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BCE Inc (NYSE:BCE)
Q2 2020 Earnings Call
Aug 6, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the BCE Q2 2020 Results Conference Call.

I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos -- Vice President of Investor Relations

Thank you, Louise, and good morning, everyone, and thank you for joining us morning. Participating on the call today will be Mirko Bibic, BCE's President and CEO; and Glen LeBlanc, our CFO. Our second quarter results package and other disclosure documents, including of today's news release, slide presentation as well as other documents issued earlier are available on BCE's Investor Relations web page. However, before we get started, I want to draw your attention to slide two, our safe harbor statement. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore, subject to risks and uncertainties. These forward-looking statements represent our expectations as of today and accordingly are subject to change. We disclaim any obligation to update forward-looking statements, except as required by law. Factors that may affect future results are contained in BCE's filings with both the Canadian Securities Commissions and the SEC and are also available on our corporate website.

With that, over to Mirko.

Mirko Bibic -- President and Chief Executive Officer

Good morning, everyone. Thanks, Thane. We're still in the midst of what continues to be a long journey for all of us, and the Bell team stepped up in Q2 by focusing on the operating principles that have guided our crisis response from the very start: keeping Canadians connected and informed, prioritizing the health and safety of the public, our customers and, of course, our team and supporting our customers and communities. I'm proud of the thousands of team members, who have been serving our customers at Bell workplaces and in the field since the crisis began. Against this backdrop, we delivered operating results for Q2 that underscore Bell's broadband network leadership to reinforce the critical nature of our services and demonstrate our ability to execute effectively under very difficult circumstances. Despite ongoing heavy demand for all our services, we have maintained Internet speeds and reliability, while continuing to operate our networks at a near-perfect 99.99% overall availability. We enabled work-from-home for about 90% of our employees, which included some 12,000 call center agents. By mid-April, service levels were back to what they were pre-COVID, and our call centers resumed full hours of operation at the beginning of June. In short, in a matter of a few weeks, we pivoted from full crisis mode to the stabilization phase. And now with Q2 behind us, we are focused on building momentum back into the business.

As Canada gradually reopens, our focus has been on ensuring customer access to our retail locations wherever possible. And as of now, 99% of our Bell, The Source and authorized dealer stores and kiosks are back in full operation. In Q2, we continued to grow broadband market share with more than 50,000 total net new wireless, retail Internet and IPTV customer additions. We also achieved a noteworthy milestone during the quarter, surpassing 10 million wireless subscribers. More impressively, despite significant COVID impacts absorbed in the quarter, we maintained our consolidated EBITDA margin essentially stable at 43.5%. In addition, we generated 50% higher year-over-year free cash flow. This contributed to our very strong liquidity position of $5.4 billion at the end of Q2, which provides ample financial flexibility to execute on our capital investment priorities and comfortably sustain BCE's common share dividend for the foreseeable future. In fact, just this morning, we declared as scheduled our common share dividend for Q3 that will be paid on October 15. I'll now turn to slide four in our presentation. In the midst of COVID, we've made meaningful progress in advancing our strategic priorities, so as to generate continued operating momentum in the near term and ultimately emerge from the crisis in an even stronger competitive position. 55% of our broadband footprint is now fiberized with 5.4 million homes and businesses, able to access the fastest Internet speeds in the market today of 1.5 gigabits per second.

We also fast-tracked our wireless home Internet service footprint with 137,000 additional homes passed in April alone, bringing the total number of rural locations equipped with fixed wireless technology to about 400,000. We're taking this unique technology even further by doubling Internet download speeds from 25 to 50 megabits per second to the first 300,000 households, starting this fall, while also expanding to rural communities throughout Atlantic Canada. And on June 11, we launched Canada's largest first generation 5G network with service available in five of the country's largest cities, which will be rolled out to more urban centers later this year. Championing the customer experience is a core strategic imperative for us at Bell. To this end, given that our retail stores were closed for an extended period, we accelerated investments on digital platforms and self-serve tools. More and more, these are the channels many customers prefer to use to interact with us. We are encouraging customers to take advantage of online and mobile self-serve options, the MyBell and Virgin Mobile My Account self-serve apps are the clear leaders in their space in terms of app ratings and provide customers best-in-class integrated access to The Bell and Virgin products and services. Since the start of COVID, approximately half of all customer transactions have been executed online. I'm also pleased to report that Virgin Mobile topped every wireless carrier in Canada from a J.D. Power ranking perspective for a fourth consecutive year as number 1 in overall customer service in the eyes of consumers, a very strong result for our Virgin Mobile brand.

