Rogers Communications Inc. (RCI) Q2 2007 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rogers Communications Second Quarter 2007 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. I would like to remind everyone that this conference is being recorded today, Tuesday, July 31st, 2007, at 12:00 PM Eastern Time. And I would now like to turn the conference over to Mr. Bruce Mann, of the Rogers' management team. Mr. Mann, please go ahead.

Thanks very much, operator. And good afternoon, everyone. Welcome to our Rogers second quarter '07 earnings teleconference. Just a couple of items very quickly. On the line with us today are Ted Rogers, our Chief Executive Officer and Bill Linton, our Chief Financial Officer as well as Nadir Mohamed, who is the President and COO of the Communications Division. And we have also got three divisional presidents, Rob Bruce from Wireless, Edward Rogers from Cable and Tony Viner from Media along with a couple members from their respective management teams. We put our full 2Q ’07 earnings release out on the wires right before the market opened this morning. If you don't already have a copy you can get them on the rogers.com site or on Canada newswire or first call. Please fully review that release and our 2006 MD&A, which is in our annual report including the cautionary language they contain with respect to forward-looking information as those conferences… those cautions and references apply equally to our dialogue on today's call. Before I turn it over to Ted, one last item. Several of you have asked over the past few days; to spare you any additional expense, late last night John Gossling and his wife became proud owners of a healthy new baby girl. So, with that let me turn it over to Ted Rogers and then Bill Linton for some very brief introductory remarks. And then the management team will take your questions. Please go ahead, Mr. Rogers.

Hello, everyone and thank you all for joining us. Bill Linton and I just have a couple of opening remarks, then we will open up the call. We think it’s important to make sure that you have ample time to ask questions and further discuss the quarter with the operating management team who have delivered the results, Nadir, Rob, Edward and Tony. I will start by saying that subscriber and financial results combined to represent another strong quarter for Rogers, and congratulations to the operating team for doing that in the quarter. We are continuing to add subscribers, while driving good financial results and in fact double digit growth in revenue, operating profit and free cash flow. It’s a good balance of profitable growth and I believe, the reflection of the benefits on how we are increasingly operating as a single company. Now, these were hard earned results in the face of a very competitive marketplace. In fact, this was the first full quarter of both wireless number portability in Canada and the win back restrictions on local telephony services being removed for the incumbent telephone monopolies. So, we started off with it being a tough quarter with these new factors. And while the results for the first half of the year are good, we still have much work to do, in just plain serving the customer better, and that’s the stepped up focus for us in the second half. Overall, nothing's changed in terms of our core focus for this year. It’s a simple execution, integration and profitable growth. While we have continued to invest heavily, we also continue to de-leverage. As well we have completed the amalgamation of RCI with our cable and wireless subsidiaries. And that enables us to really streamline our compliance obligations but more importantly, as we increasingly run Rogers as one company, this further enables the operations to work more closely together. I am delighted to report that we also laid the groundwork for returning increasing amounts of cash to shareholders by more than tripling the dividend during the quarter from $0.16 to $0.50 annually. And we think that that is a significant increase. It’s not as much as perhaps some companies do, but we have a lot of things to do in improving our Company and we want to increase it in the future but not rush it too fast. As well, we have the unique change during the quarter to opportunistically and significantly bulk up our broadcasting assets by acquiring the Citytv Network, which CTVglobemedia was required to divest. So, we exchanged in effect the A stations that we had contracted to buy before for the CTV stations, which is a wonderful thing. It was the obvious missing piece in the Media’s portfolio and Tony and Rael Merson and their teams at Rogers Media are very much looking forward to getting the deal closed and the Citytv Network into the Rogers fold. The acquisition has a lot of potential for Rogers. First of all, with our wireless company that is really emphasizing youth and the Citytv stations follow right along with that and can do a great deal with our Wireless group. And also our existing TV, radio and cable TV assets and the particularly strong geographic alignment across the portfolio. We believe that over time, this deal will prove to have been a very well timed and valuable purchase for the company. We also had an opportunity to do a tuck-in acquisition in cable during the quarter, buying out the remaining interest in Futureway from our long-time developer friends and partners. This not only brings about 40,000 telephony and internet subscribers under our full ownership, but it will also further strengthen our position in video in many of the large new residential developments being constructed around Toronto over the next couple of years. And in my opinion we… Rogers has also always concentrated on this and it’s a very important policy of ours. We obviously continue to fight the good fight in Ottawa on a number of important regulatory files that are open. And most importantly are the ground rules for the Spectrum auction planned for 2008. And Bill Linton and Ken Engelhart and all their team are working very, very hard on that. I spoke about this on the call last quarter, and I'll emphasize it again. In a nutshell competition and subsidized entry are contradictions in terms, period. I will say it again, competition, which we are all for, and subsidized entry are contradictions in terms, period. Facts are the facts. Those looking for government handouts can twist the facts around, but the reality is that we have intense competition in Canadian wireless today. We have some of the lowest wireless prices in the world for the average consumer. Yes, sure you can always point out a couple of examples where our prices are higher. But overall, for the average consumer we have among the lowest wireless prices in the world. And we have some of the most advanced networks and services in the world. I mean not to boast, but Rogers service of wireless is superb. And with the Microcell acquisition, we were able to interweave the networks together and provide a type of rugged solid service that we can put in our ads that it is the most advanced network and fewer dropped calls and it’s a much better network for customers to use. The notion of setting aside artificially low price spectrum for well financed special interests by having the Canadian taxpayer subsidize it, is purely disgraceful, disgraceful. It is one thing to say there should be a satisfaction. All right, I can understand that. But to say that they should get it at a price that is way lower than what we are going to have to pay to Spectrum is outrageous, and we protest in the strongest way. Further notion of them parsing us to let these same large well-financed companies roam on our networks to provide their own services, so they can avoid the billions of dollars of capital investment, which in our case is over $7 billion, which we and the other facilities based carriers incurred at completely our own risk, is scandalous. That’s why I call them scalawags. Our current government industry has made it abundantly clear that it stands for telecom markets governed by free market competition, for those stifling, detailed regulatory interference, which the government and ministers done so much have streamlined and improved over the last year. So, I will say it again, competition and subsidized entry are contradictions in terms. As a nationalist, I hope I am not being naïve in assuming that our government will walk the talk as they develop and hand down these important rules. I will stop here by just saying that we've had the strong first half of 2007 and with the same time we are in fiercely competitive markets. We had e many challenges and hard work in front of us for the coming quarters. I would like to make sure you have ample time to hear from our senior management team that delivered the results. So, let me stop and turn it over to our Chief Financial Officer, Bill Linton.

