BCE Inc (BCE) 2002 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to the Manitoba Telecom Services, Inc. 2002 4th quarter results earnings conference call. I would like to now turn the meeting over to Mr. Brad Woods., Director of Investor Relations for MTS. Please go ahead, Mr. Woods.

Thanks,Operator. Good afternoon everyone and thank you for joining us today to discuss MTS's 4th quarter results.

MTS's news release was issued earlier this afternoon and includes notice of the quarterly dividend which has been set at 22 cents per share.. Bill Fraser, President and CEO and Wayne Demkey, Executive Vice President of Finance and CFO, are on our call today. We're also pleased to have Cheryl Barker, President and COO of MTS Communications joining us this afternoon.

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. Additional information on these risks is contained in MTS's filings with the Canadian Securities Commission .

Bill.

Thanks, Brad.

I want to frame my remarks today around creating value at MTS, both in 2002 and as we look to 2003 and beyond.

Let's look back at where value was created in 2002. The baseline operations posted solid performance. For the year, we marginally exceeded our EBITDA and EPS guidance and revenues came in slightly under at 99% of revenue guidance. Softer telecom markets conditions did slow MTS's growth in 2002, together with a negative impact from the CRTC's price cap decision. Consistent with what others in the industry experienced.

That said, there were some wonderful stories from the baseline operations in 2002. Where services like wireless and high speed interest net continued to grow strongly. The wireless operations posted another year of double digit growth with revenues increasing by 13.9% and customers climbing by 13.4%. Average monthly revenue per customer came in at just under $50 and post paid churn continued to be a modest 1.23%. High speed internet saw excellent performance with customers reaching more than 61,000 at December 31st in excess of our target for the year. The 4th quarter was particularly strong with 8400 DSL customers added.

A second area where we confirmed tremendous value in 2002 was the new arrangements we entered into with Bell Canada respecting our Western operations. These arrangements provide the opportunity to monetize our investment and lock in approximately $650 million by exercising our Bell West put in 2004. We derisks our investment and concurrently locked in a return in excess of 20%. We took district and deliberate action in 2002 to create value by returning cash to shareholders. The quarterly dividend was raised by 16% to 22 cents per share. We were active in the market buying back more than 800,000 shares in the second half of the year. These shares were acquired at an average price of $30.45. All together, $77 million in cash was returned to shareholders in 2002 in the form of dividends and buy backs.

Strategically and operationally we continue to advances our plans for 2002. Our strategic focus is on leveraging our competencies in the core operations here in Manitoba for deleveraging long-term profitable growth. In 2002 major accomplishments were realized in the evolution of our broadband capabilities.

In addition to the significant growth in the high speed customer base, we won the province of Manitoba's data network contracts worth $50 million over five years. In 2002 we also completed our front end work on TV as the next service that will ride on our broadband network and readied our capabilities for commercial launch. We began installing MTS TV in customer's homes this month. We've started by offering the service to employees in the coverage area to fine-tune our installation capabilities and ensure that we ramp up marketing activity and bring customers on board everything runs smoothly. To date we have 300 paying customers and a further 40 customers waiting to be connected. The initial response to this service has been extremely positive and we're now just beginning our targeted marketing program to customers in the coverage area.

Let me review some of the highlights of the MTS TV offering. The service itself is superior to other digital providers. It's competitive advantages include three simultaneous video signals that are fully digital, together with high speed internet availability from one set-top box. TV call display and call management capabilities from the screen, an MTS portal that provides interactive capabilities for weather information, a very popular topic here in Winnipeg. And the service also offers local channels which are not available from satellite providers. All totaled in excess of 180 channels are available today including music and radio stations.

Overlay the superior packaging choices, the MTS brand, customer loyalty and customers eagerness for an alternative provider and we believe we have all of the conditions necessary to succeed. The current coverage extends to 9% of Winnipeg and we are on track to hit 42% by year end 2003. The Winnipeg cable market has been sized at about $100 million and is growing at about 12% annually. We believe the timing of our entry into this segment is opportune.

Digital penetration levels in Winnipeg are quite low at approximately 20% currently. And so as cable customers look to a digital solution we believe with that with our superior offering we can take full advantage of this opportunity. Our revenue expectation is about $2 million this year. With a target of approximately 6,000 customers by year-end.

The EBITDA drag this year is modest at about $3 to $4 million and will decrease next year before turning EBITDA net income positive for full year 2005. As we've emphasized in the past we're taking a measured approach to this undertaking. You can see in the orderly expansion plans for the service and in the measured financial impacts. We're not interested in buying market share, indeed our business plan conservatively anticipates 36% market share after 10 years. We fully expect this service to contribute to the achievement of MTS's overall profitable growth and long-term return from our baseline operations.

Turning to Bell West, the put arrangements places us in an excellent position going forward and we continue to analyze options associated with the put. Importantly we believe it's value is yet to be fully realized in MTS's share price.

To conclude, we believe our value creation efforts stacked up extremely well in 2002. We believe we're on the right course for continuing to deliver long-term value and we're looking forward to the opportunities in 2003 and beyond. Thank you and I'll turn the - turn it over to Wayne now to go through the financial overview.

Thanks, Bill.

