BCE Inc (BCE) 2005 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Manitoba Telecom Services Inc.’s fourth quarter 2005 results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on Tuesday January 31, 2006 at 4:00 p.m. Eastern time. I will now turn the conference over to Mr. Brad Woods, Vice President of Investor Relations for MTS. Please go ahead Mr. Woods.

Thank you operator. Good afternoon everyone, and welcome to our call. MTS’ fourth quarter news release, MD&A and supplementary package were issued earlier this afternoon. These materials are all available on our website.

The board of directors today approved a first quarter dividend, which has been set at $0.65 per share. On today’s call are Pierre Blouin, Chief Executive Officer; Wayne Demkey, Executive Vice President Finance and CFO; John MacDonald, President of the national division; and Kelvin Shepherd, newly appointed President of the Manitoba Division, replacing Cheryl Barker, who is retiring after a distinguished career with us.

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’ filings with the Canadian Securities Commission. I’ll now turn the call over to Pierre.

Thank you Brad, and good afternoon everybody. Thank you for joining our conference call today. This is my first formal opportunity to speak with you since joining MTS Allstream on December 7. I look forward to meeting with many of you in the coming months to talk about our company.

Now I understand that our press release got out a bit late this time. I can tell you that that’s not going to be our habit going forward, and we’ll rectify that and we’re sorry about that.

I know from reading analysts’ reports, many of your reports and media articles, and from shareholders’ comments that there’s a lot of interest, expectations, and speculation about our company. I appreciate that there are concerns, and I understand and share the desire for us to move forward quickly.

Let me say at the outset that I don’t have all the answers for you today. In fact, it would not be prudent for me to attempt to provide all the answers after being on the job for just over a month. I will, however, tell you that what I have seen at MTS Allstream over that month, and talk to you about the actions we are taking.

So today I’d like to provide to you my perspective on MTS Allstream’s current position and capabilities, and the opportunities I see in front of us, provide you with an update on our $100 million cost reduction program, give you highlights on the fourth quarter and 2005 results; although I will leave most of these comments to Wayne and to John and Kelvin in the question period, who are here with me today. I will also give you some insight into the business review I have under way, working closely with our board and some of the objectives we are driving toward for 2006.

When I look at the assets of MTS Allstream and its capabilities, I do see potential, as proven by the strong successes we’ve had in Manitoba and in the National division, notwithstanding the past two quarters that have been challenging.

Let me take a few minutes to discuss Allstream. I think all of you have described and analyzed Allstream and the challenges for companies operating in the Canadian business telecommunication market, so I’m not got to spend a whole lot of time describing the reprice and the impacts on legacy revenues of the move to IP based solution by our customers. But Allstream has an extensive modern network infrastructure that spans the country and that is delivering IP solutions today. In fact, I was quite impressed to learn that we have over 120 IP/VPN customers running on our network today. That’s a real accomplishment in the Canadian market for a company of our size, and the growth profile on these services is steep. Overall IP based data connectivity services at Allstream grew by 64% in 2005, and the area of strong growth is going to continue to forward.

No question there has been important repricing pressure in the market. As well, there have been changes in some of our arrangements with Rogers and AT&T particular in 2005. These changes are more one time in nature, and have overshadowed, in my opinion, our performance. In fact, if we exclude Rogers and AT&T our National division revenue base was stable in 2005 compared with 2004, with the growth revenues and new sales offsetting the legacy decline. This is an important point, in my opinion.

These one time changes and some losses in the market have increased margin pressures, in particular for Q4, where our National division margins are not where we wanted them to be. Wayne will address the Q4 margin performance in his remarks.

This reinforces why the initiatives undertaken by MTS Allstream through the Transition Phase II cost reduction plan are absolutely necessary, in my judgment. Aggressive expense reduction plans have now been launched, costs have to be lowered and aligned with the new market paradigm. Choices have to be made to focus the business on profitable market segments, and we’re making those choices.

I have also introduced more discipline in our budgetary and investment processes at Allstream, to insure tight management of expenses and capital investments while we complete our business review and finalize our strategy. In the past there may not have been enough focus on entering the right profitability levels for new customers’ contracts, and detailed planning is in progress and we are working hard with John and his team, and have implemented criteria to insure that new customers meet profitability thresholds.