Bell's strategic focus on customer experience also reflected in the latest report from the CCTS for Q2, which showed a 26% drop in the number of CCTS complaints by Bell customers; again, the best performance among national carriers. And as part of our ongoing efforts to safeguard the health and safety of the public, we introduced appointment-based selling in retail stores and ramped up our assisted self-installation and repair program. In fact, 1/3 of all new installs and repairs in Q2 were completed without entering the customer's home. In short, strong progress has been made on our imperative to champion customer experience and all these measures position us well in the short and the long term. Underscoring our ongoing leadership in service innovation, we launched Virgin TV a few weeks ago in Ontario and Quebec. Virgin TV is an app-based TV service that does not require a traditional set-top box or install and works on virtually all streaming devices. This new TV platform enhances our multi-brand strategy by offering TV services to virgin customers, who we know are clearly consuming vast amounts of content, but who are not subscribed to one of Bell's other TV brands currently. Our latest TV innovation just announced on Tuesday is the Bell Streamer. This is a compact 4K HDR streaming device powered by Android TV that offers customers all-in-one access to live TV and on-demand content from Bell Alt TV, support for the top streaming services and access to apps on Google Play. As you know, we also announced on June 1, the sale of most of our data centers to global data center operator, Equinix, in an all-cash transaction valued at just over $1 billion. We will maintain a strategic partnership with the acquirer to provide our enterprise clients with full access to Equinix' advanced hosting and Cloud solutions. The transaction is expected to close before the end of this year. As I've said before, and I think it's important to reiterate here again today, this is not the time to pull back on investment in critical network infrastructure and customer service improvements. They are necessary to keep us competitive in the short-term and will definitely benefit our company, our customers and our economy in so many ways over the medium and long term.

And the COVID crisis has underscored in a very real way, the benefits of Canada's global network leadership, whether that's wireless or wireline, all of which has been made possible because of our significant capital spending supported by long-standing facilities-based regulatory policies. It has never been more important for governments and regulators to support policies that encourage continued deployment of high-speed fiber networks, wireless home Internet in Canada's underserved rural communities and next-generation mobile 5G. And also, as I've said numerous times in the past, but again, which merits emphasizing with key regulatory decisions on the horizon, we just can't risk losing our global network leadership. Canada cannot afford to fall behind in the construction of digital infrastructure, which we all know will power so many segments of our economy, as we recover and heal from the impacts of COVID-19. Over to slide five now for a quick overview of some key operating metrics, and I'm going to start with Bell Wireless. COVID did have a significant impact on subscriber and promotional activity due to temporary store closures and stay-at-home requirements that were in place for much of the quarter. This led to a 35% year-over-year decline in postpaid gross adds in Q2. Consistent with this reduction in wireless sales activity, we also saw a corresponding decline in customer churn this quarter. In fact, postpaid churn was 0.82%, our lowest rate ever, which helped drive positive postpaid net additions of 22,000 for Q2. Notably, this result is net of a provision we took estimating the number of customer deactivations that would have otherwise occurred in the quarter for delayed or nonpayment, if not for the financial support actions we put in place because of COVID. So if you normalize for this nonpayment churn provision totaling 39,000 subscribers, our postpaid churn rate would have been 0.68% or 14 basis points lower than our reported results.

And with the introduction of device financing plans on Virgin Mobile in mid-May, Bell Wireless is now 100% EIP-based across all our brands. In prepaid, 13,000 new customers were added in the quarter. It's a good result given the COVID-driven market slowdown and the lapping of our Dollarama distribution agreement in May. With 99% of our wireless retail points of sale now reopened for business, we are beginning to see some pickup in demand, although it is still too early to predict when consumers' typical shopping activity will resume. However, when it does, and it will, we'll be ready to leverage our industry-leading distribution strength, our wireless network leadership, our fastest speeds and the improvements we are making right now to our digital platforms. So to finish up on wireless. Blended ABPU was down 8.8% over last year, not an unexpected result, given the material impact of COVID on roaming revenue, the ongoing decline in data overage, our increasing prepaid customer mix as well as the customer accommodations that we put in place during COVID to help those facing financial challenges. Okay. I'm going to move to Bell Wireline. Our subscriber results continue to reflect the importance and quality of our connectivity services. Although fewer residential and business customers are installing new services, fewer are also switching service providers. This drove 19,000 retail Internet net adds in Q2, which is unchanged versus last year, in what is traditionally a slower quarter for broadband. We also added another 46,000 FTTH subscribers this quarter, bringing the total number of direct fiber customers to more than 1.5 million, up 18% over last year. The broadband footprint advantage that we are building with the fastest fiber network and WHI, wireless home Internet speeds in the market today, positions us extremely well in both our consumer and business segments over the long-term to grow Internet revenue, which increased a strong 7.5% in Q2. On the TV side of things, we lost 4,000 net IPTV subscribers in Q2. This was the direct result of reduced sales activity and promotional offers as well as overall TV market maturity. And we also experienced good results in satellite TV and home phone, with customer losses improving 17% in satellite and 34% in home phone, as consumers continue to shelter and work from home. While we have not yet experienced any significant changes in customer behaviors or trends to date, some customers have delayed payment as they deal with the economic impacts of COVID.

