Edited Transcript of QBR.B.TO earnings conference call or presentation 14-May-20 6:30pm GMT

Our media sector has been doubling its effort to keep the Québec population informed and entertained in these unfortunate times of confinement. LCN continues to be, and even more these days, the reference for immediate and continuous information. We are, again, the first to unscramble the chain, thereby providing everyone with free access to important government updates and key breaking news.

Despite the added complexities of the confinement, our TVA teams remain creative and agile, as demonstrated by the creation of daily show, Ça va bien aller, from various homes and which draws close to 1 million viewers every day. In addition, TVA and Tele-Québec, in collaboration with the government of Québec, put together last Sunday a major TV event, Une chance qu’on s’a, to salute the outstanding resiliency of Quebecers during this crisis. Bringing together more than 80 local artists, the show raised $2 million for Les Petits Frères and SOS violence conjugale charities.

Also with a view to support our local artists, we accelerated the launch of QUB music, the first streaming platform designed and produced in Québec. Accessible via a mobile application and on the web, QUB music offers an impressive international caliber catalog of 50 million songs available on demand as well as hundreds of playlists created by avid local curators and understand Quebecers’ needs and taste. QUB music is a local product, which offers unparalleled showcase for local talent and does its part to improve artists and music right holders remuneration.

In our sports and entertainment division, which has been forced to postpone or cancel all shows and events, we reacted immediately to protect our employees and freelancers, putting in place an emergency fund of $500,000 to tide them over and ease their financial burden. And more generally, for all our employees, we have unfortunately been impacted by this crisis, we decided early on to offer supplemental salary measures applied on top of government programs to maintain as much as 95% of the regular salary in some cases and, thus, minimize the financial hardship on them and their families and keep them motivated to come back as soon as they are allowed to do so.

Despite the difficult times we’re living, we are fortunate at Quebecor that our core business is sound and resilient, that our cash flows are stable and that our historical financial discipline and rigorous management have produced a solid balance sheet and a very favorable liquidity situation.

I will now let Hugues review our consolidated financial results.

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Hugues Simard, Quebecor Inc. – CFO [4]

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(foreign language), Pierre Karl.

Quebecor’s revenues were up 3% in the quarter to $1.06 billion. Revenues from our telecom segment grew 4% to $875 million, and revenues from our Media segment grew 1% to $175 million.

Quebecor’s EBITDA was up 4% to $437 million. Our Telecom segment recorded EBITDA growth of 3% to $436 million, while our Media segment recorded an EBITDA of $4 million, a $3 million increase.

We reported a net income attributable to shareholders of $132 million in the quarter, or $0.52 per share, compared to a net income of $189 million or $0.74 per share reported in the same quarter last year. The decrease is explained by the gain on the sale of 4Degrees in the first quarter of last year, partially offset by favorable variance in the valuation of financial instruments.

Adjusted income from continuing operations, excluding unusual items or gains and losses or losses on valuation of financial instruments, came in at $112 million or $0.44 per share, flat from the same quarter last year.

Our cash flow from operations for the first quarter of 2020 increased by $19 million or 7% to $295 million, once again demonstrating the resilience and strength of Quebecor’s business model.

Our financial profitability, propelled by the strong returns from our Telecom and Media segment, remains very solid.

As of the end of the quarter, our net debt to EBITDA ratio was 2.8x, down from 3.1x reported at the end of the first quarter of last year and similar to our telecom peers.

Available liquidity of $1.8 billion as of the end of the quarter and our growing free cash flows are more than sufficient to fulfill our commitment and fuel our growth.

Our normal course issuer bid program remains in place. In the quarter, we purchased and canceled 1.1 million Class B shares for a total investment of more than $34 million. Since we initiated our NCIB 9 years ago, approximately 35.3 million Class B shares have been purchased and canceled.

As we have demonstrated in the past, our financial position remains healthy and solid, enabling us to pursue our business strategy.

I will now let Jean-François review our Telecom segment’s operations.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [5]

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(foreign language) Good afternoon, everyone. I hope that everyone is well and staying safe.

So from the inception of this unprecedented crisis, we’ve clearly lived up to our reputation of taking good care of our customers and employees, as we implemented important measures to help and protect our customers and employees. Indeed, we were the first Canadian operator to lift data caps for our home and business Internet plans, as many of our customers transition to working from home.

In addition, wireless roaming fees for customers outside of Canada have been waived in order for them to stay connected with their relatives.

Entertainment at home was also a priority for us and, we, more than any other broadcast distributor, significantly broadened our free content offering. In total, it is 68 channels that we unscrambled on Helix and illico, as well as providing 1,250 hours of additional free video-on-demand content.

