BCE Inc (BCE) 2002 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the AT and T Canada second quarter 2002 results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answers session. Instructions will be provided at that time for you queue up for questions. If anyone has any difficulties hearing the conference, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference is being recorded. I will now turn the conference over to David Lazzarato, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you operator and good afternoon everybody. I am here at Toronto with John McLennan our Vice Chairman and CEO, and Harry Truderung our president and COO. We also have with us our treasurer Brock Robertson and our director of investor relations [indiscernible]. Today's call, which we have planned to be for approximately one hour, will contain forward-looking statements and it's important to be aware that actual results can differ materially from projections. I would ask you to please review closely with safe harbor language and the risks outlined in our release today and in our recent securities files. First, we will have John and then Harry share their perspectives on a recent company developments and on a second quarter, and I will spend a few moments to review the financials, then we will open it up to questions, so with that I will turn the call over to John McLennan, John.

Thank you very much David. Good afternoon everyone. Thanks so much for joining us today. Before I began an overview an update on recent company developments, I would like to start with the summary of the positive results we achieved in the quarter. In the second quarter, we improved revenue to $385 million representing an increase of 2.6 percent from the same quarter last year. EBITDA improved to $50.5 million representing an increase of nearly 98 percent compared to the second quarter of 2001. I am pleased with our operating performance in the quarter. These accomplishments were the result of maintaining focus on our customers, on growing revenues and on significantly improving operational efficiency. This is a considerable achievement in light of the industry challenge facing telecommunications from throughout North America and then many corporate issues that ATT Canada itself is currently addressing. I would like to take this opportunity to recognize our employees for their commitment and focus on the achievement of our selected goals, and I would also like to extend our great appreciation to our customers for their support and confidence as we continue to build upon our commitment to bring real choice in telecom services and innovation to Canadian businesses. Over the past 24 months, we have been taking steps to strengthen ATT Canada's position in the Canadian market place. We have significantly improved the company's operating efficiency. We continue to work towards achieving a competitively neutral regulatory environment for competitors in Canada. We are moving towards an expected October close of the back-end arrangement with ATT Corp, Brascan, and CIBC, and we are making steady progress in efforts to restructure our public debt through discussions now underway with our bondholders. We will continue to work through this process towards our goal as establishing AT and T Canada as a strong long-term competitor in the Canadian Telecom Industry. More specifically on the operating front we have implemented changes to scale AT and T Canada's cost structure and to focus our deployment of resources to those products, services, and markets that offer the highest returns. Most recently these actions reflect decisions our management team has made in response to the disappointing CRTC price GAAP ruling. In total the actions announced in 2002 will reduce our work force by approximately 1290 or 25 percent. In January annualized operating savings of $90 million. In addition we will reduce our 2002 capital spending from $220 million to $170 million. These initiatives will help to position AT and T Canada for long-term growth and profitability and to focus on our strength as the national telecommunication's partner of choice to Canada's leading business. We will compete with the encompass in the areas of our traditional strength in long distance data and internet in partnership with AT and T corp and we will scale that [parenthesis] on products in market with financial pay back and investment requirements are not attractive at this time. So I turn back to the recent regulatory decision. As we have said we believe the regulator is significantly overstated the benefits of the price GAAP decision. Using the most positive assumptions on the overall impact of the decision of our business we calculate savings in 2002 of just 15 to 20 million dollars. This translates to an 8 to 10 percent reduction in the corp of all the facilities and services that we must buy from the telecoms. This compares for the 15 to 20 percent reduction at the CRTC is siting. The company is encouraged however with his announcement last Friday that the CRTC has recognized that the eligibility criteria for wholesale rate for digital password access to established in the price GAAP decision should be reviewed and potentially expanded. However we still believe the regulator fails to appreciate the true state of imbalance in the telecommunication industry in Canada and the necessities for competitors to have competitively neutral access to the existing networks. As a result we continue to seriously consider an appeal of the CRTC decisions that would focus on the way the regulator addressed the goals and objective of the telecommunication policy of the government of Canada. On June 25th AT and T corp formulary initiated the process to purchase all of the outstanding publicly held shares of AT and T Canada that have does not already own. When the transaction closes on October the 8th AT and T corp will pay $51.21 cents in Canadian funds for each outstanding deposit received. Following the close Brascan financial will hold 63 percent equity and 50 percent voting interest in AT and T Canada and CIBC will hold 6 percent equity and 27 percent voting and AT and T corp also announced that they will continue to hold their existing 31 percent equity and 23 percent voting interest in AT and T canada and that AT and T has a call rate on CIBC voting share. We sincerely welcome the participation of Brascan and CIBC as AT and T Canada moves forward in pursuing her goal for long-term success. Both Brascan and CIBC are highly respected members of the Canadian business and financial community and their involvement in this transaction confirms I believe that there is considerable potential long-term value in AT and T Canada's business. As you know the AT and T corp, Brascan, and CIBC arrangement required certain approvals we received from the authorities in Canada and the US. These approvals should not be controversial and we do not except they would delay or hinder in way the closing of the transaction. As we reported on July 29th our board of directors has formerly recognized and [add on] committee represent holders of overs 60 percent of AT and T Canada's outstanding public debt. We are currently leading with financial and legal representatives of the ad hoc committee with the goal of achieving a conceptual restructuring of the company's public debt. In the spirit of this objective ATT Canada and the bondholder group are focussing our energies on producing a mutually acceptable agreement, which we are hopeful will be complete by no later than the end of this year. I would characterize discussion to this point as very positive and we have made real progress since we began discussions just two weeks ago. We will keep everyone up-to-date as we continue through this process. I will stop here now and turn it over to Harry who will up date you on our operative initiatives and some of the success we have been having on the business front. I am very proud of what we have been able to do in terms of winning new business and expanding existing relationships with key customers. This performance underscored our belief that with an improved regulatory environment with a successful restructuring of our debt and by sustaining new efficiencies that we have achieved in the last two quarters that ATT Canada can absolutely be a strong profitable and growing competitor over the long haul. Harry.