As a result, consistent with the incremental bad debt provision we took in the quarter, we recorded an involuntary customer churn provision for nonpayment as we did for Bell Wireless, so as not to overstate our net subscriber additions and overall churn in Q2 for wireline. The provision for Bell Wireline amounted to roughly 45,000 customers. That's 19,000 in internet, 14,000 in TV and 12,000 in home phone. I'm going to move now to Bell Media. Although total advertising revenue was down, we have started to see signs of improvement. Some industries like automotive, retail and food are beginning to spend again. Also, the return of some key sporting events, including PGA Tour Golf, UFC, NASCAR, F1 and MLS Soccer have shown promising results. Most of these events have seen higher-than-usual audiences, and this improvement is expected to continue into Q3 and will be further positively influenced by the return of even more live sports, including, of course, the NBA, which is on right now; Golf's Major Championships, which start today; and the U.S. Open tennis. Impressively, even with the absence of live sports broadcast, TSN and RDS subscriber deactivations remained minimal in Q2. Crave also continued to deliver with strong direct-to-consumer growth as total subscribers increased to $2.8 million at the end of June, which is up from $2.7 million in Q1. And earlier this summer, in keeping with our imperative to deliver compelling content, we expanded Crave and added HBO Max program. So while it's still too early to predict what the recovery holds, we believe that BCE's Q2 consolidated results represent a low watermark. And although we don't expect to return to pre-COVID operating performance in the near term, Q3 is anticipated to show a marked improvement. We remain very confident in the underlying long-term fundamentals and performance of BCE. We're competitively well positioned to succeed with a healthy balance sheet and substantial ongoing free cash flow generation that provides us with a considerable financial flexibility to navigate through the COVID-19 crisis and to more than meet all our cash requirements for the balance of 2020.

And with that, I thank you all, and I'll turn it over to Glen.

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Thank you, Mirko, and good morning, everyone. I hope everyone is keeping well and staying safe this summer. Let's turn to slide seven. The financial impact of COVID-19 obviously accelerated in Q2, reflecting a full quarter impact of widespread retail store closures and reduced consumer activity as Canadians sheltered at home. This drove a 9.1% year-over-year decline in consolidated revenues. Due to the flow-through impact of lower revenue, adjusted EBITDA was down 9.4%. This result reflects approximately $85 million of costs incurred directly because of COVID, including the relocation of call center agents, employee redeployment expenses, the purchase of personal protective equipment, increased sanitation and cleaning and incremental provision for bad debt exposure totaling $36 million as well as donation of masks to healthcare and other frontline workers throughout Canada. Net earnings were down 64% over last year as a result of lower year-over-year EBITDA, lower equity income from MLSE due to COVID and a $452 million noncash impairment charge to Bell Media TV to reflect the current market value of its TV and radio assets.

Despite the steep earnings decline this quarter, free cash flow grew 50% to $1.6 billion. One of the reasons for the increase was a slowdown in capital spending during the initial stages of COVID, as our primary focus was on stabilizing the organization and ensuring continuity of critical services. Construction activity has now ramped up considerably. Lastly, I want to bring to your attention to a reporting change we made this quarter. As Mirko mentioned, as a result of our agreement to sell substantially all of Bell's data centers, those operating results are now being classified as discontinued operations this quarter with prior periods restated for consistency. Let's move to slide eight, and discuss wireless financials. COVID-19 had a material impact on Bell Wireless financial results in Q2 due to significant decrease in retail sales activity, reduced travel and an accelerated decline in data overage revenue, driven by optimizing of data packages with increased working from home and greater WiFi offloading, and customer accommodations introduced to help those facing financial difficulties because of COVID. As a result, service and product revenue decreased 6.2% and 24.5%, respectively, in the quarter. Although revenue pressures stemming from COVID-19 should begin to moderate as commercial activity picks up, roaming and data overage, in particular, are expected to remain headwinds for the balance of this year. Consistent with year-over-year decline in revenue, EBITDA decreased 9.2%. However, our wireless margins improved nearly 100 basis points to 45.7%. This was a result of a 12.5% reduction in operating costs attributable to the slowdown in sales activity, decreased acquisition-related expenses, including device subsidy and other marketing and distribution costs.

