BCE - Q3 2022

Transcript

Operator (participant)

Please stand by. Your meeting is about to begin. Good morning, ladies and gentlemen. Welcome to the BCE Q3 2022 results conference call. I would like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos (VP of Investor Relations)

Thank you, Donna, and good morning everyone, and thank you for joining our call. With me here today are Mirko Bibic, BCE's President and CEO, and our CFO, Glen LeBlanc. You can find all our Q3 disclosure documents on the investor relations page of the bce.ca website, which we posted earlier this morning.

Before we begin, I wanna 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 our 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, and good morning, everyone. The Bell team's continued execution excellence and customer-centric approach, combined with our unmatched leading broadband networks, yielded a record 401,132 total broadband, wireless and wireline net customer activations, incurring pressure in media advertising and some continued pressures in the B2B sector.

Adjusted EBITDA grew a more modest 1.2% as we absorbed CAD 38 million in exceptional storm-related costs and inflationary pressures, while also funding record subscriber acquisitions. Ensured our core networks remained largely operational, but the damage to our infrastructure in the field was unprecedented. A huge thank you to our field, network and wireless operations teams who work tirelessly to keep our customers connected. I also want to acknowledge.

Your focus on preparing and delivering for customers is greatly appreciated, and I'm so proud to be part of this dedicated and talented team. Without question, this event underscores how much Canadians value fast and dependable connections. This is why Bell has been investing in our networks to build a communications infrastructure that is among the best and most reliable in Canada, if not the world. In fact, a study and Australia average of only CAD 87.

We are not standing still. As you know, we continue to push ahead with our historic CapEx acceleration program, having invested close to CAD 3.5 billion so far this year. We remain firmly on pace to reach CAD 5 billion in planned CapEx for 2022.

By the end of the year, 80% of our midterm broadband internet build-out plan, comprising 10 million residential and business locations, will be completed. Recognized Bell's 5G mobile network as Canada's fastest in their latest reports. Such third-party recognition reinforces Bell's network leadership and the value of our unprecedented generational investments, which will continue to drive socioeconomic benefits to Canadians while supporting substantial free cash flow generation for years to come for our investors.

A quick look now at Bell's wireless operating results in Q3. It was another standout performance with our highest ever number of total mobile phone net adds, which increased 64% over last year to more than 224,000. This drove strong revenue growth of 7.4% and 7.8% higher adjusted EBIT.

Achieved these results against the backdrop of declining wireless prices, even as the Canadian economy faces rampant inflation. According to latest Stats Can data, the price of all goods and services in aggregate has increased approximately 7% over the past year and 11.6% since the beginning of 2020, while the cost of cellular services has declined at 3% and 25.7% respectively. In residential wireline in Q3.

That's up 33% over last year and our best ever result, driving strong residential internet revenue growth of 8%. These results are a direct reflection of the differentiated value of fiber-based internet services that provide the fastest, dedicated, symmetrical speeds that cable cannot match. By the end of the year, 5 million homes will qualify for symmetrical speeds of at least 3 Gbps. That is the broadest multi-gig broadband footprint anywhere in North America.

In September, we announced an agreement to purchase internet reseller, Distributel. This acquisition will further strengthen our competitive position and support Bell's internet growth strategy, particularly in the value segments of the residential and SMB markets. Turning to media now.

We continue to see good momentum across our streaming distribution platforms and digital ad markets, which enabled us to take share in a TV ad market that is currently facing some significant pressures. Growing customer usage of Bell Media's SAM TV advertising sales tool platform, which more than doubled bookings in Q3, together with a 29% increase in Crave direct-to-consumer subscriptions, contributed to strong 40% growth in digital revenues this quarter. I'd also give a quick update on some recent ESG developments.

Clean50, a national sustainability organization, named Bell its inaugural GHG reductions champion for achieving meaningful greenhouse gas emissions reductions and recognized Bell's solar cell site initiative as one of the most innovative and inspiring sustainability projects undertaken in Canada in the last two years.

Additionally, our science-based targets for GHG emissions reduction were approved by the Science Based Targets initiative, positioning Bell as a corporate leader in the transition to a low carbon economy. By reducing GHG emissions across our operations, we are continuing to take action to help fight climate change and improve our energy performance.

One way we're tackling direct emissions is through the electrification of our vehicle fleet and the shift away over time from fossil fuel-based transportation. To date, we've installed over 200 EV charging stations to power our growing fleet of electric vehicles.

I'm gonna turn now to slide five of our presentation for a review of some key operating metrics. First off, wireless. We added 167,798 new net postpaid mobile phone subscribers, which is up 46% over last year.

This record Q3 result can be attributed to greater foot traffic as retail stores return to full operation, continued 5G momentum, immigration growth, strong business customer demand, increased focus on bundling wireless with residential internet service, as well as our lowest ever Q3 churn rate, which improved three basis points over last year to 0.9%. Our ARPU was up 2.2%, which is our sixth consecutive quarter of year-over-year growth. This was supported by higher roaming revenue that is now at 114% of pre-COVID levels.