Thanks very much John and good afternoon everyone. Last quarter, I [indiscernible] my initiatives that AT and T Canada is undertaking consistent with our plan to support sustainable and profitable growth. Today, I am pleased to report that we are succeeding in driving the operating and capital efficiencies that are positioning AT and T Canada to be a strong long-term competitor. In the second quarter, we improved operating profitability by $12.5 million that is 33 percent increase over the first quarter. The company has now completed over one-half of the approximately 1290 job reductions announced in 2002, 80 percent of these reductions are expected to be complete by the end of the third quarter with the remainder by the end of the year. These initiatives will produce annualized operating savings of approximately $19 million. We are removing cost from our business by focussing our resources on higher margin products and services and curtailing higher costs, lower margin investments with longer pay back periods. Additionally, we are targeting new customer acquisitions for local service to businesses on our network with larger scale requirements. This will lead to lower access line additions but with improved overall margin. And as John said we have also targeted reduced capital spending in 2002 from 220 million to no more than a 179. And while we are undertaking these structural changes to our business we are enhancing our ability to compete by maintaining a resolute focus on serving the needs of our customers. Our success in this area has been confirmed by the fact that AT and T Canada's customer satisfaction results have improved by 9 percentage points over this period despite changes in the market place and within our company. In addition, we re enhancing our ability to sell into the market place as evidenced by a significant number of new and important contracts we signed in the second quarter. I will talk more about these in a moment. I want to reinforce John's earlier comments that these successes are directly tied to the result of the dedication and commitment of our employees to execute on these goals during a time of considerable change for our company. We also appreciate the ongoing support and confidence of our customers and I will reiterate that AT and T Canada remains firmly committed to build upon our already significant capabilities to enhance our customers' ability to compete. Now I would like to turn to a discussion of the significant relationships we have with some of Canada's leading companies. And there is important contract wins we had in the quarter. Over 70 percent of AT and T Canada's revenues is derived from mid-to-large size customers. Our ability to serve the needs of these customers is our strength and our focus. We have a well-earned reputation for delivering Manage Telecom Solutions that needs the sophisticated requirements of the largest and most successful Canadian businesses. We have a longstanding and significant customer relationship with our five largest banks in the customer and we have a substantial number of contracts with the Canadian Federal Government. The Ontario and Quebec provincial governments as well as some of the largest [indiscernible] corporation. We also account some of the biggest retailers and manufacturers in the country as customers. We support these Canadian companies as they compete on a global scale to our relationship with AT and T corp and we are also delivering solutions to large US based corporations likewise [Fargo and Concast]. In addition, we are delivering aligned telecom solutions for AT and T's U.S. based multinational customer base such as Citi Group, General Motors, Federal Express and Wal-Mart just to name a few. This scope an importance of our service relationships with all of these customers in substantial. During the second quarter, we continued to build on our success in the large business market with the signing of several significant contracts. I would like to share some detail and just a handful of these new agreements. In the second quarter we expanded an already significant relationship with Microsoft to provide advanced data network support. Also during the quarter, we signed significant contracts with [StarFox] and we entered into agreements with Erricson, 711 and Converters. We also now provide network capability to allow CIBC world markets to access applications based in New Jersey and deliver critical financial data for Citi Financial between Canada and the United States through a multiple cross border data solution. As well, we are supporting all the Canadian network requirements for US based broad wing that is predicated on our capability to seamlessly route traffic nationally across Canada and across border into the United States through our seven cross border points. We continue to work closely with AT and T corp business services to bring new products, services, and processes to our operation. Our portfolio of services is becoming increasingly aligned with that of the AT and T to bring the common capabilities to support and serve to multinational customers on both sides of the border. These initiatives are designed to meet the goal of business need of North American customers driven by customer demand on July 23rd AT and T announced that it is accelerating its strategy to deploy global network capability under what is referred to as end-to-end customer service. AT and T plans to deploy global private network capabilities by April of 2003 and enhance virtual private network services by the fourth quarter of this year. By the end of 2002, the AT and T global network will be serving customers in 109 cities worldwide and by the end of 2004 AT and T plans to serve all of its global customers on One [Siemens] global network. These capabilities represent a powerful value proposition to companies that compete on a global scale by enabling AT and T to provide its out sourcing manage services and connectivity products to customers on one integrated worldwide network. Canada represents a widely important part in this market in serving the telecom needs of multinational customers, because 75 percent of the world estimated [Indiscernible] operations have a presence in Canada. Included in this number is 1300 U.S. based multinational corporations, many of which are already customers of AT and T in the United States. We are in the process of aligning multiple product platforms with AT and T corp to provide comprehensive customer service and support. As John outlined previously, we have a strategic plan. We are implementing it as promised and it is generating positive results. These results are being achieved in part because the unique strengths we enjoy in the Canadian market place. AT and T Canada is the largest competitor Today in [Indiscernible] in providing telecom services to business customers. We have a diverse suite of products and services specifically targeted as business wire line customers that enable customers of all sizes to compete and succeed on a local national global scale. We have deep customer relationships with many of Canada's leading companies and we have demonstrated a unique strength in delivering innovative solutions to the large business market. And we have a powerful and coordinated relationship with AT and T corp that ensure seamless global connectivity, total brand recognition and significant technological and operating capabilities that further enhances our competitive position. Let me stop there and turn it over to David to share the share financial details of the quarter.