Let's turn to slide nine, wireline financials. Although we experienced lower demand of new residential service installations, waived Internet overage fees, providing provided pricing concessions to our customers and saw further weakness in SMB space due to economic fall-out of the crisis. The 1% revenue decline in the quarter was similar to Q1, even with a full quarter of COVID impacts. This speaks to the resiliency of our high-quality connectivity services. Combined Internet and TV revenue was up approximately 2% year-over-year, while the rate of voice decline voice revenue decline improved 3.8%, driven by increased use of conferencing, higher LD usage and fewer home phone customer deactivations. However, the business customer spending slowed down in Q2 because of COVID, which drove an 8% year-over-year decline in product revenue and a 4% reduction in business service solution sales. Despite more near-term financial risk from the after effects of COVID in the business sector compared to residential, the impact to date on Bell business markets has continued to be relatively moderate. Wireline EBITDA, which was down 5.3%, included $41 million in higher year-over-year opex, driven by the COVID-related cost impacts I detailed earlier. And in an incremental bad debt provision expense to reflect the current economic environment marked by higher levels of unemployment and continued uncertainty in the SME sector. This contributed to an approximately 200 basis point decrease in margin this quarter. Excluding these COVID-specific costs, wireline margin was relatively stable at around 44%.

Over to slide 10, and media financials. Q2 was a tough quarter for Bell Media. On a relative basis, it was our most significant impacted operating segment. But it also represented the smallest part of BCE's revenue and EBITDA mix. As witnessed by other broadcasters worldwide, we experienced a steep decline in advertising demand this quarter due to the impact of COVID on ad spending across all platforms, as commercial activity was significantly curtailed, major sports leagues suspended and other live events and TV productions canceled because of this crisis. We also faced a tough comparable from last year's strong growth that included incremental advertising revenue from our Toronto Raptors NBA championship run, the Big Bang Theory series finale and a surge in Crave customer subscriptions driven by the final season of Game of Thrones on HBO. As a result of these factors, total Bell Media revenue was down 31.2% in Q2, yielding a 31.9% decline in EBITDA. However, we maintain Bell Media's margins stable year-over-year at approximately 30% due to expense reductions driven by programming, production cost savings, the elimination of discretionary costs and amounts received under the federal government's employment wage subsidy program, as we met eligible criteria for parts of our media operation during the initial April-May measurement period. Over to EPS on slide 11. slide 11 summarizes, at a high level, the main components of adjusted EPS for Q2, which was $0.63 per share, down $0.30 versus last year. Lower EBITDA drove 2/3 of this decline, while the other 1/3 was attributable to lower year-over-year tax adjustments and higher other income expense. The increase in other expense reflected a reduction in equity income received from MLSE due to the effects of COVID and a loss recorded on a writedown of certain TV platform assets in the quarter.

Over to slide 12. Despite the COVID-driven decline in consolidated EBITDA this quarter, we grew free cash flow 50% versus last year to just over $1.6 billion. Year-over-year increase was due to substantial improvement in working capital that can be attributed to the decrease in sales activity because of COVID, higher bad debt provision that drove reduction in accounts receivable, a decrease in contract assets, reflecting a higher mix of customers on installment plans, fewer new subscriber activations and the amortization of deferred acquisition costs from prior quarters, and a lower wireless device inventory. Now it's important to note that a large portion of this favorable change in working capital is temporary in nature and will reverse as accounts receivable and inventory levels grow with a pickup in sales activity we're expecting. This quarter, strong free cash flow results also reflected an upside from a number of timing-related factors that will reverse in the second half of the year. Notably, capex, which I referenced earlier; and cash taxes, which benefited from the government relief measures, allowing for the deferral of tax installment payments until later this year. I'm going to wrap up on slide 13. And as Mirko said, but it's worth repeating, we ended the quarter with $5.4 billion of liquidity, which positions us well, given the financial challenges being faced by so many other companies and industries. And this does not even take into account the close to $1 billion in cash proceeds that we will receive from the sale of our data centers at the end of the year. We have successfully accessed the debt capital markets once again in May with a $1.5 billion MTN offering at a very attractive rate to shore up our already strong liquidity position. Our net debt leverage ratio remains very manageable at 2.86 times adjusted EBITDA. More importantly, we have no near-term refinancing requirements, as our next public debt maturity does not occur until the end of Q3 2021. In Canada and Bell Canada's defined benefit pension plan continues to remain virtually fully funded despite a modest decline in the estimated funded position this quarter due to the impacts of lower interest rates in Q2.

And with that, I'll turn the call back over to Thane and the operator to begin Q&A.