Roaming should continue to support ARPU growth for the balance of the year, and beyond roaming, we remain focused on driving sustainable ARPU growth via our 5G monetization strategy. With only 35% of postpaid subscribers currently on a 5G capable device, and the vast majority of them taking premium unlimited data plans, we see good runway for continued growth.

As for mobile connected devices, net adds increased 49% over last year to 49,044, driven by higher demand for all of our IoT solutions. Let me turn now to Bell Wireline. It was an outstanding quarter for Bell Internet, with 89,652 retail net adds, our best result in 17 years as we leveraged our rapidly growing fiber footprint, strong brands, fastest symmetrical speeds and network reliability. As I mentioned earlier, we had our best ever fiber performance for fiber net adds.

We also added 38,093 net new IPTV subscribers, which is up 20.4%. That's on the strength of our multiple brand customer segmentation approach and a more active back-to-school period versus last year. Taken all together, total retail residential net customer adds, including satellite and local phone, were 56,314 this quarter, which is up 70% or 23,000 higher than last year.

This represents our strongest result since 2005 and really is a testament to the Bell team's execution and our extensive network investments. I'll turn now to Bell Media again. As I mentioned, advertiser demand slowed in Q3 due to the economy and ongoing supply chain issues in certain key consumer good verticals, and that impacted traditional TV and radio advertising sales.

However, given Bell Media's broad mix of assets and consistently top-ranked properties, the year-over-year decline in total advertising was contained to only 2%. Notwithstanding this backdrop, digital revenues continue to accelerate. As I mentioned earlier, growing 40% over last year, and that now represents 31% of total Bell Media revenue, up from 22% last year.

This was supported by growth in Crave subscriptions and the strong increase in SAM TV bookings that I referenced earlier. CTV remained Canada's most watched conventional network in Q3, expanding its lead with a 29% increase in audience market share, while Bell Media's English language entertainment specialty channels also had a strong showing. Finishing the broadcast year with five of the top 10 properties, including the top three spots for CTV Comedy, CTV Drama, and Discovery.

On the French language TV side, Noovo continued to gain viewership, outpacing its French language TV competitors with market share primetime audiences up 4%. RDS was once again the top-ranked sports TV channel, benefiting from record audiences for F1 racing and a strong start to the NFL season.

Before I hand the call over to Glenn for a financial overview of the quarter, I wanted to end by saying that I have great confidence in our long-term outlook. That confidence is underpinned by our investments in leading long life infrastructure assets that will support meaningful growth opportunities and cost reduction across the business, the strength of our products and services, and consistent strong execution by the Bell team within our well-defined and clearly articulated strategy.

Although no company obviously is completely immune to the risks of a recession, we do have a very stable and diversified business that generates consistent and substantial cash flow. We have a strong balance sheet and cost discipline, and all of that enables us to offset economic pressures as they arise. Glen, over to you.

Glen LeBlanc (EVP and CFO)

Thank you, Mirko, and good morning, everyone. Our Q3 financial results highlight our consistent execution excellence and leading asset mix across all BCE-Bell operating segments. Total BCE revenue grew 3.2%, which delivered a 1.2% increase in Adjusted EBITDA.

Our results this quarter included the cost impact of Hurricane Fiona as well as ongoing inflationary pressures, particularly on fuel, utility, and labor costs, which in aggregate totaled CAD 38 million. Normalizing for these exceptional costs, Adjusted EBITDA growth would have been 2.7%. Despite higher EBITDA, net earnings and statutory EPS were down year-over-year. This is mainly due to the non-cash mark-to-market equity derivative losses from a decline in the BCE share price during the quarter.

Additionally, as part of our multi-year post-COVID plan to consolidate real estate space that I detailed last quarter, we recorded a further asset impairment charge this quarter as we continued to vacate some leased properties. However, adjusted EPS was up 7.3%, benefiting from a CAD 80 million tax provision reversal from the resolution of uncertain tax positions re-related to the MTS acquisition.

As a result, we now expect an effective tax rate of 25% for the full year of 2022, down from our previous expectation of 27. No further tax adjustments are anticipated in Q4. Lastly, despite a CAD 153 million increase in capital expenditures consistent with our broadband acceleration program, free cash flow was up 13.4%, reflecting the timing of cash tax installments, lower pension funding due to our strong solvency position of our defined benefit pension plans.

Turning to wireless on slide eight, another strong quarter in a long line of strong quarters. Service revenue is up 7%, driven by our focus on high-value 5G subscriber growth, strong year-over-year mobile connected device growth, and continued recovery in roaming with a Q3 amount at approximately 114% of pre-COVID 2019 levels.

Despite consumers holding onto the handsets longer and a sustained high level of pre-owned device activations, equipment revenue increased 8.6% year-over-year, reflecting a higher sales mix of premium mobile phones. Due to the flow-through of high margin service revenues and our disciplined and targeted response to competitors' promotional offers, wireless EBITDA grew a very healthy 7.8%, which delivered a 20 basis point margin increase to 44.2. Let's move now to slide nine.