In just a few days, we were able to relocate the vast majority of our employees, including our customer care agents, who are now working from home since the early days of this pandemic. We also introduced additional measures to protect the health of our employees who couldn’t work from home, mainly our service techs. For instance, our techs can now, in many cases, assist our customers from their trucks through video chat without having to enter homes for installation purposes.

As requested by government authority, we closed on March 17 almost all of our retail stores. Recent announcements will permit the reopening of all of our storefront locations, bringing our total retail footprint to approximately 50% of our original capacity. Shopping mall stores and kiosks will remain closed for the moment. Obviously, we have taken all necessary measures to protect our employees and customers who visit these locations.

From a social responsibility perspective, we have been working relentlessly to support governments, health care providers and communities. We recently provided thousands of cellular phones with unlimited packages to the University of Montreal Hospital Centre, long-term care residences as well as youth protection centers. Through these initiatives and donations, we favor less physical contacts between patients and health care workers, and allow patients and youth to stay connected with their loved ones.

Fizz also supported (foreign language) a local nonprofit organization, which helps local communities and people in need by donating $1 for each gigabyte of data shared between our Fizz customer community. In total, it is $50,000 that Fizz donated to this local organization.

Furthermore, our B2B segment and dedicated technical engineering teams also provided connectivity in record time to several new COVID-19 testing centers, allowing health care workers to quickly test and treat COVID patients in Québec.

Finally, I would like to thank all of our employees, especially our frontline techs, for their sustained work and all of our customers for their continued loyalty during these difficult times. No matter the circumstances, we remain focused on providing the best customer experience. I believe that all the measures taken during this crisis clearly demonstrate our true commitment to staying the privileged partner in connecting the population of Québec.

Turning to our first quarter results. Our performance in wireless services remains impressive, although significantly weakened since the pandemic took place mid-March. As of March 31, we powered 1,370,000 mobile lines, fueled by a growth of 39,000 lines during the quarter, better than the respective growth of each of the 3 national operators during the period and stable compared to last year, and a growth of 176,000 lines on a year-over-year basis.

We reported service revenue growth of 13% in the quarter driven mainly by solid subscriber growth. We continue to lead the market in terms of share of gross adds. And overall, we captured 26% of gross adds in our market during the quarter.

Consolidated wireless ABPU decreased to $51.60 from $52.50 recorded in the first quarter of last year, resulting from the increased proportion of BYOD customers as they continue to represent a substantial portion of our new adds. Although our overall wireless ABPU has decreased, it is important to note that on a standalone basis, once again this quarter, the wireless ABPU for both Fizz and Videotron has actually increased year-over-year.

Finally, our monthly churn rate decreased to 1%.

Moving on to wireline services. Due to the pandemic situation and the need for additional protective measures, we have focused our installation activities on connecting new customers and prioritizing repairs now, but have stalled migration activities to Helix. It has, therefore, slowed down our subscriber growth for Helix in the quarter. At the end of the quarter, we counted approximately 220,000 video and broadband RGUs to the platform.

We have recently resumed migration to Helix, and we continue to see sustained interest for Helix, especially considering its improved home entertainment experience, better WiFi coverage and control and a high self-installed ratio. Despite the recent slowdown in our activities, we continue to work on improving product and functionalities awareness for Helix. Overall, during the quarter, we recorded growth of 9,000 broadband customers and 25,000 over the last 12 months.

Similar to our wireless services, Fizz value proposal now contributes more materially to our overall sub adds, as we also led the market in terms of share of gross adds during the quarter, however, somehow eroding our ABPU growth. Furthermore, and reflecting the competitive environment, especially coming from the resellers, we have decided not to introduce new broadband price increases for this year.

In video services, we recorded a decline of 20,000 units in the quarter. It’s worth noting that, in addition to many suspended services in our B2B segment, we have lost more than 3,000 low ARPU units with the loss of 1 single commercial customer. As of the end of the quarter, 472,000 customers subscribed to Club illico, our OTT video service. We recorded growth of 12,000 customers during the quarter and 40,000 over the last 12 months. We launched our 4 original productions in the quarter, including our first drama miniseries called Mon fils.

On the financial front, consolidated revenues amounted to $875 million in the first quarter, up 4% compared to $841 million recorded in the same quarter of last year. Revenue growth from our low-margin Helix equipment sales mainly contributed to this growth. Our revenue growth in March was, however, impacted by lower broadband coverage, wireless roaming and on-demand content revenues following the introduction of our customer caring initiatives. Suspended services in our B2B segment as well as stalled Helix equipment sales also impacted our revenue growth.

EBITDA amounted to $436 million in the quarter for a year-over-year growth of 3%. We estimate that our customer caring initiatives impacted our EBITDA by $1 million to $2 million in March, and we recorded unfavorable variances in some nonrecurring items that also impacted our EBITDA growth. Now more than ever, we focus our efforts on cash flow discipline and cost containment as well as leveraging all operational efficiencies without compromising on customer experience.