Thanks Harry. I will start with a review of our financial results for the second quarter and then describe the changes reflected in our balance sheet from the chart as associated with goodwill, property, plant and equipment and other assets. Then I will conclude with the summary of our liquidity position before we head into the Q and A session.

In Q2 revenues were 384.9 million, up 9.7 million from Q2 of last year. Our service cost at 251.1 million increased by 5.6 million. Gross margin was 34.8 percent representing a 20-basis point improvement. These changes were primarily as a result of growths [indiscernible] and E-Business Solutions currently offset by rate declines in LD. Q2 FG and A expense was 83.3 million representing an improvement from Q2 of last year of 20.8 million. An improvement in the ratio SG and A expense to revenue of 620 basis points to 21.6 percent. This is the sixth consecutive quarter that the ratio of SG and A to revenue has improved. This quarter's reduction in SG and A expense is the result of savings realized from our cost reduction initiatives. EBITDA for the quarter was 50.5 million, an increase of 24.9 million from the second quarter of 2001. This improvement in EBITDA was primarily the result of the improved SG and A costs. EBITDA margin was 13 percent in Q2 this year versus 7 percent in Q2 of last. And capital expending in the quarter total 19.3 million. Year to date capital spending so far this year total 74.1 million representing about 45 percent of our planned capital spending in 2002 which as John said won't exceed $117 million. Focusing on revenue combined revenue from all resources, from all non-LD sources were 62 percent of the total revenue base up for 57 percent a year ago. These areas of our business represent over $915 million of revenue on annualized basis.

Revenues from data and internet were 169.7 million in the quarter, an increase of 14 million or 9 percent when compared to the same quarter last year. This increase is the result of the growth in E-Business Solutions primarily. Revenues from data and internet, now represent 44 percent of the total revenue base compared to 41 percent in Q2 of last year. Local revenues in the quarter were 59.7 million, an increase of 7.5 million or 15 percent from the same period last year. Local revenue growth can be attributed to an increase of 86,000 lines year over year. Local now represent 16 percent of the total revenue base versus 14 percent in Q2 of last year. At June 30th the 556,000 installed line base was comprised of 288,000 on net or on switch lines were approximately 52 percent of the total. Revenues from our adjustments were 147 million in the quarter, a decrease of 13.5 million or 8 percent from Q2 of last year. This is the result of the decline in permanent rate of approximately 6 percent and decline in [minute] volume of approximately 2 percent. This is the lowest year over year decline in LD rate that we have experienced in the past eight quarters. And we are hopeful that this may indicate that LD rate are beginning to stabilize. As a percentage of total revenue, long distance has declined to 38 percent versus 43 percent in the same quarter last year.

