BCE Inc (BCE) 2002 Q1 法說會逐字稿

Good afternoon, everyone. Appreciate you joining us today to review and discuss MTS's first quarter results. The news release detailing the results was issued earlier today, including announcement of the second-quarter 2002 dividend which the board has established at 19 cents per share. The format of today's call will include prepared remarks followed by a question period. Our presenters include Bill Fraser, president and CEO of MTS, and Wayne Demkey, executive vice president, finance and CFO. The content of today's call may contain forward-looking statements and there are risks that actual results may differ materially from those contemplated by these forward-looking statements. And for additional information on these risks, please consult MTS' filings with the Canadian securities commissions. I'll now turn the call over to Bill.

Thanks, Brad, and good afternoon everyone. In terms of my comments today, I'd like to begin by touching briefly on the first-quarter results, and then highlight the areas where we'll be focusing as we move forward. Wayne will then cover off the details on the financials. MTS baseline operations have consistently been a pillar of strength when it comes to profitability and the first quarter proved to be no exception. inaudible] also made good progress in the first quarter as it advanced along the path of profitable. Both the baseline EBITDA margin of 52.1% and EPS of 44 cents were consistent with the levels achieved in the first quarter of 2001, despite softer market conditions. While year over year baseline growth slowed somewhat from the pace set in 2001, revenues and EBITDA still delivered improved performance, increasing by 3.4% each. The lower relative year over year growth reflects the softer economic and telecom market conditions throughout North America. In MTS' case, the source of slower growth is largely from outside of Manitoba and in fact south of the border. Over the past several years, we've been very successful in winning contracts to perform infrastructure work for telcos in the U.S. With the current market weakness, demand for these services as decreased. Given the softer market conditions are not expected to persist for an extended period, we're not altering our annual baseline targets for revenues, EBITDA and EPS, which call for growth in the 6 to 8% range. We are however anticipating performance in 2002 to be lower end of this range for all three metrics. In the Manitoba market, we're building our operations and leveraging our leadership position for the continued delivery of long-term profitable growth. Our approach all along has been to carefully invest, ensuring we don't get too far out in front of the demand curve and the benefits are clear. In wireless, the vast majority of Manitobans consistently choose MTS. At March 31st, we had more than 211,000 customers, a 21% increase from a year earlier, representing 68% of the total wireless market. High-speed internet also saw excellent gains. Once again, in the first quarter, 8100 new customers were added bringing the total high-speed customer base to more than 42,000, and representing a year over year increase of 155%. The strong growth is continuing into April, and with a further 3100 customers added during the first three weeks of this month. The introduction of our DSL starter plans here in the quarter has had a positive impact. During the last six weeks of the first quarter, when we had the offering in the market, 2200 customers signed on. Priced at 24.95, it has opened the door for our existing dial-up customers to move up the value chain. At the same time, we're taking the opportunity to encourage customers to move directly onto regular high-speed service with a six-month introductory offer. In all, our combined dial-up and high-speed internet customer base now totals 102,000, representing year over year growth of 28%. Still on the baseline, our approach in the E-business space is also reflective of our prudent style. The operations are well established, provide us with access to markets beyond Manitoba and continue to deliver solid performance. And with revenues in the first quarter of $8 million, the operation is off to a great start this year. Outside the baseline, our most significant achievement to date in 2002 came on April the 11th, with the announcement that we had struck new arrangements with Bell Canada concerning our joint operations in Alberta and BC. We made great progress while leading the operations in the west, and we're satisfied in knowing the company is in an excellent position and on a path to profitability, much of which had its beginnings with MTS. There are a number of benefits for MTS flowing from the new arrangements we have entered into with Bell. We've streamlined the government's process, and enhanced the opportunity for profitable growth through Bell West in Alberta and BC. The address for market for the western operation increases from 1.7 billion to 3.4 billion, as a result of these arrangements. As a member of the Bell West board, I'm looking forward to seeing the expanded company rapidly accelerate and advance its operations in the west. We've also established significant downside protection for our investment with a guaranteed minimum return valued at approximately $650 million, and which represents a compound annual return of more than 20%, based on the 2004 put. And lastly, we've crystallized a significant gain of approximately $75 million on the sale of a portion of our investment in [Intrigna]. Lastly, a word on corporate direction. Our strategies have consistently been to focus and lead the business in Manitoba and to selectively and prudently invest in opportunities that are adjacent to our operations and that build on our core competencies. We stuck to our knitting and resisted investments in unproven strategies with high associated risk. It's an approach that has worked extremely well for creating value, and you can be assured we fully intend to continue this direction. To conclude, MTS is very well-positioned for long-term value creation. The baseline operations are highly profitable, with strong cash flows that are underpinned by a clear leadership position in Manitoba. Added to that is the company's attractive risk/reward profile, it's high credit rating, and its balance sheet strength that ranks second to none in the North American industry, all of which make us very optimistic about the long-term prospects for our business. Thank you and I'll now turn the call over to Wayne.