There’s also good news on the new business front. Yesterday Allstream announced a new multimillion dollar agreement with Royal Bank to support 1,900 banking machines across Canada, utilizing our MPLS capabilities. This win builds on the significant business we already do with the bank. It also reflects Allstream’s competitive advantage with customers, a state of the art network and service performance which is second to none in addressing customer needs through close relationships.

While we’re going through with our expense reduction plan and business review, John is continuing to drive sales hard with some significant contract wins coming through in the fourth quarter. To name a few, City Financial, Bank of Nova Scotia, [inaudible] Canada, and the city of Ottawa. We were also successful in winning a multiyear contract with CGI to provide a global MPLS solution which builds on the growing track record we’ve established through North American deployments of MPLS and our relationship with British Telecom.

Now turning to Manitoba; as you’re well aware our operation in Manitoba is strong, and I’m impressed with the quality and strength of the business, even in the face of strong and sometimes aggressive competition. In fact many of you will be happy to hear that I was pleased to find that the team has been successful in not using price as a weapon, and by staying focused on leveraging the value created for customers, which supports healthy competition. The broadband infrastructure, in my opinion, is one of the most advanced in North America. Fiber is deployed deep into our network, passing within less than a kilometer of residential customers in Winnipeg. We now have 91% of homes in Winnipeg that have access to MTS TV.

Even with an announced reduced capital end flow going forward, network extensions over the next two years will further increase the penetration of our fiber network, lowering cooper loop lines to 650 meters, and providing additional bandwidth up to 26M for services like HDTV. There are few operators that have come close to that level of broadband capability. As well more than 85% of Manitoba households can access high speed internet. These are remarkable statistics.

Also impressive is the competitive success we have in Manitoba; high market shares and increased profitability including in 2005, as well as growth from new services that it outpacing the decline in the mature legacy businesses. In 2005 pro forma revenues from growth services increased by $45 million or 18% in Manitoba, which is significantly higher than the total decline from the traditional services. MTS TV is the latest example of successfully managing the IP evolution and I think you all know that one well. 22% of customers in our TV footprint have chosen MTS after really only 30 months of operation.

There’s also a tremendous wireless franchise in Manitoba. 2005 once again saw double digit growth in revenues and subscribers, improvement in ARPU, which at $56.10 is at the upper end of the industry range. We also continue to make strong gains in the high speed internet market. In ’05 our market share increased to well over 50%, which contributed to double digit revenue growth with the customer base increasing by 21% to almost 126,000 at year end.

We should also note that we’re adding considerable focus on insuring that our Manitoba business operations do leverage the Allstream National IP base infrastructure and next generation business solution. For example, through the initial integration project, IP, voice and data traffic for Manitoba customers was migrated from Bell to the Allstream network, which generated annualized expense savings of $17 million. I’m increasing the pace on that integration work as well as on the implementation of standard processes across MTS Allstream, to maximize synergies and related efficiency gains.

Now in terms of our $100 million expense reduction program, I’m pleased to report that we’re well under way. In the few weeks since announcing the plan we have achieved a 360 reduction, in terms of headcount, and we’re on track to achieve our 750 – 800 position target. This headcount reduction represents about $30 million in annualized savings. With the cost reduction plan I believe that we’re headed in the right direction for aligning our cost structure to new market reality and positioning the company to leverage our next generation product capabilities. This will make the company, with a particular focus on Allstream, more competitive and enable profitable growth by focusing and investing in business segments where we own a competitive advantage.

So taken together, we have attractive building blocks with significant potential from which to move forward. I hope that I have demonstrated that we are on the right path operationally, that the business at Allstream is challenged, but not as damaged as some may think, and that we have evidence of early successes in addressing our challenges.

Now turning to more strategic work; I believe that there are many scenarios and alternatives to consider for MTS Allstream, and with the arrival of a new CEO it is an opportune time to undertake a comprehensive review of the business. That review will take place with members of our board, with the objective to develop a strategy to maximize shareholder value for our company with a long term horizon. The business review will consider all alternatives. We’re planning to complete the review on a timely basis in this fiscal year, and while I focus on the review, Kelvin and John will insure that the business continues to perform and grow.

