BCE - Earnings Call - Q4 2020

Transcript

Operator (participant)

All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the BCE Q4 2020 results conference call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos (VP of Investor Relations)

Thank you, Valerie, and good morning, everybody. On the call with me today are Mirko Bibic, BCE's President and CEO, and our CFO, Glen LeBlanc. We definitely have a lot of material to go through this morning. However, before we begin, let me draw your attention to the Safe Harbor Statement, reminding all that the slide presentation and remarks made during the call today will include forward-looking information and therefore are subject to risk and uncertainties. Results could differ materially. We disclaim any obligation to update forward-looking statements except as required by law. Please refer to the company's publicly filed documents for more details on assumptions and risks. With that, let me turn the call over to Mirko.

Mirko Bibic (President and CEO)

Thanks, Thane. Good morning, everyone. 2020 marked Bell's 140th year, and it was unlike any other I could have imagined when I began as CEO last January. Our new goal of advancing how Canadians connect with each other and the world unveiled last January. It could not have been more appropriate in a year that saw extraordinary change and challenges that have dramatically impacted the economy and, of course, how we live and work. Throughout it all, Bell has been on the front line delivering the networks to keep Canadians connected, stepping up every day for our customers and communities as we all continue to navigate through the COVID situation. 2021 will be a reset year as we transition towards a return to pre-pandemic levels of financial performance and operating momentum.

We can't accurately predict the path and pace of economic recovery, but we know that our business is solid, and we expect to see progressive improvement through the year, much as we did after coming out of Q2 2020. As a result, we remain cautiously optimistic about our business outlook, as reflected in our financial guidance targets for 2021. Our success in 2021 will continue to be anchored to the priorities we set in 2020. They center on increased investment on core network infrastructure that will lay the foundation for future broadband internet and 5G growth, improving the end-to-end customer experience, the ongoing digital transformation of our operations, and a continued sharp focus on our cost structure.

We will accelerate capital spending in 2021 to forge ahead even more aggressively on our successful broadband strategy, expanding our all-fiber connections, opening up wireless home internet to even more rural communities, and building our wireless 5G network faster. To that end, I'm very pleased to announce that we are putting in place a capital investment acceleration program totaling CAD 1 billion-CAD 1.2 billion over the next two years. This is the right strategic move at the right time for our customers and our company, allowing us to realize the substantial operational benefits of state-of-the-art fiber and low-latency mobile networks sooner. This will put us in an advantageous competitive position, allowing us to keep growing broadband market share and internet revenue and to begin monetizing 5G services, all of which yields very attractive EBITDA and cash flow margins.

I'm equally pleased to announce this morning that our planned financial performance for 2021 enables us to increase BCE's common share dividend by 5.1% for 2021. It's our 13th consecutive year of a 5% or higher dividend increase. This represents an emphatic commitment to our dividend growth approach and to our broadband expansion strategy. Because of the accelerated capital investment we're making this year and ongoing financial impacts during the COVID recovery period, our dividend payout ratio in 2021 will be above our historical free cash flow target range of 65-75%. Our strong liquidity position and substantial ongoing cash generation support the execution of this capital expansion program and our higher common share dividend for 2021. Let me unpack the capital acceleration program on slide four.

As I said, we plan to invest an extra CAD 1 billion-CAD 1.2 billion over the next two years, of which approximately CAD 700 million will be spent in 2021 to accelerate fiber, wireless home internet, and 5G. This is the right time for investments of this magnitude. First off, the CAD 1 billion in net cash proceeds from the sale of our data centers in October will fund this two-year incremental capital investment. Secondly, because the federal government's capital cost allowance program is in place for another two years, allowing for the accelerated expensing of capital expenditures, every dollar of network investment that we make will drive significant cash tax savings that can be reinvested into the business and support future free cash flow growth.

Normalized for the capital advancement of CAD 700 million in 2021, our consolidated capital intensity ratio is expected to be in the range of 15%-17%, consistent with pre-COVID levels. Thirdly, for the moment, we have a stable regulatory environment that makes this type of large-scale investment possible. As COVID has shown us over the past year, this is more important than ever. Now isn't the time for policymakers and regulators to move away from encouraging network investments. Now is the time to collaborate and partner with government to connect more and more Canadians, particularly in rural communities. We're showing that with the right policies in place, we're prepared to make significant investments for the long-term benefit of our customers and the Canadian economy, which will benefit from CAD 2 billion in new activity and 5,300 direct and indirect jobs as a result of this additional investment.

Now is also the right time to make these investments because the strategy is undeniably working. We see it in our results. Essentially, what we're doing is advancing the wireline and wireless network builds that we have in our long-range plan. However, by making these investments more quickly, not only do we realize the operational benefits sooner, but we also reduce our future CapEx requirements, supporting future free cash flow growth and dividend increases for BCE shareholders. There is no longer any debate about the power and value of fiber. Once deployed, we begin to see the favorable impact on both subscriber and financial growth, as well as on the overall customer experience. Internet penetration grows much faster as we deploy fiber and wireless home internet.

We can gain anywhere from 5-25 percentage points of penetration in the first 12 months of deploying a market, which has driven steady market share growth and internet revenue acceleration over time. In fact, our internet subscriber base has increased 33% since the start of our fiber build in 2010, and annual internet revenue growth has tripled from 3% to 9% in 2020. Churn is also lower when customers are on a better network. This is key because retention is such an important factor in the customer lifetime value equation. On average, the churn rate for fiber and wireless home internet subscribers is 30-35 basis points lower than those on an FTTN or ATM network.