Turning to the company's operating cost initiatives, during the second quarter, we recorded a provision for the cost of 1017 workforce reductions we announced on May 2nd. Discharge total $17.5 million and is comprised of 39.7 million from employee settlements and related costs and 30.8 million for office based consolidation costs. Discharge represent the estimated deficiency between lease obligations and amounts to be received under sub lease for premises we will vacate as part of our workforce reductions and our office consolidation activities. We will record a provision for the cost of the 270 people workforce reduction, we are now on July 29 and that provision will be recorded in the third quarter. I would like to discuss some more detail of company's financial statements and the changes that we have recorded in property, plant, equipment, goodwill and other aspects. With respect to goodwill, as we reported last quarter, we no longer amortize goodwill and in definite likes and tangible assets for earnings. Instead these assets must be reviewed periodically for impairment using a fair value approach. During the second quarter, we completed the assessment of the quantitative impact of the required transitional impairment test. Accordingly, an impairment totalling 1 billion 531 million was charged to our opening deficit as of January 1 2002 with a corresponding reduction in goodwill. Also, during the second quarter we performed an assessment for impairment of the carrying value of our remaining goodwill and it was determined that the remaining unamortized balance became fully impaired in the quarter. As such a further charge to income in the quarter in Q2 of 108 million was recorded. Also in the second quarter, we recorded, a $1 billion 95 million charge to income, in recognition of impairment of the carrying values of our property, plant and equipment. Generally accepted accounting principles in Canada require that this assessment be performed periodically and due to the changed circumstances including the recent regulatory decisions, the deterioration in the telecommunications environment and to the substantial decline in market value of companies in the telecom services sector, this assessment was made. The provision represents the difference between the net recoverable amount based on our projected future and discounted cash flows of the company and the acquiring value of these assets as prescribed by Canadian accounting standards. Also during the quarter we assessed the carrying values of our long-term investments in other assets, and recorded a write down of $11.9 million. Finally, as we discussed last quarter effective January 1 2002, AT and T Canada adopted a new accounting standard that required unrealized foreign currency translation gains and losses to be included in current earnings as opposed to be deferred and amortized. During the quarter we recorded a non-cash foreign currency translation gain of 79.6 million, which was the result of several factors. First, the Canadian dollar strengthened relative to the US dollar during the quarter. Second, with the monetization of certain of our currency and interest rate positions AT and T Canada unhedged US dollar debts increased from 800 million at March 31 to $2 billion at June 30. Under the new rules for foreign exchange accounting entered this January 1st of this year, we are now required to record the entire amount of this gain in the period, in other words in Q2. However, given the recent sell off of the Canadian dollar that we have all seen, a significant portion of this gain may in fact be reversed during the third quarter and recorded as a cost. Let me summarize the impact of these items under Q2 income statement. Net loss for the quarter, totaled $1.35 billion compared to a net loss of 174.7 million in the second quarter of 2001. This increase in net loss was primarily as a result of a $1.273 billion write down of certain assets comprised of the charge for the impairment of the carrying values of the company's property plant equipment to the previously mentioned and the write down of the remaining amount of goodwill of 108 million and the restructuring charge associated with the workforce reductions and facilities consolidation costs of 70.5 million. These increases to the net loss were partly offset by the foreign currency translation gain, lower amortization expense and improved EBITDA of 24.9 million. As we noted in today's press release, cash on hand at June 30 was over $425 million, this total includes 85.5 million raise in the second quarter through the monetization of gross currency interest rates swaps as we previously announced. During the first half of 2002 we received cash of 24 million from the exercise of employees stock options. Between the end of the second quarter and the closing of the backhand expected on October 8, proceeds from employees exercising in the money stock options will generate cash in excess of $240 million to the company. On a pro forma basis, this represents over 665 million in cash on hand at the end of the second quarter. During the last week of July, we delivered our revised operating plan to our banking [indiscernible]. This plan will form the basis of our discussions with our bank on the credit arrangements moving forward. The actions we have taken to remove costs from our business will have a positive impact on our expected 2002 EBITDA, and AT and T Canada is currently in compliance with all of its financial covenants. We expect to complete the renegotiation of our bank and public debt arrangements by year end, should this process take longer and absent in improvement in either the economy or the Canadian telecommunications regulatory environment, a revised operating plan projects that the company will not comply with the EBITDA covenant in our senior credit facility in the fourth quarter of 2000. [indiscernible] if we are unable to renegotiate acceptable covenants, we may be required to repay the facility. As you know on July 18th, AT and T Corp announced that had arranged for Brascan Financial and CIBC to acquire interest in AT and T Canada as part of AT and T Corp's plan to fulfill their obligation under the [indiscernible] agreement. The company believes that the AT and T, Brascan, and CIBC arrangement does not constitute a change of control under the senior credit facility or the AT and T Canada's debt, however, the company believes that the Brascan, CIBC arrangement could constitute a change of control as defined in the old MetroNet debt, but this is not clear. In light of this uncertainty and our current financial circumstances, the company does not intend to make a change or control offer to the holders of the MetroNet debt, but will continue its discussions with representatives of the public debts as well as the company's bank lenders with a view to reaching an agreement on a consensual restructuring of all of the company's public and bank debt, and finally we announced today that we will make our scheduled interest payment due august 15th on the $250 million US 12 percent [indiscernible] in the amount of approximately $15 million. Let me stop there and will take your questions. Operator would you please explain how you conduct the Q and A portion of the call.