For the quarter, we generated $303 million in cash flow from operations compared to $289 million during the same quarter last year, favored by our strong focus on EBITDA growth and our rigorous management of CapEx investments.

Capital expenditures, including acquisitions of intangible assets, amounted to $133 million in the first quarter, $2 million lower than last year. Wireless CapEx amounted to $25 million in the first quarter compared to $13 million in the same quarter last year.

Finally, in light of the potentially material impacts resulting from the COVID crisis on the overall economy and our business for the weeks and months to come, we prudently cut back on our CapEx program for 2020. Although uncertain, closure of businesses, job losses and lower economic activity probably leading to a recession will likely result in more suspension and/or downsize of service plans, hence, lower revenue growth and higher cost resulting from our customer caring initiatives. Bad debts remain highly speculative at this point, but we also expect to see more of them in the months to come, mostly from the B2B segment. We are, however, confident that we have taken the appropriate actions to protect our cash flow in 2020.

I will now turn it over to France to review TVA Group performance.

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France Lauzière, Quebecor Inc. – President & CEO of TVA Group and Chief Content Officer of Quebecor Content [6]

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Thank you, Jean-François. Good afternoon.

Over the past nearly 60 years, we have been through many historical challenges and hardships with Quebecor. When this crisis — it took our people only a few days to put everything in place and focus our efforts on the 2 essential services that are at the core at TVA (foreign language), news and entertainment. This mission has never been more vital than it is now in these unprecedented times.

To accomplish it, we have taken a number of measures to protect our employees and their families. When it comes to information programming, our new theme has long been towards people trust, so Quebecers have turned to TVA News and LCN to find full, accurate and empathetic coverage in this difficult period.

I also want to underscore the work of the teams that innovatively adapted the programming of our channels in record time. For example, we started a daily program called Ça va bien aller. This event has become a real social movement that breaks down the walls of isolation by reaching out nearly 1 million viewers every night. TVA Group is also playing an important social role at this time by helping the most vulnerable. In addition to initiating the television event Une chance qu’on s’a, which raised funds for 2 charities, as Pierre Karl mentioned, TVA Group has joined forces with La Table des Chefs in Les Cuisines Solidaires project. Our chefs and his team have reopened their kitchen to prepare more than 25,000 meals for people in need. None of these initiatives would have been possible without the efforts of our dedicated and talented employees. I thank all of them warmly.

Turning to our first quarter financial results. TVA Group recorded operating revenues in the amount of $137 million, a year-over-year increase of $3 million. Broadcasting revenues decreased by 2% due to a decrease in advertising revenue and in commercial production revenues due to lower volume of activity, partially offset by the addition of operating revenues from the Évasion and Zeste channels for a full quarter, and a 5% increase in subscription revenues from the other specialty services, stemming from the renewal of most of our distribution agreements at rates reflecting the fair value of our channels.

On the ratings front, our overall viewership market share reached 40.4%, up 2.1 points from the same period of 2019. TVA Network grew its share by 1.1 points, while the specialties channels share increased 1.0 point as a result of strong 2.2 point growth at LCN, which speaks at a 6.9% share, holding its position as Québec’s most watched specialty channel. In that respect, we are very proud of and grateful for our employees’ hard work, which has enabled us to continue providing essential services, particularly through our continuous news coverage.

Magazine publishing revenues declined 30% due to continued decreases in advertising, subscription and newsstands revenues and the discontinuation of all Elle Canada and Elle Québec magazines, the last issues of which were released in May 2019. MELS revenues increased 39% mainly due to a significant increase in soundstage, mobile units and equipment rental revenues due to higher volume and the presence of a major production in our studios and a 55% increase in dubbing in described video revenues as a result of the new CRTC license conditions for described video. Those positive variances were offset by a 21% decrease in postproduction revenues.

Our new production and distribution segment, created following the acquisition of Incendo on April 1, 2019, added $4.8 million revenue in first quarter results.

TVA Group’s EBITDA reached $8.5 million for the first quarter, an increase of $4.5 million compared to the same quarter last year. Our Broadcasting segment reported positive EBITDA of $3.8 million, a favorable variance of $1.3 million. The Magazine segment recorded EBITDA of $0.7 million, down by $0.7 million, while MELS segment posted EBITDA of $3.2 million, a $3.1 million higher than last year. Our new production and distribution segment made a positive EBITDA contribution of $0.7 million to our quarterly financial results.

Cash flow from operations was $6.7 million for the first quarter, an improvement of $6.8 million over last year due to a $4.5 million EBITDA growth and a $2.3 million CapEx reduction.

Thank you to all.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [7]

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(foreign language) France. So before concluding, I would like to say a few words on Quebecor’s interest in the Le Sac selling.