We're pleased with the overall results from our operations in 2002. In the baseline, excluding restructuring charges, we exceeded our profitability targets with EBITDA finishing the year about 3.4% and EPS advancing by 1.7%.

Baseline revenues at $209.6 million in the 4th quarter were largely unchanged from a year earlier and for the year increased by 1.7% to $835.1 million. These results include strong performance from the wireless and internet lines of business. The wireless segment had an outstanding year with 4th quarter revenues up by 15% to $36 million, and annual revenues increasing by 13.9% to $137.4 million. We also saw more pricing stability in 2002 with RPU declining by 3.6% to $49.52 compared with the 6.9% decrease in 2001. The decline in RPU reflects competitive price changes and a marginal increase in the proportion of customers using prepaid service. Partially offsetting these impacts were select pricing increases for network access and prepaid service. Overall, MTS continues to have one of the highest RPU's in the industries.

Internet was another highlight in 2002 with revenues increasing by 34.3% to $36 million in 2002 and by 31.6% to $10 million in the 4th quarter. We made tremendous gains in the high speed business in 2002 with our market share increasing from 37% to 42%.

The momentum continued to build in the latter part of the year where we estimate MTS was winning between 2/3 and 3/4 of all new high speed customers. Partially offsetting the strong performance in wireless and internet were lower levels of year over year e-business revenues and miscellaneous revenues. The latter principally relating to contracting work we have been doing in prior years in the United States. In both cases, the decreased revenues reflect lower demand in 2002. Helping to reduce the decrease in the miscellaneous revenue line was strong performance from our security business which grew by 17% to $8.3 million in 2002.

eBusiness revenues were down by 7.5% to $23.6 million in 2002 with 4th quarter revenues coming in at $4.3 million versus $5.7 million a year earlier. Strengthening in the sector is anticipated and Qunara is very well positioned for this recovery. In fact, the company got off to an excellent start already this year after being awarded a five-year $13.6 million contract by the government of Ontario. Qunara will provide professional and managed services related to IT security for the government of Ontario's Health Information Network. It's a major customer win and speaks directly to the capabilities of Qunara in it's field of expertise.

Turning to the traditional operations, local revenues have declined marginally year over year primarily due to the change in the CRTC's contribution mechanism. Excluding this impact, revenues would be down by less than 1% for all of 2002. Annual long distance revenues increased by 1.8% to $205.5 million due to increases in residential pricing and increased wholesale revenues throughout the year. Partly offset by a 1.4% decrease in minutes.

Fourth quarter revenues decreased marginally by 1.2% to $50.5 million due to a slight decrease in call in volumes. MTS's tradition of carefully controlling costs continued in 2002 and is evidenced by the baseline margin which for the full year was 52.7% compared with 51.9% in 2002 . Cash operations expenses in the baseline were down by 1.6% in the 4th quarter and unchanged for the full year.

As in past quarters, the performance on the expense line reflects lower contribution in and long distance costs and reductions in the traditional and other lines of business which have been used to fund higher growth operations and contribute to ongoing profitable growth and free cash flows.

In support of our ongoing focus on efficiency we announced a workforce reduction initiative in November of last year. This resulted in a $10 million one time restructuring charge in the fourth quarter. This initiative reduces MTS's workforce by approximately 250 positions and will attract savings approaching $10 million in 2003. The majority of these departures have have already occurred with the balance scheduled throughout the remainder of 2003.

In the 4th quarter, consolidated earnings per share was unchanged from a year earlier at 20 cents per share. For all of 2002, consolidated EPS was $2.55 versus $1.14 in 2001. The 2002 results include MTS's second quarter $94 million gain on the Bell West transaction and the 4th quarter restructuring charge related to our workforce initiative. MTS has consolidated results this year reflect the impacts of the Bell West and Bell Intrega operations. MTS's equity pickup on Bell West's losses was $9.7 million or 13 cents a share in the fourth quarter and $26.2 million or 52 cents per share for all of 2002. The annual impact includes Intrega's losses to April 10th.

Income tax expense was $15.5 million in the 4th quarter and $71.6 million year to date representing effective tax rates of 55.2% in the 4th quarter and 31.2% for all of 2002. The lower annual effective tax rate also includes the impact of the gain on the Bell West transaction that occurred in the 2nd quarter of 2002. The effective rate of 55.2% in the 4th quarter is higher than Manitoba's statutory rate of 42.6% owing to Bell West's equity losses being taxed at the lower capital gains rate. Going forward, MTS's effective tax rate will more closely approximate Manitoba's statutory rate as Bell West's expected losses decrease.

On the Cap Ex front. Baseline spending finished the year slightly under our $220 million target. Baseline spending was $213.6 million for the year decreasing by 19.2% from 2001. The decline reflects lower year over year spending on our broadband infrastructure as 2001 was the peak year for spending on this initiative. Consolidated Cap Ex totaled $222.2 million which includes $8.6 million in capital spending at Bell Intrega in 2002 up to April 10th.

Consolidated operating cash flow in 2002 decreased to $209.8 million largely due to the payment of two years income taxes in 2002. However, if you look at cash flows before changes in working capital to remove this one time anomaly, you get a better sence of the strength of MTS's operations. On this basis 2002 baseline free cash after dividends was $31 million in line with our forecast for the year.