Thank you, one moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question please press the star followed by the 1 on your touchtone phone. You will hear a three tone pound acknowledging your request, and your questions will be pooled in the order they are received. If you would like to decline from the pooling process please press star followed by the 2. Please ensure you lift the handset if using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from Stewart [Isherwood], UBS Warburg, please go ahead.

Hi good afternoon.

Good afternoon.

First I wanted to ask about the issue of a change of control. In the Brascan, CIBC agreement is there any conditions with respect to a change of control event, I am just wondering that if it does result that someone can prove that there is a change of control here, would at it all impact the transaction as it is expected to close on October 8?

Let me start by saying that the agreement between AT and T, Brascan, and CIBC is an agreement amongst those three. We were not a party to negotiate in the agreement and we have not seen the details of the agreement, but having said that we understand that the issue of change of control under the MetroNet bonds is one of determining whether beneficial ownership is changed as opposed to some - I will call it relatively simple, miracle test, and that it's explained to me that is a very much a question of the facts and circumstances, and case law in the United States and those are the reasons that it is unclear, so we've chosen to you know the portray to make the disclosures. It is unclear, based on it being unclear we have no intention of considering a change in control offered.

But is there any way that it could somehow tie into the equity transaction?

Not to our knowledge Stewart Isherwood:, we are in a process of discussing a restructuring over a depth as John referred to, we have been in those discussion now for over two weeks, they continue, I think they are going well, at least that is what we were told and I don't see that, that is going to impact us.

Okay, great, may be I could just ask two other questions more on the operating side. First of all your data revenue growth is quite strong in the quarter reversing a [Slide] over with the past few quarters and I guess, it is [not] that particularly surprising given that you have cut back on operating cost and CapEx and I was hoping may be you could elaborate of that more on why that is going so low.

We had stirred the [indiscernible] turn around - we did see growth in their portfolio, it was what I would consider relatively modest on the data portfolio itself. We did see some customer rotating out of some of the older private line services into virtual private network. We saw some growth there, most of that growth actually came as a result of the increase in revenues from the professional services side, the monetary side, which we included in that category.

Do you expect that the current revenue level can be sustained with your new reduced CapEx plan?.

Yes, we are projecting that we can sustain and in fact see the moderate growth that we think is available in today's telecom market place.

Great, finally if I could just ask quickly on the issue of appealing the CRTC decision, obviously you have had some time to review the decision, what would make you decide at this point whether to appeal or not [indiscernible] as for as further proceeding goals or are there some other issues you are still looking at?

There is a time limit on when you can appeal and it really ends at the end of this month and we have to make our decision and either go or no go by the end of the month and we would base our decision on appealing more on how the decision actually reflected the policies and intent of the policy of the department of industry and the cabinet and the federal government, would how competition should be ruled out and we are very concerned that the CRTC has the impression and it can really micromanage the role out of competition and investment in Canadian infrastructure by dictating which telephone company facility should be available to competitors at some special cost based prices and which ones are not, it is all very arbitrary to assets. It is the decision to really highlight facilities based competition to act as beyond the scope of the policy of the federal government and an appeal would really be structured around those fundamentals. It really is an issue of how competition is to be ruled out in this country and that is what we are analyzing and finishing up over the next two weeks. When we will partake a proposal to go or no go to our board within the next week and half and then we will make a decision at that time.

Okay great, thanks very much.

Alright.