Thanks, Ted and hello everyone. I'm going to very quickly hit on a few of the more significant highlights, and some accounting changes in the quarter and then we'll get to your questions. Clearly, we're continuing to maintain our growth, right across the board. Revenues, operating profits, free cash flow and dividends are all up in the quarter. As Ted mentioned, we also completed the amalgamation of RCI with our wholly owned cable and wireless subsidiaries. This enables us to go from three public reporting entities to one, and for having multiple bank line and credit facilities to one new consolidated line. Not only will this streamline a lot of our reporting and compliance, it also enhances our flexibility in the future. On the financials we've recorded revenues of $2.5 billion, representing a 16% top line growth versus the same quarter last year. That's essentially all organic growth, driven by wireless being up 25% strongly supported by a 12% top line growth in our cable business. On the subscriber front, obviously continued solid customer growth at wireless with 138,000 net adds which combined with postpaid churn at 1.15% and the 8% ARPU increase creates very powerful operating leverage for this quickly growing and as Ted told you, highly competitive segment. At the cable business we saw the usual pattern of sequential declines in subscriber adds associated with Q2 seasonality, but our RGU growth was steady year-over-year. And I think you'll see a bit of a heightened focus on cable RGU growth as we proceed in the second half. In terms of the year-over-year decline in operating profit of Rogers Media, that was principally driven by the combination of higher player cable costs at the Blue Jays, investments in new publications such as Hello and also partially reflects the comparison to last year's unusually strong results, which included quite a bit of high margin FIFA World Cup advertising revenue. EBITDA for the quarter or operating profit, adjusted for the option accounting change and integration costs of $898 million is up 20% from Q2 last year, with margins up 130 basis points as well. So, good growth financially and continued positive operating leverage. With CapEx and interest both down modestly year-over-year, operating free cash flow, which is EBITDA less CapEx and interest was $365 million, up more than 90% from the $188 million in the year ago period. Now in the quarter we introduced a cash settlement feature for stock option exercises, which provides a tax deductible use of cash and source to mitigate dilution. Effectively it is a tax deductible buyback. As part of adopting these stock appreciations rights, we were required to change our stock option accounting going forward, to use what's called the intrinsic value method, which has a two fold effect. First is that we recorded a transitional one time non-cash charge for accounting purposes of approximately $452 million. Second is that effective with the May 28th adoption date. We will report stock compensation expense on our income statement based on changes in our share price. We consider these costs more like costs that are or will soon be associated with share buybacks. So really they are more a capital transaction than an operating expense. The accounting is a bit counterintuitive and there will be some volatility in EBITDA to the extent there are movements in our share price, as a result of this accounting. So that you can easily separate out the stock comp effect, to normalize the results. We've laid out both of these elements, the transitional charge and the stock comp expense for the second quarter of Q2 '07 in the table of page six of the release and we will continue to do so each quarter, going forward. These fluctuations are write offs that were not assumed in our 2007 guidance. One final item I wanted to call your attention to, is the breakout we've provided this quarter both in the MG&A and the footnotes to this statement with respect to the derivative instruments line on our balance sheet. As you can see, the split of the $1.6 billion derivative instruments line between $1.3 billion, which is foreign exchange related and $291 million, which is interest rate component. Now this component reduces to zero, as the debt matures. Several of you had asked for this breakdown, so you could more clearly exclude the interest rate component and not overstate the net debt number in your models. Lastly, in looking forward as we said in the release this morning, we have increased the high end of the fiscal '07 guidance ranges for revenue, EBITDA and cash flow by amounts which implied, apply respectable increases in our year-over-year growth rate for 2007. I'll end it there and we will take your questions.

