BCE Inc (BCE) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Manitoba Telecom Services, Inc., 2004 Second Quarter Results Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Brad Woods, Director of IR for MTS. Please go ahead, Mr. Woods.

Thanks, operator, and good afternoon, everyone, and thank you for joining us today to discuss MTS's Second Quarter 2004 results. Our news release was issued earlier today and includes notice of the second quarter dividend, which has been raised to CAN 65 cents a share. On today's call are Bill Fraser, CEO, Wayne Demkey, EVP, Finance and CFO, Cheryl Barker, President of our MTS Manitoba Division, and John MacDonald, President of our national division, Allstream.

We are this quarter including a slide presentation to support our prepared remarks. The slides are available on the MTS website, in the Investors section.

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, and good afternoon. On March 18th, we announced the acquisition of Allstream, a historic event for our companies, our customers, and our shareholders. Today, I want to bring you up to date on the progress we've made to date on our continuing transition plans. I'll also comment on the performance of our operations through the quarter, and conclude by touching on the opportunity we now have before us.

Let's begin with the progress to date. On May the 12th, Allstream shareholders voted overwhelmingly in favor of MTS's offer, and so on June the 4th, after successfully defending against a requested court injunction, we closed our transaction. During the quarter, we completed our new debt issue, raising CAN $350m in the market. We experienced excellent demand, reflecting the strength of our company and backed up by the solid credit ratings issued by DBRS and Standard & Poor's. We confirmed our senior management team, including Cheryl Barker and John MacDonald, who are leading the Manitoba and national operations, respectively. Cheryl and John have also each established their teams. On July the 2nd, we announced a settlement agreement with Bell Canada. Most importantly, the agreement provided for the orderly transition of our commercial arrangements in a manner that is designed to be seamless and transparent for our customers. Additional key attributes of the agreement included provision for the disposition of Bell's equity interest in MTS, the termination of Bell's shareholder and governance rates with the settlement payment that was completed on August the 3rd, the termination of all Bell legal proceedings against our company, and the continuation of our wireless agreements. This was a very important achievement, and we're pleased to have resolved these issues and to now be able to focus exclusively on executing our business plans.

Last week, of officially completed the last chapter in the Bell West story. Through that initiative, we achieved a double-digit return for our shareholders; that was confirmed with the receipt of CAN $645m in cash proceeds we received from Bell on August the 3rd.

Today, we're committed to when we announced that transaction, back in March, and supported by the strength of our business cash flows, we've increased the dividend and launched our share buyback. The board of directors has approved 160% increase to the quarterly dividend, the new rate is CAN 65 cents per share, or the equivalent of CAN $2.60 per annum, representing an extremely attractive yield of 6%, based on yesterday's closing price, making MTS one of the highest-yielding telco stocks in North America.

Our CAN $800m substantial issuer bid is being offered at a price range of CAN $43 to CAN $48 per share.

In terms of other integration issues, our teams are making excellent progress. Our integration activities have been scoped out, detailed plans are well into development, with implementation either already underway or soon to begin. We've already combined our two e-business operations, [Qnera] and Allstream ITS, into the national division. Going forward, they will operate under the Allstream brand.

In addition, the synergy opportunities have now been analyzed in detail, and we've confirmed our original target of CAN $40m in annual operating savings. We anticipate largely completing the execution of our integration plans before the end of 2005.

Turning to operations, we continue to make solid progress through the quarter. At Allstream, significant progress continues to be made in positioning the business for long-term success. An important component of our strategy rests in leveraging the opportunity offered by Allstream's state-of-the-art IP infrastructure. During the quarter, Allstream continued the rapid launch of next generation services, including a fully managed enterprise IP telephony solution, which enables organizations to collaborate and communicate, using converged web and voice-based technologies, including wireless devices. Allstream's Digital Inc. solution, a first in Canada, which streamlines data capture and information access for businesses by offering electronic data capture from pen and paper as an efficient and cost-effective means of accelerating business processes. And voice-over-IP access, a wholesale offering enabling service providers to connect their self-managed voice-over-IP solutions to the public switched telephone network, to deliver local service to residential and small business customers utilizing Allstream's extensive network infrastructure. Primus is already using a service and discussions are currently underway with other providers as well.

For all of 2004, we are anticipating the addition of some 12 new services to support our continuing leadership in the IP world. With seven through the gate so far, we're making excellent progress against that objective, and while it's still relatively early, we're starting to see some good traction with some of these new services, including Ethernet private line, translate LAN, CDNA, and business IP service.

Looking at the sales funnel, we've had some noteworthy customer wins and extensions, including Primus Canada, HSBC, Starbucks, the post office, or the passport office, Kraft Canada, CIBC, and Great West Life. Together, these represent approximately CAN 8m in new annualized revenue.

Allstream's brookings and sale force quotas were on plan at the midpoint of the year. We're convinced that we're on the right course of achieving long-term success in the evolving telecommunications industry, and as the new, higher growth next generation services gain traction in the marketplace, the revenue profile will gain momentum as well.