Wireline reported its first quarter of positive top line growth in almost two years, with total revenue up 1%. This was led by residential internet revenue, which increased 8% on the combined impact of strong subscriber growth, including higher year-over-year business activations and higher ARPU.

Although our overall B2B results continue to reflect the effects of the global chip shortages and related spending delays on new services, the year-over-year rate of service revenue decline has stabilized. Total product revenue, however, was up 46%, and this can largely be attributed to the timing of sales to certain large enterprise customers and easier year-over-year comparisons, given that the data equipment supply issues began to intensify in Q3 of 2021. Notwithstanding the increase in revenue this quarter, EBITDA, wireline EBITDA did decline 1.2%.

This was a direct result of CAD 34 million in costs absorbed because of Hurricane Fiona and ongoing inflationary impacts. Normalizing for these cost pressures, underlying EBITDA growth was quite respectable this quarter, increasing 1.4%. Over to media on slide 10. Despite a weaker advertising market this quarter, total media revenues remained stable year-over-year.

As Mirko Bibic said in his opening remarks, and it's worth repeating, that it is a testament to our diversified mix of media assets, including a growing contribution from digital platforms and consistently high ratings for all of our TV properties.

Advertising revenue is down 2.3%, reflecting softer TV advertiser demand and a slow radio recovery from COVID due to ongoing macroeconomic uncertainty, as well as the non-recurrence of approximately CAD 15 million in related revenue generated last year from the federal re-election, UEFA Euro 2020, and Tokyo 2020.

The financial impact of these factors was moderated by a strong COVID recovery in our out-of-home, further gains in digital advertising, as Mirko mentioned, and a 2.2% increase in subscriber revenue from ongoing Crave streaming growth. Although total media revenue was flat year-over-year, EBITDA was down 15.3%.

This result was expected given our higher programming and broadcast rights costs associated with the return this year to regular sports broadcast schedules and the normalization of TV content deliveries. This return to a more typical pre-COVID cost structure and a choppy advertising market are expected to weigh heavily on Bell Media's EBITDA in Q4. That said, advanced advertising for the upcoming FIFA World Cup is exceeding our expectations, with revenue already up 50% from the 2018 World Cup.

This success is a testament to the massive popularity and value advertisers place on premium sporting events. Lastly, I'll finish on slide 11. With CAD 3.5 billion of available liquidity, a manageable debt leverage ratio of 3.2 times Adjusted EBITDA, a historically low after-tax cost of debt of just 2.8% with an average term to maturity of 14 years, and a capital structure that has a substantially high portion of fixed rate debt, BCE's balance sheet is very healthy, helping to mitigate the impact of rising interest rates.

Moreover, with a substantial pension solvency surplus totaling CAD 3 billion that has low sensitivity to interest rate movements, approximately $1 billion in US dollar spending that has been economically hedged well into 2024, and a relatively low cyclicality for the majority of our revenues, BCE's free cash flow generation is strong, reliable, and well protected from market uncertainty.

With three-quarters of favorable consolidated results already reported, sound industry fundamentals and a competitive position that is better than ever, we are on track to deliver on our 2022 financial guidance, despite some difficult economic conditions that are expected to persist in parts of our business through Q4. On that, Thane, I'll turn it over to you and the operator to begin Q&A.

Thane Fotopoulos (VP of Investor Relations)

Great. Thanks, Glen. Before we start, so that we can get to everybody in the queue that I see here, I'd please ask you to limit yourselves to one question and a brief follow-up if you must. On that note, Donna, we are 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 mute your handset before making your selection. If you have a question, please press star one on your device's keypad. To cancel the question, please press star two.

Please press star one at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. The first question is from Maher Yaghi from Scotiabank. Please go ahead.

Maher Yaghi (Managing Director, Telecom, Cable and Media Analyst)

Yes, good morning, guys. I wanted to start maybe quickly on your internet loading, very impressive in the quarter. You recently introduced 8 gig symmetrical internet speeds in the market. Are there any services that are requiring such high speeds? Just in terms of competition, Comcast also announced in September that they have shown that DOCSIS 4.0 is capable of achieving speeds of up to 10 gigs in symmetrical capability.

Are you concerned that this technology could, you know, help your cable peers close the gap here in Canada? Do you think they can do it in a cost-effective way? Just a follow-up on the wireless, also very strong subscriber loading there, you know, probably helped by immigration and students coming back to university. Are you expecting the strength to continue? Is it sustainable in your view? You know, just in terms of what you're expecting for 2023 and Q4. Thank you.

Mirko Bibic (President and CEO)

Maher Yaghi, thanks for the question. Let me start first with the wireline question on fiber. Look, here's the way I look at it. You know, our best network's value proposition clearly is standing out. You know, it's been doing so for a while, but particularly stood out in Q3, and we think that will continue. It's clear to me that multi-gig speeds and network reliability really are at the forefront of the purchase decision, Maher Yaghi. If you know, 62%, just 62% of consumer fiber-to-the-home activations in September for Bell were on multi-gig speeds.