This extends the duration of the customer relationship with Bell by approximately two years, leading to an improvement in the overall lifetime value of a direct fiber and wireless home internet customer by approximately 50% and 35%, respectively. Of course, our cost to serve a fiber customer is lower. Annual service and support costs per customer are approximately 40% lower on direct fiber links versus copper. Over time, as a greater proportion of our footprint is fiberized, we will see even more meaningful change in our overall cost structure. Let me turn to slide five of our presentation. The accelerated network build-out plan, the one that we have in store for 2021, gives us 850,000-900,000 more homes and businesses across our wireline footprint that are equipped with either direct fiber or fixed wireless technology.

This represents an incremental increase of up to 400,000 new locations covered with broadband service than would have been deployed in 2021 without the capital advancement. At the end of this year, more than 62% of our planned broadband build-out program will be completed, representing up to 6.9 million total combined fiber and wireless home internet locations. This is up from approximately 6 million homes and businesses at the end of 2020. For wireless, our accelerated capital plan will double the reach of our national 5G network to 50%. I'm also very pleased to announce that Nokia and Ericsson have been selected as the suppliers for our standalone 5G core. Our fiber and 5G investments are working symbiotically to drive Bell's continued leadership in next-generation communications technology, paving the way for future service innovation.

With a wireline infrastructure that includes high-speed fiber already deployed to more than 92% of our cell sites, over 2,700 central offices that are available for mobile edge computing in a 5G world, a wireline footprint encompassing 76% of Canadian households, and the broadest retail and B2B distribution in the country, no one is structurally better positioned than Bell for true wireless wireline convergence in the most capital-efficient manner possible and to capitalize on the revenue growth opportunities that await. I feel very positive about the power of our business and our ability to execute in 2021 and energized by the accelerated capital program. As always, we'll continue to stay true to our long-term strategy and continue to focus on our strengths, which include a vertically integrated business, the best networks, distribution breadth, a deep customer base, a powerful brand, a growing dividend, and the very best people.

I'm going to turn now to slide six for some operational highlights. In every successive quarter since the pandemic began, we've seen quarter-over-quarter improvement across all our segments. Despite the challenges of COVID, we delivered 96% of 2019's EBITDA and maintained our consolidated margin stable at 42%. We generated over CAD 3.3 billion of free cash flow. The ability of BCE to generate this magnitude of free cash flow, even during times of extreme uncertainty and economic difficulty, is remarkable. We are well on our way to returning to where we were pre-COVID, and our results for both Q4 and full year 2020 represent further proof of the continued momentum we're generating from the lows of Q2. Our consistently strong operational execution was in evidence once again in Q4, as we delivered 147,000 total new net wireless, retail internet, and IPTV customers.

We also grew broadband internet market share faster than any of our peers this past year, with a leading 149,000 retail internet net adds, up 10% over 2019. The broadband footprint advantage that we are building positions us extremely well in both our consumer and business segments over the long term to grow internet revenue, which increased a strong 12% in Q4. As for our mobile 5G network, it's now operational in over 150 centers, covering nearly a quarter of the Canadian population. On the customer experience front, we've made real progress over the past year and received recognition for the quality of our network and services. Bell's 4G and 5G networks were certified as Canada's fastest by PCMag in its most recent annual study of network performance.

Virgin Mobile also topped every wireless carrier in Canada from a J.D. Power ranking perspective as number one in overall customer service in the eyes of consumers for 2020, while its My Account app was named the best telecom mobile app of the year. We boosted our wireless home internet download speeds for more than 350,000 rural homes, bringing enhanced 50 megabit download and 10 megabit upload speeds to Canada's underserved communities that are two times faster than before. Our strategic focus on customer experience was also reflected in the latest report from the CCTS, which showed a 35% drop in the number of complaints by Bell customers. Again, the best performance among national carriers for a fifth consecutive year. We have also made it even easier for customers in Quebec and Ontario to transfer their residential services when they move with our new Move Valet concierge service.

This is just one example of initiatives that put customers front and center. Lastly, the strides we're making in digital transformation are evident. Directly because of investments to improve online functionality and the app-based sales experience for consumers, 54% of all customer service transactions now are executed online. Let's turn to slide seven for an overview of some key operating metrics for Q4. I'm going to start with wireless. Despite reduced retail store traffic and transaction volumes due to the second wave of COVID, we experienced sequential improvement in postpaid net adds, low churn, which improved 17 basis points over last year to 1.11%, and an ARPU decline that continued to moderate. We added 93,000 total new net postpaid subscribers this quarter. Of this total, 87,000 were mobile phone customers, 27% higher than last year.

It's an impressive result that speaks to our focus on driving service revenue and EBITDA growth through accretive smartphone transactions. This disciplined approach to subscriber growth was also reflected in our promotional offers, where handset subsidies were, on average, 14% lower than they were in the previous year. In prepaid, because of lower overall market activity from reduced immigration and fewer visitors to Canada during the pandemic, combined with greater competitive intensity in the discount mobile market, we incurred a net loss of 12,000 customers this quarter. Nevertheless, prepaid service revenue was up an impressive 14% on the back of strong growth over the past year led by Lucky Mobile, which generates higher than average industry ARPU. A couple of notable developments on the retail distribution front that are worthy of mention. We recently renewed our exclusive national distribution agreement with Dollarama for all Bell prepaid products.