Let's now look at the year ahead beginning with the brief discussion on pensions and stock options. On the issue of pensions, MTS is in excellent shape. Our plans assets are extremely well diversified across a number of asset classes and manager styles. Added to that we have always utilized prudent assumptions for our pension plan.

For 2003 we've decreased the discount rate to 7% from 7.5%. The return on assets assumption is unchanged at 7.5%. As a result, the estimated negative impact on MTS's 2003 results versus 2002 is approximately two cents per share.

In terms of stock options, beginning in 2003, we will be including stock option compensation in operating expense using the fair value method of accounting. For reference, the 2002 actual and 2003 forecast amounts associated with stock option compensation are identified in the news release.

Turning to the financial outlook, in December, we confirmed our previous preliminary guidance for 2003. This year, baseline revenues, EBITDA and EPS are each expected to increase in the range of 3-6%. We continue to forecast baseline growth rates to be in this range even with the changes respecting pension and stock option expense.

Baseline Cap-X is set at $210 million this includes approximately $40 to $45 million of broadband spending of which $30 million is earmarked for MTS TV. Cash flows for the baseline business are forecast to grow strongly in 2003. With free cash flow before changes in working capital expected to be approximately $45 million.

As Bill noted, in 2002 we deployed a significant amount of cash to shareholders through dividends and buy backs. Our ongoing commitment is to deliver value through the appropriate deployment of cash into the various alternatives available, including dividend increases, share buy backs and investments for profitable growth. The consolidated results anticipate equity losses from Bell West in the range of 35-40 cents a shares.

MTS's 2003 estimated funding commitment to Bell West is approximately $89 million. The put option in 2004 guarantees all of MTS's funding to Bell West plus an 8% return on that incremental funding.

In summary, while 2002 was not a year without challenges we are satisfied in knowing we were successful in achieving profitable growth despite slower market conditions. We were successful in delivering value to shareholders and that we were successful in positioning MTS for continued long-term profitable growth. Thank you. We will now take questions.

Thank you. We will now take questions from the telephone lines.

If you do have a question, please press one on your telephone key pad. If you're using a speaker phone please lift the hand set and then press 1. If at any time you wish to cancel your question, please press the pound sign. Please press one at this time if you do have a question.

There will be a brief pause while participants register for their questions. Thank you for your patience.

Our first question comes from Rob Goff of Credit Suisse First Boston. Please go ahead.

Thank you very much. Good afternoon. Could you address your decision making time line ahead of the infamous put option next February.

Well, that is a very difficult question to give a precise answer to. Certainly, the put is for February of '04.

I don't think that anybody would expect that a decision would be left until the last minute. Certainly as we've indicated in previous conference calls and so on, we have been focused on this issue for some time in terms of considering the various options available to us and we continue to do that so that under whatever scenario might unfold that we'll be adequately prepared to deal with that. I think that's about as precise as I can get.

So, I mean it's - we're not sitting back and waiting for that time to approach. We very much are focused on ensuring that we've considered every potential option for increasing shareholder value and that at the end of the day we make the right decision.

Thank you. And a small follow-up if I may. Can you give us your thoughts on the share repurchased during the quarter. It wasn't quite as aggressive as it had been previously.

Well certainly we had some target ranges in terms of buy backs and we did see some strength in a share price in the last couple months of the year so we weren't as aggressive in the market as we had been in previous months. I think the average price for the 800,000 that we did get back was $30.45. So that's basically the reason, plus I mean, I think people have been not wanting to be sellers in the market so they are not readily available.

Okay. And your position there on a go forward basis?

We continue to look at the opportunity to buy back shares. Obviously the price is important. If we see weakness in the price, we'll take advantage of that.

Great. Thank you very much, Bill.

Thank you. Our next question comes from Greg McDonald of National Bank Financial. Please go ahead.

Thanks and good afternoon. I wonder if you might address the issue of market demand.

It's a broad reaching question and difficult one to answer but a weakened earnings season here. We've heard indications on 2003 estimates from negative to cautiously optimistic, I guess is the way to describe it across the board.

I wonder, when you think about your communications with the business customers that you have, both in terms of -- I'm referring partly to Qunara but also business customers within Winnipeg. What are you finding their thoughts on what they're thinking their spending is going to be in 2003 if and when there there might be a turnaround?

Well, I think, there is a number of things that impact that from our perspective. I think we had extremely good success on the business side with some very strategic long-term wins.

Certainly the province of Manitoba, date of contract was one of them that positions us on a go forward basis. And that provincial data network also allows us to extend the reach cost effectively of the broadband network and as a result of that we're able to look at the business case in terms of expanding high speed internet into some connecting areas which is which is certainly good.

The growth that CanWest has seen in the Manitoba market and the success that we've had in winning their business has been a good strategic long-term win from our perspective. We have also had other significant wins in terms of Red River Community College development in the downtown area and with the City of Winnipeg as well.

So, I mean, the dynamics of our customers in our market and our success with them is not necessarily consistent with what might be happening with other encumbants in other markets at this particular time. So I think we do have solid momentum and run rates and success rates going into '03.

And you know I'm really not in a position to compare that to the other incumbents and I don't know enough about their current situation from that perspective but I think that we're in a good position. We had a good solid 2002 not just in terms of the actual cash flow in financial results but in terms of the large strategic wins that we have that tie that business up for, in most cases a five-year term which is in good solid position.

our press release implies a pretty optimistic view for Qunara. Is that just the Ontario Ministry of Health contract or are you seeing other indications that demand maybe picking up?