And finally, of particular highlight was the recently announced extension of our agreement with AT&T. It's a very important relationship for our two companies, and we're delighted to have solidified our arrangement for a significant period of time.

Turning to Manitoba, areas of specific highlight include wireless high-speed Internet and digital TV, which all continue to perform extremely well. Wireless revenues and subscribers both saw double-digit year over year growth consistent with our expectations for all of 2004. The high-speed Internet segment continued to grow strongly, with subscribers incremental by 29%. And digital TV is also generating extremely positive results. At June the 30th, we had 20,000 customers, and with 22,000 customers currently, we're well on our way to exceeding the high end of our original year-end range. I should also note that earlier this year, we launched our Less To Talk residential long distance offering in Alberta and BC. We have experienced a tremendous response to the service already and we anticipate very positive growth from this new initiative in the quarters ahead.

Overall, the Manitoba operations are performing well. We've always held a strong competitive position across the segments of the Manitoba market and now, with the take-to-market capabilities of Allstream, our position in Manitoba is that much more formidable. In fact, we were just awarded a three-year, CAN $10m contract with a major Manitoba-based company to provide a national data network solution. Our successful bid was a real team effort that leveraged our combined strengths.

We've said, and we very much believe, that the acquisition of Allstream is not so much about what we are today, it's about what we can be in the future. We have a leading-edge, fiber-based national network, a growing suite of next generation IP-based products and services, an opportunity to increase our share of the national enterprise market, with a well-established foundation of blue chip customers to build from, a 7,000-plus employee base that's highly skilled and strong customer service orientation, and an extremely strong management team, with tremendous expertise and capabilities.

To conclude, we now have all the tools to provide winning solutions to the market. We have the technology, the network, the people, and the financial strength to carve out a solid position in the changing telecom world to grow profitably and provide excellent returns for the long-term. Thank you, and I'll now turn it over to Wayne.

Thanks, Bill. Before discussing the results, I'd like to touch on the new reporting format we've adopted. Following the acquisition of Allstream, we did considerable work on reporting format, taking into consideration how our businesses are organized and managed, what information would be useful for investors to understand our business, and we also revisited reporting formats and content of other companies in the industry. The income statement includes combined revenue line items that extended across both our predecessor companies - local, long distance, and data. I know many of you in the past have asked for the break out of our data revenues, and so I hope you will find this added disclosure useful.

Data is comprised of data connectivity, Internet, and ITS services. Wireless services remain as a separate line item on the income statement, and ``other'' includes directory, MTS TV, and miscellaneous. To help you with the transition to the new reporting format, we have provided historic quarterly pro forma revenues and expenses of the combined organization on the new basis, down to operating income, and back as far as the first quarter of 2003. We believe it's important to continue to be able to assess the progress of the national division, and so we are continuing to report revenues and EBITDA. We have consolidated [Qnara] with Allstream's ITS business and so the national division's results now include revenues and expenses from [Qnara]. On this basis, we have provided pro forma results of our national division for the three and six months ended June 30th.

In terms of the actual second quarter results, with the closing of the Allstream acquisition, we are now reporting consolidated results for the expanded company. The results we are reporting today therefore include approximately one month of Allstream and a full quarter and six months of MTS. A major contributor to virtually every line on the income statement relates to the acquisition of Allstream. Total revenues were CAN $314m for the quarter and CAN $525.1m for the six months ended June 30th, representing increases of 44.8% and 22.8%, respectively. EBITDA increased by 20.9%, to CAN $137.1m and CAN $251.2m year-to-date. Earnings per share in the second quarter increased by 54%, to 59 cents. Including the one-time CAN $75m settlement agreement payment, earnings per share was negative 10 cents in the quarter. Year-to-date earnings per share was CAN $3.20 compared with 77 cents in 2003. The increase reflects the gain on our sale of our Bell West investment from the first quarter of 2004, the acquisition of Allstream, and the continuing success of the Manitoba operations, partially offset by the one-time settlement agreement payment.

The combined MTS operations continue to be a consistent generator of cash. Free cash flow, excluding net acquisition costs, the Bell settlement, and Bell West funding, in the first quarter of 2004 was CAN $30.6m and CAN $69.6m, year-to-date. This number reflects our funding to the MTS Manitoba pension plan for 2004 of approximately CAN $42m. It includes our normal cost of funding, as well as a special annual payment for the plan's unfunded position.

In the back half of 2004, we will be funding the Allstream pension plan's normal cost in it's unfunded position.

On a combined basis, then, total actual funding our pension funds for all of 2004 will be approximately CAN $61m.

Looking to 2005 and beyond, we will be continuing to fund the normal cost of both pension plans of approximately CAN $20m, as well as making special payments to address remaining unfunded positions in both plans. These special payments are structured to eliminate the unfunded position over a five-year period. Importantly, all of these funding requirements can be accommodated within ongoing cash flows from operations.