Giant Tiger, a new distribution channel for us, began carrying Lucky Mobile in its more than 250 locations across Canada late last year. We renewed our contract with PC Mobile, a partnership that has been in place since 2005. Great prepaid growth potential ahead. To finish up on wireless, our blended ARPU decreased 3.9%. This results in a notable improvement over the 6% decline we saw in Q3, despite persistent headwinds from lower COVID-induced roaming volume and reduced data overage from ongoing customer adoption of unlimited plans. In fact, normalizing for these impacts, ARPU growth was slightly positive in the quarter. Let's turn to Bell Wireline. We saw another strong RGU quarter in wireline. We added 45,000 new internet customers, 25% higher than last year, reflecting broad-based growth across all brands. We added another 73,000 fiber customers this quarter, bringing the total number to close to 1.7 million.

That is 1.7 million direct fiber customers, and that is up 17% over last year. On the TV side of things, very pleased with 21,000 IPTV net adds, and that is essentially unchanged versus last year, despite the impacts of COVID. Q4 was also the first full quarter that Virgin TV was available in the market, and early results are quite promising, both from a customer demand and ARPU generation perspective. Satellite net customer losses improved for a fifth consecutive quarter, actually down 5% year over year. We continue to see improvement in home phone customer losses, down 7.5% this quarter. On Bell Media, advertiser demand picked up in Q4 with the start of the new fall TV season and more live major league sports programming, and that drove a meaningful sequential quarterly improvement in TV ad spending. In fact, total TV advertising in Q4 was down only 2%.

That is down 2% compared to last year. Crave also continued to deliver with strong direct-to-consumer growth as total subscribers increased 8% over last year and are now at 2.8 million. As for TSN and RDS, they were the top English and French language sports channels in Q4, and both are having a very strong start to 2021, particularly with World Junior Hockey and NFL playoffs. Lastly, we continue to see great results from our Quebec Media strategy with significant gains in prime-time viewership for our conventional French language TV network, Noovo, which led all peers with a 6% increase in audience levels this quarter.

To summarize and before turning it over to Glen, great operational execution delivered by the team, not just in Q4, but throughout the year, with consistent, steady improvement that is building momentum back into the business, and that sets us up nicely as we enter into 2021. Over to you now, Glen.

Glen LeBlanc (CFO and EVP)

Thank you, Mirko, and good morning, everyone. I'm going to begin on slide nine. Despite the ongoing COVID impacts, the year-over-year decreases in Q4 service revenue and EBITDA continued to improve sequentially. Adjusted EBITDA was down 3.2%. However, we maintained our consolidated margins essentially stable at 39.4%, even with CAD 10 million of COVID-related expenses absorbed in the quarter. Net earnings were up 29% year over year. As a result, in Q4 of last year, reflected higher net mark-to-market losses on our equity derivatives and hedge contracts and a media asset impairment charge.

As we signaled on our results conference in November, CapEx ramped up considerably in this quarter, increasing to nearly CAD 1.5 billion. This was a planned increase, reflecting greater network construction activity following a slower pace of spending earlier in the year because of the pandemic, as well as continued investments to enhance our digital capabilities. As for free cash flow, it was down CAD 782 million in Q4. This result was expected given this quarter's increased capital spending, higher cash taxes due to the timing of installment payments, and a reduction in working capital driven mainly by the growth in accounts receivable that reflected a higher volume of wireless installment sales and the timing of supplier payments. Turning to Bell Wireless on slide 10, although the return of COVID restrictions affected transactions volume in the quarter, our wireless financials improved sequentially.

Product revenue remained relatively stable year over year, declining only 0.7%, reflecting a mix shift away from tablets to smartphones. As expected, roaming and data overages remained a headwind to service revenues, which declined 2.5% this quarter compared to 4.3% in Q3. If you would normalize for the COVID impacts, service revenue growth was, in fact, positive, increasing by approximately 1% in Q4. As a result of the better service revenue trajectory and disciplined device discounting, the year-over-year decline in EBITDA also continued to moderate, improving to 3% from the 4.4% we experienced in the previous quarter. Let's turn to slide 11 now in Bell Wireline. Revenue was down 1.3%, which drove a 2.7% year-over-year decline in EBITDA.

Notwithstanding COVID, we faced tough year-over-year financial comps this quarter, as last year we benefited from a number of non-recurring items, including the federal election and bulk sales of international wholesale long-distance minutes. If you normalize for these items, Q4 represented Bell's best quarterly revenue performance in 2020, while the year-over-year decline in EBITDA was similar to that of Q3. Clear highlight of the quarter was residential wireline, where revenues increased a strong 1.5%, representing our best performance in two years. In business wireline, while this quarter's results continued to reflect soft customer demand and spending on business service solutions and data equipment, given the current economic environment, overall results have held up reasonably well. Let's turn to slide 12 on Bell Media. Another quarter of improvement with revenue down 10% year over year. This result reflected increased advertising demand, as Mirko described earlier, and continued strong Crave subscriber growth.

Bell Media EBITDA was down 7.8% this quarter. The sequential improvement was even more pronounced than for revenue due to an 11% reduction in operating costs, which encompassed lower sports broadcast rights due to the postponement of new major league seasons, as well as TV production shutdown and delays. That does it for my overview of quarterly results. I'll turn now to our financial outlook for 2021, starting with revenue and EBITDA on slide 14. We are targeting revenue and adjusted EBITDA growth of 2%-5%, which should yield a relatively stable year-over-year consolidated margin. These growth ranges reflect a recovery back to within 2019 financial performance levels and are wider than we typically provide in order to absorb additional COVID turbulence that may arise during the year. Underpinning this outlook is positive top line and EBITDA growth from all Bell segments.