Thanks, Bill, and good afternoon everyone. Looking first at the baseline operations, revenues in the first quarter were up by 3.4% to 204.4 million. And EBITDA also increased by 3.4%, or 3.5 million, to 106.5 million. The EBITDA improvement, as we've described in the past, is reflective of our approach to managing the business, an approach that focuses on the margin in the traditional operations to reduce the associated expenses and using the savings to fund selective profitable growth areas. Very positive revenue gains were realized in our higher-growth areas of wireless, internet, and E-business through the first quarter. Wireless revenues climbed by 15.7% to 31 million due to growth in customers partially offset by a lower average revenue per unit. Customers increased on a year over year basis by about 21%, while average revenue per unit at $46.53 in the quarter continued to rank well in the industry. Driven by continuing strong demand, internet revenues increased by 37.3% in the first quarter to 8.1 million. Year over year, the total number of high-speed customers increased by 155% to more than 42,000 at March 31st. The DSL starter offering we have in the market is also helping to attract customers to the broad-band platform, which we believe is key as we look to move them up the value chain with other broad-band enabled services in the future. The E-business operations reported strong growth in the first quarter, with revenues increasing by 33.9% to 8.3 million. As noted in the past, this business does typically experience some seasonality in Q1 of each year. This is attributable to a portion of Qunara's customer base being government departments and agencies and their budget year-end being March 31st. Revenues from traditional operations, including local, long distance, and directory, collectively were 151.3 million in the fourth quarter, up marginally by approximately 1%. Local revenues increased by 0.6 million as a result of local rate increases implemented in 2001, together with growth in enhanced services. These increases were partially offset by lower revenues due to changes in the [CRTC's] contribution mechanism, together with a small decrease in wire line network access services. Long distance revenues rose 1.2% to 51.1 million due to a variety of things, including new customers, select residential price increases, partly offset by lower residential calling volumes, and some price decreases. Miscellaneous revenues were 5.7 million in the first quarter, compared with 8.7 million in 2001. The lower revenues are primarily attributable to decreased demand for telecom infrastructure work in the U.S. For all of 2002, we had anticipated revenues from these services to be approximately $16 million. Given the current market conditions, we have removed this from our forecast, which contributes to our targets for baseline revenues moving to the low end of our 6 to 8% range for the year. Turning to consolidated results, earnings per share was 27 cents from the first quarter, reflecting the strength of the baseline operations, net of the impact from [Intrigna]. Intrigna's] EPS impact on MTS was negative 17 cents in the quarter and represented a significant improvement from the negative 20 cents per share in the fourth quarter of last year. Consolidated EBITDA was 90 million in the quarter, versus 93.3 million in 2001. The 3.5% decrease is due to [Intrigna]'s EBITDA losses, partially offset by growth in baseline EBITDA. [Intrigna]'s EBITDA losses in the first quarter were 16.5 million, reflecting a sequential improvement from its loss of 18.5 million in Q4 '01. Consolidated revenues increased 23.8% to 290.4 million. Intrigna]'s revenues climbed to 86 million, up from 57 million in the fourth quarter. Telecom revenues were up by 16.5% to 55.9 million, compared with 48 million in the fourth quarter. Of these revenues, 8 million were on net. Super-net construction revenues came in at 30 million, compared with 9 million in the fourth quarter. Capital spending for the quarter totaled 47.6 million, compared with 67.1 million a year earlier. Baseline capex was 41 million, up from 35.7 million a year earlier due to the timing of spending at [inaudible]. For all of 2002 next general's capital envelope currently at 76 million, 37% lower than 2001's level. Intrigna]'s capex was 6.6 million in the first quarter versus 31.4 million in Q1 '01. This year, more of the capex for the western operations is scheduled for the last three quarters of the year than was the case in 2001. Our baseline capital budget for all of 2002 was set at 228 million. We are currently taking a close look at our planned baseline spending in relation to our business plans to determine if there are any opportunities to rationalize capex this year. In terms of cash, our cash flow from operations was negative for the first quarter, owing to the payment of income tax for 2001. We cut our first-ever check to Revenue Canada in February, representing income taxes for last year. This amounted to about $80 million. Beginning this year, we are required to make regular quarterly and monthly installments. In other words, we will be required to make cash payments for two years' taxes this year, for both 2001 and 2002. If you back out the payment for 2001 income taxes, you see a truer picture of the cash flow from operations and available free cash flow. Excluding 2001 taxes, we would anticipate generating approximately 50 million in free cash flow from base operations this year. During the quarter, we issued 70 million of medium-term notes. The seven-year notes were priced to yield 5.85%, a very attractive rate and reflective of MTS' strong financial position and high credit ratings. With this issuance, the company's debt ratio moved up marginally to 34%. Looking ahead, this will increase slightly as additional medium-term notes are used to fund growth at Bell West. By year-end, the debt ratio is expected to be about 35%. Still, by far, the lowest in the North American industry. Lastly, as a reminder, the new arrangements we have entered into with Bell also have some significant impacts on the way we report the western operations in our financial statements. Prior to closing this transaction, MTS consolidated [Intrigna]'s financial results. Effective April 11th, we will begin accounting for the investment in Bell West on an equity basis, meaning we will no longer include the western operations' revenues and expenses in our income statement. Rather, we will only include 40% of Bell West's net income or loss on the MTS income statement. We will, therefore, report [Intrigna]'s year-to-date April 11th results as part of MTS' consolidated financial performance and thereafter report only MTS' 40% interest in Bell West's earnings. Also, in the second quarter, we will be recognizing a gain of approximately 75 million, which reflects the reduction in MTS' ownership in the western operations from 67% of [Intrigna] to 40% of Bell West. It is based on that portion of the difference between the guaranteed minimum floor value and the underlying book value of our investment in Bell [Intrigna]. This gain represents a compound annual return of more than 20% over the life of MTS' investment. Thank you. We would now be pleased to take questions.