Thane Fotopoulos -- Vice President of Investor Relations

Hey. Thanks, Glen. [Operator Instructions]

So with that, Louise, we're ready to take our first question.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan -- Scotiabank -- Analyst

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

Mirko Bibic -- President and Chief Executive Officer

Okay. Thanks, Jeff. Glen, I'll start first. And then I'll hand it over to you to unpack the ABPU a bit for Jeff. Thanks for the question, Jeff. So I'll start first on wireless, your question on that. I'll just give you some high-level comments on the ABPU or the service revenue impacts from COVID. So I break it down into 3, four categories. So there was a roaming decline, clearly with the halt in travel. And you can, kind of, quantify that in the range of $60 million. And then there were COVID-related overage decline impacts, as customers were staying at home and were offloading data usage to WiFI. Then of course, there was data overage decline due to the migration to unlimited plans. But on that one, I have to say the team I've said this every single quarter that I've been on these calls, the team has continued to manage that migration really, really well, and we've been doing that since the launch of unlimited plans last summer. And there has been the impact of customer accommodations that we offer to help our customers during the COVID crisis. So you put all those together, Jeff, and they are more than the overall service revenue decline. I'll answer the customer experience question now. And then, Glen, you can unpack ABPU a little bit more if you think necessary. So on customer experience, you're right.

I mean it has been a focus since I've come on board as CEO on January 6. And it's a journey on the improvements to our online platforms, like it's clear that customers our mission is going to be to serve customers the way they want to be served. And the vast majority of transactions, especially in wireless continue to be in traditional retail stores. And as I mentioned in my opening as the economy reopens, and we're 99% open on the stores, that advantage swings back our way. So we'll continue to be best-in-class on that. But other customers want to be served in the call centers and we need to be best-in-class there and online as well. And we're upping our game each and every day. It's a journey. It's things like allowing customers to change their TV programming online, make online payments, change their rate plans online, upgrading their smartphones online. It's those kinds of things, Jeff, that we continually work on the byflows. And I'm not going to quantify how much we pulled into Q2, but it will be a core category of capex spend this year, and that's going to continue. Over to you, Glen.

Glen LeBlanc -- Chief Financial Officer and Vice Chair

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

Jeff Fan -- Scotiabank -- Analyst

Okay, thank you both.

Operator

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

Richard Choe -- JPMorgan -- Analyst

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

Mirko Bibic -- President and Chief Executive Officer

Thanks, Richard. So on TV, I'll start there. I think sales were clearly disrupted because of COVID. And there was an impact on the commercial side, obviously. So I think small businesses, bars, hotels, that kind of thing. And we are seeing the effects of high penetration of TV in our current five markets. We're lapping strong all-TV growth. And certainly in Q2, anyway, because of initially the impacts of COVID, we did have slower new service footprint growth, which I think will pick up in the back half of the year in terms of service footprint growth. Now on Internet, you're right. I mean performance was quite resilient during, what we all know is, a pretty difficult period of time, and that speaks to the importance and the quality of our Internet.

We have the fastest download and the fastest upload. And upload is pretty important right now. And we have the best WiFi in the marketplace. And that, too, is very important. So on that, I mean, I think those would be the primary reasons why Internet is so resilient. We've had the acceleration of footprint on wireless home Internet. Of course, as we enter a community, particularly a rural community that hasn't had high-speed broadband with wireless home Internet, we accelerate that footprint, that just is a boon for the community and, of course, leads to the subscriber growth, and we expect the resilience in the Internet to continue over the rest of the year.

Richard Choe -- JPMorgan -- Analyst

Great, thank you.

Operator

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

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

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

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

Mirko Bibic -- President and Chief Executive Officer

Okay. Thanks, Aravinda. I'll take the enterprise question. Glen, why don't you take the free cash flow question. So on the business side, the puts and takes are the following. So customer spending did slow down in things like product revenues and service solutions. On the other hand, there was traction in connectivity, remote collaboration, conferencing services, those types of things. So it, kind of, intuitively makes sense, right, given what we were going through in Q2. So those are the broad categories of puts and takes. But I have to say, I mean, as I look forward to the rest of the year, I think it's still too early to predict how all that's going to shake out for the rest of the year on the enterprise side. And a little bit the same answer on SMB, small business, again, really too early to predict what's going to happen. But on the SMB, as you know, it's a very small part of our overall business markets exposure. Glen?

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Thanks, Mirko. Yes, free cash flow strength, I think you kind of unpacked it a little bit and touched on the caution that I was giving going forward. As I said in my opening remarks, capex was lower certainly in the early months of March and April and May as we focused on organizational stability and ensuring that we propped up or secured our critical services, and now we're moving back to more construction and footprint expansion. So we will see capital increase in the second half of the year. The working capital, I mentioned earlier, will reverse. Now on the handsets, it's hard to say how this will shake out. I certainly I'm not going to try to predict second waves and third waves, do we have potential store disruption, again, with a slowdown in sales activity. Obviously, it's going to be down because we as Mirko mentioned in his opening remarks that we had we're 100% EIP now. When I look at the quarter alone, EIP, plus the reduced sales activity, I mean handset costs were down 25%, $140 million, I certainly hope sales activity is stronger in the second half of the year. So I wouldn't think you can just extrapolate that. But hard to see how it's going to shake out. Let's just keep our fingers crossed that we see sales activity remain strong in the second half.