We are we're seeing other indications as well. We have -- we announced a good win with Corel back in the November / December time frame.

We've also had an excellent win with AGRICORE in the west and we're going to be in a position within the next short time to be able to announce a further significant win that where the contract hasn't quite been finalized but the deal is ours. So, I mean, we are seeing again good run rates and good momentum coming into this year that certainly were lacking last year.

That's helpful. Thank you.

Thank you, Mr. McDonald. Our next question comes from Vince Valentini of TD Newcrest. Please go ahead.

Thanks very much. First just follow-up on Greg's question. With this strength of new contracts of Qunara show up as early as the 1st quarter or do you think it takes a while for these new wins to start to contribute?

Yeah. I don't think you'll see certainly the full impact of them in the 1st quarter. I mean, I think we're going to start seeing some cash flow in February. But it will kind of ramp from there.

So Qunara, sort of, good growth this year is maybe a bit back end loaded?

Yeah, I would say that that's certainly the case.

On the the CRTC side, can you remind us how much the incremental impact of the price cap decision is in '03 versus '02?

In the price cap decision, we originally in our news release announced the $5 million impact in 2002 and $10 million to $15 million in 2003 and now with further information and further analysis, I would - the impact in 2002 was approximately $3 million and in 2003 we're looking at somewhere in the $8- $10 million range so there is an extra $5 million impact in '03.

Very helpful. Thank you. And the recent CRTC decisions on win backs and DNA access and bundling, are those material at all for your '03 numbers?

No. Not materially in aggregate.

Okay. And the last thing is the Bell West side. Can you break out the construction revenues this quarter?

The construction revenues, I don't have that number specifically. They were I'm guessing in the $10-$15 million range.

And in terms of how far along the super net is there a lot more construction still to do this year or is it pretty much done?

Well, they're, in terms of that contract, they are in full gear I suppose in terms of building that out and they are on a time frame that was originally and continues to be a three-year time frame. So I would expect that the revenues from that contract will continue and there is going to be ups & downs depending on the various segments that they're building but that will continue and probably increase in volume in 2003.

Okay. I'm sorry, I lied. I just have one other thing.

You shared with us a fair bit more information on the television project today. Is it possible to share any information on the economics of this point in terms what the set-top boxes are costing you and the cost for adding a new customer?

Well, we're not providing that information at this point. In terms of the over all business case, it includes various things and the cost of acquisition. You know when you have 300 customers, it's going to be different than when you have 20,000 customers. So going forward, that's going to come down significantly and I don't know that the number on day one is all that meaningful.

We're looking at a solid business case. I think as I talked about before it's part of our overall next gen initiative and at incremental revenue without significantly increasing the cost of the next gen infrastructure that we had started to build. In terms MTS TV we're looking at a return in that business case of 15% to 20% so we're comfortable going forward that it's a great opportunity and based on the, you know, the early success of our market research, you know, we're looking forward to next year.

And when, just to gauge your $3-$4 million EBITDA hit guidance, I assume when you buy equipment for a customer and install them that will be fully capitalized?

Yes.

Great. Thanks.

Thank you, Mr. Valentini. Our next question comes from Glen Campbell of Merrill Lynch. Please go ahead.

Yes. Thanks very much. I have three questions.

First, a quick one. Could you give us a head count at the end of '02 for the baseline operation and how you expect it to change by the end of '03? In other words is that 250 reduction net or gross?

With respect to the 250 reduction that is, for the most part, a number of positions rather than a number of bodies. But the -- what I could say -- I don't have the actual number of people that we have now or expect at the end of the year. But with respect to the people who left in January, it was over 200 out of the 250.

Would you expect the head count to be down by that kind of number year over year? Yes. Okay, that's great. My second question was on Bell West. There is an interesting trends sequentially where if construction was only $10-$15 million it looks like revenues jumped up. The EBITDA loss is dramatically narrower and yet the equity loss increased from 10 cents to 13 cents.

Can you talk a little bit about what's going on in the business and then how it flowed to your income statement?

With respect to that, there is the footnote that describes the Bell West. I think it's number five in the supplementary information. They had about $16 million of additional revenues in the 4th quarter that was based on the resolution of pricing arrangements between Bell West and Bell Nexia that had been in negotiations basically through the - from April 11th forward and had - or retroactive in terms of application so that went, the pricing changes were retroactive to April 11th so that is causing the the revenue change I believe. And if you look at the -- and that also would have increased the EBITDA as well. Since that was a pricing change and there would be no costs associated with that.

And so the wider equity loss?

Okay. In terms of the equity loss, the difference there, there are a couple of things. The difference between EBITDA and net income is growing partly because the depreciation expense is increasing as they go forward. So that would be causing part of it. And then the remainder would be some fourth quarter charges that I guess would be described as balance sheet cleanup that we're taking in the 4th quarter.

Okay. Super. And my last one was for Bill. We understand that in your current thinking on the possibility of income trust conversion is that this is something that you would look at doing in response say to a BCE bid but otherwise it wouldn't be plan A. I just want to confirm that that is your current thinking.