Thank you, gentlemen. Questions by using a quick queue polling feature. If you have a question, please press 1 on your touch-tone telephone. If you're using a speakerphone, please lift the hand Seth first and press 1 and should you wish to cancel your question, please press the number sign. Please press 1 at this time if you have a question. Our first question comes from Vince [Valentini] from [TD Newcrest]. Please go ahead.

Thanks very much. First, Wayne, I'm just trying to clarify there. If you exercise the put in February of 2004 for 458 million, there would be no further gain to book at that time?

No, Vince. Actually, what we've recognized is essentially 40% of the ultimate gain that we are likely to achieve. As that -- and that is representative of the reduction in our ownership interest from 66 and two-thirds to 40%. So if you take 26 and two-thirds over 66 and two-thirds, that's the proportion of our investment that has been deemed disposed of, and therefore, it's that portion of the gain that we've recognized at this point.

Good, good. That's more what I was thinking. The second question is broader. If you do exercise that put, I think you'd take what's already a pretty healthy balance sheet, with 35% debt to cap, as you say, by the end of the year. You'd probably be in an almost debt-free position in 2004. I'm wondering, Bill, if you can give us any sense at this time what the strategic plans are and whether you can prioritize certain uses of the cash, whether it be increased dividends, maybe going after something like [Sastel], maybe trying to expand Qunara, where your thinking is at these days.

Okay. Well, certainly we're going to assess our investment in Bell West in February of 2004 based on their performance up to that point in time and the expectations going forward, and relate that to alternative investments that we may have in terms of comparison of that. And certainly all of the things that you mentioned in terms of looking at opportunities to expand our core business. I mean, we're going to continually do that in terms of seeking out opportunities that we think are going to increase shareholder value. I mean, the other things that we would certainly look at are increasing the dividend and share buy-backs, and/or reducing the debt, but probably the first three would be a higher priority than reducing the debt, given the strength of our balance sheet at this point in time.

Can I just follow up on that? I mean, some of your peers at [Telus] and [NBC], the boards there have looked forward -- or the business plans for a couple of years to justify what are seemingly pretty high dividend payouts right now whereas at MTS it seems to be the opposite. It seems that you have a lot of room to increase the dividend today, given that you have certainty over the value of [Intrigna] and the risk profile there is extremely low now. Is it not on the board table to increase the dividend in the near term even before you get to 2004?

Yeah, I think that's a fair observation. There was discussion at the board today around that issue, and -- and certainly there was a request for us to bring back analysis and further discussion in future board meetings to assess that situation. So certainly we're not going to wait for two years in terms of looking at whether that should be increased or not.

Okay. Great. Thanks.

Our next question comes from Glenn Campbell from Merrill Lynch. Please go ahead.

Yes, thanks very much. A couple of questions. First, on the starter DSL offer, you gave us some good detail on how that's progressing. It seems to be coming well. Could you talk a little bit about cannibalization, the degree to which those customers might be coming from people in the regular high-speed service?

At this point, Glenn -- and I should qualify this by we've only had the starter plan in the market for about six weeks, but we haven't noticed really any cannibalization at all. It's been negligible. As a matter of fact, it's about the migration that's going the other way. In terms of our dial-up customers moving to the high-speed plan, more are moving to the higher-speed rather than the starter plan. The majority of those, or about 65% of those people that were migrating that way, chose the higher-speed. And really, there hasn't been any migration the other way, from the higher-speed to -- to the starter plan at all.

Okay. Thanks. And also, in DSL, can you remind us of what the unit capital costs are for a subscriber? I'm thinking of the modem and the [D-Slam]. How much per subscriber is that costing, ballpark?