I know that many of you will be interested in the various possibilities, their associated probabilities and so on, but I won’t get into those right now. I think it’s too premature and you understand why. We’ve begun to work with the board and advisors, we’re starting from a clean slate, and we’ll report back to you as soon as possible. Now given the time and resources required over the next few months to complete the review, ramp up our cost reduction program and run the business, please understand that we will not be out actively participating in investor conferences in the short-term. With completion of the review, though, we look forward to conducting extensive investor meetings and discussions about our [inaudible] forward.

Lastly, I’d like to touch on the financial outlook. I’ve been through the numbers that are reflected in the preliminary guidance provided in November. Until I understand better what we have, I will not be giving further guidance. Subject to what may come out in the early stages of the review, I believe that we’ll be in a position to give you more information on 2006 with the reporting of our first quarter results.

Notwithstanding this, and based on the work we’ve done to date to evaluate capital investments, working capital, cash expenses and dividend requirements, we believe fulfilling our 2006 cash flow requirements is manageable. I’ve seen enough of the business to announce that we are lowering our 2006 capital program to $270 million. Significant investments have been made in modernizing the network infrastructure, both in Manitoba and nationally. In fact, in 2005, we saw the completion of the Manitoba division’s five-year, $300 million broadband expansion program, which is giving us a networking capability second to none in Canada. Those investments, in addition to the choices we’re making at Allstream, are putting us in a favorable position, in terms of capital requirements going forward for 2006 and beyond.

These reductions in capital, together with working capital improvements, should put us in a good position to be able to cash-flow our 2006 obligations, including higher pension solvency funding, dividend and costs for our Transition Phase II cost reduction program, and that with only minimally incremental borrowing. This should leave us with a continuing strong balance sheet, from which to move forward.

I can also tell you that nothing I have seen since my arrival would make me conclude that the dividend is not affordable, and this is particularly true for 2006. But more work needs to be done, and following our business review, I expect to give you more information on this.

To conclude, we’ve got a lot of work to do in the next few months, and the senior team is committed to it. I want to reinforce that, notwithstanding the important challenges we face in the national market, and while we are progressing on our business review with the board, I believe that there are significant opportunities to taking our company forward and delivering long-term value for our shareholders. Thank you and I will now turn the call over to Wayne to discuss the 2005 financial results.

Thanks, Pierre and good afternoon everyone. 2005 results finished the year generally in line with the revised guidance we provided with Q3 results. Consolidated earnings per share were $0.22 in the fourth quarter, compared with $0.63 a year earlier. For all of 2005, reported earnings per share was $3.16 compared with $4.31 in 2004. Included in these annual results, are a number of items not from continuing operations, which are detailed in our MD&A. The fourth quarter results include $0.43 per share for restructuring and integration charges related to our transition activities, as well as a provision against an investment.

For all of 2005, consolidated results from continuing operations were comparable with pro forma 2004 results. Revenues were $2.01 billion. EBITDA came in at $671.9 million, compared with $675.8 million in 2004, and earnings per share from continuing operations were $2.74 vs. $2.76 a year earlier.

Fourth quarter results from continuing operations include revenues of $503.7 million, which is unchanged from 2004. EBITDA was $162.2 million, compared with $176.1 million in 2004, and earnings per share were $0.65, compared with $0.74 a year earlier.

Turning to consolidated revenues from continuing operations, fourth quarter results were $503.7 million, and for all of 2005, revenues were $2.013 billion, which was up by approximately $3 million over pro forma 2004.

Underneath these results was strong growth in IT services, Wireless, MTSTV and Consumer high-speed Internet, as well as improvement in local service revenues. Offsetting these improvements were declines in legacy data connectivity and long distance.

Data revenues were $172.4 million in the quarter, 2.4% higher than in 2004 and $677.4 million for all of 2005, which is basically unchanged from pro forma 2004 results. The changes in 2005 data revenues reflect growth from IT, Internet and IP-based Data Connectivity services. Offsetting these improvements were lower revenues from legacy data services.

At the National division, we’re seeing strong performance in the growth service included in data revenues, which have increased by 36% in 2005. Contributing to these gains is good growth from some of our new IP-based Data Connectivity services, whose revenues together have increased by 64% in 2005. Examples of these services include transparent LAN, Ethernet Private Line, Switched Ethernet and Global MPLS, which are delivering strong growth. It’s an area where we’re seeing good traction.

