen said to any great degree on the business side. We, we are also seeing service solution revenue, you know, strength, decent strength there. You know, you put all those things together, you look ahead to the back half of the year, I think we're going to continue to deliver strong service revenues, and particularly as we're lapping the return to pre-COVID levels of promotional activity that we saw at the back half of last year, particularly during the Black Friday period.

Stephanie Price (Executive Director and Equity Research Analyst)

Great. Thank you very much. Congrats, Glen, on the retirement.

Glen LeBlanc (CFO)

Thank you.

Operator (participant)

Thank you. Next question is from Vince Valentini, TD Cowen. Please go ahead.

Vince Valentini (Senior Equity Analyst)

Yeah, thanks very much. Best, best to you, Glen, in your future. Two things, if I can. One, I'll call a clarification. You, you gave a good answer on free cash flow earlier, but I have no doubt you'll, you'll hit your guidance. You always do. Can we assume that the high end of that guidance range is starting to look a little out of reach, given what we saw in the first half on free cash flow? The second one, the spectrum thing, we see you paid CAD 145 million to subordinate some spectrum from Xplor in Quebec. Given that it was 3,500 MHz band, I assume it adds to your cap for the upcoming auction. Can you clarify that and maybe tell us how many megahertz you bought?

Mirko Bibic (President and CEO)

Yes, it does, it does add to our cap.

Glen LeBlanc (CFO)

Yeah, and Vince, on the free cash flow, as I, I provided the answer earlier, significant reduced year-over-year CapEx spend, you know, fairly sizable difference in timing of installment payments and acceleration of earnings. You know, we have a higher earnings profile, EBITDA profile in the back half of our, our business than we do in the front half. All of that leads me to be very confident, as you said, we will deliver on our guidance. Now, I would say, suffice to say, I, I don't see us at the high end, but we'll deliver on the guidance.

Vince Valentini (Senior Equity Analyst)

Thank you. The number of megahertz, is it 20 megahertz from Xplor?

Glen LeBlanc (CFO)

It varies across, across the different regions, Vince.

Vince Valentini (Senior Equity Analyst)

Okay, thanks.

Operator (participant)

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

Speaker 12

Oh, hi, guys. Thanks for taking the question. It's Matt just subbing in for Dave this morning. Glen, just wishing you all the best in retirement as well.

Mirko Bibic (President and CEO)

Thank you.

Speaker 12

The first question is just on the strategy with the Virgin Plus and the relaunch, and particularly around the inclusion of 5G plans. I know, Mirko, you mentioned that you're doing well in the premium segment. I'm wondering how the new Virgin strategy kind of helps that, or how you see it adding to that? Just any color would be really helpful. On the ARPU side, you know, overage was, you know, a bit of a headwind as people moved to higher plans, and they have less overage. I was wondering if you could put some context to that, how much might be remaining or how quickly that is dissipating as people move. It would just be helpful to get context. Thank you.

Mirko Bibic (President and CEO)

Hi, Matt. Mirko. I'll take the Virgin relaunch question. Really what we're trying to do, a little bit building on the prior answer, it's to reenergize the Virgin brand, recognizing that we do really well on the Bell brand in the premium segment. We also want to reenergize the Virgin brand, and the strategy there was making the brand more appealing and relevant to a broader base of customers, particularly newcomers. I mean, I think that's the simplest way to put it. As for 5G, just know you know, now we have plans available on Virgin on 5G as well as 4G, not 5G Plus.

It was really not much of a secret that, you know, one of our competitors was going to launch 5G on its brand. You know, it's always being mindful of what's to come competitively and positioning ourselves in that regard. Of course, there's still a price gap between the Virgin and the Bell brand, particularly given the premium offering that the Bell brand continues to have.