I'd now like to discuss the performance of our combined businesses, based on pro forma results, as if it had existed as a single entity on January 1st, 2004, using comparables from 2003. We have excluded from the 2003 pro forma numbers the results from Allstream's [contour] of businesses, which were sold mid 2003. This provides are more meaningful analysis of the progress of the business.

On this basis, consolidated revenues in the second quarter were CAN $503.1m, down 6.8% from the second quarter of 2003, and relatively unchanged from the first quarter of the year. The year-over-year decrease reflects lower revenues from long distance, local, and data services, partly offset with growth in wireless, MTS TV, and directory services.

Let me give you some additional comment. Local voice services were CAN $135.5m in the quarter, down by 4.5% from a year earlier. The decrease is primarily due to a 6% year over year reduction in Allstream's access lines, which reflects Allstream's continuing focus on selling higher margin local lines on our network, or via unbundled loop, and de-emphasizing low-margin resale lines. Sequentially, local revenues are unchanged from the first quarter, at CAN $135.5m.

Data services revenues were CAN $168.8m in the quarter, down from CAN $180.9m in the 2003. Pricing pressures on legacy data connectivity access at the national division was the main contributor to the negative variance.

Long distance revenues were CAN $130.7m in the quarter, down by 16% from a year earlier. Decreased revenues at Allstream are due to lower outbound rates and decreased toll-free volumes, which were partially offset by increased international outbound volumes. Long distance revenues from the Manitoba division have also declined, due to continuing competitive pressure and the discontinuation of the customer's requirement for cross-border wholesale services in the third quarter of 2003.

Wireless revenues for the quarter increased by 13.7%, with subscribers up 10%. On a year-to-date basis, average revenue per unit was CAN $53.01, up from CAN $50.50 in 2003, reflecting increased usage and positive pricing trends in the wireless market, including the change from per-second billing to per-minute billing. Churn continues to be very positive, at 1.09% for post paid customers.

Other revenues also increased in the second quarter, with gains from directory, AAA Alarms, and MTS TV services. As Bill indicated, the TV rollout is going extremely well. Revenues from MTS TV were CAN $2.3m for the quarter and CAN $3.7m for the year, up from CAN $0.1m for all of the six months ended last year.

Continuing with pro forma results, consolidated operations expense for the quarter was CAN $344.4m, down by CAN $13m or 3.6% from the previous year. The year over year decrease relates to the national division and reflects lower costs of goods sold, branding costs, and salaries expense, partially offset by one-time workforce reduction costs and higher stock-based compensation expense.

Taken together, these revenue and expense results translated into consolidated pro forma EBITDA for the quarter of CAN $158.7m. The underlying cash flow our expanding company generated is impressive. Pro forma free cash flow from continuing operations, excluding pension funding for the unfunded position, was CAN $160m year to date.

Let's now turn to the outlook for the balance of 2004. When we announced the acquisition of Allstream back in March, we provided 2004 pro forma financial information that was based on the financial forecasts of both MTS and Allstream, as if the two companies had existed as one on January 1st, 2004. Today, we are providing updated pro forma guidance for 2004 that reflects our forecast for the balance of the year, with consideration of the results of both companies through the first six months.

For 2004, pro forma revenues remain with our previous range of CAN $2b to CAN $2.1b. The outlook for 2004 pro forma EBITDA is CAN $670m to CAN $680m. This reflects the more modest results of the national division year to date, together with the one-time costs from the national division, referred to earlier. Contributing to the more modest outlook for the national division is softer demand in the enterprise segment, competitive pricing in legacy services, and longer sales cycles involved with many of the next generation services.

Recognizing the current market conditions, we have and will continue to be taking action that strengthen EBITDA from the national division through the balance of 2004. As such, EBITDA is forecast to come in at approximately CAN $210m for the entire year. Allstream's EBITDA performance in June, at CAN $20m, supports this target.

Pro forma free cash flow is now expected to be between CAN $265m and CAN $295m, reflecting the lower EBITDA, partly offset by a reduction in capital spending, to CAN $315m. Our success-based capex is being lowered in light of the more modest market conditions.

And finally, pro forma earnings per share is forecast to be greater than CAN $2.75, and cash earnings per share at CAN $4.15 to CAN $4.30.

At MTS, we have a reputation of being the most efficient operator in the business. The team at Allstream has also accomplished much through its efforts to reduce costs and increased efficiencies. As a combined organization, we will continue on this path for the long-term, and although we are still very early into life as a much-expanded company, we are very committed to working hard on the cost side to reduce the impact the delayed revenue growth would otherwise have on EBITDA.

The fundamental ability of our business to generate strong cash flows remains unquestionable. Cash flows that support the investment requirements of the business, one of the most attractive dividends in North America, and cash flows that hold the opportunity for future dividend increases and/or share buybacks.