Our interest is motivated by our will to stay as one of the Québec’s biggest brands internationally and a creative powerhouse based in Montreal, which is forced by current events to look for a long-term solution to its heavy debt burden. Quebecor has the operating track record and financial wherewithal, to structure an accretive transaction that would ensure the survival and long-term success of this great company. I will not comment any further than to say that we will work over the next days and weeks at finding a solution that would create value for both Le Sac and Quebecor.

Before closing, I would also like to make a couple of comments with respect to our main competitors. First, on leverage. I would honestly never have thought, back in 2001, when our leverage ratio was more than 7x, that 1 day, we would have a lower ratio than Bell. And yet, here we are at 2.83 debt to EBITDA ratio compared to 2.86 for Bell. In addition, it is worth noting that our wireless subscriber growth at more than 39,000 new lines this quarter is almost twice that of Bell, even though they have a national footprint and we are only in Québec.

In closing, I would like to take this opportunity to recognize the exceptional dedication of all our employees who are on the forefront of this crisis, showing courage, agility and a will to perform in all circumstances. Thank you to all our news teams on television, radio, newspaper and magazines. Thanks to all our Videotron to employees, namely the customer contact agents and technicians entering the service of our network and, finally, to all our employees whose business activities have been brought to a halt. We are there for you and with you.

And thank you for your attention, and we will now let question period to start.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Drew McReynolds from RBC.

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Drew McReynolds, RBC Capital Markets, Research Division – MD of Canadian Telecommunications and Media Research & Analyst [2]

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First, a clarification and then a couple of others. Pierre, just on the CapEx commentary that you had. Clearly, your CapEx guidance as of last quarter going into 2020 here is down year-over-year for a few reasons. Are you depending on, obviously, circumstance going forward? Are you bringing that down again or just reiterating that it will be down year-over-year, consistent with what you’d previously indicated?

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [3]

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Thanks, Drew, for the question. In fact, we are bringing that down again.

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Drew McReynolds, RBC Capital Markets, Research Division – MD of Canadian Telecommunications and Media Research & Analyst [4]

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Okay. And any quantification at this point? Or…

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [5]

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Well, I would say it’s more likely that we’re going to be at the low end of the range rather than the high end of the range.

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Drew McReynolds, RBC Capital Markets, Research Division – MD of Canadian Telecommunications and Media Research & Analyst [6]

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Okay, okay. Fair enough. A couple of bigger picture questions. First, and maybe back to you, JF, on Helix and the television performance in the quarter, clearly not a usual quarter, I would guess, nor would Q2. But maybe can you talk to the TV dynamics overall. Cord cutting in light of, obviously, sports being on pause, does the environment that we’re getting into impact your ability to migrate on Helix, an update there? And then lastly, just on the sports and entertainment side, I think we’re all eyes wide open on the shutdown. In terms of modeling on operating loss for this segment until things begin to open up, is there any kind of guidance you can give us on that? That would be great.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [7]

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So you have 15 minutes, I guess, for me. Okay. So well, first of all, I’d like to point out that we saw how we exhibited decline of 20,000 subs in a quarter. 3,000 of them were essentially related to one single customer — commercial customer. And those 3 lines or — they are essentially low ARPU, mostly hotels. I mean, with hotels, the ARPU of those is very, very low compared to a residential ARPU. So the impact on revenues will be minimal for those 3,000 lines — or our customers, as we call them.

Second of all, due to the crisis and necessity to focus ourselves on essential services, we have decided a bit before mid-March or mid-March to stall our migration to Helix. So essentially, we had no single customer on Helix since that date. So obviously, it may have — probably most likely had an impact as well on our numbers. That being said, since the beginning of the crisis, one thing that we saw is essentially a major slowdown in connecting and deconnecting our churn activities, significant slowdown. For the first — for the last 2 weeks of March, essentially, we saw essentially 50% reduction in churn and 50% reduction in connections because we are net losers in the environment in terms of wireline services, mostly on TV. But it’s that behavior that we saw in the market is essentially positive for us, and it continued over in the month of March. So in terms of how does it look like today, with respect to wireline services, it looks much better than Q1 because of the slowdown in connection activities and churn activities.

On the other hand is the opposite for wireless because on the wireless side, we’re net gain — or a net gainer. This slowdown of activity has impacted us since mid-March and it continued in April. That being said, we’re still growing. We’re growing less than last year, but we’re still growing. And the fact of the matter is we estimate that through — from mid-March through end of April, the market activity was at — about for wireless services only, was at about 30% to 45% of normal activity in terms of switchers going from one operator to the other. We’re now up to about 65% of normal activity, so there’s a significant slowdown in terms of market activity. But the thing is since we capture more than our peers and even more since the beginning of the crisis in terms of share of growth adds, well, last week and the week before, our results in wireless services were on top of last year’s and even better this week. So it looks like, at least at our end, things are getting to some kind of a normal. So I’m still encouraged.