Thanks, Bill. Operator, we will be ready to take questions. From the participants, just a moment, quickly before we begin, as we do each quarter just ask that those that have questions that are participating would be courteous enough as to limit the questions to one topic so as many people as possible have a chance to participate. And then to the extent we have time we will circle back around and take additional questions. So with that, if you would explain how you want to queue for the questions, we will be ready to take them. Question and Answer

Thank you. [Operator instruction]. Your first question comes from Jonathan Allen of RBC Capital Markets. Please go ahead.

Thanks very much. First, I've got one clarification question. Bill, as far as the stock options, you mentioned in that, just pull the table on page six, that $1 a share appreciation in Rogers stock prices, $16 million. So if your stock price at the end of June was $45, then at the end of each quarter we just sort of make that adjustment and add that to the recurring corporate expenses, I suppose?

There's a couple of things, Jonathan. First of all, you've got to take the change in the stock price. Secondly, there is a change in the vesting. So as options vest, the expense increases. And you have got to remember that we also have outstanding, a lesser number of RSUs and DSUs that have always been marked to market. So that will impact the calculation as well. But we can… we've tried to break those out a little bit on that table on page six, but we can certainly go through that with you and help you out with it.

I'm sure you will be getting a few calls after this for clarification. Real question for perhaps, Edward or Nadir or whoever. Looking at the cable business, I guess the subscriber growth was pretty good this quarter, and not too much of a shortfall relative to consensus. But still looking at the EBITDA margin continuing to decline year-over-year, and I think you are doing about 36%, 37% EBITDA margins, still a fair bit below where your peers are Cogeco, Vidéotron, and Shaw all up in the low to mid 40s. I am kind of wondering where can Rogers cable margins actually get to perhaps in the long run and what is it going to take to be able to get from that 36% where we are now to something in the low 40s?

Well, I'll start, I will take that. I think… thanks for the question. When we look at, first the EBITDA for cable, we're on track to achieve our guidance that we put out for 2007. you know when I look at the, I mean all I can do is go through some variables that we see as things that should help us in the future in our business and where that nets out to is tough to track, where we will be on a comparable business because you never know where all the companies go. But obviously we are still pushing hard to grow our business. We were, as I say on track on our customer in terms of the net adds by product. But we would probably like to do a bit better, we are pushing RHP awfully hard both in terms of acquiring new customers and moving the current customers from circuit over to cable. There's a couple of, maybe I don’t know if this is only Rogers, but it's at Rogers, things for instance, as we move circuit customers over to RHP cable, we are retiring as we've mentioned in the past our tier I platform and moving to an all boxes platform as we prep for DOS' 3.0 [ph]. And some of these are costs that are going to have longer term benefits but don't generate incremental revenue in 2007. We launched tier 4 on the TV side this year, which when we look at our census on customers to add, and value for money showing some good numbers, but probably longer term will show… will be helpful to us on market share and on future rate increases. But in the short term that did show more costs as we launched American movie classics and Turner movie classics. As was previously said by Bill, we did have some changes on stock options and such which I don’t know if others get. And we are seeing a bit higher costs on tech, on the tech side especially for RHP, and what we have found is that as we take internet for instance as a percentage of base calling, it was quite high in the early days, and has come down to sub 20 points of our internet base and our RHP base is starting a bit high and we are hoping to get some leverage and some scale and improve our efficiency on the tax side that should help drive future margin on that business.

I don’t want to put words in your mouth Ed, but it sounds like you’re saying in the near term you’re still focused on growing the business, but structurally, doesn’t sound like there’s anything different from Rogers Cable than in the peer group. And so should we assume that at some point in the next few years you could probably get up over that 40% range?