Inclusion, we are very positive about our opportunities for continuing the delivery of long-term value for our shareholders. We have prudent, proven strategies that leverage our core competencies, a strong platform for long-term, profitable growth, solid cash flows, a strong balance sheet with very profitable operations, and an excellent management team. Thank you. We'll now take questions.

+++ Operator: [Operator Instructions] Your first question comes from Dvai Ghose, CIBC World Markets. Please go ahead.

Yeah, thanks, a few questions, if I may. First of all, the division payout ratio with the 260 division looks to be about 62%. I guess it depends upon how many shares you buy back through this CAN $800 repurchase. But are you comfortable with that level of payout? It's clearly higher than your peer group, given the fact that your tax shield with Allstream will run out in five years? And I've got a couple of other follow-ons.

Dvai, we're comfortable at that level. I mean, there's no question that over that five-year period, that we'll have to address that, and I think we've talked about in the past, in terms of when the tax shield runs out, we'll need to, you know, address the situation with respect to the cash flows. And over that five-year period, I believe that we have more than sufficient cash flows to address that through share buybacks.

OK, that makes sense. Now, another key part of your cash flows will be the margin improvement at Allstream that you were alluding to. Could you give us some ideas of what you're thinking about there -- is it headcount reduction, is it a redoing of the network? How did you expect to get margin improvement?

Well, in essence, some of the EBITDA improvements have already been put in place. First off, in terms of the first half, part of the shortfall in EBITDA is due to one-time costs, basically due to workforce reductions, and that will be beneficial in terms of the second half.

And secondly, in terms of the operating cost, we've also got, you know, things put in place to improve EBITDA and manage costs over the second half.

OK, and then two real quick ones, on the consumer side. Interesting that you've launch residential long distance in BC and Alberta. Could you give us an idea of pricing and what sort of retaliation, if any, you expect fro Telus, and also on the TV side, you seem to have captured some very nice market share very quickly. Has there been any retaliation from Shaw?

Dvai, it's Cheryl.

Hi.

With respect to the long distance dial around service in Alberta and BC, we ramped it up and started it off in April and we've had a huge amount of success. We've had very pinpointed, targeted marketing to certain segments of Edmonton, Vancouver, and Calgary, and we have exceeded four million minutes of use in the period from when we started it to the end of June. We're currently at a break-even position, and what we've done is we have the five-cent, I guess, we kind of claimed five cents for ourselves. The marketing program is a very strong one, with very much claiming the nickel, as we got extremely competitive pricing with- for overseas calling, and of course, as we know, there's a fair amount of overseas calling that occurs in the Alberta and BC marketplace. We also look to see even greater profitability on that service as we move our facilities from Bell Canada, where they currently reside, over to Allstream. That will also enhance the profitability. We haven't seen much in the way of competitive response. As you are no doubt aware, [YAC] is not there, active in the Alberta and BC market, and so we have, I think, are taking a premium position out there, and expect to continue to see those volumes ramp up.

On the TV side, thank you, yes, we are doing just fabulously well in Winnipeg for TV, and on the competitive side, you know, Shaw is a strong competitor and they're- they have been putting specific, targeted offers to try to win back customers that we have taken from them. What we've seen, which I think is true to form on research that's been released in the past, is that bundles assist companies in maintaining customers, so we have a strong offering for high speed and TV, over 50% of our TV customers are also high-speed customers, and they receive a CAN $10m loyalty reward discount, and we have found that the churn has been significantly reduced, so we continue to ramp up both of those services. And you know, we're just-- we're competing in the trenches.

That's great. Definitely good growth, by numbers. Congratulations.

Thanks.

The next question comes from John Henderson, Scotia Capital. Please go ahead.

Yes, hi. I wanted to probe a little more on the difference in EBITDA from Allstream in the quarter of CAN $20m for the month of June versus 40 for the quarter. Is that difference all explained by the one-time charges that you mentioned? Does that-- in other words, implying that the those charges are in the order of CAN $20m, or can you sort of separately identify those for us?

The one-time charges that I'm speaking about, John, were basically workforce reduction or severance costs, and that would be about the half of the difference that you're talking about, and the rest would be related to the more aggressive pricing that we've seen in the market, year-to-date.

So has the-- the improvement, then, of- we're still missing CAN $10m in the-- does June do better than the other two months, or is it the workforce reduction that has had an impact on reducing cost in June?

Well, it has. It's a little bit difficult to compare a quarter to a single month, and so some of that would be timing. But essentially, if you go back to the quarter view, and say that, you know, we were roughly CAN $10m short due to the workforce restructuring costs, and then you know, CAN $10m with respect to the, using your numbers, with respect to the market pressures, that-- that first part, the one-time cost, goes away on its own, and the second part, we're addressing through cost management.

OK. And sort of the follow-up to that is that, I guess, if you remove those workforce reduction costs, you'd be about CAN $100m of EBITDA for the first half, and you're suggesting 210 now for the year. Is that-- do you see an improving outlook? It doesn't look as if the outlook is improving; I wonder if you can kind of help reconcile that?