Glen LeBlanc (CFO)

Matt, it's Glen. On your question on ARPU, first of all, I'll say I, I'm actually very pleased with how well ARPU held up. A couple things I'll unpack there for you. We are at the point that we're no longer enjoying the tailwind of roaming that we, we were. I, I mentioned that roaming revenues are up. Last quarter, I think 74%, I said, and this quarter, they're only up about 35%. We've reached the point now that a number I quoted in Q1 was that roaming revenues were now at 124% of pre-COVID levels. Well, they're at 125% this quarter. You're seeing a slowing there that's impacting ARPU. As far as data overage, I would say a, a modest increase or in the decline.

We are down about CAD 12 million year-over-year in the quarter versus CAD 10 million in the first quarter. It's not overly material. When I look out to the future on ARPU, what gives me confidence is only 47% of postpaid subscribers are currently on a 5G-capable device. We, as you know, we see quite a, you know, double the usage-... when people move to the 5G device from LTE. That's a great opportunity for monetization and gives us confidence in the growth of ARPU for the future. Thank you for your remarks, Matt.

Speaker 12

All right. Thank you so much for the answers.

Operator (participant)

Thank you. Next participant, Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery (Equity Analyst)

Thank you very much. Good morning, Glen, best wishes for your retirement. I wonder if we could come back to fiber. Perhaps you, you referenced the 9 million target for 2025. Could you just update us on the passings year to date and the outlook and how that plays into the CapEx timing? Strong net adds on the fiber side. Maybe give us a sense of what the headroom here is and how the cohorts have been behaving, what sort of penetration rates are still left to get in those markets that you've been building over the last several years before they reach terminal penetration? Thanks.

Glen LeBlanc (CFO)

There's no material change in our long-term fiber plans, Simon. As we said, we get to, to pass approximately 9.5 million homes of our 12+ million, and then we have our wireless to the home footprint. I mean, I, I think on the, on the capital side of things, just to remind you, 2022 is the high watermark in spending, and we'd see a natural decline through 2023, which you're starting to see, or you will particularly see in the back half. That decline will continue through 2025, 4 and 5. You know, we ultimately see ourselves reaching a point where we'll, we'll reach what our strategic objective of fiber homes passed will be by the end of 2025, and then your, your sub 17 CI and, and, and maybe sub that in 2026.

Simon Flannery (Equity Analyst)

On the, the penetration levels?

Glen LeBlanc (CFO)

Well, the penetration levels, I mean, you can, like you can, without getting into the specific penetration levels by, by tenure, which, which, you know, is quite competitive in terms of information. I would say that just if you look at the healthy loadings, we've had, like 52,000 fiber subscribers and, and, and re- really, really strong where we have fiber. You can assume that our penetration is very healthy where we have fiber, particularly in, in markets where we've had fiber for, for quite a bit of time. We're getting close to kind of the, the, the, the objective we set for ourselves in terms of market share in, in each and every community. In terms of how we're tracking to...

You know, we said, we've always said for the year that we wanted to reach approximately 650,000 locations, and we're well on our way in the first half, given the investments we've made, in the first 6 months of the year. Then more broadly, just strategically now, again, we have well-articulated, accelerated CapEx build plan from now, you know, from really from 2021 to 2025. You know, we've, hit our targets, every year since we launched the, or, or initiated the accelerated CapEx build plan. You know, post 2025, all else being equal, post 2025, we're clearly not gonna stop building, but we're gonna go back to a build run rate that, you know, you would've been used to seeing from us prior to 2019.

That would be the plan, and I think we're well on track on all of it. I mean, the only thing that might, you know, bump us off of that plan, as I look forward, would be public policy and regulatory rulings.

Simon Flannery (Equity Analyst)

Thanks a lot.

Glen LeBlanc (CFO)

Thanks, Simon.

Operator (participant)

Thank you. The next question is from Jerome Dubreuil, Desjardins. Please go ahead.

Jerome Dubreuil (Senior Equity Analyst)

Thank you. Good morning, everyone. I'll echo the comments, congrats on your tenure, Glen. Again, on the guidance, we've talked a lot about the free cash flow guidance, but I wanna dive a bit more on the EBITDA guidance. You said you're expecting catch up in the second half. If you can maybe describe what are the drivers of that improvement in the second half? If you can maybe specify what's the expected impact of maybe storms and natural disasters that you have baked in your guidance and versus what we've seen so far.