The thing is will we catch up on the gap that was created from April 1 to, say, April 30, I hope so because, obviously, a gap was created with the slowdown in market activity. But I think that now we’re getting to — we’re getting on track with our normal performance with respect to wireless. So I know I spoke about a lot of things, but hopefully, Drew, it answers your question. I guess so.

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Hugues Simard, Quebecor Inc. – CFO [8]

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You had a last question, Drew, on sports and entertainment, I think, right?

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Drew McReynolds, RBC Capital Markets, Research Division – MD of Canadian Telecommunications and Media Research & Analyst [9]

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Yes. Just from a modeling standpoint.

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Hugues Simard, Quebecor Inc. – CFO [10]

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Yes. Just — I mean, we don’t — I mean we’re not going to start today to give guidance, obviously. But I mean, I think it’s easy to see on that small division, I mean, revenues, I mean, all shows have been postponed, have been canceled. So that being said, there’s obviously a very important part of variable cost on that. So at the end of the day, the impact on EBITDA will be obviously significant for that division, but overall, fairly muted for us.

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Operator [11]

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Next question comes from Jeff Fan, Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division – Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [12]

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I’ve got a few questions on wireless. First couple is just clarifications for JF. JF, you talked about Fizz and Videotron ABPU, I think, increasing year-over-year on a standalone. I’m just trying to clarify what you meant by that. Do you mean the subscribers that were in your base last year, if you looked at them again this year that you saw an ABPU increase and that any dilution in ABPU is just a result of mix? Just wanted to clarify that comment. And also you gave a CapEx number for wireless. Wondering if you can just repeat that, and also if you have the wireless EBITDA as well. And then the last question is just on the ARPU or ABPU, however you want to talk about this. The trend looked like it started to improve this quarter. I know you’re still adding a lot of BYOD and Fizz, but wondering if we have seen kind of that inflection point of improvement in ABPU, notwithstanding, obviously, the impact from COVID. But was just wondering the underlying trend is starting to move in the right correction for you even with the mix impact.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [13]

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Okay. Well, first of all, comment about year-over-year ABPU growth on a standalone basis for both Fizz and Videotron, so what we mean by that is if you look — if you simply look at Fizz, this ARPU — or ABPU is up year-over-year. And essentially, if you remember, for Fizz, last year, at the same period, we were in the launch prices essentially, and we have jacked up our prices in October, so obviously, we get the benefit of that. And so it’s a major increase for Fizz. And even for Videotron, if you take ABPU last year versus this year, it’s obviously not to the same extent of Fizz, but it’s still greater than 0.

The CapEx in wireless this year — this quarter was $25 million, last year was $13 million, so we almost doubled our CapEx investment in wireless. And obviously, it’s related to the LTE advanced 5G network.

EBITDA for wireless, obviously, I will not disclose the EBITDA for wireless, but I can tell you that the growth is significant. It’s even greater than what I disclosed for the fourth quarter of 2019, so we’re close to 40% of growth in wireless this quarter.

Obviously, Fizz is contributing quite nicely. Fizz is generating positive EBITDA, and the margin is quickly approaching or getting close to our Videotron brand margin. And it’s all related to the 100% digital experience and lower cost structure for Fizz.

And in terms of the trend in ARPU, well, it’s still a decline in terms of ARPU, so it means that Fizz and the BYOD base is increasing, therefore, eroding ARPU. It’s lower this — the decline is lower this quarter, I admit. Hopefully, it’s a change. And then we’re going to see reduction in declines. And at some point, maybe it’s going to go above 0 or it’s going to grow. But I think it’s a bit premature to conclude that we’re going that way because, still, the base — the BYOD base is increasing in our total base.

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Operator [14]

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Next question comes from Maher Yaghi from Desjardins.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [15]

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Yes. I wanted to ask you first, JF, on your wireline services. With the pandemic impacting the subscriber base, have you seen the initial indications that customers are downgrading their packages in any way? And I’m talking here on the residential side mostly because you don’t have a lot of exposure to the enterprise market. And also on wireless with — as you mentioned, Fizz is having a good success, and it’s a bigger proportion of your subscriber base. Have you figured out all the technical issues there? And is the technology behind Fizz as solid as you want it to be? And I just have a final question on media after.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [16]