Oh, I mean, definitely we’re targeting for our improvement and we’re targeting to be in line at 40% or better. The only one you look at comparably to cable companies what’s embedded in that line is obviously the DSL and circuit switch territory, which is a good business but not at the historic cable margin businesses. And we’re also higher on digital penetration, and our average revenue per TV sub is, I think amongst the highest, if not the highest. So while HR [ph] gets incremental, EBITDA is not at the same percentage per se. And so if you look at EBITDA per RGU or EBITDA for TV customer I think we’ll be doing quite well. But on the overall margin, those are just some of the differences you'd see today.

Okay thanks very much, Edward.

Jonathan, just one quick addition, just to add to what Edward’s already covered, and area that we’re looking to be more efficient, going forward is that an area on packaging our products and services. Most of you would know that in the market we’ve so far been focused on incremental sales to our existing customers. There is a, going forward a much more, call it a stronger orientation to triple pay packages that I think will help both on the COA side as well as the provisioning side where we can get more efficiency in terms of tackling something [ph]. But Jon, I mean, completely as Edward said, we’re focused on improving these margins and we think there’s opportunities, going forward.

Okay, thanks, Nadir.

The next question comes from Jeffery Fan at UBS Securities. Please go ahead Jeffery Fan – UBS Securities (Canada): Thanks very much and good afternoon to everyone. I wanted to follow up on the questions regarding cable. First of all on the basic subscriber front, I realize there are some seasonality that impacts the sequential net additions or decline. But when we compare it on a year over year basis, it looks like the subscriber decline is higher this year. Wondering if there is anything specific in the quarter? Second is to Nadir's point about the triple play and perhaps zero in on the provisioning. Given that the cable net abs look like it's a little bit lighter, are we not seeing yet any sort of pull through from RHP and the provisioning in getting basic subs back up? And is that something that is a key focus in the second half of this year? And I’m wondering if Nadir can expand a little bit on that? Thanks.

Sure, I'll start again. I think on the basic it's… there is a seasonality element with it. We got off to a fairly good start in comparison to previous first quarters. So our second quarter wasn’t where we’d like it to be. I think we saw definitely our competitors with a little bit more hustle and muscle in market, they reintroduced bundles. Their offers were sharper. I think we have had our… we had a push around our VOD to differentiate our product and to drive revenue per customer, that probably wasn’t… didn’t, wasn’t as sharp on acquiring as more customers per se. And as you roll these things out, some of them take off well and some of them don’t take off as well as they should have. But probably a bit more of a focus on acquiring versus upselling through the balance of the year. I think when you look at the results in terms of the basic to RHP growth, generally I think there is an uplift as you're more competitive in the products. And as Nadir mentioned, we're launching our more formal triple play pricing which actually goes out today. And we hope that too, that all ports will lift. I think there is a lot of talk out there in terms of does basic directly benefit and I think the answer’s yes, but I think there’s a lot of things around that. But being more confident in all three products, and getting customers to come on should help the basics for the balance of 2007.

There’s just that one small addition, and again if you look back over the first six months, simply a continuation on our strategy for the last couple of years has been very much on modest discounts, balance between profit and growth. If you looked at specifics in the last couple of quarters, our marketing programs tended to be around additional services, whether it’s VIP add-ons or in the case of home phones and wireless connections, or play where we offered some special programs for free calling for ISD customers. I think the shift that you will see going forward, as Edward made reference to it, it's coming up a lot today is more acquisition oriented with the focus on triple play. I think it says that we’ll be looking to drive some more loads and loads in a manner that are efficient from a good provision point of view. Jeffery Fan – UBS Securities (Canada): Okay thanks.

Your next question comes from Bob Bek of CIBC World Markets. Please go ahead Bob Bek – CIBC World Markets: Hi I’ve got a question actually on the media for Tony. I mean I was surprised [ph] you put forth the very strong platform you guys now have with the acquisitions. Can you talk a bit more about how you plan to leverage that? I mean, you're now with two layers, both the CITY and the OMNI, you’ve got quite a potential to leverage that along with the radio assets. So can you talk a bit about strategy there, on how you plan to sort of build out? And if you could talk at all about what might be missing? Ted mentioned this was a missing piece. Are there other pieces missing from the media platform? Anthony P. Viner – President & CEO, Rogers Media Inc. Bob. Most… the big media players in Canada have… the missing piece for us was over the air, television and clearly the acquisition of the CITY Television Group was important for us. It’s a great brand and it's across the country from Toronto to Vancouver. Well, I've said before we’re bullish on over the year television because… for a few reasons. One, they still… over the air television still attracts individually larger audiences than cable channels do. They still enjoy mandatory carriage on all of the distribution platforms and that is going to increasingly become important as the systems migrate to digital. And in Canada, of course we have simulcast rates which are very important. The Channel M acquisition which is both CITY and Channel M are subject to CRTC approval, was a nice tuck-in for us. Perhaps lost in the noisy acquisition of CITY was, on the same day that the commission announced that they required CTV to divest, they also said that we were awarded licenses in Calgary and Edmonton for OMNI style stations. So Channel M gives us sort of horizontal efficiencies in two stations, two OMNI stations in Toronto, one Calgary, one Edmonton, and one in Vancouver so that we can have programming and sales synergies, horizontally, I’ll call it. And then vertically, we will, if successful at the commission we will have two stations in every market except Winnipeg, and combine those with the CITY stations and be able to have… take advantage of what I'll call vertical synergies. So we’re pleased with both of those. And as you and Ted have both mentioned, we have leading radio stations in all of those markets. So we expect that we’ll have a strong presence as we go forward.