Your next question comes from [indiscernible] CIBC Worldmarkets, please go ahead.

Good afternoon, it is Stein Robinson for [indiscernible], I just have a couple of quick questions, just I am getting back to the change of control issue, how [indiscernible] for how you got into that with the bond hold as now, is something there that has come up with the current bond holders in your discussion and secondly, just with respect to the expectations that you may be in breech of the [indiscernible] in Q4 2002, are there any cross default provisions in the public debt that would be triggered.

The change that control the issue, that we describe here has included in our press release etc we have discussed with our bondholders and our bankers and so they are aware of it and the - you know our attention as I said is to continue the consensual discussions we have had. With respect to the EBITDA covenant there are a number of alternatives or courses of action opened to us obviously, at that time one is to re-negotiate, two is to repay in order to avoid [indiscernible] in the event, then when we get there without a consensual restructuring agreed to.

Right.

To answer your specific question, are there cost defaults? Yes there are, as would be typical in these situations in the event - that a fall actually takes place. But as I said we have ways to mitigate that.

And it is very much our intention to have a consensual agreement concluded -

By year-end?

Certainly by year-end, hopefully before year-end.

Okay and the second question is now that the price cap hearings or whenever you are making a decisions to whether or not you are going to appeal, are you prepared to give any target at this time for the remainder of the year in terms of the revenue EBITDA?

No we haven't, Bob, as far as forecasting EBITDA for the rest of the year, we are not prepared to do that right now, but you know - and we are not really attaching any outside potential in [indiscernible] way to this revisiting of a process as the CRTC says could reap further benefits at a later date, because the process don't even begin until 13th of September. It is scheduled to end in February. A decision would come out some in late 2003, and they do say it would be retroactive to July of, you know, 2002.

To the original [per capita]?.

But that's took a year-and-a-half to find out whether or not you know what's your cost structures is going to be. It is just mind-boggling to me that the CRTC fails to recognize the urgency of what's really going in a competitive environment. But, so we are really not making any predictions and impact on EBITDA at this time.

Okay and just one last question, just on your - kind of question on CapEx levels, and maintenance CapEx just doing a quick calculation and see that your CapEx as a percentage of revenues somewhere about around the 10 or 11 percent range, I mean, is that where you see it in the future and do you not think that low level could potentially have some implications for some revenue growths, most of the incumbents though or I must say competitors are somewhere in the 15 to 25 percent CapEx to sales ratio?

They - the level of CapEx going forward has at least two variables to it, may be more, but its really is which product areas do we think we are going to grow, and where do we have the opportunities in the current market to grow, compared to our - the assets we have in place already. So that's one dynamic and I appreciate every company will be a little different on that dynamic.

Okay.

Secondly if our CapEx levels going forward into the timeframes you are looking to I think implicit in your question you are implying out of this year and of the next year or two?

That's right

It really depends on in one way; it depends on the capital available to the company to take advantage of the opportunities. On the one extreme if this is a company that is clearly just in a self-sustaining cash mode, we will take that into account, marry against our opportunities and plough on, but with the opportunity that generates new capital investment in the company whether through the kinds of partners that AT and T have identified at this point or in other ways, then we will look at that as marry against the opportunities that exist in the market. So the answer to that question without knowing those variables going forward is pretty difficult to do.

Okay, that's fair enough. Thanks a lot gentlemen.

Your next question from [Roger Faxx], [Cap-A Financials], please go ahead.

Thank you, a few questions I guess for Harry, you can provide a little bit more color on the, I guess, the types of customers that AT and T Canada is pursuing higher margin, greater revenue type customer and how that differ from you know the past quarters as to what was being pursued and also, I guess, for days you can just tell us how much of the Internet revenue was from I guess the DMC, MONTAGE e-business? and I think John mentioned during his remarks, there has been some minor conditions as for the disclosing of the equity back end just stating what those are and has everything been filed and expect this timeline with that. Thank you.

Okay Roger, it is Harry Truderung just responding to your questions about how we are going to focus on the higher margin product areas, and how does that differ. Well, really a couple of key thrusts is that there is much greater focus on net potential opportunities both for local and data. Obviously, you know, you have to still take some incidental alternate to satisfy customer's complete need, but the focus will be much more on net. Or in the local area, we are going to be focusing our efforts on larger customers who have a greater density per location, so we do except the order volume to come down in terms of lines over all, but they will be on net and they will be in a larger density, and of course when we look at the drivers of volume, work volume in the company, this is a key part of how we are taking work volumes out of the company to allow us to realize the cost savings and at that same time we are going to be focusing on those higher margin areas. So those are the two areas where we are going to be taking a much more focussed approach to pursuing customer opportunities.