It's even higher on the Bell brand. Those are big numbers. What that shows to me is that there's a clear demand for multi-gig services because symmetrical upload and download actually does matter.

Consumers realize that, and they understand the benefits of fiber. If you think about our footprint, we've got by the end of the year, this year, which is, we're only 2, 3 months away, we'll have 7 million fiber locations. All of them will be capable of delivering gigabit symmetrical upload and download speeds, 5 million capable of 3 gigs and over 1 million capable of 8 gigs, and that's just at the end of this year alone. We've got strong growth in all territories.

Basically, we're at a point, it's pretty clear that the traditional telco technology disadvantage is gone, and it's now a sustainable advantage, which is going to persist for a long time. I think cable's gonna be catching up for quite a long time. Then you asked me about that, and you referenced the Comcast 8 gig trial.

That's a trial, and it's speeds delivered in a laboratory environment. When we look at it, we don't see true symmetrical multi-gig DOCSIS path. The true symmetrical DOCSIS path is quite unclear, and it's gonna take a while. Even then, I don't think they're gonna come close to our upload speeds, and it's gonna be an expensive proposition either way.

You gotta decide, do you do a fiber overlay, which is expensive, or determine a DOCSIS path which is uncertain. Again, it just comes back to the fiber advantage is a sustainable long-term one. On wireless, I think, like, it's been strong for the entire industry. You see our results are very strong.

They're record results. I think you're gonna see healthy growth across the entire industry, and I do think it will continue. I don't say that in a cavalier manner. Just look at the kinda tailwinds that are operating in everyone's favor. There's immigration, and the federal government's indicated that's gonna continue to grow over the foreseeable future. We've got, you know, in the near term here, strong consumer roaming, and we're seeing roaming pick up in business.

We've got very healthy increases in network usage. A big one is the 5G upgrade cycle. Probably should've started with that one. We still only have 35% of subscribers with 5G devices, so there's a lot of room for growth there. 5G customers, I mean, I say this all the time, you know, they use twice as much data, and they spend more. We're seeing strength in all channels. I think there's continued room for momentum there. Hope that answers both of those questions, Maher.

Maher Yaghi (Managing Director, Telecom, Cable and Media Analyst)

Yeah. Yes. Thank you very much.

Mirko Bibic (President and CEO)

Question please.

Operator (participant)

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

Vince Valentini (Managing Director, Equity Research)

Thanks very much. Hopefully I can sneak in a clarification before my big question. Glen, the CAD 38 million, any chance you can break that apart between what was actually the storm, which is obviously non-recurring, and what was just the inflationary pressures?

Glen LeBlanc (EVP and CFO)

Good morning, Vince. Sure. The total cost, as I mentioned, CAD 38 million. About 34 of that impacts our wireline business, about CAD 4 million wireless. If I broke it down by storm and inflation, CAD 19 million is storm.

The vast majority of that is related to Fiona. Unfortunately, there'll probably be additional costs flow into Q4 as we're still doing tree clearing and cleanup from that devastating storm that hit Atlantic Canada.

Of the CAD 19 million that's inflationary, it's really split between fuel and utility, about half of that, and labor, about the other half as we've had to put through higher than typical wage increases, and we've had some collective bargaining agreements related to our unionized labor workforce come to an agreement. That's a pretty good breakdown, Vince, of how that 38-

Vince Valentini (Managing Director, Equity Research)

Oh, no, that's more than what I expected, Glen. Thank you. Just a bigger picture question, probably for Mirko. I think you'd admit that your internet ads in Q3, which were phenomenal, were partially driven by a bit more aggressive promotional activity than we've seen from you guys typically.

Probably for good reason, leaning in on the good network and the problems that your competitor was facing in the quarter. I just wonder, are you happy with the blend of sort of ARPU and margins plus volume that you gained just so that you just keep up the current pace, or should we view Q3 as a bit unusual because of the outage and the ability to lean in on promotions?

Mirko Bibic (President and CEO)

No. Well, first, I am quite happy with the balance of all those things, Vince. I wouldn't interpret the record results as being singularly driven by a competitor's network outage in early July. Actually, the momentum's been there for quite a while. You know, as the footprint grows, you're gonna see the momentum continue.

On the promotional intensity, yeah, it's a bit higher in Q3, but to me, that's not unexpected given our share gains. You know, in terms of kinda managing margins, don't forget that we kinda have a double benefit with the fiber build, right? Or triple benefit, however you wanna put it.

As we grow the footprint, share swings our way, and we get the benefit of embedded cost reductions by having better fiber network where the cost support and service costs are much less as you know. You know, ultimately our share gains don't have to be at the expense of industry profitability if you think about it.

Vince Valentini (Managing Director, Equity Research)

Fair enough. Thank you.

Operator (participant)

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

Stephanie Price (Executive Director, Equity Research Analyst)

Hi, good morning. I was hoping you could comment on the fiber rollout and talk about the competitive environment that you're seeing against cable peers here. Is there any update on how we should be thinking about fiber share gains?