We expect a strong financial contribution from Bell Wireless in 2021, where an ongoing focus on higher quality smartphone subscriber loadings and disciplined device discounting will drive a healthy year-over-year improvement in operating profitability. We also anticipate an improving ARPU trajectory with a partial recovery in roaming volumes expected in the latter part of 2021, as well as a deceleration in the rate of data overage decline. Our wireline financial growth profile is also expected to strengthen progressively as the year unfolds. The broadband footprint advantage that we are building positions us extremely well in both our consumer and business segments as we continue growing internet market share and revenue faster than our competitors. We will continue to focus on winning the home by delivering the fastest broadband speeds, as well as the best Wi-Fi and TV experience to drive higher internet and TV net customer additions.

In business wireline, we anticipate improving year-over-year rates of revenue and EBITDA decline on the back of higher customer spending as the economy rebounds and an ongoing focus on cost reduction. As for Bell Media, we see good TV advertising momentum going into 2021, especially as we lap COVID impacts beginning towards the end of Q1. We also expect to benefit from contract renewals with TV distributors and continued Crave growth. However, higher costs for sports rights and the resumption of a full broadcast schedule and the premium content for our Crave streaming platforms will moderate Bell Media's EBITDA growth in 2021. Let's turn now to slide 15. Despite a decline in discount rates in 2020 and supported by a strong 14% return on plan assets, the solvency ratio of Bell Canada DB Plan, the largest of the BCE pension plans, was 102% at year-end.

Given this strong valuation position, BCE's regular cash funding for 2021 remains unchanged year-over-year at CAD 350 million-CAD 375 million. With respect to total pension expense on the P&L, that is expected to be moderately lower in 2021 at CAD 300 million due to the favorable impact of a lower discount rate on our below EBITDA pension financing costs. Let's move over to slide 16 on tax outlook. The statutory tax rate for 2021 remains unchanged at 27%. Our effective tax rate for accounting purposes is also projected to be around 27%, reflecting minimal tax adjustments this year compared to $0.09 per share in 2020. We also expect cash taxes to remain relatively stable year-over-year at CAD 800 million-CAD 900 million, as the tax savings enabled by the federal government's accelerated CCA program will be largely offset by other higher income taxes. Over to slide 17.

Slide 17 summarizes our adjusted EPS outlook for 2021, which we project to be $3.05-$3.20 per share, or 1%-6% higher year-over-year. This reflects a strong underlying contribution from operations driven by positive EBITDA growth across all three Bell segments. Depreciation expense is expected to be $200 million-$250 million higher year-over-year due to our accelerated capital investment program that will be putting more capital assets into service sooner. As I just mentioned, higher income tax expense will also moderate adjusted EPS growth this year. Excluding the tax adjustments, adjusted EPS is projected to grow 3%-9% in 2021. Let's turn to slide 18. As a result of the strong EBITDA growth, we expect to generate CAD 2.85 billion-CAD 3.2 billion of free cash flow in 2021.

This is substantial given approximately CAD 400 million in additional capital spending that we are absorbing, as well as working capital pressure from the growth in accounts receivable due to increasing sales activity as we continue to recover from COVID, which includes a higher expected volume of wireless installment plan transactions. BCE's consolidated capital intensity ratio for 2021 is projected to be in the range of 18%-20%. As Mirko quantified, this includes around CAD 700 million that we were targeting in 2021 as part of our two-year capital expansion program. Normalizing for this capital advancement, our capital intensity ratio in 2021 decreases to 15%-17%. Free cash flow growth improves in the range of 6%-16%, and the payout ratio falls within 80%-90%.

I would also like to point out that our definition of free cash flow includes all elements of working capital, while some others do not. Now that the Canadian wireless industry has shifted to installment plans, the receivable base on our balance sheet is growing rapidly. If you normalize for the financing of EIP receivables, which over the course of two years will flatten out, our dividend payout in 2021, normalized for both the incremental capital spend I just mentioned and device financing, falls below 80%. A few brief comments on our balance sheet and cash resources on slide 19. We have access to CAD 3.8 billion of liquidity as we enter 2021 and a capital structure that is aligned with our investment-grade ratings.

Our debt leverage ratio remains manageable at 2.9 times adjusted EBITDA and is expected to increase in 2021 as a result of anticipated wireless spectrum purchases at the auction later this year and the accelerated capital spend. Our balance sheet is well-structured with an average term to maturity on our long-term debt of less than 12 years and a historically low after-tax cost of debt of just 3%. More importantly, we have no near-term refinancing requirements as our next material public debt maturity does not occur until Q4 of 2022. In addition to all of our major DB plans being fully funded, our close to $1 billion of annual US dollar spending has been economically hedged well into 2022, effectively insulating any free cash flow exposure until that time. To conclude on slide 20, as we said, 2021 is a recovery year.

It is about maintaining operational momentum as we transition towards a return to pre-COVID levels of financial performance. While the path of the pandemic and the pace of economic recovery are expected to remain uneven, potentially constraining revenue and earnings growth in parts of our business in the near term, the industry fundamentals are sound. Our competitive position remains strong, and the Bell team's ability to execute is proven. I'll turn the call back over to Thane and the operator to begin the question and answer period.