Oh, gosh, Glenn, I'm not -- I don't think I have that number, offhand. I'd have to get back to you on that.

That would be great. And then lastly, on -- in terms of corporate structure, I mean we're seeing -- you know, you've got lots of options in front of you. One that gets talked about a little bit is the possibility of conversion to an income trust, and I wonder, Bill, is that something you've looked at? Is it something you would sort of, you know, not consider? Are there -- are there reasons why you think it might not be a good idea?

Yeah. We certainly have analyzed the implications of that, and we have been sort of asked that question before. I guess in terms of the benefits of that, I mean certainly because the -- the payouts on the income trust are before tax, that you're in a position to pay out more cash, and for pension funds and investors that are not taxable, it provides, I think, a significant benefit. Our current shareholder base is mixed. We have pension funds and nontaxable shareholders, but we also have quite an array of individuals and so on that are taxable. There's also capital gains tax implications in terms of it.

In terms of cutting off its growth avenue?

Right.

Okay. I mean, one of the things that sort of comes to mind is the potential for a big value lift for the shareholders, and I guess the obvious example is [Bell Nordique], up more than 7 times EBITDA versus I think your pro forma is something like four. I mean, do those numbers sound reasonable? I mean, are they -- would they override, say, the potential for invest for growth?

Well, I mean, again, certainly those are things that we're going to continue to look at. You know, we've got a two-year period minimum, in terms of assessing the progress in Bell West, and certainly that opportunity is huge. We believe in -- certainly in the business model and the business plan that's been developed and in the market opportunity out there, so -- and there may, you know, well be reasons why Bell would want to encourage us to stay in in the longer term. And so we're -- we certainly haven't concluded, in terms of that we're going to exercise that put, but we will be continuing to look for opportunities, if that scenario unfolds, so that we'll be prepared for it, and we're not going to wait for that -- for that point in time.

Okay. Thanks. And one quick final one. Miscellaneous income, is there anything in that of significance other than the contracting revenue?

You mean miscellaneous revenue?

Yes. Sorry.

Yeah.

as well as outright sales and maintenance revenue and a variety of other small things, smaller things.

Which we -- budget for the year might be, what, 15 to 20 million for all the noncontract stuff?

Yeah, that would probably be pretty close.

Okay. Thanks very much.

Thank you, Mr. Campbell. Our next question comes from John Henderson from [Skocia] Capital. Please go ahead, sir.

Yes. Good afternoon. I'd like to ask about a couple of things. One, at bell [Intrigna], very strong revenue growth there and I'm wondering if you can kind of provide some color on where that growth came from, if it was provided from Bell, finally, you know, coming through with more support than they had in the past. I'd like to follow up with something on capex, if I could.

You know, aside from construction.

And then the remaining increase would have been probably about half of that coming from single-source increases through [Nexia].

Single -- what does that mean?

That's their national customers, the large banks and those type of customers.

Okay. So that is predominantly the difference between 48 last quarter and 56 this quarter?

Yeah. Well, as I said, that would be a -- say roughly half of the increase.

Okay.

Intrigna] did have two significant wins recently. I mean, one just before the deal was made, and that was with the [series] school division in British Columbia, which was a very significant deal. Now, the revenues haven't started flowing on that. Another one was the -- the Calgary stampede business, which -- where the revenues have started flowing.

Okay. That's great. And on capital expenditures, you mentioned that you're going to look at that with a view, I gather, of bringing it down a bit in baseline. It was -- I guess the old guidance is sort of 27% of revenues, and if you compare that with any -- you know, certainly any [USR box], the capex numbers there are closer to 15% of revenues, almost half the relative level, and I just wonder, you know, if there is, indeed, that much latitude for cuts to your capex. You're seeing similar sorts of growth profiles as the [USR box] on the top line, and I just wonder if you could comment on that.

Okay. Well, first off, I could just start off by saying that in terms of the -- the difference there, it would be our [Next Gen] project, so I mean I could see us going to those levels over time, but I wouldn't see that happening this year as our [Next Gen] project is still ongoing. And so we're -- we wouldn't see those kind of levels this year. Do you want to answer that, Bill?

But having said that, we have been looking very carefully at the capital, and the restructuring that took place as a result of the Bell West deal, the appointment of Cheryl as president and COO of MTS communications. And Cheryl has just basically got on board as of yesterday, and so we haven't had an opportunity to go through the results of those reviews with Cheryl, but certainly our intention is to reduce capital. We're just not in a position at this point in time to give a firm number.