IT revenues were also up strongly in the quarter and for all of 2005, increasing by approximately 30% from the previous year, due to strong underlying organic growth from our Managed and Professional Services, together with revenues from the Delphi acquisition.

And lastly, contributing to our data revenues was excellent performance from our DSL service in Manitoba. In 2005, we increased our market share against the cable company as net additions increased on a year-over-year basis. Our subscriber base grew by 21% to 125,876 customers at December 31st, contributing to strong double-digit revenue growth from our DSL service.

Revenues from local services increased by 1.4% to $140.2 million in the quarter and for the year, it came in at $558.4 million, up by 2.4% from pro forma 2004. The increases are due to wholesale access line growth, which was partially offset by a re-pricing in the national segment and marginally lower revenues in Manitoba, associated with competitive losses.

Long distance revenues declined to $107.2 million in the fourth quarter and year-to-date were $467.7 million, down by 8.2% compared with pro forma 2004. The decline from the national markets reflect pricing pressure, which was somewhat offset by higher year-over-year minute volumes. In Manitoba, the declines reflect competitive losses, marginal re-price as well as some wireless and e-mail substitutions.

Wireless performance in the quarter was once again very strong, with revenues climbing by 16.4% to $54.6 million and by 14.2% to $207.7 million for all of 2005. These very positive results are due to year-over-year customer growth of 11.1% and improvements in average revenue per unit.

Our 2005 ARPU was $56.10 and is 3.4% higher than last year, reflecting increased usage driven by the growing popularity of enhanced features and the growing portfolio of data applications available on wireless devices. Post-paid churn too continues to rank well at 1.13% for 2005, which is up only marginally from 1.1% in 2004.

Other revenues in the fourth quarter were $29.3 million compared with $31.6 million in 2004 and year-to-date increased by 7.6% to $101.7 million, compared with 2004 pro forma results. The year-to-date improvement reflects more than a doubling of TV revenues in 2005 to $22.9 million, together with lower equipment sales than in 2004. The strong improvement in TV revenues is primarily due to continued strong growth in subscribers, which have increased by 58% in 2005, to almost 52,000 at year-end.

Operations expense in the fourth quarter was $341.5 million, compared with $327.8 million in 2004 and $1.3 billion year-to-date, which is essentially flat compared with pro forma 2004 levels. The fourth quarter increase in expenses reflects a changing revenue mix and higher costs associated with that revenue mix at the national division. Also contributing to the increase were higher costs to fund the growth of operations within the Manitoba division.

Partly offsetting the year-over-year increases in expenses are reduced salaries and benefits, the realization of synergies across our organization and savings flowing from the CDNA decision. In 2005, we realized $29 million in operating expense synergies. We’re very pleased with the success we achieved through the initial integration. Our run rate on operating expense synergies, as we exited 2005, was $47 million, significantly exceeding our original $40 million target.

Consolidated EBITDA from continuing operations was $162.2 million in the quarter, compared with $176.1 million in 2004, and $671.9 million vs. $675.8 million pro forma 2004. The fourth quarter change reflects strong growth and synergies from the Manitoba operation, which continues to deliver industry-leading levels of profitability, offset by a decline in EBITDA from the National division net synergies.

National division EBITDA was $41.1 million in the fourth quarter, reflecting some year-end cost adjustments along with similar trends to what we experienced in the third quarter of 2005. These trends reflect changes and re-pricing pressures in some of our arrangements with Rogers and AT&T, along with aggressive market pricing in the long distance and legacy data connectivity segments of the market.

We have responded to this challenge by taking significant steps to reduce costs with our Phase II cost reduction, which is well underway and by focusing on profitable customer segments where we are seeing significant growth and solid margins. Importantly, these growth data services have been performing well with significant growth expected to continue, going forward.

Consolidated free cash flow from continuing operations was $48.7 million in the quarter. This contributed to strong year-to-date free cash flow from continuing operations of $265.1 million, which is comparable to pro forma 2004, which was $262.5 million. Our operations in 2005 delivered strong cash flows and our expectation for 2006 is to contemplate this positive trend continuing. Capital expenditures from continuing operations for the year came in at $320 million. In addition, we incurred restructuring and integration Cap Ex, as planned, of $22.4 million.