Mirko Bibic (President and CEO)

I mean, the short answer is we're taking significant share of market growth in every area where we have fiber. Even just kinda high macro answer, 89,000 total internet net adds for us, which is very high. 95,000 fiber net adds.

We're continuing to see big growth where we have fiber and customer losses where we have copper networks where the speeds just don't keep up with customer demand. It comes back to my first answer to Maher. I think speeds do matter, and upload and download speeds do matter for subscribers. You know, when you get asked, or when I get asked, "Well, are there any services?" Actually, Maher asked me the question, and I didn't answer it.

What are you seeing services that need 8 gigs? I think he asked me, but I get asked that all the time. You know, multi-gig does matter, and you can't think of things as one user, one session in the home, and therefore anything can work on a 100 meg pipe. It's very rare that you have one user, one session in the home.

In fact, most households have multiple family members in them, everyone using things at the very same time, and more and more devices are being connected at the same time. These things do matter. Again, it's a bit of a macro answer, but you're going to see share gains swing to us where we have fiber.

Glen LeBlanc (EVP and CFO)

Just adding to that, Stephanie, we made a decision a number of years ago to accelerate our broadband investment. I think it's truly paying off. The results speak for themselves. You know, we set a record for the highest fiber internet adds in our history, and I think that speaks volumes to the strategy is working. Where we have fiber, we take share.

Stephanie Price (Executive Director, Equity Research Analyst)

Thanks. Just a follow-up here on bundling. It looks like wireless and wireline bundling offers have picked up across both Bell and Virgin. Hoping you can share some early learnings from that.

Mirko Bibic (President and CEO)

Yeah. On so one of you know the cross-sell or the bundling cross-sell of mobility to internet and vice versa is actually one of the key drivers of competitive success in the communications industry today. I mean, that's part of you know our focus on that in the last couple of years is bearing fruit and that's how you can compete in this industry.

You know, for us, it's focus on high-quality loading, focus on the Bell brand whether or not it's wireless or wireline. We've made major investments in digital channels and in self-install capabilities. One of the other elements of the strategy and our execution has been that cross-sell.

If you have a large installed base that you can cross-sell to, whether it's one side to the other and vice versa, you're in good shape. If you own your own networks, you're in good shape. Those are the kinda two things. High-quality networks, owner economics, and the ability to cross-sell to an installed base of customers.

Stephanie Price (Executive Director, Equity Research Analyst)

Thank you.

Operator (participant)

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

Jerome Dubreuil (Research Analyst, Telecom and Media)

Yes, thanks for taking my questions, and congrats for the strong loading in the quarter. However, you did mention in your prepared remarks, you talked about a bit of difficult wireless prices. We got 5G, and we'll see what happens with competition in Canada. What would or could make wireless pricing turn around in the next few quarters?

Mirko Bibic (President and CEO)

What I said is I was referring to the Statistics Canada data, which shows that wireless, the wireless services basket, as measured by Statistics Canada, shows a continued decrease as compared to general inflation across all goods and services in Canada growing dramatically. I wasn't referring to wireless plans in any specific manner.

It was the Statistics Canada data. In fact, where we see the significant growth right now is in 5G, and 5G pricing's held up really, really well, which shows that we're in a good position to monetize 5G. Yeah, of course, we're always in a competitive environment, and we adjust, and we do things.

I think frankly, the promotional intensity in wireless has been pretty good. Handset discounting has been pretty good. 5G rate plan pricing has held up. Those are the things you should look at to sustain both continued loading momentum, as I talked about earlier, and the ability to monetize that appropriately.

Jerome Dubreuil (Research Analyst, Telecom and Media)

Great, thanks. The second on Bell Ventures. From what I understand, it's been 100% new endeavor here, but it does seem like a renewed focus. Are you looking to integrate maybe more products in your lineup or maybe is it more adopting a strategy that's a bit more similar to one of your Canadian peers?

Mirko Bibic (President and CEO)

What we're doing is we're always looking to showcase our superior networks, and frankly, Canada's globally leading, you know, networks and infrastructure. We start from that proposition. We do have phenomenal networks in Canada, so how do we take advantage of those and showcase them?

The approach starts right there. Second part of the approach then is to encourage early stage and growth companies to drive innovation by using these networks. If we can partner with them strategically and through, you know, direct and indirect investments, we're gonna do that. That's what we're trying to do.

The focus is on direct investments, where we're gonna hold minority equity interest in target companies and indirect fund investments. Again, either way, the objective is to secure strategic partnership positions for ourselves and for the partner and ultimately to kinda highlight innovation using our networks.

Jerome Dubreuil (Research Analyst, Telecom and Media)

Very clear. Thank you.

Operator (participant)

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

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

Yeah, thanks very much. Good morning. Two for me. Just first on the economic headwinds, either for you, Glen or Mirko. You know, I don't think anyone should be surprised, they're gonna persist here into Q4. Just would love to just get a better sense of the cadence of the economic headwinds through Q3.