Okay. If -- could I follow up with one more and then I'll pass it on to others. The EBITDA increase of 3.4%, I guess all the way through last year you had sort of close to 10% or maybe even better in some quarters baseline EBITDA growth, margin improvements in every quarter, you had higher local rates this quarter than you did a year ago, quite considerably higher, lots of -- you know, more than one rate increase. I would have thought margins maybe would have been increased. Were there some expenses that came into the quarter that may be taken out in subsequent quarters, or is there a focus at the company to make some cost-reduction measures for the latter half of the year?

Okay. That was a lot all in one question.

Sorry.

Let me try this: In terms of the margin at 52.1%, we're -- it's a significant achievement, in my mind, in terms of that being the -- leading the industry in that regard. In terms of the costs, the cost reduction isn't something that we do once in a while. Rather, that is constantly our objective. And so I wouldn't see that we're going to be doing any specific cost reduction initiatives in Q2, 3, and 4 that we haven't already begun. And so we're working on that every year, and that is part of our target to achieve our 6 to 8% growth in that regard. So, again, the last thing I think you mentioned was rate increases, and we have had some rate increases in our local revenues over Q1 of last year. However, we've also had some reduction in revenue due to the contribution mechanism which offsets part of that, and so in that way, you wouldn't really see the margin improvement coming from the revenue increase.

Did you not also have a reduction in contribution expenses of about the same magnitude?

There -- yes, there would have been.

And can you tell us how much those would have been?

The -- the reduction in contribution revenues would have been -- I think it's roughly $2 million in the first quarter.

And about the same in expenses?

Yeah. It would be a little more than that in expenses, in the expenses. We're slightly positive on the change in the mechanism.

It's between two and three.

Okay. Thank you very much.

Thank you, Mr. Henderson. Our next question to say from John [Grandy] from [Yorkin Securities]. Please go ahead, sir.

Thank you very much. I wonder, as you're now moving to deconsolidate your investment in Bell West and also you're slightly lowering your guidance for revenues from the baseline business, I wonder if you could give us updated guidance for the entire company for the current year.

Company guidance for -- okay. Well, in terms of the EBITDA growth, we're -- we would be in the, say, roughly in excess of 20% this year, and I believe in EPS we're in the 15 to 20% range. I don't have those -- the figure on revenue.

All right. Well, that one, I guess, we can probably figure out because we'll just take Bell West out of the revenues as of April the 11th and you've given us the revenue growth for the baseline business.

That would be a fair assumption. There are 10 days of revenue that we'll pick up next quarter from Bell [Intrigna], so in addition to the formula you just used, you would probably add, you know, a proportionate amount for -- for 10 days in April for [Intrigna]. That would still be consolidated.

Right.

No, no. The baseline EPS, as we mentioned before, was the 6 to 8% range, and Bill mentioned that we would still see -- or be looking at the bottom end of that range. In terms of the whole company as you had asked, that would be the consolidated, and so the difference in the growth rates there is because the impact of [Intrigna] on our EPS will be less in 2002 than it was in 2003. And you may have this in your notes, but previously we had indicated that our impact of Bell West -- or the combined Bell West and Bell [Intrigna] for 2000 and [inaudible] was expected to be between 40 and 45 cents.

Right.

So then if you add that to the growth in -- if you add that to the growth in the baseline, then you would get to what I was referring to.

Right. So that 15 to 20% obviously excludes the 75 million onetime gain.

That's right.

Okay. That's great. And one last question. Once you have moved to accounting for Bell West on an equity basis, will you provide us with restated historical numbers, or we're just going to drive forward?

Well, we would still be, in essence -- since our baseline numbers do exclude [Intrigna], I think that we probably already have, but we certainly would look to making the numbers going forward look comparative. But I think you would find those -- the answers you're looking for in a comparison of the baseline.

I guess what I should -- the way I should have asked the question is: Will you be providing us with the revenues and EBITDA for your interest in Bell West in the future, or are you just going to give us one number which will be the equity account losses or gains from Bell West?

We're looking to continue to provide the results of Bell West, similar to what is provided in our supplementary disclosure in quarter.

Okay. That's excellent. Thanks very much.

Thank you Mr. [Grandy]. Our next question comes from [Desia Gold] from CIBC World Markets.

Yes, thanks very much. If I can start at the local side of the business, you saw a 2.4% decrease in access lines. Although you know [Deesay] has network access services. I guess, you know, what's the difference? I see there's a pickup on the business side. If you could explain the difference in definition. And second, do you see the 2.4% decline year over year we saw this quarter sort of continuing, and if not, can you tell us what you see changing?

Okay. We have changed to the network access service to be consistent with what we were seeing in other companies, whereas we had been continuing with the network access lines previously, and the network access service, I believe, is a more accurate measure on the business side as it represents -- or it represents the actual channel access and represents the mix of different configurations. The network access lines just represents the number of physical customer access lines that we have.

So this would be sort of voice-grade equivalent sort of line, would it?

Yeah.

Okay.