Well, I think all I can say is that we continue to analyze the implications of the income trust. There are, I think as I've indicated before, I think MTS profile lines up pretty well against that. The one caveat being in terms of capital going forward. And the trade-off in terms of reinvestment and growth and that sort of thing. So I mean that is an issue that we continue to analyze what might be in the art of the possible from that perspective. But I think that the - fundamentally no decisions have been made at this point but we continue to analyze all of our options.

Could you give us a sense of how much capital expenditure that structure might accommodate?

My sense is it could probably handle more than the kind of base 170 that you're talking about. Even [INAUDIBLE] for the TV project looks quite easy to handle.

Is there a much bigger level of Cap-X that you're contemplating that wouldn't fit under a trust structure?

No. No. I think those are good book ends. If you look at different scenarios. Kind of the 175 being one book end and you know 203 capital at 210 being the other. I think that's kind of sort of the really realistic framework to be looking at how we might manage that going forward.

So the issue isn't whether the trust structure could accommodate that kind of number, the question is if in the future you might need to spend a chuck more than that there might be a problem.

Well yeah, the trade off. I mean, obviously, the less capital the more cash distribution and the greater at least short term value creation and the implications of those things.

Okay. That's very helpful. Thank you.

Thank you, Mr. Campbell. Our next question is from Dvai Ghose of CIBC World Markets. Please go ahead.

Yeah, thanks very much. Three questions if I may. One regarding the achievable of '03 targets given Q4 results.

Two regarding Bell West and three regarding your free cash flow target for this year. As far as the achievablity of targets, you've just reported Q4 with no revenue growth. For the full year 1.7 and you've just reported 2% EBITDA growth and 3.5% or so for the year. Now you've got the price cap and the TV strategies as drags on your EBITDA in '03.

I'm wondering how, definitely, you can achieve the 6% that you're talking about but even the 3% at the lower end of the range?

Okay. There are in terms of the revenue growth I think that there are a couple of good things that are occurring in '03 as well. And with respect to that, I mean we expect continuing growth in wireless and internet revenues. There is also when you look at '02 versus '01 there was a significant drag in '02 in terms of our telecom related services business in the U.S. So, that is out of the way and so that you know going forward, there is, you know, I think probably a similar opportunity as there was last year for growth in terms of the growth businesses without the drag on that traditional business.

So in terms of the expense line, I think with respect to the targeted deductions that were completed,or largely completed in January, that that's going to be a large part of us achieving growth in the EBITDA as well. And as we always do, in terms of continuing to look for efficiencies in both the baseline business, or the traditional business as well as our growth businesses, the - For example, the internet business has while we were EBITDA positive currently and there is a lot of opportunities in a business that is been growing at that level to make EBITDA improvements in there so there is the incremental revenues are coming in without proportionate incremental expenses.

Okay. Makes sence. Okay, if I could move along to Bell West please. It seems as if this assets been somewhat off and but Canada rarely talks about it, but you've got the put so you're satisfied, but you've delayed your capital by $18 million from '02 to '03. The revenue guidance hasn't come through. It was supposed to be 500 of revenue, then 400, comes in at 368. The construction revenue is much lower than anticipated from the supernet project. You have Axia suing Bell West.

I'm wondering what exactly is going on there. Because it seems as if Bell West has hit a wall.

I don't think that's at all the case, Dvai.

Okay.

I think it's the fact that the, as you're aware, I mean the construction revenue is low margin revenue. Then uh - What they have been doing is looking for opportunities and being opportunistic in terms of buying dark fiber and that kind of thing which have helped to facilitate the time frame and the completion of - and the cost as well of the supernet. They are making good strides in terms of run rates and momentum and improvement in margin. And certainly there is a seasonality in terms of the construction time frame.

And you know, so I think from an operational perspective, they are making good progress and I'd just as soon not comment on the Axia issue at this point because it's a legal issue.

No, that's fair enough. But do you have a revenue target in mind seeing as you sit on the Bell West board? Is there a revenue target for this year?

There certainly is. Offhand, I don't recall what it is to be honest. I mean I know Wayne has indicated in terms of his remarks the EPS impact that we expect from Bell West being in the 35-40 cent range next year, which is an improvement from 52 cents this year and I believe our capital contribution is identified as being $89 million.

Okay. The last question then is the question of free cash flow. And a couple of issues here. You talked, Wayne, if I heard you correctly about $45 million of post-dividend free cash flow. At your investor day, you talked about 54. I'm wondering why there is that reduction and also I mean given the earlier question that Glenn asked about income trust. Again, I question how you resolve having the highest Cap Ex to sales guidance for '03 at 24% with an income trust?

With respect to the free cash flow, the difference between in the investor day and now would be just that the budget is finalized and I don't know specifically what would have cause that $8 million difference. But the $45 million free cash flow going forward in '03 is the guidance now anyway.

I'm not sure I caught your second question.

I'm just coming back to Glenn's question regarding the income trust and he asked you would you need to decrease your capital intensity in order to be an income trust and you suggested not.

Could you talk me through that, because, you know, your capital intensity is the highest probably in North American telecom in 2003. Which does not immediately stand out as an income trust structure. Again I'm not seeing enough distributable cash to add value if you become an income trust. Can you just explain how you can? Without reducing Cap Ex.