Hi, this is Ed here, I’d just like to add that it’s my understanding that the multi-cultural stations will be run separately from the Citytv stations. And they’ll each have their own personality and their own unique programming sources. They will not be made into homogenized TV. There’ll be two very special Champagne TVs. Anthony P. Viner – President & CEO, Rogers Media Inc. That’s correct. I mean, the synergies we might gain will be mostly in sales and in administration and what we call back office expenses. Bob Bek – CIBC World Markets: So it would be fair to say that if other assets were available, I mean, you guys now have a bulk in media that’s certainly a size to play. I take it you’re looking at other assets if they become available. Anthony P. Viner – President & CEO, Rogers Media Inc. We’ve always been opportunistic, Bob. If there is a good opportunity for us, we’re focused, we’d like to grow. But I think right now we’ve got… we’ve got a big integration in front of us. So I think we’re going to concentrate on that. Bob Bek – CIBC World Markets: Okay. And then lastly can you just update us on the timing with the CITY in the view of the CRTC, and I guess the new station start ups in Alberta and Channel M. Can you just update timing and all? Anthony P. Viner – President & CEO, Rogers Media Inc. Sure. We’re… the hearing is August 29th. The decision… we would expect that the decision will occur some time in the fall. The hearing for Channel M won’t happen until early in the New Year. And our expectation is that we'll be… we'll launch Edmonton and Calgary, the OMNI stations in the Spring of ’08. Bob Bek – CIBC World Markets: That’s great. Thanks very much. Anthony P. Viner – President & CEO, Rogers Media Inc. You are welcome.

Your next question comes from Randal Rudniski of Credit Suisse. Please go ahead

Thanks. In the presentation earlier, I think those are that second half was the heightened focus on subscriber, maybe growth or metrics. As it pertains to wireless, there are some new devices that are out there that could be important drivers, specifically when it comes to the iPhone. Can you give us an update as to when it's coming or and as to what it's like?

Hi, Randal, it’s Rob Bruce, I’ll take the questions. Well let me start off by saying that the iPhone is a phenomenal product and we look forward to being able to offer it in Canada. As far as when, I can’t give you a precise answer. I'd say it's fair to say that it’s a big world out there with more than 2 billion GSM subscribers. And if you believe what you read in the papers, Apple’s focused on where they will go next after the U.S. in terms of its next set of very large markets, which, this is speculation, and in fact some of the facts are it's likely to be Europe or Asia or some of the BRIC countries. I honestly can’t tell you where Canada or Rogers is in Apple’s Q in terms of specific marketing plans, but I can tell you that we know the folks at Apple here well and that we are ready to move forward in Canada, and we are excited to continue our dialogue with them whenever they are ready. So, the other speculation, and again some down days in the media world got people speculating that it may have something to do with pricing in Canada, and I would like to just say that I think that’s nonsense. We’ve shown in the past that we are aggressive, we are innovators in terms of pricing and we’ll have the appropriate pricing in place to meet the Apple iPhone application when it’s available in Canada. So, let me lay that to rest. On your second question with respect to Wi-Fi, I think there were some articles written to suggest that carriers in Canada weren’t launching Wi-Fi devices. We in fact have launched three Wi-Fi capable wireless devices, so they are doing multiple back and forth between Wi-Fi and our, at GSM networks. So, and we are committed to continuing to launch devices like that, going forward. So, I guess that probably for the most part covers the question.

Okay, thanks. I have one other question, if I may. It pertains to the media business. Revenues rose 4% year-over-year in this quarter which is a pretty sharp deceleration from the growth trajectory in the first quarter. I guess the question is, is that slowdown, is that chiefly due to Sportsnet or did any other division experience the same trend?