Glen LeBlanc (CFO)

Yeah, certainly, I'll give you some, some color commentary on that. A couple things. One, you will recall that we incurred substantive storm costs in the back half of last year, with the vast majority of it being Fiona, about CAD 34 million with it. So you know, that, that, let's hope that that's behind us. Just in this quarter alone, we saw quite an improvement in storm-related costs. We incurred about CAD 2 million in this quarter versus about 7 or 9 for the same period last year, so about a CAD 7 million improvement. You heard in our opening remarks that we took on a very aggressive workforce reduction program in the second quarter of this year. Naturally, the benefits of that will flow in the back half and not in Q2.

That is another area of, of improvement in, in trajectory or costs, of cost trajectory. Inflation, we're, we're starting to see a slowdown, or at least a lapping, I should say, of inflationary pressures, about CAD 13 million inflationary pressures in this quarter compared to about CAD 12 million last year. When I look out to the back half of this year and what we incurred last year, I actually see potential for modest improvement as opposed to headwind that we've been experiencing for 12 months. Then, you know, the continued fiber technology. As we build fiber, we have a lower cost structure, a digital transformation, lower cost structure. Or, real estate rationalization, lower cost structure, handset discounting has, has been better with BYOD. All in all, I think it's, it's all hands on deck.

We're, we're excited about the momentum we see in, in the business right now. We're excited about the, the health of growth in this country, as Mirko mentioned, immigration. You get it. From that perspective, we, we expect revenue growth to remain solid, and I see some, some pretty nice momentum in place for the cost containment that we'll enjoy in the second half of the year.

Aravinda Galappatti (Managing Director and Equity Analyst)

Great. Thank you.

Glen LeBlanc (CFO)

You're welcome.

Operator (participant)

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

Batya Levi (Managing Director and Analyst)

Great, thank you. All the best for Glen as well. 2 questions. One, on the new loadings, they've been very strong. Can you talk about the take rate for bundled offers versus the base and the impact that you're seeing on churn? On the cost transformation for media, should we assume that that's fully implemented and will start to provide some upside in the second half, or will there be more elements to it as we move ahead? Can we see media margins head back to mid-20% with, with that transformation? Thank you.

Glen LeBlanc (CFO)

The cost initiatives that we've taken on were really done in the latter part of Q2, so we really haven't enjoyed any benefits of those. Absolutely, we expect those benefits to kick in, particularly through Q3 and absolutely in Q4, to help improving media. The media margins will return. What we're doing in our media business is true transformation and the move to digitization that we've already talked about. Advertising will return, and when it does return, we are going to have our assets positioned to capture a larger share of the marketplace than ever before. I remain bullish on media margins, but we're still in an advertising headwind, and advertisers are right now reluctant.

I believe when that returns, we will have used this time wisely to right the ship and focus on the, you know, a broad suite of assets that allow us to capture greater share. Over to Mirko on the front end.

Mirko Bibic (President and CEO)

Yeah, on the, on the bundling, you know, it's pretty clear that the, the market is evolving more and more towards one, one where, you know, the customer value prop is, for many customers, defined by the bundle. I think we're really well positioned when it comes to that, with an ever-growing fiber footprint and fiber internet superiority and a national wireless network on 5G and 5G Plus, where we're rated as the best on both those fronts. Right there, and with attractive pricing, and you put all those things together, and it's pretty compelling. The price, the quality, and, and the overlapping footprints. On.

You know, we keep growing the percentage of our internet customers who take mobile and the percentage of mobile customers who take internet, and the percentage of new customers who are taking both of those at the same time from us from the outset. That, that continues to grow. It's been one of our focus areas, and we have a lot of upside there. You know, that's another area of, of opportunity for the Bell family of brands or the BCE family of brands, I to be more precise.

Batya Levi (Managing Director and Analyst)

All right. Got it. Thank you.

Operator (participant)

Thank you. Once again, please press star one on your device keypad if you have a question. The next question is from Drew Reynolds, RBC. Please go ahead.