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

Thank you.

Operator

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

Vince Valentini -- TD Securities -- Analyst

Yeah, thanks very much. Yes. First, a clarification, if I can. The 39,000 and 45,000 subscriber provisions, can you just clarify if that would have been zero in the second quarter last year? Or is this something you always do, but it just got elevated this quarter? The second one, a bigger-picture question. I see a huge arbitrage opportunity and strategic opportunity for BCE emerging here. I mean your cost of debt has never been lower, you're flushed with cash. You've got another $1 billion coming from the data center sale soon, and we're looking at a media industry that's just imploding and Stingray's revenue is around 60%. Yesterday in radio, I think Corus Radio was down 52%. I mean there's a big need here for the government to step in and allow some consolidation or regulatory relief. And it seems to me that BCE should be the leading candidate here to arbitrage your incredibly strong scale in media and cost of capital to try to, sort of, save the industry and help yourself and your shareholders at the same time. So I'm just wondering if you have any comments on thoughts about strategic growth opportunities in media, Mirko?

Mirko Bibic -- President and Chief Executive Officer

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

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Of course. Vince, look, the customer provisions, and this is what transpired. In any normal quarter, what would happen is when customers reach certain points of nonpayment, then we activate what we refer to as an involuntary churn or involuntary disconnect. What we had agreed to do during this difficult time is, we would not deactivate customers. And we would ensure that they had their Internet and their wireless connectivity that became so critical at this difficult time. That said, we know that we will have to one day return to normal, and we are going to see an escalation or a requirement for involuntary disconnects. So what I did is ensure that the provision that we took from the customers, 39,000, you alluded to in wireless, 45,000, 46,000 in wireline mirrors exactly what historical experience would have been on disconnects. So as you see in aging, into 30, 60, 90, 120 days, we ensured that the provision is it mirrors historical performance. So the important thing to remember, Vince, is now if you take revenue credits, if you take bad debt increase in bad debt provisions, you have to ensure that your nets and your churn, are all aligned, and that's what a customer provision does, doesn't overstate one metric.

Mirko Bibic -- President and Chief Executive Officer

Okay, thanks. And Vince, on the second question. So I'm always open to good ideas, let me tell you that. We think we've shown a strong track record over the years at being opportunistic and very strategic on the M&A side. So we'll always keep looking. I'm not going to comment specifically on the precise example you put forward, but always looking to be opportunistic. Mean, you're whether or not it's in media or in telecom, I mean, you do raise a point about scale. And it's pretty obvious that we ought to be encouraging scale in the country. Look, you just take media, which is the example you brought forward. Just look who are we competing against. It's a rather silly notion to still think of the media industry as a domestic media industry with three players competing with each other. I mean, we're competing with global Internet giants really at this stage in the game. And I'm happy with our asset mix right now. I think it positions us well strategically and always looking to be opportunistic and it's hard for me to comment on this call on the specific idea, but it was a good question.

Vince Valentini -- TD Securities -- Analyst

Fair enough. Thank you.

Operator

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

Drew McReynolds -- RBC Capital Markets -- Analyst

Yeah, thanks. Thanks very much. Yes. A couple of housekeeping questions for Glen and then one bigger one for you, Mirko. Glen, on the pension exposure, doing a great job keeping the solvency fully funded, essentially. Are there kind of any scenarios here where that changes kind of going forward, maybe just remind us on sensitivities? And on the bad debt expense, can you break that down between wireless, wireline and media?

And then over to you, Mirko, just bigger picture. Satellite broadband services around the world are getting a lot of attention. Love to hear your thoughts on, at least, in Canada, sizing up, either that opportunity or threat for your broadband strategy over the longer term?

Mirko Bibic -- President and Chief Executive Officer

Okay. I'll go first, Glen, on the second question. So Drew, on the satellite broadband services and the competitive implications, I'll put up our fiber Internet network up against anything, I mean the fastest speeds in North America. And we got what customers want. What do they want? They want download speeds, we can't be beat and certainly, satellite can't beat that. And with upload speeds. That's what they want. That's more and more important, as I said in my opening remarks, can't beat fiber, and certainly satellite broadband cannot. And the in-home WiFi services that we have, the time to market advantage, weather and then on fiber generally as compared to satellite. But if you think about our wireless home Internet expansion, 25 download, one meg up. That's going at 5, 50, 10 soon. That's going to be hard for satellite to beat. We've already got 400,000 homes that have the ability to purchase that product. So I think we're in a very good position. I think we're in a great position if you even compare us to your traditional cable competitors, let alone satellite broadband that hasn't launched yet. And like, obviously, it will be well received, I think, in some very, very deep rural areas at some point. But I think that's kind of my reflection on that question, Drew. Over to you, Glen.