Essentially, are things still getting worse out there, or is there any stabilization that you see here in real time? The second question on 5G monetization, maybe for you, Mirko, as you're looking at 2023, what are your expectations in terms of how the different buckets will or won't kinda ramp up here as we go through the year? Thank you.

Mirko Bibic (President and CEO)

Okay. On the first question, let me start, and then Glen. I'll start at the highest level, and then Glen can unpack some of this for you. You know, on the economic pressures that we're either seeing now, and when I say we, I don't necessarily mean Bell, but just, you know, the macro economy or from a macro perspective that, you know, we're seeing or feeling or like, or is likely to come.

I'd say this from our perspective, we are a multi-segment and highly diversified and resilient communications and media company. You know, the diversified revenue portfolio's really helping us, in otherwise difficult economic circumstances. I said in my opening remarks, we continue to generate substantial cash flow, and we're very disciplined on costs, and we have a strong balance sheet.

Ultimately, you know, the accelerated capital investments that we've been making are bearing fruit, you see it in the results. We knew at the time when we accelerated them that it was the right strategy, and I've never been more certain than right now. What we're going to do is we're gonna keep driving on that strategy and execute against it, and so grow share and manage costs.

I think I'll say that. If I unpack it a little bit more, like on the consumer side, you know, data usage is so ubiquitous and important and critical today that it's not quite as simple to manage that down like it might have been 10, 15 years ago.

On the enterprise side, things are fairly stable for us, in the context of a difficult supply chain environment and a potential recession, so I don't wanna minimize the impacts, but they're stable. On the media side, we are in an ad recession. You know, Glenn and I both talked about it, can't hide from that, but we are taking share because of our diversified asset mix in media.

Glen LeBlanc (EVP and CFO)

The only thing I would add is another segment, SMB. We tend to see pullback in spending in recessionary times, but we're not seeing that right now. Actually, I would say the contrary, as SMB is still recovering from the pandemic.

Then the final thing that obviously, Drew, I watch carefully is consumer payment patterns. To date, there's been no material change. As Mirko said, if there's a canary in the coal mine or an area that we're facing the greatest headwind, it's media advertising. All in all, I would say we're quite recession-proof as we have proven in the past, and quite resilient.

Mirko Bibic (President and CEO)

On wireless and 5G, I guess, you know. Here are the three things for me. We're gonna continue to expand our 5G footprint, so that's good, which is gonna continue to create demand for 5G. We'll take advantage of the 5G upgrade cycle.

That's kind of on the demand side. On the pricing side, of course, as long as 5G pricing holds, which it has, and I think it will, you know, both of those factors, you know, increase subscriptions to 5G and a pricing environment which allows us to monetize it are the two key drivers. I think that's going to hold up well into next year.

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

Okay. That's very helpful. Thank you.

Mirko Bibic (President and CEO)

Thank you, Drew.

Operator (participant)

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

Batya Levi (Managing Director, Telecommunications and PayTV Analyst)

Great. Thank you. With the majority of your residential households on the fiber network right now, can you talk a bit more on the cost efficiencies you can get, maybe provide some examples where they would come from, and how quickly you think you can get there? Just a follow-up on advertising.

Can you provide a bit more color on the weakness you're seeing? Is it across the board or in certain verticals, and how has that progressed into 4Q? I think you mentioned digital was still holding up. If you maybe strip out the demand for World Cup, are you seeing any change there? Thank you.

Glen LeBlanc (EVP and CFO)

Good morning. I'll handle the last part, and then we'll probably tag team the first part. On media advertising, as Mirko mentioned in his opening remarks, we're actually seeing pretty good strength and recovery in the out-of-home, and that's really a product of how out-of-home was so significantly impacted during the pandemic, and we're seeing healthy recovery. Mirko also mentioned that we're having great success in our digital advertising focus.

The areas that are being impacted the most is traditional linear TV advertising and that of radio, as you can expect. When I mentioned in my remarks about one specific property, we are quite excited about FIFA World Cup and the success we're seeing there on selling advertising.

The overall advertising, TV and radio advertising is where we're seeing the headwinds, and we expect that to persist into Q4 and frankly, probably into 2023. I think you've seen it from others in our industry who have reported results recently. Mirko, on the first question.

Mirko Bibic (President and CEO)

I think, I mean, the typical stat we share is that where we have fiber, our service and support costs tend to be 40% lower than they used to be on copper. I mean, that would be the headline answer. Just to give you a little bit more flavor to that, better network means more stable and reliable network, means fewer customer calls to address issues.

It's really end to end, because you can start scaling up self-install, so then you don't have an install cost. Post-install, customers can mediate with you online through the app, so they don't have to call in. Ultimately, I mean, all these things lead to better service and support costs.

Frankly, the most important thing, better network, superior network, happier customer, lower churn. You gain share along the way, of course, as you can see. Those, the fiber story is a good one all the way around.

Batya Levi (Managing Director, Telecommunications and PayTV Analyst)

Got it. Thanks so much.