Thane Fotopoulos (VP of Investor Relations)

Thanks, Glen. Given the volume of information we covered this morning, I'm sensitive to the time we have left, so please limit yourselves to one question and a brief follow-up if you must. Thanks for your cooperation. Valerie, we're ready to take our first question.

Operator (participant)

Thank you, Mr. Fotopoulos. Please press star one at this time if you have a question. Our first question is from Jeff Fan with Scotiabank. Please go ahead.

Jeff Fan (Managing Director)

Hi, good morning, everybody. Lots to talk about, I guess, around the investment plans for 2021 and 2022. My question is, if you look beyond this accelerated plan after the two years, do we get back to the CapEx intensity around that 15-17% CI, the level where you would be at without these accelerated plans? Or do we need to think about kind of additional sources to help fund further expansion, like what you are getting from the data center? My quick follow-up, again with the investment plan, is these are very strong statements and plans supporting network investment, but we do have a couple of regulatory decisions coming, plus spectrum auctions. How could those events, and maybe they won't, impact your investment plans for the next couple of years? Thanks.

Mirko Bibic (President and CEO)

Okay, thanks. Thanks, Jeff. Look, briefly, what we're doing here with the CAD 1 billion-CAD 1.2 billion over two years is advancing capital that we otherwise would have spent over a longer period of time, right? If you think about our broadband footprint program, we want to cover roughly 10 million households in our operating footprint with fiber or wireless home internet. We are 60% of the way there. That means there's 40% to go. That 10 million is the denominator. By forging ahead more quickly, that means on the back end of the journey, there's a lot more flexibility for us in terms of CapEx, in terms of the technologies we might want to deploy over time.

The short answer to your question with that preamble is, yeah, expect us to get back to normal CapEx capital intensity ratios. On the data centers, we did get that $1 billion in proceeds last year. There is no better place to deploy that capital than in our footprint expansion strategy because, I mean, I'm not going to repeat what I said in my opening comments. The strategy is clearly working. For shareholders, this is the best place to put that $1 billion. On regulatory look, I mean, that it's still significant issues. We have the wholesale internet rates decision pending and the MVNO decision pending. I think we've got some very good signals from the federal government last year, particularly in August when that decision came out.

The Order in Council came out regarding the wholesale internet rates, and Minister Baines at the time had said that he was concerned that the rates that CRTC had put in place would undermine investment in high-quality networks, particularly in rural, and that we need policies that encourage investments. I think that's a pretty important signal. I think in 2020, we've all experienced, it's pretty tangible now, the importance of these networks. We can't risk making more investments. I am forging ahead with this bold investment program. I say bold. It's the biggest one in our history because I have confidence that policymakers and regulators right now are going to appreciate the importance of a stable regulatory environment. If the decisions come out and they're materially negative, then of course, it's our job as a management team to stare that down and adjust as required.

Glen LeBlanc (CFO and EVP)

The only thing I'll add to that, Jeff, is on your question regarding spectrum. The capital investment decision we made today to fund the additional 1-1.2 million was funded by the data center divestiture, and it plays no role in our intention around participation in spectrum auctions.

Jeff Fan (Managing Director)

Thank you both.

Glen LeBlanc (CFO and EVP)

Thanks, Jeff.

Operator (participant)

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

Vince Valentini (Managing Director)

Yeah, thanks very much. A couple on the same topic. Glen, your slide shows CAD 700 million of extra CapEx for this accelerated program in 2021. I just want to make sure I didn't see that anywhere else, so I want to make sure I'm clear on that. Of the CAD 1-1.2 billion, most of it is actually 2021, and there would only be between CAD 300-500 million left in 2022. Call that a clarification, Thane.

A bigger picture question would be, in terms of the fiber to the home incremental spending, can you give us any color on geographies here? I mean, I know Toronto and Montreal are largely done. Does this mean a bit of an accelerated rollout into the 905 areas and then maybe some of the smaller cities you cover? Thanks.

Mirko Bibic (President and CEO)

I'll pick it off, and you can fill in. Vince, just think about the $1 billion to $1.2 billion like this. Roughly two-thirds in 2021, one-third in 2022, roughly two-thirds in wireline, one-third in wireless. I would say that would be a kind of high-level benchmarks for you. On fiber, it's going to be pretty much across our operating footprint. We're going to get the job done, finished in Montreal. Toronto is largely done.

Montreal is well on its way, but we're going to finish that. Winnipeg, which we announced, Hamilton, we're going to kind of extend in the suburban areas. On wireless, home internet as well. It's going to be continuing in Atlantic Canada, continuing in Quebec, launching wireless home internet in Manitoba, and of course, continuing the pace in Ontario and rural areas. Glen, I think there was a clarification you wanted to.

Glen LeBlanc (CFO and EVP)

Yeah, just to clarify, Vince, and good morning. I'm sure it gets you to turn to slide four of our deck. You'll notice that the CAD 1.0 billion-CAD 1.2 billion, as we state there, and as Mirko said, about a third, 60%-70% is our intention. You are correct in approximately your number of 700, but that's over baseline, as we note in the footnote. Baseline normalized capital spending, not the higher spending level that you've seen in 2020. That's the clarity.

Vince Valentini (Managing Director)

Makes sense. Thank you.

Glen LeBlanc (CFO and EVP)

Thank you, Vince.