Randal, the decline was on a number of fronts, Sports Entertainment, or the Jays was one area. Sportsnet was down slightly… I guess it was across the board in terms of revenue. On the EBITDA side as we said in the release, it was very heavily the Jays, some options and then we had a… we’ve launched a couple of new publications which as we expected would, it created losses in their first few months of operation. But actually we’ve had… in radio, we have been strong. And again, the only issues we mentioned are, is the FIFA last year in the second quarter, we had World Cup, and the fact that it's not now there has affected the top line at both Sportsnet and OMNI.

Perfect, thanks.

Your next question comes from Tim Casey of BMO Capital Markets. Please go ahead

Thanks. I’ve got an oldie but a goody for Mr. Rogers. There has been renewed speculation in capital markets and in the financial press regarding a potential transaction with Shaw, and I am just wondering Ted, could you… I know you are not in the habit of commenting on rumors but I am wondering if you could comment on this one? Thanks.

Well, let me just say that I think the speculation in the papers recently about Rogers buying Shaw well just plain irresponsible. I’ll say that again, plain irresponsible. Some of that they are right, some completely theoretical data [ph] based on no sources or facts whatsoever. Based completely on speculation. And then the media turns around, and writes about this as it were a fact. And you can debate who, if anyone, these kind of stories are helpful for, but where I come from, we'd be hard pressed to call them news. Look, we got a lot on our plate right now. As I said at the start, we are focused on execution and integration. To the extent we are looking at the acquisitions, they are relatively small, tuck-in type deals like what we’ve done in the media or cable this past quarter. We do not have any act to file on Shaw. We have not had any discussions with Shaw on putting on the companies together. And I frankly just don’t see the need to go take on some very large and defining acquisition like that because we are in as good a shape as we have ever been. The fact is that the Rogers family is the company's single largest shareholder. So you can rest assured that there is not a lot of appetite to do some large dilutive transaction like that. I'll just leave it at that.

Thank you.

Your next question comes from Phil Cusick of Bear Stearns. Please go ahead

I want to follow-up on an earlier question that was asked. Can you expand, on you mentioned the extent… the focus on RGU growth in the cable side in the second half and can you expand on that? And I also wonder if you can give us a little update on 3G timing and what you are thinking there? Thanks a lot.

Well I'll start and pass it to Rob. I think, I mean there is two things. I think there is, number one on the second half or Q, has been historically a stronger time for us and you will see that as you go into the past years. And three, as was mentioned, we do a pretty good job one product at a time and will continue to do that, because a large segment of customers purchase product in that fashion. But we want to do a better job and be more confident at selling two and three products at a time. And we are aligning ourselves in putting out pricing and trying to align our channels in such a model and we think that that should help us. So, more RGUs than we would have, if we continue to spend the majority of our time and money doing it one at a time.

Phil, it's Rob Bruce. On that second part of your question, I assume you are referring to our HSDPA rollout?

Yes.

When you say 3G timing. Let me just update you again and say that as you probably know, we've rolled that to Golden Horseshoe and that’s been out there for some time now. Over the balance of the year, we will be rolling out to between 55% and 60% of the POPs across the country. And we haven't actually declared the market-by-market rollout plans for competitive reasons, but that plan stands and we are on track.

Thanks, guys.

Your next question comes from Greg MacDonald of National Bank Financial. Please go ahead

Thanks. And first, congratulations to John and family for the new addition. Questions on free cash flow and the strategy for use thereof. Looks like it's, given the track, it's fairly safe to say $1 billion plus in free cash flow this year and $1.5 billion, let’s call it plus in ’08 is easily achievable. I wish I have the same challenge but I wonder if you might comment a little bit more on planned use of cash, specifically because you actually did mention in the last conference call that you might have a little bit more insight from the board’s perspective on target, targeted uses for free cash going forward. I know that there was a dividend increase last quarter. But I think it will be helpful for us if we had an idea on a go forward basis, what’s the planned sort of payout ratio you are looking at for dividends? And given the fact that bonds spreads are widening, if that has an impact on where your capital structure targets are, and how much cash you want to keep on the balance sheet, those sorts of things?