I think the way I asked Glenn's question is that, we have from a planning perspective looked at different bookings in terms of, if capital was say 175, you know, what would the yields and the multiples be and what is does that scenario look like in terms of how much shareholder value.

What is it at 195 and what is it at current levels and obviously there is a trade-off there. The higher the capital, the lower the incremental value in the short-term at least. In relation to that. So I mean at this point all we're looking at is analyzing information and understanding the trade-offs and implications of the various scenarios. But as I have indicated before, we intend to be in business for another 100 years and we want to make sure that the framework that is established is reasonable to allow us to reinvest and grow the business and be successful in the future. So I mean those are just kind of book end scenarios.

Okay. That makes it a bit clearer. Thank you very much.

Thank you, Mr. Ghose. Our next question is from Mr. Bob Hastings of Raymond James. Please go ahead.

Yes. Just in the EBITDA margin I noticed that they dropped almost a percent in the fourth quarter from the third quarter levels and looking at the last year's fourth quarter, actually it increased a little bit. So it didn't look like it was seasonality.

Are there any, sort of, specific pressures that would have been there in the fourth quarter? I'm just looking at your telecom operation, the baseline operation.

No, I don't think so, Bob.

Rather than seasonality, that's just a question of timing and with respect to expenses, I think that if you -- in terms of the 3rd quarter and 2nd quarter guidance when our EBITDA margin was in excess of 53%, we were indicating that that was probably not where we would be for the year. And so, I mean, I think it's just a question of the time of when we undertook certain projects and that would have influenced whether the expenses were incurred.

Okay. And that's not a trend.

No. I wouldn't say so.

Just one point of clarification on those government of Alberta revenues and Bell West and I think the comments were made earlier in the year that they would spend about $120 million. They had to sort of spend it or lose it. I don't know that there was a lot of seasonality sort of mentioned. I just wonder if part of this is a reflection that there's maybe a problem with that contract where the government maybe wanting to delay its introduction?

No. Absolutely not.

Okay so it would be so much slower than anticipated, why?

Well I think as I indicated before, I mean, one of the things that they have been doing, I mean, is looking at dark fiber acquisitions and so on as opposed to builds. They have, sort of relooked at whole engineering and the capital efficiency of it and so on. And as a result of that, I mean have produced capital efficiencies and the over capacity and the over leverage of some of the people with that over capacity has provided buying opportunities for them and so on.

Okay. So that would have brought it down by more than 50% for the year?

I don't have the exact figures in front of me but certainly the overall contract is progressing according to schedule and there is no significant issue there. I mean other than the Axia issue that been alluded to.

Right. Okay, thank you very much.

Thank you, Mr. Hastings. Our next question comes from Mr. John Henderson of Scotia Capital. Please go ahead.

Hi. Thanks.

I wanted to just ask a question on the income trust again. Just if you could give us some idea of timing on when we should expect to hear of a decision that you and your Board will take on the trust conversion matter.

I'm afraid I can't say anything more than I already have on that. It's an ongoing issue with us.

We're certainly very focused on it and will continue to be. It's a major issue from a shareholder value perspective and I'm afraid I can't give you any more specifics in terms of the timing on that.

Okay. I would like a couple of follow ups. Could you tell us - these are a couple of sort of technical questions.

On the high speed internet, are you incurring some equipment subsidies there the way you do in wireless? And are those being deferred and amortized and if so, can you tell us how much would have been incurred for the quarter for both wireless and for high speed internet?

With respect to the high speed internet, there is no subsidy.

The only thing that we capitalize is the cost of the modem and the modem costs have been coming down. I don't have the figure specifically but the -- we also are redeploying modems as we go and we're finding that as you go forward, the cost actually decreases considerably, but on a per customer basis, you know, it's maybe between $100 to $150.

Okay. And you're renting those modems and that's why they are capitalized?

That's right.

Can you tell us if your earnings estimate for next year of 3-6% growth includes the charges for pensions and stock options?

That has all been included. Yes.

Okay. The $10 million charge in this quarter when it's backed out what sort of tax rate do you use on that?

The tax rate would be our regular tax rate which is in Manitoba 43%.

And where is that going next year?

I'm not sure if I follow you.

Are you still at 43% next year?

Yeah. It comes down slightly. I believe it's 42%.

Okay. And can you tell us why Bell converted its preferred shares?-

It's was just an administrating, housekeeping - I mean - When we made the original deal there was still provincial legislation that prohibited anybody from having more than 10% common shares so the deal was structured 10% common and 10% preferred but with the preferreds having the same characteristics other than their ability to vote for directors. So, I mean, once the provincial debt was paid back and that provincial legislation was expired and basically we incorporated the conditions into our articles, that arrangement of preferred and common didn't make sense. I mean, it was a front end structure to be able to manage through the hurdles that were there. So now we just cleaned that up. That's all.

Okay. So they are at 20% now and then their residual is just the -.

Yeah. There is a point and a half or thereabouts that are still in preferred.

My last question, I promise, is in the working capital. Changes in working capital. It's kind of jumped by $38 million in the quarter is there a big chunk of the $10 million charge that's in there? And what else would help to explain why that is higher? Is is just managing your working capital?