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Okay. So in terms of downsizing of service plans, well, for the first quarter, we haven’t — we obviously hadn’t see — I’m not seeing anything. In April, we’re starting to see some, but it’s nothing really material on the residential side. On the business-to-business side, though, although I wouldn’t call that downsizing, we had to suspend many services. A lot of clients of ours are bars and restaurants and hotels. And obviously, those are shut down, so they almost all called us to suspend their services, which we did as a customer care initiative. So that’s essentially what we’ve seen. Since the B2B segment has not started back to be back in business, we don’t know what’s going to be the impact in terms of the B2B segment in terms of downsizing. But so far, on the residential side, we haven’t seen any significant trend as of yet. But if the pandemic last a few months or a few quarters, it will have an impact on the economy overall. And if it has an impact overall in the economy, it means that, at some point, it’s going to have an impact on residential services as well. So that’s why we prudently decided to cut back on our CapEx program to protect our cash flow. We’re proactive here rather than being reactive. We’re going to make sure that when things come to normal, we have the financial resources to bring them to normal.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [17]

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And on Fizz.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [18]

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On Fizz, I’m sorry. On Fizz, yes, everything is fine. We know in July of last year, we fixed all the problems that we have with respect to the technology. And since then, we haven’t seen any significant or material problems with our technical platform. So now, everything is on track, everything works fine. We — and as you know, in October of last year, we have jacked up our prices because we were confident that the platform was solid. And indeed, it is solid.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [19]

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You had a question on media.

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Maher Yaghi, Desjardins Securities Inc., Research Division – VP, Telecom, Media & Tech Analyst and Intellectual Property Analyst [20]

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Yes. I — basically, with production shutdown, I wanted to just understand what you think this could mean in terms of major production volume in the fall, how that could impact your revenue and advertising. And is there a — because you run a convergence model, and you believe that production and media is essential for you to continue to have a good subscription model on your wireline services, I wanted to know if you have any concern when it comes to this convergence model if production continues to be shut down.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [21]

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Yes. I’ll start and ask France to have more comment. But you’re right to mention that we’ve been building our model on convergence. That production — television production and other matters also were part of our strategy. I guess that — and it looks like that it’s everywhere in the world. I mean, it’s a North American factor and elsewhere, even that production facilities on — are on a slow motion environment. Does that mean that we will get — we will be forced to change our model? I don’t think so. I mean — and we should think that this situation will not occur forever, and that we’re looking for alternatives right now.

On the advertising side, this is for sure that certain aspects of our businesses have been impacted just recently. We are repositioning, I would say, the way that we would like to offer our different platforms to our customers also on a convergence basis to compete effectively against our competitors, which do not have the capacity to offer many platforms, which we do. So we will continue to look forward to push this model to our customers. And maybe I would let France to say a few words on our production facilities.

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France Lauzière, Quebecor Inc. – President & CEO of TVA Group and Chief Content Officer of Quebecor Content [22]

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All the teams right now are expected some different difficulties. But another point, we prove with our recent production that we are able to — with our creativity and to put something forward and to have production. So we’re having that in mind. And for the convergence, I think that Pierre Karl told what it is.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [23]

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We will continue to look forward for having productions, which is not completely local production. It is, but also we are populating Quebecor with some purchases, some acquisitions on the international basis. So it’s a mix of both, and we will continue to work in this direction, despite the fact that it’s a little bit tougher than it used to be before.

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Operator [24]

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Next question comes from Matthew Griffiths from Bank of America.

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Matthew Griffiths, BofA Merrill Lynch, Research Division – Associate [25]

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I just had a question on the cost in the Telecommunication segment. It looks like they kind of increased quarter — or sorry, year-over-year. And I’m assuming a lot of that’s driven by what was going on with Helix in the quarter. Maybe you can just talk about that, if that’s right and what the drivers of the costs are. And then, of course, with things changing for the remainder of the year, kind of what you see the trajectory of costs going forward might be.

And then I had a follow-up just on the way that you plan to handle kind of these suspensions of service in the — you were saying mostly in the B2B segment. I don’t suppose that shows up next quarter with kind of subscriber losses, but they’re not being billed. Does it just show up, I guess, in the ARPU for the services being reduced on a per customer basis? Or how is that — how do you think that is going to be reflected?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [26]

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Okay. I’m not sure I got the last question, but I’m going to answer the first 2 ones, and maybe you could repeat after, Matt. So with respect to the cost, of course, with Helix, our model has changed rather than being an infrastructure play and investing in CapEx and then having to recoup the investment through our revenues, we’re now on a license-based model. So we’re now like in a SaaS model. So we obviously have additional cost in our structure related to this change in the model. We obviously had — in terms of cost, we obviously has a normal cost inflation that we see on salaries and then so many entrants of our model. So I guess from — on a year-over-year basis, that’s what it would explain the increase in cost.