It’s Ted here. Let me just start and say what I think I said the last time and that is that we are very grateful for the results and the returns due to the terrific management in the group. We are very grateful for the free cash flow and the general prosperity that we have in 2007. But I think it’s important that Rogers really starts to look at itself and review all its processes, review its IT work. We, as the business gets more complex, we have to upgrade our customer information and billing system, our procedures. We have to make sure that we have done everything we can to minimize the danger of some of that happening somewhere where we have switches or headends or something of that nature that could… the chance of that happening is relatively small, but the effect if that happens is catastrophic. So, I am very keen on reviewing all of those things. And if it takes… I don’t refer to this as capital expenditures in the normal sense. If it takes an investment in ourselves to put us on a better footing or whatever comes in terms of technologies or new competition in future, then so be it. As a large shareholder that is the most important thing that we can do, is protect the shareholders and make this a very strong industrial type company that can withstand adversity and shocks and difficulties, whether they be manmade or they may be terrorists or no matter what it is. I think that it's important for me to see to it that those things are dealt with now while we have the means to do so. I hope we keep increasing the dividend over time. Buy back a lot of shares? No, no. We need to, as I say, use the money for improving our company. And in due course, when the company is strong, as I would like it to be and cash flows are overwhelming, as I hope they will, then fine, we can answer the phone when somebody many calls with a deal. But there is nothing attractive now. We don’t need to be running around doing things. We are creating shareholder value the old fashioned way, not through great deals or pursuits. Thank you.

So just as a quick follow on, I appreciate you expanding on that issue. Are you implying them that free cash usage in the near term priority would go to potentially higher CapEx for these one time type items to bulletproof your service offering or are you implying sort of more like, you would prefer to have a conservative balance sheet for a rainy day in case that type of expenditure is required?

The former, the former.

The former? Okay.

It takes too long. If you are going to overcome some of these difficulties, I am talking of a three year program.

Right.

A big deal. And the sooner we can have it, the better it is.

Okay. That’s helpful.

We are getting at it. We are getting at it. Let me assure you. Nadir and Bill and myself and Rob and Edward, the whole team are working very, very hard on these issues.

Okay. Thanks a lot.

Your next question comes from James Breen of Thomas Weisel. Please go ahead.

Thank you. Just couple of question on the wireless side, we saw a pretty good jump in EBITDA margins this quarter for wireless. I was wondering if you could just talk about what’s caused that and if you think the current level is sustainable? And also… we also saw a good step up on ARPUs, in wireless ARPUs. Can you talk a little bit what held that and is there… will further HSDPA adoption continue to help to push up ARPUs there? Thanks.

James, Rob Bruce. Firstly, from a margin expectation perspective, I guess, I'd just draw your attention to the guidance we just issued, the new guidance and that should point you in the right direction. In terms of EBITDA strength in the quarter, I mean, propelled by revenue growth, churn improvement, lower COA and I think some comprehensive cost management. Touching on the… on what the key drivers were from an ARPU perspective data, obviously number one, some help from roaming, from LD and essential services, our customers continues to buy more things from us and that’s obviously reflected in the ARPU growth. So good strength across the board. And we will work hard to continue it.

Great. Thank you.

Your next question comes from Dvai Ghose of Genuity Capital Markets. Please go ahead.

Thanks very much. Congratulations on the results. Question to do with your M&A strategy, and I am not talking about big acquisitions like Shaw, more historic tuck-in acquisitions. If I look at the results, you have a great M&A track record, don’t get me wrong, but if I look at where the drags are, on the media side you talked about the Blue Jays, OK Radio was referred to in the press release and I assume that Citytv will put even more drag on profitability and growth. It’s all growing very fast. It doesn’t generate any EBITDA. If I look at the cable segment it seems that the Call-Net acquisition continues to be a drag in terms of margins as well as growth. Could you help me to understand why these acquisitions will create shareholder value or are creating shareholder value?

That’s quite a question. Because we believe that it is the optimum way for us to spend the resources we have for a long-term sustainable growth for the company.

I don’t as on the… just to correct the impression on OK Radio, it’s been terrific acquisition for us and added substantially to our growth in the second quarter.

Okay. Well, maybe I could take it another way then. You deemphasized acquisitions in terms of use of free cash flow on a going forward basis, but you've referred to rainy day risk, I guess, if we look at the sort of rainy day items that are out there such as switch video, introduction of MPEG 4 encoders et cetera, et cetera other ways of enhancing your cable network, they all seem relatively inexpensive compared to overbuilds and so on. Is there something we are missing here in terms of potential rainy day issues?

Look, I am not… I am not referring to the sort of things you referred to which are our normal growth. We will have digital switching in due course, MPEG 4 is going to take a little longer. And we will move some of the channels off of cable analog when the penetration for tier 3 comes up to 85%. No, I am referring to much more sort of key issues, like if you lost a cellular switch or if you lost a cable headend and various other things of that magnitude. I am talking about getting a new billing system, so that we can look after all of the customers' needs. We talk about running this company as one company, because you can’t run this as one company if you have a whole bunch of different billing systems. Right. So, that’s been the mistake in my judgment, in my life time, that has been the mistake of other communications companies. They have not invested in keeping up-to-date and they've paid for it dearly.

Thanks very much. Appreciate it.