Well, I think the outlook begins to improve in the second half, as we begin to, you know, see the revenue side start to turn in our favor, in terms of seeing- or arresting the decline in revenues and working towards ending the year on an uptrend.

John, John MacDonald here. I haven't-- I haven't given up the towel on the whole initiative to actually arrest the decline, and quite frankly, what would have to happen, it has to be done through better products and services in the marketplace, and it has to be done by borrowing share from the other guys.

Right. OK. Is there more room to cut capex, if need be?

I think that, you know, we've-- certainly capex is success-based, to a large extent, and certainly from that perspective, you know, we-- we have managed that. We believe that there is room to reduce capex, and we've reflected that in our guidance. Whether there's more than that, we'll see, but certainly, you know, to the extent that the capex is success-based, we would only be spending it if we are successful in gaining customer contracts where we can earn a return.

OK. And I guess one last quick question for Bill -- if you could share with us your interest in national wireless assets?

We're currently reviewing our options and watching how that movie unfolds with Telus, so I mean, that's not something that we're prepared to provide any detail at this point.

But you're reviewing options? Thanks very much.

The next question comes from David Lambert, TD Securities. Please go ahead.

Yeah, hi. John, you had- this is question for John MacDonald -- you had set some goals on sales quotas, and I was wondering if you can give us an update on that, and also from the acquisition of 360, you see any impact sort of the midsize business market?

First off, part of it-- basically everything is going to according to plan, and what we were trying to do, when we established the plan, was to, you know, have more quota-bearing sales people with better what I used to refer to ``arrows in the quiver,'' and then being able to get them on target. So the bookings numbers that we're seeing are quite a bit ahead of plan, as a matter of fact, and we see a continuous improvement. The- the issue on the top line has to be, and it's an issue that everybody is experiencing, has to do with reprice and churn, and so what you have to be able to do is make sure that you're pouring more water into the bucket than is leaking out the bottom kind of thing, and that's what we're focused on, in doing, in particular for the latter part of the year.

Relative to 360, first of all, I was sort of hoping that 360 tended to be fairly aggressive in terms of their pricing in the marketplace, and felt that we'd bring some semblance of normality back to the market, but we haven't quite seen that yet. We do see an opportunity to the extent that there's customers and employees that are perhaps a little concerned about the acquisition that then that may represent an opportunity for us to gain share and we're pursuing that.

Thanks.

The next question comes from Craig MacDonald, National Bank Financial. Please go ahead.

Thanks. It's a bit of an add-on to John. If you could talk a little bit about what the changes that you're seeing in the Allstream business - clearly there is an impact, and I don't see any change in guidance on the top line, and I wonder, first, does that imply no change in the Allstream top line guidance, and then secondly, John, if you can talk about-- things have changed since the announcement was first made for the acquisition. In your mind, what businesses are getting worse than what you originally thought, what businesses are offering a little bit more light at the end of the tunnel, relative to what you originally thought?

Maybe I could just address the first one, and then turn it over to John. With respect to the guidance, I think that there is some decrease in revenues that we've experienced over the first half of the year, and as John indicated, we're working hard on improving that in the second part.

I think that, you know, with respect to the guidance specifically, that the range of guidance on the top line was a little larger than that, in terms of EBITDA and so that you, you know, we're still in the range, with respect to revenues.

In terms of what we see happening in the market, or what's changed, well nothing, for the most part, has changed in the market, aside from, you know, customers are still buying the data communications services the way they buy PCs. You know, same price [inaudible] capacity kind of thing. That really hasn't changed.

There seems to be-- have been an acceleration within the market overall, relative to LD. I think it's been triggered, to a certain extent, with all the discussions about people trying to enter the consumer voice telephony market, be it cable companies, like Rogers and Shaw. Also people are looking at, you know, what Primus is doing, with their [talk] broadband, there's a lot of talk about Vonage, a lot of talk about Skype, and I think that, you know, in particular, looking at short-circuiting a lot of that, that concern, by offering their CAN $5 plan, but that CAN $5 plan is establishing a price point in the marketplace that is pretty low. So, you know, we would see an acceleration, particularly in the whole area of LD, of moving price points downward, and that's a phenomena I would see in the past couple of months.

And are you mostly seeing that impact on the carrier side of the business versus the enterprise, or large business side?

You can see it on both. And by the way, when the prices get, you know, close enough to where they are right now, there's really no difference between two- whether you're a wholesaler or whether you're a retail customer. Price points, the deltas, don't really- they're not that large.