Now, in terms of the percentage decrease, we -- I guess if you look at over quarter 4, it's probably a better indication, and if you look at the business decrease, we're at about .3%, and that trend has probably been, over the last several quarters, relatively constant. And so we would probably see that continuing in terms of a competitive decrease at less than half a percent per quarter. And in terms of the residents, the reasons for the decrease there are a combination of -- in Q4, we had disconnected some customers in terms of nonpayment, and also we were seeing some migration to high-speed and -- in terms of not needing a second line, and also to wireless, to a lesser extent. Those migrations will probably continue, but I would -- I would guess that that's going to slow down as the year goes on.

Okay. Great. That's good segue to my second question, which is the start-up high-speed versus the full-speed DSL that was talked about earlier. So, you know, you're incurring -- or you're receiving lower revenues. Are there corresponding costs which are lower on the start-up side , or is it just a lower margin product?

Well, it -- there is a similar cost of acquisition for the customer, and in terms of the cost of -- ultimately, there is I guess a lower cost in terms of a lower bandwidth that the customer is using. But in terms -- I would suspect that it is a lower -- or, sorry, it is a lower margin product. Now, you wouldn't necessarily see that this year because basically the -- there is an introductory offer on the higher-speed, whereas in the starter plan you're starting at basically the $25 a month.

Right. Now, that's a fair point. And then my last question is to do with the balance sheet and free cash flow. You mentioned about 50 million in positive free cash flow, excluding last year's taxes in the core operations, but overall, if you include all the tax -- the cash taxes that you expect this year, plus your investments in Bell West, could you give us an idea as to what you see in terms of cash usage?

Well, I think in -- if you add those up, we're, say, roughly 50 million, excluding the taxes. The tax bill was around 80 million, and the -- our commitment to Bell West, as we've noted before, was -- I think it's 99 million.

Okay. Great. So net-net, you'd be down about 130 million?

Right.

Okay. Thanks very much.

Thank you, Mr. [inaudible]. Our next question comes from Peter McDonald from [inaudible] and partners. Please go ahead, sir.

Thanks. Just on the profitability, back to profitability if I can. If the [Pac Bell] contract, what type of margins were associated with that and are those expenses easily removed from the business?

The margins on the PCA Bell business would probably have been, say, roughly 25%. It depends on the contract and the type of work, so that would be a pretty rough average, I would guess, in some cases higher, in some cases lower, depending on the projects that they were working on. Those costs, I would view as -- as variable costs that can be redeployed.

So that could have impacted the margin potential growth in the quarter and so we might -- is there a chance that we could see that margin increase by the amount of revenue that has been lost on the PCA Bell type of contracts?

You mean in terms of our overall EBITDA margin?

Yeah.

Well, I wouldn't see our margin increasing from the 52% where we are now.

Okay.

Not significantly, anyway.

Okay. The wireless subadds were very strong in Q4 but a little bit light in this quarter to my estimates. I was just wondering, is that just a function of Q4 stealing demand from Q1, or are you seeing increased competition, or is it a function of a slower economy or whatever? If you can give me some more color on that.

Yeah. I think that's consistent with the historical trend. I mean, Q4 is always a very strong quarter in terms of the Christmas buying season and the winter weather and so on, and Q1 is always relatively light.

Bill, I think the difference between Q4 and Q1 this year versus other years was more -- more drastic. Your -- I guess you're not seeing any other changes with respect to that? You just -- you believe it's completely seasonal?

Yes.

Okay. And if I could ask just one more question. On your broadcast television initiative, can you give us a level of capital commitment that you've put in place to date and what you might commit for the rest of this year, and if you have details of an anticipated rollout schedule, if you can provide us that as well.

Okay. We don't have detailed rollout schedules because what we've got going on now is both technical and market trials. We've got 200 customers, and basically we'll be testing throughout this year. The cost -- and maybe Wayne can correct me here, but -- is a couple of million dollars, and based on the tests and the market reception and so on, I should say that the technical tests have gone extremely well, and we're up and running very quickly and haven't had any difficulties. We will, once we get the additional data, review the business case of the strategy and that hasn't been done at this point in time, so there isn't a specific rollout plan until we hit that -- hit that point where we've got enough information to assess the overall situation.

Would it be fair for us to assume that you'd be prudent -- as prudent with this investment decision as you have been with some of your other decisions?

Yes, most definitely. I mean, you know, it's not a done deal until we confirm that -- that there is a very legitimate low-risk business case and investment scenario in terms of moving out and moving it out prudently in terms of not getting ahead of the market curve on it.

Okay. Thank you.

Thank you, Mr. McDonald. Our next question comes from Richard Talbot from RBC Capital Markets. Please go ahead, sir.