Roger, Dave, on your second question about Internet revenue, I think you then said [Montage DMC] in the second quarter of 2002, our revenue from Montage DMC was approximately 17.7 million in Q1 of this year, it was 17.1 million and in Q2 of last year it was 9.6 million. You recall that the Montage part of Montage DMC was acquired partway through Q2 of 2001.

Great.

Roger you ask me about where the approvals have to come from, what kind of agencies that we have to submit the deal to. The approvals have to be received from the competition act in Canada, from the FCC in the US and from Washington State Utilities and Transportation consortium and also in the US, so we don't expect these approvals will be anyway be controversial, and we do not expect that they will delay or hinder in anyway the closing of the transactions. Approvals from the FCC relate to a career authorizations and cable landing license that AT and T Canada has in the US, and we expect those approvals by the September 23rd and AT and T Canada also holds the certain minimal amount of assets in Washington state related to an acquisition made by [Nesternet] several years ago. Even if it is necessary to get that approval we will get it no later than the end of the month.

End of August.

Yeah end of August.

And I guess that competition. I guess come here in Canada.

Yeah! That is not going to be problem.

Okay that was filed already.

I guess that, yes they were.

It has been filed Roger.

Okay [indiscernible] on that time frame typically.

I am not aware of the exact time

They were looking for August 23rd next week.

Okay great. Thank you very much gentleman.

Your next questions comes from [Peter Ramie] [indiscernible]. Please go ahead.

Three questions, [indiscernible] two operational and one on regulatory, and the first one perhaps you answered, I think, Stewart's question with regards to data and I am wondering a lot of [indiscernible] in US and Canada have reported the decline in whole sales revenue. I was just wondering if you could go into that little but that experience were have been in a sequential improvement Q2 over Q1 of this year, and otherwise things will stabilize in that part of that year, takes us through that. Second of all perhaps for David Lazzarato you talked to me a little bit about and where you have taken write down on your network, network of assets that these were with analog digital [indiscernible] and so on, then I will state my regulatory questions later. Thank you.

Okay, this is Harry here with respect our wholesale portfolio we have and I think like many other carriers experienced, a really a soft wholesale segment. We are focussing really on what we call our top forty accounts there, I think, fair to say have a much broader sales effort there in the past. I think, we have all experienced stress from the wholesale side as a result of the Internet and ISP downturn and you know, we are still seeing some significant carriers coming under stress. We are managing our way through that, we think that we are seeing some stability emerging with a couple of the notable exceptions that everyone knows about in the industry and we are managing through that on our bad debt site, I would say that we have actually seen an improvement this year over the last year in our bad debt performance and we are managing very closely any of the larger accounts that [merit] calls to our attention and we don't believe that we have the kind of exposure that we experience last year on bad debt.

You think it is followup on the pricing, side you mentioned along this that showed some signs of stabilization. How would you characterize the pricing regime and data?

In data, our experience is that it is very competitive pricing and you know there is the market now, I think is driven at the customer level by customer desire to save money and reduce cost versus a desire to expand their operations and so I would say that when opportunities do arise that there is a lot of competition for the bigger quotations, the bigger our fees will come along and we are certainly holding our own in that regard.

Right, thank you.

Your question with respect of the break down associated with property finds equipment, the way that is done is it initially done as the, I will call it a macro assessment of the value and that is what we have done and we have to come to the determination as they described. The next step in this process is to allocate that new carrying value to the various assets. The essence of your question, that work hasn't been completed yet but it will be completed shortly and we can update everyone on that at a future date. It is really that allocation that is now the next step after we have made [discharge some].

So, when you look at your best as you really did it, some of the free cash flow.

[indiscernible] again that the Canadian accounting rules talk about looking at your prospects moving forward certainly look at it on an un-discounted basis, that is right.

Okay.

The total as opposed to I will say you know, the other approach not prescribed by GAAP at least philosophically would have been to value each asset independently and add it up. That is not what GAAP requires.

Okay, great, thank you. On a regulatory fact John or maybe this is would be David's [indiscernible]. I was under the understanding the hearing or the public notice by the CRTC on [DNA] was restricted primarily to DNA and that they were going to discuss in addition to its other category through digital network access. They are going to include link charges and what - whether that should be included. That was my understanding, I didn't realize that when I am reading your comments is that this [potential] could balloon into something much larger, that being the first point, and some [color] on that would be great. The second point would be is if it is just the link charge, I understand that is relatively a small component of the overall cost of any carrier, so what is the potential impact of such a hearing on your company or the industry.