Drew McReynolds (Managing Director)

Yeah, thanks very much for the follow-up here. Glen, couldn't let you go without a pension question. Sorry about that. On the pension solvency surplus, like, we, we all know on this call, Bell's been or used to put a lot of money into the plan because of just the punitive decline in interest rates on the solvency calculation. Obviously, we're in a slightly different environment, and it may get even more interesting going forward. Question is: Do you have any ability to get back some of that surplus over time? Is there a mechanism or a process where that CAD 3.5 billion, if it gets to CAD 4 billion, CAD 4.5 billion, CAD 5 billion, do you have any access to that, is the question?

Glen LeBlanc (CFO)

Well, Drew, I appreciate you letting me take one last victory lap on pension. After a career of deficits and necessary funding to get to this position, Curtis can thank me later, but we're in a surplus position. The mechanism is easy, Drew. Is that we're allowed to take contribution holidays, and in the BCE plan, the Bell Canada plan, including DC. It's not just defined benefit, it's defined contribution as well. The mechanism is easy. We can continue to take holidays, and with a deficit, or excuse me, a surplus the size of what we have, you know, 116%, CAD 3.5 billion, like, we'll have an opportunity to take surpluses for the foreseeable future.

If your projections are true, and it climbs beyond 3.5 into 4, then, then I think Curtis will be retiring with a big surplus in, in decades ahead. Again, Drew, thank you for everything, and, and thank you for giving me one last chance to brag about pensions.

Drew McReynolds (Managing Director)

Awesome. Thank you.

Operator (participant)

Thank you. The next question is from Aravinda Galappatti, Canaccord Genuity. Please go ahead.

Aravinda Galappatti (Managing Director and Equity Analyst)

Good morning. Thank you, and let me offer my best wishes to Glen as well. I had a question on on the on the enterprise or B2B side in general. You know, having closed the FX Innovation acquisition, Mirko, what are your thoughts on sort of the the the the headroom to make similar acquisitions in that broader space or and perhaps even your appetite? Maybe connect that to sort of your strategy to taking that, you know, so the the B2B segment back... potentially to growth at some point, maybe an update on those on those elements. Thank you.

Mirko Bibic (President and CEO)

Okay, thank you for the question. Look, I mean, our strategy on, our focus in the B2B segment is really kind of 3, 3 core pillars there. Continue to improve the customer experience for enterprise customers would be 1. Another 1 would be kinda to continue to put a sharp focus on the cost structure that we carry to support our legacy services, which, you know, clearly are high margin, but declining in many respects on the legacy side. You know, if we do that, we'll be even stronger in our areas of traditional strength, given our superiority and our connectivity and our distribution strength and the relationships we have.

At the same time, we're gonna continue to, to put a focus on, on future growth vectors in the enterprise space, and in particular, 5G, IoT, private networks, and call it the, you know, little bit of a, the combination of, of the cloud business and being advisors, so to speak, or for lack of a better word, being partners with our, our large customers in their own digital transformation journeys, and that's where FX comes in. So we, we have we're quite optimistic about the potential in all those areas. We have a right to play in, in the segments that I just mentioned because of our core strength in connectivity and our distribution strength and our, and our, and our deep and long-standing relationships.

FX plays a very important part in that, in that strategy, particularly in our customers' move, their own moves, you know, digitally into the cloud. We're gonna keep growing that business. That's certainly what we're gonna do, and we're gonna use the FX business based here in Montreal, as, as a launch pad for future growth.

Aravinda Galappatti (Managing Director and Equity Analyst)

Thank you.

Operator (participant)

Thank you. There are no further question registered at this time. I would now like to turn the meeting over to Mr. Fotopoulos.

Thane Fotopoulos (Investor Relations)

Thank you, Gisele, and thank you again to all who participated on the call this morning. As usual, the IR team will be available throughout the day for any follow-up question and clarification. With that, have a good rest of the day.

Mirko Bibic (President and CEO)

Thank you, everyone.

Aravinda Galappatti (Managing Director and Equity Analyst)

Thank you!

Operator (participant)

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