Well certainly the restructuring charge would be all in there and that's part of it. The other is basically a seasonality issue where payables typically ramp up in the 4th quarter and usually then would get paid out in the 1st quarter. So it's really just completing a project that we're started towards the middle of the year. And that's, I believe if you look back probably is common.

Okay. Thanks very much.

Thank you, Mr. Henderson. Our next question comes from Richard Talbot with RBC Capital Markets.

Thanks. Good afternoon. A lot of my questions have been asked but I would like to go over a little bit with respect to the further cost reduction potential that you have. You did mention further incremental could occur, but you've always had the lowest cost structure in the industry. I'm just wondering, you know, where did the cost come from?

And if the 250 people that - positions would those be evenly spread across the organization or were they concentrated in any particular area? And then I have a couple of other questions if I can , please.

They were concentrated in a number of areas that specifically related to reengineering projects that in terms of changing the way that we do business so I mean it was isn't a an across the board thing. It was a very targeted thing.

With respect to the margins, Richard, we're not anticipating an increase in our EBITDA margin. The cost as I or I guess to clarify what I was talking about earlier is that, focusing on cost reductions and efficiencies is something that we always do. I would then say that that would allow increases in revenue to drop to the bottom line. With that, the same margin.

Okay. When you look at where your systems are set up in terms of call center consolidation and self provisioning and the like, have you achieved most of the synergies or productivity improvement from those two areas? Or would you see that still to come?

Well, maybe Cheryl could add to this. But I don't think that we see cost reductions or efficiencies as an end game in any way. And you know there is always ways that we can continue to work on that. But --

It's definitely a journey of what you just mentioned. There is no necessary end in site and two of the areas that you mentioned are certainly on our radar screen. Our call centers are very efficient right now and we're hitting our CRTC targets for grade of service and on competitive services as well.

Having said that we've had some bench marking studies and we are implementing changes in our quality control monitoring and insuring that the scheduling and all those tweaking the back office to ensure that we're as efficient as possible. And we're looking at approximately 30 individuals, not people that are going to be released, but in fact where we might might have expected to see 30 people added to the ranks, they are not going to be added because of those efficiencies. Data provisioning now is an excellent example of another reengineering area that we are looking at. And again we're looking at reducing the amount of time to deliver service to the customer which we believe we'll have in the end positive impact on revenue and a minimal impact on people but certainly a reduction in cost so, two very good examples of areas that we're focusing on.

Okay. Thanks. Second, on the cable or on the TV initiative.

Any comments in terms of what your market research is showing with respect to pricing and whether you'll be using this primarily on a bundled approach. And if that is that is the case, how do you think about that bundling with respect to the embedded discount off the a la cart value.?

With respect to the market research, I don't think that or that has been embedded in our pricing and I think that what that has shown is the market is looking for an alternative and that we have a great opportunity to capture a piece of that market.

Part of that is that as the -- there is a fairly low penetration I believe it's about 20% in terms of digital TV and as the customers look for a digital alternative from their analog service, we're in a great position to capture a large chunk of that market. So our pricing accordingly has been set to be slightly above the analog service provided by the incumbent cable player and below that or even with their digital service. Now when you look at the pricing, one of the things that we've also focused on in terms of coming out of our market research and this probably isn't surprising is that customers are looking for flexibility in choice. So we packaged our product in terms of pricing in smaller theme groups of channels so that the customer can pick what they choose, get more of what they want and less of what they don't want. And in that way, likely achieve a more satisfactory value for the price that they are paying. So it's a little bit of a different strategy and not a simple answer to your question, but we think that's where the customer's or what the customers are looking for and that's where we have positioned ourselves.

If I could maybe just add to that on the bundling side, Richard. I think you ought to vote whether we see a bundle in the future. It's certainly a logical next step to look at internet and TV being bundled together especially since the modem or sorry the ser-top box includes a high-speed internet modem within it. We certainly aren't going to give away what our strategy might be in that but it's a logical next step. In terms of a total bundle with the triple play we would have to take into consideration the CRTC's rules on price cap and bundling regulated and nonregulated services together and the impact on increasing the baskets so that would be further in the future.

And is your billing system capable of moving all of those services on one integrated bill or could you update us on where you're at on that perspective?

On the billing side, we have a number of initiatives underway. We currently bill internet separate from the wire line side and the TV is being billed with wire line. The customers have the opportunity to select one bill or a unibill and we have an electronic stapling capability at this point in time to amalgamate or merge that information and have one bill presentations. We're talking about on the consumer side at this point. The platform, as you know a number of companies are investigating wireless billing solutions and we're looking to ensure the platform that we ultimately go with will have the capability to bill both legacy and the growth sides of the business.

Okay .Thanks. And on last question. With respect to the ruling from the CRTC on Nexia and that getting folding in back into Bell. Just wondering what implications that has for Bell West from your view?

I don't see any obvious further implications on a go forward basis. I mean, as Wayne indicated that the pricing split between Bell West and Nexia, and so on was finalized at the end of the year and sort of a $16 million adjustment as a result of all that. So I would and obviously those prices will carry forward into '03 but other than that, I don't see any additional incremental changes as a result of that.

The terms of the put option are not impacted by that at all then?.

No they're not.

Thanks very much.

Thank you, Mr. Talbot. Our next question comes from Joel McKay of de Jadan Securities. Please go ahead.