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Thanks, Mirko. Pension exposure, a great question. It's hard to believe that the discount rates continue to drop at a time when we were looking at discount rates at the end of 2019 between our plans, they were running around, on average, 2.8%. And now at the end of the quarter, we were balancing around 2.23% to 2.37%, between our multiple plans. So significant decrease in the discount rate. But all of that said, we remained at 99 we're balancing now 99% to 100% on any given day from a solvency ratio perspective, which is just remarkable, and I'm incredibly proud of what our team has done to put us in this position. We didn't get here by accident. We got here by following a very prescriptive glide path, ensuring that over 70% of our assets are now invested in fixed income. So that gives us a natural hedge against this declining discount rate. So a remarkable job. On a sensitivity, if you saw discount rate drop another 25 basis points and reach two or sub-2 it's around $125 million to $150 million and when you consider a pension plan of over $25 billion, in total, that's pretty manageable.

So I feel like we've positioned ourselves incredibly well to mitigate this risk and never, in my wildest dreams that, I think we'd be looking at discount rates at this and still have a fully funded plan. Over to bad debt exposure. Yes, as I mentioned in my remarks, I think there's I'll unpack this a little further. I took an extra provision of $36 million as a bad debt expense. But I also took provision of $28 million through revenue. So a total of $64 million additional provision related to COVID. Through revenue a provision of revenue, that's really accommodations we gave customers, customer credits we gave, waiving late paid charges and making arrangements for folks, who were struggling during this difficult time. So in total, if you look at the P&L impact of COVID, bad debt and revenue impact, it's about $64 million. If I broke that down by BU, 45% wireless, 45% wireline, about 10% media.

Drew McReynolds -- RBC Capital Markets -- Analyst

Okay that's perfect Glen. Thank you, both.

Operator

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

Maher Yaghi -- Desjardins -- Analyst

Yes, thank you for taking....[Technical Issues]

Mirko Bibic -- President and Chief Executive Officer

Hey, Maher, we can't hear you. Sorry, you cut out.

Operator

Hello, can you pick up sorry, he dropped off his line, so I'll just go to the next person. Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

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

Mirko Bibic -- President and Chief Executive Officer

Thanks, Simon. Yes, so we did launch on June 11, you know that. So the cities were Montreal, the GTA, Calgary, Edmonton, Vancouver, and we will be expanding to about 28 additional markets in 2020. So all that's going according to plan. I mean I'm really pleased that our competitive positioning here on 5G because our speeds are 1.7 gigabits per second, which is fastest in the industry. And we're going to be even faster than that next year when 3.5 gigahertz spectrum becomes available for mobile. I'm also quite pleased that we have a 3.5 gigahertz spectrum advantage going in to the auction given our Inukshuk Holdings. And just generally on the network side, with so many advantages, including our network sharing arrangement with Telus, as you know, and then the number of cell sites that we have, which are fiberized, which will be so important for the service attributes customers will be looking for, for 5G.

So far, look, it's early days. I'm quite pleased with how well it's going in the context of having just launched, having launched, kind of, still with stores having not been completely and fully opened at the time that we did. I'm really pleased with how well-positioned we're going to be to capture growth in 5G. And to that question, which is the last part that you asked me about, Simon, I mean I see growth potential in the consumer space, just kind of like on the consumer side when we upgraded from 2G to 3G, 3G to 4G, etc. There's always a spike in penetration, smartphone adoption, especially usage, and that drives revenue. And you're right, there are going to be a multitude of use cases on the enterprise side and on the IoT side, which will be in a great position to capitalize on, especially when you think about our distribution advantage with BBM, Bell Business Markets, and our enterprise strength.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you.

Operator

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

Maher Yaghi -- Desjardins -- Analyst

Thank you for taking my question and getting me back in the queue. I wanted to take Vince's question and flip it other side. With capex expected to increase, I guess, with 5G, you have spectrum auctions coming up next year. You also have increased volatility in the markets that you're operating in. Do you think you have other assets that could be divested off? And I'm thinking here, real estate potentially. And you always, in the past, talked about the importance of owning cell towers. In the world of 5G, do you think that dependency and importance is to the same extent or you could get capital out of the market, out of your assets from that portion of your asset mix and redeploy it somewhere else?

Mirko Bibic -- President and Chief Executive Officer

Okay. Thanks, Maher. Nice to hear you come back on the line. I'm going to, in some respects, reiterate some of the things I said in response to Vince's question, which is, I'm quite happy with our asset mix, but we'll always be looking to optimize that as things develop. On the specific question you asked in terms of divesting cell site or tower portfolio, I am of the view that, that is a very competitively important asset. And I think it's especially important in the world of 5G. So owning that infrastructure remains an important part of our core business, and I don't see that changing in the near term, that's for sure. And in terms of just more general, your point about cost savings with respect to real estate, if I take the real estate question a bit more broadly, clearly with what we've gone through in the last few months, and what we are going to put a strong focus on real estate optimization, and particularly, from an office space point of view. And that's something that we're going to be looking at as others across the Canadian economy surely are.