Turning to 2006 from a cash flow perspective, our objective this year is to fund all of our 2006 requirements from operations, with only limited incremental borrowings. This includes those cash requirements that extend beyond the routine. In terms of additional or special cash requirements this year, we have two; Transition Phase II costs and pension solvency funding. We are currently expecting cash requirements for Transition Phase II to be approximately $70 million to $80 million this year. On the pension solvency issue, we have an update actuarial evaluation under way. The numbers will be finalized in the second quarter, but we believe we can provide a good estimate at this point.

Funding for the solvency deficiency was $69 million in 2005. Based on estimates of our new valuation, which is currently being completed, and which we believe is conservative, our estimated 2006 funding requirement is expected to be approximately $100 million to $120 million, leaving a remaining solvency deficiency of approximately $300 million for future years. The reason for the increase is solely due to a decrease in the prescribed discount rates that federal pension rules dictate must be used for determining our pension obligations. A decrease in these prescribed rates is due to a general decline in the interest rate environment historic lows.

We believe the federal pension rules that give rise to these valuations at funding levels are providing significant and unnecessary burdens on all companies who sponsor defined benefit plans, and this needs to be addressed. Under the current rules, funding is determined by performing two separate valuations, a going concern valuation and a solvency valuation. Sponsors are required to fund based on whichever of the two is the more negative. The going concern valuation assumes the company will continue to operate in the normal course and correspondingly deficits are amortized over 15 years.

The solvency valuation assumes that the pension plan is wound up on the valuation date, and determines what assets are required to annuitize the benefits owed to the plan members on that date. Funding based on this valuation must be completed over five years. In our case, we estimate on a going concern basis we wound be fully funded. On a solvency basis our remaining deficit is $300 million. Unfortunately the current low interest rate environment is a circumstance the federal rules never really contemplated. As a result, the rules are acting as a disincentive for the companies who establish and maintain defined benefit pension plans.

We are certainly not alone in our circumstance, and frustration with the current rules. We have joined forces with other large plan sponsors and have been lobbying the federal government and department of finance. We have proposed a number of solutions to ease the unnecessary burdens the rules are placing on companies, and by extension, curtailing corporate investments and development in the Canadian economy.

We are hopeful that these pension funding obligations will moderate in the future, either with interest rate increases and/or with changes to the regulation to facilitate funding over a reasonable time provided, that does not provide an overly burdensome requirement on investment grade companies like ours with strong cash flows and solid financial positions.

We are taking the actions necessary to align our costs, focus on market segments and improve our cash flows. Pierre spoke to the flexibility we have in our capital program. We are also planning to generate additional cash by managing working capital. With our continuing strong cash flows from operations and these efforts, we believe we can fund all our internal requirements, the dividend, the requirements of Transition Phase II, and the pension solvency deficiency with only limited incremental borrowing.

In summary, we are moving forward aggressively, executing on our business plans, ramping up the Transition Phase II cost reduction plan, and aggressively working our way through the business review that has begun. We have a solid plan for managing our special cash flow requirements, and it is all backed up with a strong balance sheet position, and operations with good potential to deliver growing profitability in the future.

Thank you, we will now take questions.

Thank you. One moment please. [OPERATOR INSTRUCTIONS] Your first question comes from Peter Rhamey from BMO Nesbitt Burns.

Thanks. Pierre I appreciate that it’s very early in the process for you to be looking at your strategy, but I was a little confused by your comments. First you said by year end you would have some sort of plan in place with regards to your review, and later on you said it would be in the coming month. So can you just take us through, perhaps, how you will approach that, and maybe if you could offer your initial view on the dividend and clear the air on that. Do you see that as kind of a last resort option for management to undertake, or do you see it as one of the – something that you would consider as an equal opportunity to other strategies you might undertake? Thank you.

Thanks Peter. Sorry if I wasn’t clear there. I think when I talked about the next few months I talked about the 2006 numbers. What we believe it’s going to take quite a few months to go through is our business review.

So we could be into Q3, conceivably, before we have a definitive plan from the board and yourself with regard to your strategic review. Is that correct?

I think it’s going to take the time that it’s going to take, unfortunately. We’re going to consider all alternatives and all scenarios, so that may take a little while. But in terms of specific numbers for 2006, that should take just a few months. Now, talking about the dividend and talking about the strategy, I can expand a bit there.