Hi. Good afternoon. I wonder if you could just talk about what you're seeing in your wireless market? You you didn't seem to get that much of a lift on your net adds from the Christmas selling season.

Are you seeing any increased competition or is it - are you flattening out of the penetration rates. And also I wonder if you could you tell us what level of prepaid you have in your sub base right now? Thanks.

With respect to wireless additions, I don't think that there is a significant change there. If you compare to last year, I think last year was an exceptional fourth quarter in terms of adds. This, in terms of this year, I don't think that's an unusual amount. I believe, the - in terms of from a competitive standpoint, that we're still in the same position market share wise. That's where we have been been for some time. So we're not seeing any changes in the market from that perspective.

If you look at penetration in Manitoba, we're at about 30%. And that compares to the Canadian average of about 37% so we still have lots of room to grow there and expect the growth rates to continue into next year and beyond.

If I could add one data point to perhaps help you out and that in the fourth quarter of 2001, the internet promotion was solo phone. A wireless phone so we had a huge rump up in the 4th quarter of '01 which included that phone and we didn't have that same kind of offer this year. We had a different offer on the internet side so you wouldn't have seen the same kind of up take.

Okay. That helps a lot.

And one other thing you talked about was the prepaid percentage and we're just under 18% prepaid in our customer base at end of the year.

Okay. That's great. Thanks very much.

Thank you, Mr. McKay. Our next question is from Peter Ramey of BMO Nesbitt Burns. Please go ahead.

Hi. Thanks. Just want to go back to a previous question. And it was a long question so I think part of it didn't get answered.

When I look the your Bell West numbers on revenue and when you're looking at, you suggested construction revenue was are might be $50 million. That suggests that recurring revenue did a sudden uptick in the fourth quarter. I was wondering if there was any -- whether you could confirm that and where that's coming from? I'm just looking at run rate into 2004 - into 2003, excuse me, could be a lot better than I had originally thought.

As well as just to confirm that in your EBITDA loss on your TV side I assume that does not include cost - the EBITDA loss does not include any subsidy that there might be inherent in the set-top box because basically you own them and lastly, share option expense. It escalates from one year to the next. I'm wondering if that trend continues or time or whether it stabilizes at a certain level? Thank you.

Okay, with respect to Bell West revenue the other thing that I mentioned was that there was the adjustment on pricing that you would remove out of there to come up with a normalized quarter. But I mean there is no question that the reoccurring revenues are increasing in Bell West.

But didn't they increase like $20 million in the quarter sequentially?

No. The one possibility and I guess my guess on construction revenue may be slightly off. I would have to get back to you on that. It's probably closer $20 million. But in terms of the EBITDA loss on TV, there is no subsidy included in there. The set-top boxes again, we're renting so those are capitalized in our capital assets.

With respect to stock options, the increase year over year would be the additional stock options that we would have estimated to be granted in 2003. And the way our stock option program works is that the options best over a period of five years and so the cost of that would ramp up over that term and then they would be - they would hit a sort of a critical mass and stay at that level.

Would it be fair to assume then if it's 2 cents in a year that we fast forward nothing being different it's really 10 cents?

Well, I suppose it depends on how many options are issued in a given year. It's probably a little less than that I would think because the two cents is rounded up.

Okay. That does increase over time. And lastly, the fact that you took this adjustment at Bell West in your guidance for losses was that incorporated, that new contract incorporated in your guidance or should we expect lower losses from Bell West in your numbers for next year?

Sir, I'm not following the question.

On Bell West you renegotiated your contract with Nexia.

Oh yes, okay.

So was that new contact incorporated in your guidance?

Yes, they would have been expecting a resolution of that in terms of their forecast going forward.

Okay. There is no upside there. Thank you very much.

Thank you, Mr. Rhamey. Once again, if you do have a question, please press one at this time. Our next question is a follow-up question from Mr. Rob Goff. Please go ahead.

Thank you very much.

Question would be for Cheryl, I guess. Are you looking at a significant investment in billing software?

No. We're not. We have already implemented changes on our internet billing system to make it very robust. What we're looking at in the future is a wireless solution. We believe that there are opportunities to piggyback on others who have implemented wireless solutions within the or either have or in the process of implementing solutions. So we don't believe that that will be the kind of investment that you're probably envisionsing.

The second thing is that we currently have an arrangement with Telus Enterprise Solutions and we're paying on a per bill basis and so, with another outsource arrangement it would [INAUDIBLE], we don't see an uptick there.

Thank you and a question for William. One of clarification. Your projected 15-20% return on investment for the cable product. Is that based on stand alone economics or would that include a retention factor in there?

There would be a retention factor in there.

Okay. Can you sort of put some parameters on that?

Well, I mean, basically, I don't have that number handy. The business case was over a longer time horizon and the for double the retention in the first few years would have been negligible and so the retention factor is farther out and as a result when you discount it back I'm not sure how significant that would be. Certainly not so much in the early years. If that helps.

Okay. Thank you very much.

Thank you. And at this time, I would like to turn the meeting back over to you, Mr. Woods.

Thanks very much, Operator. Just before we close the call this afternoon, a final reminder, MTS's 1st quarter results and conference call are scheduled for release on Tuesday, April 29th. Once again, thanks for joining us and have a good evening.