Operator (participant)

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

David Barden (Managing Director)

Hey, guys. Thanks so much for taking the question. I guess my question is related to the guidance, Glen. A lot of companies are highlighting the kind of transformation on the cost structure around digital channel adoption, remote work, etc., and how the revenue leverage might lead to higher margins. You also called out, I think, a 14% reduction in enhanced subsidies in the quarter. It looks like, in your expectations on a go-forward basis, that there's going to be lower subsidies. Could you talk about kind of why we aren't going to see better margin improvement over the course of 2021 versus 2020? Thanks.

Glen LeBlanc (CFO and EVP)

Morning, David. First of all, many organizations, whether it be in our industry or any industry, have chosen not to provide guidance due to the tumultuous environment we're operating in. We have decided today to demonstrate the confidence we have looking forward that we believe the guidance we show here today gives us a range that we can absolutely accomplish. It includes all of the things you alluded to. Yes, we're going to see digital transformation and ideally continue to focus on adding high-value wireless subscribers, continue to focus on reduction on handset subsidies. All of that is factored into the guidance we provide here today. I think the challenge we face is that we're not through this pandemic yet, and we continue to see challenges in retail and curfews remaining in many places in our market.

I think the guidance we provide here today speaks to a healthy outlook and a healthy performance we have, expectations we have for 2021, but they include all of that. We are striving towards higher margin, but frankly, roaming is going to take time to recover, and you know that's an extraordinarily high margin revenue. It's going to be the back half of 2020 before 2021. I'll leave it at that unless Mirko wants to add anything. No. Okay.

David Barden (Managing Director)

Thanks, guys.

Glen LeBlanc (CFO and EVP)

Thank you.

Operator (participant)

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

Drew McReynolds (Managing Director)

Yeah, thanks very much. Good morning. Maybe Mirko or Glen, just to elaborate a little bit longer term when you talk about fiberizing the cost structure. Glen, you just alluded to wanting to kind of push margin over that medium and long term.

Perhaps just update us on how you see a lot of that cost structure or fiberizing, the cost structure unfolding through that medium term. Is there any updated timing on an ability to decommission copper? As a follow-up, I guess, Mirko, let's start with you on a lot of kind of news flow on satellite broadband continues to come into the narrative of global telecom. With this increased investment, just what are your latest thoughts on where that type of competitor kind of fits within the Canadian landscape? Thank you.

Mirko Bibic (President and CEO)

Thanks, Drew. We are always very mindful of the competitive dynamics in the industry, and that's what we do every day, adjusting to shifts in technology in the marketplace and pricing, etc. It is no different with potential satellite launches. I feel pretty good with regard to where we stand.

We had our million-household footprint plan for wireless home internet. We're pretty much halfway there now. We're accelerating even more. We've got kind of the early lead in terms of product availability. Our speeds are 50, 10 now, 50 download, 10 up. Those are very fast speeds. It is a robust service that we offer. The customer is going to get those speeds. Not to be underestimated ever is when you subscribe to wireless home internet with Bell, you get a Bell technician who drives to your place, installs it for you, and if there's a problem, there's somebody to call, and we'll come and fix it. That's not the case with some of the early versions of LEO that we've seen out in the marketplace.

That is not evident, climbing up on your roof and installing the equipment, and then if something goes wrong, what do you do? Continued focus on customer experience. I feel really good about the competitive positioning of that product, and it is only going to get better as we get more 3.5 GHz spectrum and are able to transform that service into 5G. On the cost structure, yeah, look, on fiberization, I mean, I tried to unpack it in my opening remarks, Drew. The churn benefits are clearly there. The top-line benefits are there. The churn benefits are there. Fewer truck rolls with fiber, fewer calls. There is a whole lot of goodness. As we push fiber out even more, those cost benefits are going to be particularly significant.

Not to mention, we've talked about it already, but just to reiterate, the CapEx flexibility we're going to have in the outer years of our expansion program. I mean, the cost side is clearly there in the medium to longer term, and it's there right now. In terms of back to Glen's answer a little bit earlier on, we're managing costs very tightly. The fiberization and the Wireless Home Internet expansion strategy is part of that. Controlling handset costs and subsidies is part of that. Of course, always looking at our total cost of labor is part of that. The digital acceleration is a part of that cost control as well. Margins are going to increase as broadband expansion continues. Yeah.

Drew McReynolds (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question is from Sebastiano Petti with J.P. Morgan. Please go ahead.

Sebastiano Petti (VP and Equity Research Analyst)

Hi. Thanks for taking the question.I'm just wondering if you could unpack perhaps the fiber buildout. I think you talked about 5%-25% penetration within the first 12 months of kind of new vintages or new expansions. Just looking at the 1.7 over your current fiber passing implies penetration of about 30%. I'm not sure if I'm getting that incorrect. Just thinking about the opportunities for additional penetration gains within your existing footprint above and beyond the new kind of home builds and that acceleration. If you could perhaps comment on the level of competition within both the fiber markets as well as some of your traditional broadband non-fiber markets as well. Thank you.

Mirko Bibic (President and CEO)

Okay. I mean, if you take wireless, let's start with wireless home internet. When we enter a market, it's a market where we either have not had any service at all to offer to customers or it's been very low-speed DSL. Where we've either had no service or, frankly, service not competitive enough, penetration gains in those markets can be very high. In fiber markets, it's a combination of building in areas where we had DSL, which is not at this stage in 2021 competitive with alternative services. So, and you know, 5 Gb, Gigabit Fibe is the most competitive internet service in the country. When we enter a DSL market with fiber speeds of 1-1.5 Gbps, it's an extremely competitive marketplace. That explains our product, and that explains the growth in penetration.