Right. And--

But there are areas that are growing. I mean, there's-- the business IP, in terms of IP telephony, at the enterprise level, and I'm talking about IP PBXs, is not growing as fast, and there's a variety of reasons for that. For example, customers are very concerned about the- putting their local area infrastructure, along with their telecom services, together, and they may see benefits associated with that in terms of new applications, but they're not readily apparent, at least initially. What customers are seemingly interested in is having somebody else manage that on their behalf, so a hosted IP telephony service, where somebody can actually take all the worry from them and look at generating new applications and make sure it's an evergreen approach for them, that's gaining some interesting traction, along with transparent LAN service, Ethernet private line, we really do see that Ethernet everywhere is what most major customers are looking for, and they want somebody to manage that on their behalf, once again, to make sure that they have all the various pieces lined up. The other--

The-

One other, if I just could just finish, one other area that's growing quite quickly is security, and [Qnara], with MTS, had a strong security product, as Allstream, ITS, had a strong security product, and we continue to see opportunities and growth in that area.

One quick follow-on -- as far as enterprise customers are concerned, some of the other telephone companies have commented that they're starting to see a pick-up in volumes, and that was a comment that a bunch of telephone companies made in the first quarter as well. Can you comment -- and you alluded a little bit to that in terms of wanting more volumes for the same price. Can you comment on what your enterprise customers are saying about their businesses and what that might imply for demand, going forward?

Well most definitely, there's an increase in volume, particularly in the data service area. You know, and people are looking for higher speeds, and there's a real business benefit, operational benefits, in terms of applying those kinds of capabilities within the enterprise and reducing their cost. So, we don't see any slackening in demand relative to bits per second. It's a different point in terms of volumes of minutes of use. There are some changes that are occurring, overall in the market. You are seeing applications that are being transferred from traditional PSTN into, say, Ethernet private line, to a PBX traffic, that may be originating in the States, that's terminating in- that would normally terminate in the States, is now not going over the 800 [cloud] as much as it used to. It's being piped via private line right over to India, for example. So you're seeing traffic moving off the PSTN, on to a data fabric, at least for those kind of point to point applications. We're seeing a growing trend in that area. But the size of the pipes, there's no question, they continue to grow, and there's a lot of capacity out there in core networks to accommodate that.

OK, thanks, guys.

The next question comes from John Grandy, Orion Securities. Please go ahead.

Thank you very much. A couple of brief questions. At the end of 2003, the unfunded portion of the pension at MTS was, I believe, CAN $47m. It appears from what you just said that that number has increased somewhat, to the extent that you're going to have to fund it over a period of years. Can you clarify if that's correct, and if so, what is the unfunded amount today?

Well, the difference essentially there would be accounting basis for the pension fund versus the funding basis, and there's slight differences there between the accounting rules and the rules that [OSPE] uses in terms of what your actuaries have to follow to do the pension fund valuation. We're working on a valuation presently in terms of the current year funding, so I don't have that number exactly, but we're probably- we did fund an amount against that, and so we're probably looking at the deficit in the, I'd say, CAN $90m range.

CAN $90m today -- that doesn't included the unfunded pension at Allstream?

No. Allstream would be a little bit less than that number.

Right. Thank you. And then when I look at the pro forma numbers that you've provided and compare them with the historic results for the Manitoba division, it would appear that some of the what used to be called long distance revenue at the Manitoba division has been reclassified as data -- am I correct in thinking that?

Yeah, we-- basically we looked at our lines of business in terms of how others in the industry were reporting it, including Allstream, Bell, and Telus, and basically we re-organized the revenues on that basis.

That's perfect. Thank you very much.

The next question comes from Vince Valentini, TD Newcrest. Please go ahead.

Thanks very much. A couple of questions, I guess. On the Allstream results again, this CAN $19.4m figure for most of the month of June, would you characterize that as a run rate, going forward, that included all of the benefits of the workforce reduction that was already done, or is there more workforce reduction benefit to still come in future months?

That-- there's a few things happening within that month, so I would say the run rate is in that neighborhood. There probably is some workforce reduction benefits yet to come in, but then there was probably some timing differences that offset that, but you know, if you look at our guidance for the year, I mean, we're targeting in that range, on a monthly basis, so that's probably pretty close.

Yeah, and I noted that as well, the second half guidance is pretty identical to that 19.4. Is that something, at this point, you could talk about, 2005? Is there any reason to believe that that's not the starting point for a run rate for '05?

Well, I mean, I would say you're probably better to look at the full year in terms of a run rate and there we're looking at about 210 for the year. We're still in the preliminary stages in terms of looking at our 2005, so I-- you know, can't really comment further on that.

OK. And second question, on the full year guidance, I guess, relative to synergies, when you had done- announced the merger, I believe you sort of showed, ``Here's our EBITDA, EPS, free cash flow,'' and then below that, you showed a range, what happens when you add CAN $40m in synergies to it -- so I just want to clarify. When you say 670 to 680 in EBITDA now for 2004, does that include some realization of the CAN $40m in synergies?

No, there's no-- essentially any synergies in 2004 would be offset this year by the costs that we're spending in the operating side to achieve them, so there's no positive impact in that 670 to 680. That will begin to take, or have a bigger impact, in 2005, to the extent that we put in place what needs to be done this year. Some of those synergies, though, you know, transferring traffic and so on, may take a little longer to accomplish, and so we may not achieve the full CAN $40m in 2005, but we will have, you know, put the pins in place in terms of our run rate for the CAN $40m.