Operator (participant)

Thank you. The next question is from David Joyce from Barclays. Please go ahead.

David Joyce (Senior Equity Analyst Media Sector)

Thank you. This kind of follows on an earlier question, but could you help us understand how the very strong mobile phone net adds this quarter alone were possibly approaching half of the Canadian-wide population growth. How much of those net adds are coming from the incremental immigration? How much is coming from increased penetration of products per account? And how much is coming from the competition? Thanks.

Mirko Bibic (President and CEO)

Actually, the short answer would be it's from all three, and it's hard to unpack, but there's certainly growth there because of immigration. I think we are doing well on switchers, which is the last item you identified, and there is still room to grow in the industry in terms of device penetration in Canada compared to what we've seen in some other countries. I mean, you identified all three, but for me to assign a percentage to the mix, it's difficult.

David Joyce (Senior Equity Analyst Media Sector)

All right. Thanks. If I could just follow up on the CapEx side of things. How do you balance the CapEx spending with free cash flow generation? This kind of ties in with the inflation issue and some of the supply constraints, but are you really at your maximum operating capacity for upgrading? I know you need to sort of manage through the seasonality of when you can do the upgrades, but are there limiting factors with your infrastructure? Or I'm just wondering what dials that you can adjust to maybe to continue accelerating your CapEx upgrade plans. Thanks.

Glen LeBlanc (EVP and CFO)

Good morning. Look, I couldn't be more pleased of what we're accomplishing with our accelerated CapEx program this year. I mentioned earlier, and I've mentioned in previous quarters, this will be our largest spend in the history of BCE, topping over CAD 5 billion, passing over 900,000 homes and continuing on our ultimate fiber journey to pass 10 million homes, but 9 of those will be fiber and about 1 million of those will be wireless to the home.

The constraint really is just the magnitude of work. You know, we have a finite window of construction in this country, as you could appreciate, and the teams have worked very hard through the summer and through the fall here. We're very pleased.

You know, the guidance we've given on CapEx is to be roughly in that CAD 5 billion range, and the guidance we've given on free cash flow, 2%-10%, is still in line, and we're confident in that guidance. Couldn't be more pleased. We don't feel we have any constraints on product that's slowing us in the ability to deploy our fiber and 5G strategy.

David Joyce (Senior Equity Analyst Media Sector)

Okay. That's great. Thank you very much.

Glen LeBlanc (EVP and CFO)

Thank you, David.

Operator (participant)

Thank you. The next question is from Simon Flannery from Morgan Stanley. Please go ahead.

Diego Barajas (VP Inclusive Ventures Lab)

Hi, good morning. This is Diego Barajas filling in for Simon Flannery. Thanks for taking the question. On enterprise, can you just talk about what you're seeing on that front? Is there any update to the product sales translating to services sales cycle, and if that has improved? Any higher level changes on buying patterns from enterprise customers? The second question is there any update on how you think about managing leverage through this environment and especially with the big rise in rates? That would be helpful. Thank you.

Glen LeBlanc (EVP and CFO)

Could you start, Colin, on the second one?

Mirko Bibic (President and CEO)

Yeah, sure. As I mentioned in my opening remarks, we're pleased with our balance sheet, the liquidity situation we find ourselves in with over CAD 3.5 billion available. Our debt leverage ratio stays stable at 3.2 times. We have historically low after-tax cost of debt at 2.8, as I said. You know, what we did was very opportunistic in the low interest rate environment. We took advantage and did significant term placements, and you watched us do, you know, upwards of CAD 6 billion between Canada and the US in the last year or so.

That was all opportunistic and preparing us such that in a time of rising interest rates, we could lean on things like commercial paper and securitization and use more of a floating debt structure in order to manage this. I think we're in great shape. If you look out to 2023, and you look at our towers, we have very little maturing.

I think it's about CAD 600 million in 2023. You know, kudos to our team. I'm very proud of the fact that we set ourselves up to manage through a rising interest rate environment very well with the placements and the tapping the market as opportunistically as we did. Your first question on enterprise?

I mean, the update is it's the same update as largely the same update as I gave last quarter, actually. We're still not seeing any cancellation of projects in the enterprise segment, but revenues continue to be delayed for the same reasons as I shared last quarter. We're not losing market share, we don't think.

We also still believe that we're poised to capitalize when some of that supply chain disruption eases. For example, just a data point for you, the equipment we're receiving now is for orders that we placed 6 to 12 months ago, which kind of gives you a bit of a sense.

you know, if I pivot to the small and mid segment of the business market, we're seeing in the SMB side continued improvement, actually. Seeing volumes up, churn down, and the second quarter of revenue improvement. We're pleased with that.

Diego Barajas (VP Inclusive Ventures Lab)

Great. Thank you.

Glen LeBlanc (EVP and CFO)

Thanks, Diego.