In FTTN markets, what we're talking about here is we may have a customer, we move that customer from FTTN over to FTTH. There's a lot of goodness there too in terms of increased ARPU for that same customer and then lower costs of service. Across the board, it just leads to growth. As a percentage of retail internet, the 1.7 million subs that I refer to is actually 50% penetration, not 30%.

Glen LeBlanc (CFO and EVP)

Yeah. Sebastiano, it goes without saying. I've said it many, many times before. Wherever we construct fiber to the home, we take a disproportionate share of net adds. That ultimately is going to lead to us having a significant increase in our existing internet market share. That just bodes well for the future and speaks volumes to why we want to accelerate the investment today. Fiber works and the debate's over of the value that it brings to our customers and to our shareholders.

Sebastiano Petti (VP and Equity Research Analyst)

Okay. Thank you.

Mirko Bibic (President and CEO)

Next question, please.

Glen LeBlanc (CFO and EVP)

Thank you.

Operator (participant)

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

Batya Levi (Managing Director)

Great. Thank you. Can you provide maybe some more color on wireless trends since the beginning of the year? Have the volumes slowed more given the extended lockdowns and if there's any change in competitive intensity? And one just quick follow-up. Your comments about relatively stable margins for the year, does that hold true for both segments, assuming maybe roaming comes back in the back half of the year for both wireline and wireless? Thank you.

Mirko Bibic (President and CEO)

Okay. I'll take the first one, Glen, and then over to you for the second one. Look, on the lockdowns and the new lockdowns that hit us in November, December, and are continuing today, clearly they've had an impact on the volume of transactions. That is certainly the case. There is a lot of churn benefit just in terms of our improved customer service and just the nature of buying patterns given the lockdown. There has been a benefit there as well. Our approach is the following, though. We are focusing on high-quality loading. I mean, you see it in the results. While the transaction volumes may be down, the fact that we're focusing on high-quality loadings is actually providing a lot of goodness in terms of service revenue growth or, if you want, kind of the improvement in the service revenue decline.

As I mentioned at the beginning, if you normalize for the overage impacts and the roaming impacts, our ARPU would have actually been positive. If we take the approach that we're always going to be competitive, we're going to be very disciplined on discounting and on promotions, again, while being competitive and responding in a competitive marketplace. We're going to focus on those high-quality smartphone loadings. We're going to de-emphasize tablets and other connected devices except where they're accretive. It's paying off, and you see it in the Q4 results. Glen?

Glen LeBlanc (CFO and EVP)

Thanks, Mirko. I'll tackle the question on margins. The short answer is yes. We believe we will have stable margins in both our wireline and wireless business heading into 2021 here. The cost-discipline actions we're taking will protect our margins.

What I can't predict is the pace of recovery on high-margin things like roaming. Obviously, like everyone on this call, I am optimistic and hopeful that coming through the back half of 2021, we're going to see the vaccine taking hold and allowing Canadians to travel once again. Should that happen, obviously, those roaming revenues are extremely high margin. Our focus in the meantime will be ensuring that we take the necessary cost actions to protect and ensure stable margins in both of those lines you alluded to. Thanks for your question.

Batya Levi (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question is from Tim Casey with BMO. Please go ahead.

Tim Casey (Equity Research Analyst)

Yeah. A couple for me. I guess, Glen, for you, how should we think about media for the year? I know you gave some comments on the guide, but just how are you thinking about the pace of media?

You did mention the programming costs are going to go up. Just wondering if you can provide any more color there. Second, for you, Mirko, could you talk a little bit about competitive intensity regionally? How are, if there are any differences between the important Ontario and Quebec markets on the wireless competitive intensity stuff? Thanks.

Glen LeBlanc (CFO and EVP)

I will jump in first as Mirko thinks about the second part, Tim. As I said in my opening remarks, I expect all of our business units to provide positive contribution to both revenue and EBITDA in 2021. Media is part of that. I expect it to return to positive. What I said is that it could be moderated and will most likely be moderated because if the year plays out the way we envision, we will return to all live major sports returning, which will increase programming costs.

We expect to see an increase in advertising revenue as people start moving around. You think about our out-of-home business. That's been so heavily impacted as there's people not moving through airports and downtown foot and car traffic is down so much. Billboard advertising is down. I expect all of that to recover, I also expect programming costs to increase. It will be a positive contribution to EBITDA. It's one of our most volatile business units when you think about how this pandemic affects it. I also want to remind you it represents 8% of our EBITDA. Feeling confident it will return positive and will be a contributor to the overall guidance that we've provided today.

Mirko Bibic (President and CEO)

Okay. Thanks, Glen. Thanks for the question, Tim. You've heard me say quarter after quarter that as an industry, we really do need to keep a check on what we're escalating handset subsidies, particularly, as I've mentioned before, when you separate the rate plan from handset costs and you kind of offer handsets that cater to all affordability levels, there's really no reason to be subsidizing handsets to the same levels as in the past. That's one aspect of it. Of course, on either that or just general promotional intensity, it does ebb and flow depending on the time of year. I'd say the good news is that progress was made in Q4. Handset discounting improved 14% year over year. We saw product margins that were positive and improving year over year. Again, that's a focus or a byproduct of our focus on higher quality smartphone loads.