In terms of the trends for the rest of the year, obviously, the pandemic has created some additional pressure on some of our cost. If I think about bad debt, bad debt is very speculative, but I would assume that bad debt is going to go up. So it could — it will certainly, I think, have an impact. Our customer caring initiatives, they play on both side, both on revenue that we’ve forgiven by providing those customer caring initiatives, but also some cost related to those. So retrofitting the stores as well, it’s going to add cost. The sanity measures that we put in place, they’re going to have some cost. But that being said, on the other hand, we certainly have some savings. We unfortunately had to let some people go temporarily, but there’s some salary saving that we’re going to see throughout Q2. We’ve cut on advertising in some respect. I talked about CapEx. We do more auto — self-install, I should say, so there’s going to be some pluses and minus here and there. Is it going to be a total wash? Maybe not, but that’s probably the impact of the pandemic. And maybe repeat your last question, please, Matt.

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Matthew Griffiths, BofA Merrill Lynch, Research Division – Associate [27]

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Sure. So I was just curious, with the suspension of service that is happening, for instance, like the bars and restaurants, you’re not going to record those as lost customers or deactivations in the coming quarters. But obviously, they’re not incurring a bill because they’re not actually using the service and they’re suspended. So is this just going to flow through as a lower ARPU in the quarters to come?

And just if I could add one more question. I think both yourselves and all your customers are getting kind of a crash course in how to operate with each other online. Does this change or accelerate kind of how you view the kind of evolution of the business coming out of this pandemic, if we can look further down the road?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [28]

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Yes. Well, for your question with respect to ARPU and B2B segment, you’re right. So it’s just a suspended service so far, so it’s not a loss of customers. So yes, it’s going to pull through a lower ARPU, you’re perfectly right.

In terms of, I would say, opportunities with this new trend that has been created with the pandemic, which is working from home and doing more stuff online, yes, I think it’s a great opportunity for our broadband business. And no doubt that people will be consuming more broadband — or more bandwidth in the future with — but there’s a lot of opportunities that are created. How about a working from home plan that we would put in place for businesses to make sure that people — or their employees are working from home have a flawless experience from security side, from the broadband, the coverage side or the speed side? That’s something that we can think about. If people are working from home…

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [29]

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Don’t say everything. Our competitors are listening, Jean-François. You know this.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [30]

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So if people are working from home, telephony and the cloud, obviously, it’s going to — I think is going to accelerate. So there’s many opportunities, I believe, that are created by this pandemic, but the key of it is really broadband.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [31]

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Absolutely, and we’ll continue to work on it.

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Operator [32]

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Next question comes from Vince Valentini from TD Securities.

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Vince Valentini, TD Securities Equity Research – Analyst [33]

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JF, just to reclarify on the operating cost increase in Q1. You said that equipment revenues were up pretty materially year-over-year for Helix, and those would be low margin. So wouldn’t that be a key driver of year-over-year OpEx increase as well?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [34]

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Absolutely, you’re right. That’s true. That’s a fair point, yes. Okay. The cost, yes, absolutely. The cost of the boxes, yes.

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Vince Valentini, TD Securities Equity Research – Analyst [35]

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The other way I saw on CapEx, if you’re at the low end of $625 million to $700 million this year, can you talk a little bit about projects being delayed? Are there some 5G items or new construction areas? Is it possible that, that means we need to be at the high end of $700 million or maybe even above $700 million in 2021, assuming the world is back to normal by then?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [36]

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Yes. Well, I will certainly not comment about 2021, but the projects that we — it’s really delays in the projects. So we’ve slowed down our investments. We have not canceled projects so far. So that obviously has to be reflected in your model.

And in terms of things that we’ve delayed, network extensions, that’s the biggest piece of it. Some IT projects, the retail stores as well, we had a project to do some improvements on our retail stores. Obviously, it’s been delayed because the retail stores are shut down — are closed. On the 5G side, there’s no major impact of this. Some nonmaterial impact, but nothing that is major of our plan. We have experienced some delays because the Samsung team, obviously, they’re stuck in Korea, so they’re not here to work with us. So obviously, it has an impact on us. But nothing that I would characterize as being material.

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Vince Valentini, TD Securities Equity Research – Analyst [37]

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Okay. Probably, Hugues, the taxes for the year, can you give us any sense? Like sort of like $150 million of cash tax a ballpark reasonable number?

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Hugues Simard, Quebecor Inc. – CFO [38]

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For 2020?

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Vince Valentini, TD Securities Equity Research – Analyst [39]

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Yes.

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Hugues Simard, Quebecor Inc. – CFO [40]

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Yes.

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Vince Valentini, TD Securities Equity Research – Analyst [41]

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Okay. And lastly, in terms of balance sheet and free cash flow priorities. So if an acquisition of any kind comes up, whether it’s a hockey team or entertainment company or anything else, is there — do you have the same sort of thinking about maximum debt leverage that you’ve talked about in the past several years of maybe up to close to 4x temporarily as long as you see a path to bringing debt leverage back down? If you can remind us of your balance sheet targets. There, And also would share buybacks be a lower priority than good acquisition? So if you needed money to pay for something, we’d probably see buybacks slow down in the short term. Or do you think you can keep doing both?