OK, that's helpful. Sticking with guidance, another metric is capex. I believe for just the baseline Manitoba business, you had been looking at CAN $200m of capex for the year, and you've spent only CAN $84m in the first half. Are you trending closer to CAN $170m now are you still targeting CAN $200m?

Now, we're still at the CAN $200m. Typically, in Manitoba, there's a seasonal element to our capex, and you know, in the first quarter, it's usually especially slow and the fourth quarter is especially busy, so there's- I would say we're still targeting at the same CAN $200m to CAN $210m in capex for that division.

Great. And the last one for me is [Qnara] -- is it right to say that the national revenue breakdown that you're giving for this quarter includes sort of the one-month of old Allstream plus a full three months of [Qnara]?

That's correct.

OK. And if that's the case, can you give us any characterization of EBITDA at [Qnara]? Can you even say if it's positive or negative for the quarter?

Well, I don't have those numbers in front of me, and I don't think it would be a particularly meaningful to provide that breakout, because, you know, that-- essentially that was one of the first areas that we're looking at in terms of integrating the business, so when we put [Qnara] together with the Allstream ITS, there's been some cases, overlapping skillsets, and so that's-- there's been some action taken to address those things and to really, to get the businesses to work together as a single unit. A lot of that is underway and has been done, so I think that it's probably better to watch the next quarter results in terms of trying to get an indication of where they're heading.

OK, thanks very much.

The next question comes from Dan Farb, High Fields Capital. Please go ahead.

Yes, hi, it's Richard Grubman. You know, in the last several months, you've closed this transaction that you didn't allow your shareholders to ratify with a vote, and it would appear so far, even in the last few months, that guidance for the acquired assets is already down 13%. You also didn't tell us, when you announced the deal, you were going to pay BCE CAN $75m. Mr. Fraser, I'd like to know if we have your commitment to resign if you miss yet another quarter?

No, you don't.

Why is that? We're suffering and you're not.

Because I think what we've indicated to you in here is that there is a much better opportunity to grow this business profitably and to provide long-term shareholder value than under the previous scenario.

You destroyed over CAN $1b of value by not converting to a trust, and you've already lost CAN $200m of value at the 13% rate on existing cash flow of Allstream. You can't possibly recover that.

Yeah, I don't think that in terms of looking at the potential for an income scenario, given what's happening in terms of the market and voice-over-IP and the competitive situation, that that in any way, shape, or form was a viable alternative in the long-term.

Why didn't you offer your shareholders the vote, since they own the company?

Well, we've been through that a number of times; I don't think there's any point in reiterating that over and over again.

So what does it take for you to admit that you were wrong? Is such a thing possible?

Well, I think you've got wait to see how this unfolds and whether long-term shareholder value is created or not.

Well, maybe you gotta wait until the next proxy season.

OK, thank you very much for calling in.

The next question comes from Peter Rhamey, BMO Nesbitt Burns. Please go ahead.

Yeah, thanks. Quick question on guidance -- you've taken down the guidance by approximately CAN $30m, and I notice you have a workforce restructuring liability on your balance sheet that you'll bring to the income statement, I presume, over time. One fact -- you did CAN $6.1m, Wayne, in the first quarter, of that?

Of the workforce restructuring costs?

Yes. OK, so that's the- part of the, as you call it, the ``miss'' in the first period. Second thing, where do you think that will be in the income statement in that guidance? How much of that CAN $30m decline in the guidance is attributable to the workforce?

That would be- let's say ten-ish.

Ten?

Yeah.

The rest would be due to a decline in the outlook for primarily- primarily Allstream?

Right, that's over the first half, yes.

Right. Second one is a bigger picture question -- is, on-- and it's for Bill, looking at your company, it is under-levered relative to many other companies out there. You've got an CAN $800m buyback. That number was put in at a time when the stock was trading north of 50. I'm wondering, what are your plans after you do the buyback in terms of normal course [inaudible] is to continue to- I mean, quite honestly, you don't have to use free cash flow for this, you could lever up a little bit and buy back the stock, particularly if it's trading-- I think, wouldn't you agree that a dividend at 6%, it makes sense to buy back shares, because it's cheaper to fund through borrowing than to pay that out on a pre-tax basis.

I think that's a fair analysis and I think if you looked at our track record in terms of share buybacks in the past, that we certainly intend to continue to do that on a go-forward basis. We've also mentioned that we have a transition issue over the next five years, in terms of moving from being non-taxable to being taxable, and that we would see one mechanism of dealing with that, in part, at least, through share buyback, so that's certainly something that we have in mind, going forward.

Right. Would you be-- looking at how your board is structured and how you make decisions there, would you be in the position to make that decision in '04, or is that something that has to wait for calendar '05?