Thanks very much. Good afternoon. A lot of my questions have already been asked and answered, but I was interested, Bill, if you could update us on where you are in terms of penetration of value-added services on the local front, and whether that is perhaps one of the avenues you're looking at in terms of growing the top line. Second is, I hoped you could perhaps update us on a couple of metrics for [Intrigna], looking for three in particular: If you had the number of access lines, building signs, and then perhaps on-net revenue. Thanks.

Okay. In terms of enhanced services, the current penetration levels have reached 52.8%. Revenue has increased Q1 '02 over Q4 '01 by 2%. It's increased 7-and-a-half percent first quarter over first quarter of last year. And 7-and-a-half percent sort of year-to-date. So we are seeing good continued growth in terms of the enhanced services area.

Yeah, maybe I can help there. The -- one question you asked, Richard, was the on-net revenues, and I indicated that that was 8 million for the quarter. In terms of the other metrics, we don't plan on providing those going forward as, again, being the minority partner, I think we have to look at what we -- what information we are giving out, and that -- that we feel comfortable in being able to explain, and so again, I think the -- with respect to the numbers that we have provided, revenues and EBITDA and gross profit, that we will be able to provide that, whereas when you get into the -- the next layer of detail, that being no longer in the controlling position, that it would be difficult for us to provide you with the background on that, and so therefore we aren't going to be providing it anymore.

Okay. Fair enough. Any general comments, though, in terms of you talked about a couple of contract wins? Any insight in terms of what the overall pipeline of, let's say, RFPs and so forth is that you're looking at currently, how that would be relative to where it was two quarters ago?

Okay. Are you speaking MTS or are you speaking Bell West now?

I was thinking more Bell West.

Okay. I -- certainly -- and I, you know, can't give you specifics, but certainly we expect to see the traction in that market increase significantly. I mean, I think everybody knows from the comments that Mr. [Monte] and Mr. [Stavia] have made in the past that the shareholders weren't aligned and that there was -- and that that was hurting us in terms of migrating traffic and in terms of sort of getting Bell's full support behind it. I mean, now that that's done, I think there is a huge wave of opportunity in terms of migrating aggressively Bell's eastern prime customers onto -- onto [Intrigna], and so I think the challenge that we're going to have is in terms of kind of the physical capacity in terms of capital investment and manpower in terms of how quickly they can do it.

Okay. Great. And if I can just follow up on my first question, if you were to look at the [Smart Touch] business, I believe Bell Canada was talking about roughly 5 -- 5 to 6% of their revenue overall for Bell is coming from [Smart Touch] features. Do you have an idea of what the comparable figure would be for MTS baseline?

No, we don't -- we don't have that for you, Richard.

Okay. Thanks very much.

Thank you, Mr. Talbot. Our next question comes from Rob [Boff] from Credit Suisse First Boston. Please go ahead, sir.

Thank you very much. Could you give us an indication of how the board is reviewing a share repurchase versus a dividend increase, and whether there's a thought to more of a onetime or special repurchase dividend versus an ongoing change?

Yeah. I mean I think certainly they look at ongoing increases and we had that discussion this morning and they haven't asked for additional information. We will be going back to them in terms of looking at -- looking at dividend increases going forward. There hasn't been any discussion at this point in time in terms of onetime special dividends, and as I indicated earlier, that, you know, what we are doing is looking at opportunities to grow the business through prudent investments, and so if we're unsuccessful in terms of doing that, and if we're ultimately -- exercise the put, then, you know, those would be things that at that point in time that we look at. But there hasn't been -- there hasn't been any discussion around that at this point in time. And certainly we have a buy-back capability, and that's something that -- that we'll look at. But if you look at the capital requirements that we have in terms of Bell West and in terms of [Next Gen] and so on, I mean those are longer-term issues for us as opposed to immediate issues.

Okay. Very good. The one thing that is a given, your risk profile has changed today with the deal done. Now, an accounting question, if I may. Could you give the level of COA expenses that may have been capitalized on this quarter, and what they may have been for the period a year ago?

Sorry, Rob, I don't have that -- that number handy. I can get back to you on that.

Okay. Great. Thank you very much.

Okay.

Thank you, sir. Our next question comes from Peter [Ramey] from BMO Nesbit [inaudible] please go ahead, sir.

Thank you. Point of clarification. On your free cash flow, Wayne, you talked about $50 million, but I guess you would adjust that for your current tax in the current period to sort of normalize it. So if I could get your thoughts on that for free cash flow calculations. Second of all, your effective tax rate was lower than I would have thought in the quarter. I was wondering whether I should be thinking a lower number for the year, or something higher. If you can give some commentary. And lastly, and I'm really concentrating on taxes. I recognize this. What is your effective tax rate on the capital gain that you're taking on the 70 million and what could we infer for your after-tax proceeds from your final proposed disposition, say, come 2004? Thank you.