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Hugues Simard, Quebecor Inc. – CFO [42]

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Vince, no. On the leverage, I mean, we certainly don’t anticipate leverage to materially increase. I mean, we’re not — we’ve said in the past, and our narrative is not going to change. If we do something — and we’ve always wanted to keep some flexibility on that front in terms of acquisitions. But we’re not looking at something that would materially impact our leverage.

In terms of NCIB, we — same — dividends in NCIB, we’re staying the course. This is — again, there’s nothing in our mind that warrants any change of strategy there. I mean our cash flows are sound and continue to increase. So we — at this point, we stay the course, as I say, on these 2 fronts.

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Operator [43]

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Next question comes from Aravinda Galappatthige from Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Corp., Research Division – MD [44]

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Two from me. Just going back to media, just wanted to get a sense of the sort of the cost behavior. Obviously, as you see some pressure on the ad front and in other areas, you’re going to look to sort of protect your EBITDA line. Maybe just talk about some of those mitigation options that are available as well as sort of the cost behavior in the various divisions within media. And then secondly, maybe for Jean-François. Can you just talk a little bit about your cost of acquisition in wireless? I know that as you move towards the BYOD model, that component of the cost is expected to decline. But is there more room for reduction there as we look through to the rest of the year?

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [45]

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First, on the media side, quickly, as you know, the overall impact regarding the EBITDA is minimal. And to say that, obviously, we’re going to always be looking at our expenses and then, therefore, if we were to reduce the amount of cost incurred to produce our media or to run our media, we will do. In fact, pagination and newspaper had been lower everywhere across The Street. Some of our operation in music had been on the hall basis. Same thing for book publishing and book distribution. So I think that what we should say is part of an overall convergence strategy, but with minimal financial impacts.

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Jean-François Pruneau, Videotron Ltd. – President & CEO [46]

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In terms of the cost of acquisition, well, obviously, with our model that is more than ever BYOD base, on an absolute dollar basis, obviously, it has a positive or favorable impact on cost of acquisitions and handset cost subsidies. But the thing that I would mention is I think that from a cost of acquisition per new subscriber, we’re doing a better job than we were doing in the past, and that’s another project. But that’s an initiative that I wanted to focus on in 2019. And I think that we’re doing — well, I don’t think, I’m sure that we’re definitely doing a better job in terms of reducing the cost of acquisition. Is there any potential for further reduction? Maybe, especially with the EIP model that has been implemented by our competitors, which we haven’t yet. Well, if the main reason for our competitors was to ultimately reduce the handset cost subsidies, well, I think it’s going to be a benefit to us from — naturally. So yes, there might be some additional potential savings on that front.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [47]

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We’ll take the last question. I think it’s David McFadgen.

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Operator [48]

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That’s right. David McFadgen, Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division – Director of Institutional Equity Research [49]

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Yes, a couple of questions. So first of all, I don’t think you gave out these metrics, but you usually do. What percentage of gross adds on the wireless side that you captured in the quarter? And then were the BYOD net adds still running at around 2/3 of your total net adds coming in?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [50]

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We captured 26% of gross adds. And yes, that’s right, about 2/3 is BYOD.

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David John McFadgen, Cormark Securities Inc., Research Division – Director of Institutional Equity Research [51]

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Okay. And then just following up on your comment, you said that the wireless EBITDA growth was around 40% in the quarter. So would that imply that the wireline EBITDA was down slightly?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [52]

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Yes. I mean it’s pretty close to flat, yes.

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David John McFadgen, Cormark Securities Inc., Research Division – Director of Institutional Equity Research [53]

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Pretty close to flat, okay. And then just lastly, on pricing for Fizz. You talked about moving up your prices last fall. I think, initially, you had to back off a little bit because you raised them a little too aggressively. And I was just wondering, following that, were you able to get all the price increases that you were targeting?

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Jean-François Pruneau, Videotron Ltd. – President & CEO [54]

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Yes. Well, it’s true that we’ve pulled back on some packages, mostly the low-end packages, so low data packages plans. So yes, we pulled back. Overall, I think about, I would say, 70%, 75% of the overall price increase has been kept or maintained.

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Pierre Karl Péladeau, Quebecor Inc. – CEO & President [55]

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So we thank you all. Thank you for joining us this afternoon. We hope that you keep well, and we’ll talk to you at the next quarter conference call.

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Operator [56]

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Ladies and gentlemen, this concludes the Quebecor Inc.’s financial results for the first quarter 2020 conference call. Thank you for your participation, and have a nice day.