Operator (participant)

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

Aravinda Galappatthige (Managing Director, Equity Research Analyst)

Good morning. Thanks for taking my questions. I wanted to ask about internet ARPU growth. Obviously, the internet revenue numbers are very strong, 8% growth you reported again. It looks like the vast majority, maybe close to 7% of that is subscriber driven.

I know that we're at a point where you're sort of driving forward with your fiber deployment, and there's gonna be some promotional activity around that. When you think of sort of the higher quality of services, the speeds and so forth that you're delivering, maybe just touch on the upside to pricing and how the ARPU component can become a bigger piece of that down the road, particularly in an inflationary environment where I think, you know, there's some justification for that.

Secondly, a quick follow-up on your comments about Bell Ventures. Can you just sort of share your thoughts on sort of the 5G business models? You know, it's obviously not completely clear at this point, but you know, you wanna drive revenues above just, you know, connectivity. You know, 5G can potentially be different than 4G in terms of, you know, the telecom share of that economic pie and how sort of the venture initiatives sort of plays into that. Thank you.

Mirko Bibic (President and CEO)

The venture, I'll start with the latter. The ventures initiative is in large part designed to do just that, actually. How do we partner with you know, with the right strategic partners with you know, in which we can take equity interest to do exactly what you just said, which is both showcase the value of our networks, not just for the connectivity part of it or the connectivity revenue part of it, but to move up the solution stack, as you say. Yes, that's what we are trying to do. On that side of things, we are playing the long game, right?

These are long-term investments, we're making on fiber, in particular, long life fiber, long life infrastructure assets, which we plan to monetize for decades to come. The investments are bearing fruit now, but they're gonna bear fruit for decades to come, and we will continue to be patient on that strategy and play the long game, as I say.

In terms of, you know, ARPU growth in wireline, the quarterly growth has been pretty consistent, all year, and I look at, overall internet revenue growth, as a key thing, and that's continues to be up significantly 8%. Really the approach is a multi-pronged. New footprint, new subs, right? In existing footprint, increased penetration. Get customers who are on our network to tier up to higher rate plans.

Of course, there are tactical pricing initiatives that we always put into place at the right time. The last element of this multi-pronged strategy is product intensity. Someone asked me earlier about, I think it was Stephanie, about cross-selling. That's another way to kind of drive the overall revenue performance on the network asset. Little bit different than your specific question, but it is part of the multi-pronged strategy.

Aravinda Galappatthige (Managing Director, Equity Research Analyst)

Thank you.

Mirko Bibic (President and CEO)

Great. Donna, we're running out of time, so this will be our last question that we'll take right now.

Operator (participant)

Thank you. The last question will be from Matthew Griffiths from Bank of America. Please go ahead.

Matthew Griffiths (Research Analyst)

Hi. Good morning, and thanks for taking the question. I just wanted to quickly ask on the if you see a lot more runway on roaming. I know that's been a nice tailwind in the past, but are you seeing that level off, or do you expect that to continue? Just maybe for Glen, we've been asking a lot of companies to clarify something on the pensions. Just we see some-

Reporting some kind of liability-backed investments that are, you know, with market volatility and rising rates are creating some pension problems. I know you mentioned that you're well-funded and the sensitivity is relatively low. I just wanted to double check that there's no volatility or interest rate risks that are creeping up in the pension.

Glen LeBlanc (EVP and CFO)

Good morning, Matthew. Actually, this is been quite a journey on pension management for us. In my time here, we had many years of falling in significant deficit position. We followed a very clear glide path towards immunizing, if you will, the liabilities by moving to a lower risk or fixed income weighted portfolio and less on equity.

I think it's proven to play out in times like this. Despite the fact that interest rates and discount rates have been all over the map and rising at a rate, an unprecedented rate, we really never saw any change in our funding position. We bounced around from 113% to 118% during the quarter, I think of our solvency position.

Still sitting at CAD 2.93 billion of a surplus, excuse me, that's sitting in the pension plan. Do I expect that to continue to change over time? Sure. The important thing is we don't see it having an impact on our ability to take contribution holidays in the foreseeable future. You know, you could give back some of that and have a surplus fall down to CAD 2 billion. No, we are not seeing any problems in our pension plan.

We're delighted with the holidays we've been able to take and continue to think that that will be available to us for the foreseeable future. On roaming, 114% I mentioned is where we're at. That's a product of both volume and rate because there were rate increases.

I would say, we're probably at the high 90s right now in volume, and the rest is rate driven. Mirko mentioned it in his remarks. Most of that has come from consumers returning to travel. Although we have not seen as much come back on the business side yet. We do believe tailwinds exist, and we'll continue to see a bit of that tailwind in the coming quarters ahead.

Albeit naturally, it's not gonna be at the same level of what we've enjoyed the last four quarters as we went from virtually nothing in roaming to a recovery to 114%. Thank you, Matthew, for your question, and thank you everyone for the morning.

Matthew Griffiths (Research Analyst)

Great. Thank you everyone.

Mirko Bibic (President and CEO)

Thank you so much for your participation and the great questions that you asked. Thanks again. Have a great day.

Operator (participant)

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