Okay, you are right that it is restricted to digital access, I didn't the mean to portray that it could be ballooned and expanded beyond that. Really, in the price [Cap] decision, and they [regulate] a recognize that competitors did suffer from a competitor disadvantage particularly in the delivery of high-speed digital services. So as a result they developed a wholesale digital network access service. Unfortunately, they instituted a number of restrictions that severely limited the benefit of this wholesale service. So in fact based on the restriction in the price Cap decision, less than one-third of all of our [expend] on DNA qualified for the wholesale rate. So, now what they are going to do is take a look at how to expand, we spent a $170 million on the DNA service and the way they had structured in the decision only a third of it really qualifies. So, now they are going to try out see if the rest of what we spent only in the DNA area qualifies for consideration as well. I guess, I am a little bit surprised that they wouldn't have understood that going in after the months and months of submissions about, at least I am encouraged that they are facing up to it and addressing it. But, if that's the case for DNA, I don't understand why it doesn't apply to 100 of millions of dollars we are paying in compensate for other services as well. I have no idea what the rationale is why one service qualifies and the others don't, because it all comes out of a common product cost within the telephone companies there are no - you know they have very little idea what costs are per service within the telephone companies. So, I don't know how its going to turn out to tell you the truth I don't know why they came back and said that you know we are willing to open this up but or encourage that they did and that's hopefully, you know, it can become something big but right now it sure isn't

Okay so on the DNA though in the best case scenario coming out of this if they do it in a reasonable timeframe and potentially you have got to -

The timeframe is they are going to start it in September end it in the spring of next year, and make a decision by the fall, and if they decide thus this further reductions required a retroactive [tenure], a year-and-half is a life time in this industry.

I agree.

So, why they are taking that amount of time after all the informations that's has been submitted, really truly does frustrate me and confuse me, but there you go, at least they are willing to look at it. But, my question is why wouldn't they expand it to all the services because the logic is just the same.

That being as it may, potentially, $120 million or another two thirds of this DNA charge could be marked down to phase II class 25, 15 percent, excuse me, if this decision came out positively?

The total 170 million could be reduced pretty dramatically but we are not even making any predictions right now. That 8 to 10 percent that we know based on the original decision represents about an annualized rate of $45 million roughly to us how much more this could add depending on what they determine after a month more of consideration. I have no idea what it would be, but it might be eat more into that 170 million that we pay on DNA.

Great, Thanks.

And at least, I am - we are hopeful where you know we are at least pleased that they are willing to say they didn't understand us and they are willing to take another look at it.

Thank you very much, John.

Ladies and gentlemen, we have time for one more question. The final question comes from [Jeff Govalcus] [Nested Burns], please go ahead.

Thank you very much, I was wondering, if you could outline the sources and uses of cash for the balance of the year, and my other question is has the management team signed any agreements to stay on past the completion of [indiscernible] of the trust and has there been the discussion of any management retention programs?

Jeff this is Dave, I want to take the first question on sources and uses and perhaps John can take the second question out or whether that was a two part or not. Sources and uses, you know, in course of John comment about us making projections we are not going to get into the detailed projections at this time. We did tell you what we think our CapEx is going to be, we told you what we directionally, what we think, our EBITDA will do and I think our EBITDA does, for now. We will obviously be and we are currently sharing the details of our plans with our bondholders, advisers, and our bankers on a confidential basis, and I think in respect of those processes going properly, this is the best action for us to take when are trying to be quite or trying to be proper in the current events.

Okay, now address the question on management retention. Certainly, that will be a subject for discussion it will be line item for discussion for sure as we go through the detailed discussions with our bondholders with broad [scan] with ATT of course after the back end there certainly will be some payout to employees as their stock options best and the payouts are made, I can't say exactly how the management team will shake out but actually very confident of the core of the team is very, very committed to staying, they are kind of - they are very excited about the fact that we are really going to get ourselves on a stable footing us what I would call our real viable ongoing business and I think that's for the most part, the majority of the management team is very, very committed to that, there is a kind of grittiness and intensity being experienced by our team as we bond even closer together through this incredibly complex and difficult time. So, I would predict that the core of the team that's in place today will be very much in place going forward after the restructuring. I can't say you everybody specifically, but I feel very confident that the core of the team will be here to execute.

Okay, thank you.

Mr. Lazzarato, I will turn the call back to you. Please continue.

Thank you and thank you everyone for joining us this afternoon. We broadcast that this call will be available shortly on the AT and T, Canada website or by dialing the number provided in our press release. This concludes the teleconference, and again thank you and have good evening.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating, and ask that you please disconnect your lines.