Okay. With respect to the free cash flow that I mentioned, in terms of the $50 million, that's after you've added back in the 2001 cash tax payment, which occurred in the first quarter, and was approximately $80 million, so if you add that back to the cash flow from operations, that would give you sort of a normalized view of our cash from operations for the first quarter. And then if you were to -- the 50 million, though, sort of comes from the -- the projection of that out for the entire year. So if you take that cash from operations and deduct the capital expenditures that we've planned and the dividends on the baseline business, we'd be at roughly $50 million remaining for the investment in -- or commitment to the investment in Bell West.

And that is net of tax incurred in 2002, then?

That is correct, yeah.

Okay.

That would be after the taxes as well. In terms of the tax rate f I'm not mistaken, our tax rate was roughly 48% this quarter.

Right.

And I think that that's -- there's a bit of a blend there, and what happens is that because Alberta's rates are lower than Manitoba's, we're accumulating tax expense at a higher rate than our tax recovery from the Bell West losses, and so you end up with a hybrid tax rate which is higher because of that. Now -- so going forward, I think that our tax rate will decrease from the blended rate down to what the Manitoba rate is, and so -- but 48% isn't that much out of line, so you might see that come down to, say, 46 for the year. And in terms of the capital gains rate, a good rule of thumb to use would say -- be, let's say, 24%.

Using that rule of thumb. So therefore the 70 million gain is something like 70 divided by .76 would be the pretax?

Well, that's correct. The 70 million is already tax affected.

Right. And what is your paid-in into [Intrigna] [inaudible] that you disposed of it.

It would have been right around 200 million of our investment in [Intrigna].

That's book value. That's net of losses, though, right?

That's correct.

So do you have the paid-in capital number, which would be pretax -- pre-loss?

That would have been, I believe, 260.

Okay. Great.

You add back the [Intrigna] losses over time, our share and you'd get that number. So I could be off by 5 or 10 on that one.

That's fine. I was just getting -- trying to get a general drift. Thank you very much.

Thank you Mr. [Ramey]. Once again, please press one if you have a question. Our next question is a further question from John Henderson from [Skocia] capital. Please go ahead, sir.

Yeah. Thanks. Just could you help us with how much depreciation was at [Intrigna] in the depreciation number for this quarter? I.e., how much we expect will come out in subsequent quarters? And I have one follow-up.

Okay. The depreciation in the first quarter at [Intrigna] was about 8 million.

Okay. Thank you. And I -- actually, I have two follow-ups, then. I'm going to go back to that tax question that Peter asked. 48% also to me seemed relatively low, considering the losses at [Intrigna], and even though the tax rate is lower in Alberta, I would have thought that -- I just wonder if there was any sort of onetime shelter that was made use of in the quarter that allowed the tax rate to be as low as 48%.

Nothing significant, John. We had some rare [inaudible] going on with the amalgamation of [Exacom] and Qunara at the bottom of the year, but that, you know, was maybe one or two million. There's really nothing in taxes other than that.

Okay. Okay. And then finally, I'm wondering if you can help with what it is that causes the doubling of the addressable market at Bell West from 1.7 to 3.4 billion? Is it just more rapid expansion of coverage or is it simply an inclusion of [Nexia]'s addressable market?

It's the inclusion of [Nexia]'s addressable market. I mean the market was segmented in terms of [Intrigna] having the regional customers and [Nexia] having the national customers and so the addressable market basically doubles as a result of combining the two.

And what percentage is that of the total potential market?

Well, that would be the total business market in those two provinces, excluding the residential consumer market, which is not being addressed by Bell west, at least not at this point in time.

All right. Okay. I'll work it out. Thanks.

Thank you, Mr. Henderson. Our next question is a further question from Vince [Valentini] from TD knew crest. Please go ahead, sir.

Hi. I'm just looking forward to 2004. If -- if you do exercise the put, and let's say Bell sells their 14 million shares of MTS to help finance that, would it envision a scenario where Bell and MTS no longer have a relationship. I'm just curious if any of your negotiations with them or any of your agreements with them have any safeguards that protect MTS from having Bell Canada enter the Manitoba market as a competitor, as a [select].

Yes, they do. We, in fact, have what we call continuity agreements which extend our agreements with Bell Canada in terms of connectivity internet, intellectual property, and combined buying power and those sorts of things. So in fact all of the arrangements that we have in Manitoba have been continued and extended through this agreement.

So is there a time frame on those? Do they expire at some point?

Well, yeah. I mean there's different agreements that expire at different points, but in general, it's kind of three years beyond the put, let's say.

Okay. That's helpful. Thank you.

Thank you, sir. Once again, please press 1 if anyone has a question. There are no further questions that have registered sir. I'd like to turn the meeting back over to you.

Great. Thanks very much, operator. Just a me as a reminder, the taped rebroadcast of the call is always available until midnight May the 7th, and as well, the call is being archived and available on the [inaudible] MTS website that concludes our call for today. Again, thank for you joining us.

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