Well, maybe I could comment on that. I mean, we're in the process of working through our, you know, 2005 budget and looking towards the future, and so really that's, you know, towards the end of this year before the, you know, the work can be done to even put that decision or those thoughts in front of the board, so that would be later this year, at best, before they would even be considering that, other than from a high level philosophy, as Bill has talked about.

Right. And lastly, Bill, you mentioned the tax situation being fully-- being good for five years, but I understood that you're not fully taxable for 10 years. Is that- can you reconfirm that, please?

Yeah, I can just add that we, under our forecast, our tax shield goes basically at 100% for the first five years, and then it ramps. Our tax will ramp up, and so we don't become fully taxable until after the five years are up, and I'm not sure if it goes all the way to 10 years. That depends on a lot of things, and predicting things, you know, beyond five years, is a little bit of an art. But that's probably a fair assessment in terms of ramping up the full taxation over a period of, let's say, seven to 10 years.

And that would be a-- a proportional ramp. We're not talking about going to a 30% tax rate and then incrementally-- we're talking gradual ramp?

That would be to whatever the tax rate happens to be at that time.

Very good. Thank you very much.

The next question comes from [Merrill Whitmer], [Eagle Capital]. Please go ahead.

My questions were answered, thanks.

The next question comes from Dvai Ghose, CIBC World Markets. Please go ahead.

Thanks very much. Bill, I've got to follow back on the Microcell question, because as Wayne just talked about, you've got at least five years of 100% tax shield and beyond. Telus needs a tax shield in two years, to that gives them a big net present value pick-up over you. You'd have to spend significantly in terms of incremental capex over them because Microcell doesn't cover the whole country and you don't have a national network. Of course, there's a GSM network, yours is a CDMA network, so you'd have to perhaps overlay GSM on-- in Manitoba and maintain a CAN $2.60 a share dividend. Is any of this realistic?

No.

Thank you very much.

The next question comes from [Rob Goff], [Heywood Securities]. Please go ahead.

Thank you very much. Do you feel that the pricing pressures in the enterprise market are product-driven or driven by the players trying to create greater scale out of region or in other words, regional market share competition?

I would say it's-- it depends upon the area, the services you're looking at, but I would say it's probably more the latter, in terms of trying to grow share outside of market, looking for growth opportunities. There are some that are driven by the technology itself, like what I was referring to earlier about, you know, the large increases in data bandwidth. That is not the heavy lifting it used to be in terms of the capital to support that. You know, the capital can be deployed on a much more granular, much more cost-effective basis today than it could have been a few years ago, and when you're doing Ethernet gig-E switches, for example, that's a whole heck of a lot cheaper than putting ATM switches out there.

And sort of a follow-through question on this issue, when you're looking into '05, do you think the reprice impact will be equivalent to, greater/less than the synergies that you would hope to realize through this deal?

Well, with respect to the synergies, I mean I think we've kind of indicated what we think is happening there, and the synergies are across the whole business, in essence bringing the cost structure of putting the company together and sharing certain services, in back office and network and IT services, and so on.

With respect to the pricing pressure, I mean, I think it's difficult to quantify that impact and as I mentioned, with respect to our 2005 outlook and budgeting process, we're working our way through that. There are a number of things happening in the marketplace, as John mentioned, and so it's probably a bigger question to answer than we could at this point.

OK, thank you very much.

The next question comes from John Henderson, Scotia Capital. Please go ahead.

Yeah, just following up on the synergies that you've identified, the CAN $40m, just remind me, that that is really operating expense synergies and was there some attempt to include the impacts of Bell competing in Manitoba now against- I guess more aggressively - I guess they were competing a bit before, but more aggressively? What sort of revenue impact would you expect from that?

Yeah, I think- I mean, we've mentioned before that Bell has been competing in our market in various ways before. They haven't announced any plans to enter our market in any different way than they have been, and you know, I wouldn't anticipate, in the early stages, that there would be much of an impact at all.

Don't forget, Allstream is not competing in the markets as well, so--

yeah--

Great.

The next question comes from Vince Valentini, TD Newcrest. Please go ahead.

Yeah, sorry, I just forgot to clarify, on the free cash flow guidance, when you do pro forma and say you're assuming Allstream was in from day one, does that mean you're assuming no cash tax, other than large corporation tax, in 2004, even though you went through June 4th without owning it, so you effectively will pay tax in the first six months?

Yeah, that's correct, Vince. In terms of the pro forma, one of the things that we would do is to add back the tax that was paid in actual fact in the first half, because on a pro forma basis, we wouldn't be paying that tax.

But you have no way of actually going back, retroactively, and saving tax in the first half of the year?

No.

And also, on taxes, I should ask, the Bell West proceeds are still taxed at the same level, about CAN $43m, that you had always expected?

Yes.

OK, thanks.

[Operator Instructions] Mr. Woods, there are no further questions at this time. Please continue.

Thanks, operator. Just as a reminder, a taped rebroadcast of this call will be available until midnight, August 22nd. As well, today's call will be archived and available on the Investors section of the MTS website. That concludes our call, and again, thank you for joining us today.

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