Queue, the holiday season, I think, was encouraging in terms of the level of promotional intensity generally. We did see it get pretty hot at times on the Flanker brands in particular, so that had an impact on the prepaid segment, as I mentioned earlier. I think all in all, we're good progress on that front. Generally, less intense year over year, less intense than Q3 2020, the exception being the flanker brands. I think we're kind of headed in the right direction at starting to properly monetize the massive investments we're making in wireless, particularly with the kind of spike in investment we're all going to make in our 5G networks and spectrum. We're going to need to monetize that in a way that's really reflective of the tremendous value we provide to consumers.

While at the same time, we are being very mindful of affordability because prices are going down. You can even see the latest kind of StatCan launched a digital portal, and you can see that wireless prices have decreased quite significantly from 2019 to 2020. We all know that in the important segments that they've also decreased in 2020, particularly the segment that the Canadian government's asked us to reduce prices in. I think we're doing a good job. The discipline seems to be there. We're certainly intent on monetizing the investments, and we are going to deliver on the commitment to the government and offering just generally more value at the right prices to customers.

Thane Fotopoulos (VP of Investor Relations)

Thanks. Next question.

Tim Casey (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from Aravinda Galappatthige with Canaccord Genuity, please go ahead.

Aravinda Galappatthige (Managing Director)

Good morning. A couple of quick clarifications. Number one, perhaps with Glen, you talked about the service revenue growth of 1% excluding the COVID impact compared to the 2.5% decline reported. Are you able to give us a little bit of a breakdown in terms of roaming, overage, and other, in particular, given the fact that really that Rogers kind of talked about a more significant other impact, I wanted to make sure that is Bell seeing that sort of a hit in terms of activation fees, etc.? As a follow-up on the handset costs, I think you referred to a 40% decline. With EIP rolling out, do you expect to see sort of a more, perhaps even a more material gain on that front as you step into 2021? Thanks.

Glen LeBlanc (CFO and EVP)

Okay. On service revenues, yeah, I'll give you a little bit of insight. What we've experienced in roaming has been extremely consistent since Q2. I told you in Q2 that the implications to the pandemic resulted in almost a 70% reduction in roaming. In that quarter, it was around CAD 60 million, I reported. That same dollar value, roughly identical, continued through Q3 and into Q4. That is the biggest driver on what's challenging service revenues. I say challenging service revenues, but I will take a victory lap that we're very pleased with the performance that we had on service revenues in the quarter compared to our peers. Short answer, no, I don't have anything to unpack on other because there isn't another. As Mirko said in his opening remarks, we continue to manage the data overage declines. That's happening. It's something that we've done a very good job. You've heard us speak about historically managing that. The trend continues.

It is declining as overage and people move to unlimited plans, but our focus is ensuring that that's a managed approach and it's not a race to the bottom. I don't recall the second part of the question.

Aravinda Galappatthige (Managing Director)

It's with respect to the subsidies. You talked about handset discounts have fallen 14%.

Glen LeBlanc (CFO and EVP)

Yeah. Look, we're extremely pleased with the handset discounting that we're seeing. The move to installments is accomplishing exactly what we had hoped it would. At times, I think there is a lack of discipline in the market, and we hope that cleans up. We think about what the installment program does. It gives customers the choice. They can migrate to the handset that best meets their needs, and they can finance it over a term that allows it to be affordable.

What it allows the industry to do is be more cost-conscious on how expensive these handsets are becoming and manage the discount and the back pocket offers that go with them. Early signs are encouraging, and I expect and hope it will continue, and it's a big part of our strategy on managing margins. We will focus on it and try to bring the discipline to that.

Thane Fotopoulos (VP of Investor Relations)

Okay. We have time for one more quick question.

Operator (participant)

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

Simon Flannery (Managing Director)

Great. Good morning. Thanks for taking the question. Glen, quick one for you. Could you just talk about how you're thinking medium term about the payout ratio and the leverage target?

Obviously, nice to see the dividend increase here, but given the CapEx guide, it sounds like on the auctions and maybe C-band beyond the 3.5, leverage is probably not going to be generating substantial free cash after dividends until maybe 2023 and beyond. How should we think about what are you comfortable going to say the low threes for a little while and then try to get it back to current levels in the three to five-year view? Is that the right way to think about it?

Glen LeBlanc (CFO and EVP)

Yeah. I think so, Simon. As I unpacked for you today, first of all, we're in unprecedented times. No one ever envisioned we would find ourself in a global pandemic of this nature. To expect us to force our organization in a short time frame back into a historical targeted payout ratio would be detrimental and damage the business when we know long-term this industry is stable and we will return to historical earning levels. Right now, we decided in a low-interest rate environment, the best thing we could do is to use the proceeds of the data center to invest in the network. By investing in the network, we know that's going to bring growth in internet and TV subscribers. That growth is going to bring growth in future cash flow. That future cash flow is going to manage the payout ratio and the ability to fund dividend go forward. Look, in the short term, yes, we're outside of the payout ratio. Done eyes wide open. We know that.

In the medium term, as you alluded to, post 2022, when this investment is behind us, and let's all hope the pandemic is behind us, we will return to more normalized levels. In the case of leverage, yeah, we're above our stated objectives for leverage, but again, an extraordinary low-interest rate environment. We think the leverage is manageable, and the free cash flow generation of this company in the medium to long term will absolutely allow us to manage leverage. It's the right thing to do at the right time.

Thane Fotopoulos (VP of Investor Relations)

Great. Thank you, everybody, for your participation this morning. I am available throughout the day for any follow-up questions and clarifications, so have a great rest of the day. Take care and stay safe. Thank you.

Operator (participant)

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