Your next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Okay. Thank you. Good morning. And question for Rob. We haven’t heard too much about number portability, it looks like your churn is in good shape. So can you just comment on the relative amount of ports that you saw this quarter and whether there was much in the way of incremental share gain or loss versus your expectations? And what you might think for the rest of the year? Thanks.

Yes. Thanks Simon. It's, overall total port volumes are slightly lighter than we had… than we had forecast overall. Again, I think we said we wouldn’t talk about port in and port out stocks as we remain very focused on churn, net adds and EBITDA which we think are the most important part of the business. But I think in terms of how the Canadian industry has executed, and Rogers' obviously a big part of that, we are seeing very low port failures. We're one of the few countries around the world that offers inter-modal ports from landline to wireless. And we are told that the effort across the industry has been one of the best and fastest ever accomplished. So, we're proud of what’s been done. But it’s really been not that big a factor in terms of the way the quarter has played out.

Okay. Thank you.

Ladies and gentlemen at this time we have time for two additional questions. Your first one John Henderson. Please go ahead… from Scotia Capital.

Yes, thank you, and congrats on some great numbers. The question is around sort of Inukshuk and wireless data. And I just wanted to get a sense of where Inukshuk revenues are going, do they show up in your data revenue line at all? Do they impact postpaid ARPU? And then also just an outlook on, I guess capital spending for Inukshuk for 802.16e and when we might expect that to get started?

Yes, it's Rob Bruce. The numbers do show up in the revenue. I would say with respect to Inukshuk, it's still early days. We continue to take up a modest approach in terms of how we roll out Inukshuk and the guidance that we've provided in the past in terms of capital is, we're still at it.

It's Ed Here. This is really turning out to be better than we ever forecast. You may have read recently that Sprint and Craig McCaw's company have done a deal in the United States that remarkably tracks the deal that ourselves and Bell have done. We will be converting it to WiMAX over the next couple of years. And it is now a stationary service, you can't use it in a moving vehicle or anything. And that will happen in the next couple of years. So it’s a… plus I've always said it was a investment in the future with '08, '09, '10 as the start of the maturity years. And I think we made a fabulous decision to get into it. Our board was a little nervous, as you can imagine, but the Rogers boards have always been a little nervous when I was proposing things over the years.

Thanks very much. That’s great.

Your next question comes from Glen Campbell of Merrill Lynch. Please go ahead.

Yes. Thanks very much. On wireless, you put up a fabulous churn number in a market where we've seen really very aggressive pricing on wireless and so number portability's come in. So I'm wondering to what degree… and at the same time your retention spending is low. So I'm wondering to what degree this sort of lower, more aggressive pricing in the market has enabled you to sort of move your existing customers on to lower priced plans, instead of seeing them churn, and to what degree you've done that instead of offering them new handsets. And I guess whether, and whether there would be any sort of knockout effects in terms of ARPU in the future? Thanks.

Glen, it's Rob again. We spent an awful lot of time working on the customer experience components in advance of LNP. We think that's paid major dividends that are reflected in the churn numbers. Frankly, we're very pleased because in most countries that we studied in preparation for LNP, we saw a churn bump at least for two or three quarters. So we're pleased to not do that. I think again I would say it's a reflection of a fair bit of work in preparation in front of it. I wouldn’t want you to walk away thinking we went out and re-priced the whole bunch of people in the base, because we just plain didn't do that. Obviously, as you saw, in our retention spend, we've been quite open about it. We've continued to make sure that our customers are on great handsets that they are pleased to wear. And we've taken other retention measures, obviously very targeted ones to make sure that we land in a good place both financially and from the churn perspective. So I think that's, that's what you see in the numbers. We're very pleased with our churn numbers. Plus personally I think it' one of the highlights of the quarter for all of us sitting around the table.

Just broadly on this sort of pricing flow through issue. There have been various price changes over the last sort of 12 to 18 months. Should we model in any moderation in the rate of ARPU growth in the coming quarters, let's say on the voice side to reflect anniversary dates on price changes?

We think that's always reasonable, there's… as you know there are, from time to time price increases, most notably, some of the ones we've referenced on previous calls, voicemail, ID changes last September. These things will roll over in a typical manner and won't necessarily be replaced from a voice perspective. I would hope that you would continue to see some great efforts on the data side as we continue to drive and continue to build those businesses in a targeted way. So, hopefully those will help offset some of the sort of diminished opportunities on voice as we go forward.

Okay. Thanks very much.

Right, it's Bruce Mann, let me just quickly say thank you to everybody for participating this afternoon. We all appreciate your ownership and your coverage and to the extent there were people in the queue that we didn't get to, that have questions, if you'd please give Dan Coombes or myself a call, both of our contacts are on the press release, we'll get your questions answered. So thank you again, and this concludes today's call. Have a great afternoon.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.