Maher Yaghi -- Desjardins -- Analyst

Thank you very much.

Operator

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

Batya Levi -- UBS -- Analyst

Great. Thank you. Can you also provide some color on how the $85 million COVID-related expenses were allocated in each segment? And how do you think about wireless margins in the second half with activity picking up? And one follow-up in media. Does adding HBO Max change our profitability of the segments in any way?

Mirko Bibic -- President and Chief Executive Officer

Why don't you go ahead, Glen?

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Yes. Okay. I'll start on the first part on the $85 million. Look, I gave of that $85 million, I said that operating expense of $36 million of that was bad debt. And I gave you a breakdown of how that affected to BUs. And I'm not going to unpack the rest of the details. The $36 million represents a substantive portion of the $85 million. I gave you the color on what it was with PPE and the donation the increased sanitization costs, the donation of PPE that we gave to our frontline workers, the cost we incurred trying to ensure that our we were able to move our contact center employees home to work in a safe environment. As far as the split of that, the 45%, 45%, 10% is pretty accurate on the whole envelope. And Mirko, over to you on...

Mirko Bibic -- President and Chief Executive Officer

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

Glen LeBlanc -- Chief Financial Officer and Vice Chair

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

Mirko Bibic -- President and Chief Executive Officer

Look, sales are growing week after week, month after month. And while traffic is clearly down in our stores, we're seeing strong conversion from the traffic that is in stores. I mentioned this last time we were on a call like this together. And we're seeing that trend continue. So it all points toward positive momentum half of Q2.

Batya Levi -- UBS -- Analyst

Got it. Thank you.

Operator

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

Mathew -- Bank of America -- Analyst

It's Mathew[phonetic] sitting in for David. I just had two. Mirko, in your prepared remarks, you mentioned you expect sequential improvement in Q3. And I was just wondering if you could elaborate on what you see as the main drivers of that expectation. And then just secondly, if I could, with the acceleration in the self-serve and online channel, is that leading to any change in how you see the physical distribution network, whether it's size or its reach and maybe some cost savings that you could extract from there? Anything would be helpful.

Mirko Bibic -- President and Chief Executive Officer

Okay. Good questions. Thanks, Matthew. So on Q3, kind of, I'll pull from different comments we've made over the last hour. So on wireless, I just previously mentioned what we're seeing in terms of continued strength week after week, so I won't repeat that, but we'll reiterate it. On Internet, as I mentioned earlier, performance is quite resilient, and we expect that to continue over the rest of the year. On home phone, no significant sales, but really strong churn. I called out the results in my opening remarks. And we've seen a material improvement in the pace of decline, and we expect continued improvement in the pace of decline throughout 2020. TV, I called out a little bit earlier in the enterprise side. And on media, I had not talked about what we're seeing in media, we're seeing gradual improvement and momentum slowly building. Cancellations have stabilized. Some segments are advertising again, and we're seeing bookings month-over-month accelerating. We're seeing strong demand for the fall season. And I mentioned F1. Just take F1, for example, just to point out the pent-up demand for sports, we're up over 20% over the first three races, and we're on pace for new audience records for that property. You have seen NASCAR, very strong viewership year-over-year.

And I think the Raptors are going to be very strong in terms of viewership. In fact, the U.S. versus U.S. team matchups that we've had on TSN since the NBA has come back, have been triple our normal audiences for matchups featuring U.S. teams. So all that bodes toward progressively improving loadings or bookings on Media. In self-serve, look, like I said earlier, I still think that the predominant way Canadians are going want to shop for telecom services, particularly wireless over the near-term is in store. And so that natural advantage we have, so it's back our way. Yes, we're going to need scale self-serve and you, kind of, see it in our results. And when we direct activity online, it does lead to a lower COA, which is a lot of goodness. And then the footprint, we'll be optimizing that as we go. And that's a function of consumer behavior, consumer patterns, our readiness online, and we'll continually be evolving that mix between online and traditional retail store footprint.

Thane Fotopoulos -- Vice President of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Thane Fotopoulos -- Vice President of Investor Relations

Mirko Bibic -- President and Chief Executive Officer

Glen LeBlanc -- Chief Financial Officer and Vice Chair

Jeff Fan -- Scotiabank -- Analyst

Richard Choe -- JPMorgan -- Analyst

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

Vince Valentini -- TD Securities -- Analyst

Drew McReynolds -- RBC Capital Markets -- Analyst

Maher Yaghi -- Desjardins -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Batya Levi -- UBS -- Analyst

Mathew -- Bank of America -- Analyst

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