First, in terms of the strategy there’s one that’s really short term, which is a bit of what we’ve mentioned, both Wayne and I, and that one is to really focus on execution on discipline and insure that we make, in the short term at least, the right move and action and decision where we need to support the business, and in some areas bring it back to its feet. Secondly, that we do implement our announced cost reduction plan as quickly as possible, and during that time we push hard on the business but also move forward on our business review. That’s really the short term strategy, and there you’ll understand that there’s not a whole lot more to say than this right now.

Now you questioned about the dividend, we’ll see as we go through the review where we end up, and as we close on the medium/long term strategy for the company. But I would tell you that before contemplating a move, or canceling or changing the dividend, it’s something that we must consider carefully with the board, and I think that will be addressed in the review. In the meantime I think we have solved some of our short term cash flow issue to support it, but we need to really look at all of our alternatives before making a final call on it.

Great, that’s a great answer. If I could ask a quantitative question, Pierre, maybe to Wayne? On the Cap Ex side, your Cap Ex is going down at $270 million, you mentioned the NGN network build was in last year’s numbers, it’s not in this years. How big was that component, and where else are you cutting Cap Ex?

Well the Cap Ex reductions are kind of across the board, but the next gen piece was probably about $30 million on its own, and that, now that we’ve completed that network rollout, which actually exceeded where we were heading in terms of the coverage for our TV footprint to about 91% of Winnipeg, as was mentioned earlier. So that’s the primary source of the reductions.

That would represent two-thirds of the cuts, OK.

And hopefully you understand that this is not a one year [inaudible], that we’re really taking a good look at the business and we’re befitting from the good investments that have been done over the past few years, both on the Manitoba side and on the National division as well, the MPLS, network and IP products.

I can infer from that, Pierre, that your Cap Ex will stay down at these levels then, perhaps going forward longer term, is that what you’re saying, or does it bounce back up?

Well there are two answers to that one, first is that as we close on our final strategy there may be some impact to it, but if everything stays the same those types of run rate we believe are [inaudible].

That’s great. Thank you very much.

The next question comes from Glen Campbell from Merrill Lynch Canada, please go ahead.

Yes, thanks very much. First a quick follow up, to achieve that cut of Cap Ex reduction in ’06 are there additional restructuring costs that will be needed to do that? I’m thinking that a big part of the Cap Ex there is probably capitalized labor on the NGN.

With respect to the Cap Ex reductions, two parts to the answer, Cap Ex that we talked about in terms of $270 million, doesn’t include any Cap Ex that we might be spending as part of the $75 million that we’ve talked about, or $70 million to $80 million in transition costs. Some of that will likely be capitalized, but you’re right in terms of the reductions in capital are part and parcel with reductions in the labor force, you have less labor, less requirements with a lower capital program, so those two go hand in hand.

OK thanks. I had a couple of questions on pensions. First in the kind of guideline numbers you’ve given, can you tell us what assumption you’re making on the discount rate drop? And then my follow up there was I just wanted to get a sense of the potential to close off or change your defined benefits plans. I think most of the Telco’s have actually closed their defined benefits plans. I don’t think you have. Do you have the flexibility, under your labor contracts, to do that, and is it something you’re looking at?

Let me try to answer your second question, then I’ll pass it back to Wayne. But in terms of our pension plan, you’re right to note that and you’re correct in what you’re saying other than for the Allstream business, where the employees there are on the DC plan. But in terms of the balance of our operation, that’s something that we’ve begun looking at and we have to continue to work with our employees and union to see how we could move forward with this. But that’s something on my agenda of things to do, and that we want to pursue, absolutely.

With respect to the discount rate, Glen, you’re referring to the one that is used to calculate, for accounting purposes, the pension expense. We have estimated that our expenses based on a 5.5% discount rate, would increase about $6 million year-over-year.

And what about on the solvency side? You’ve given us a good range there for a projection, what are you assuming is the change there?

The solvency discount rates are prescribed by legislation, but in general our biggest plan would be at around 3%.

OK, that’s great. Thanks very much.

The next question comes from Greg MacDonald from National Bank Financial, please go ahead.

Thanks, good afternoon. Nice to be dealing with you again, Pierre. The question, I have actually two quick ones; one is on, just to make sure that I understood you correctly, on the 2006 guidance you’re considering that no longer valid. This is something that you’re going to revisit, and I’m assuming that there are possible negative implications to that.

Well I didn’t say all of that, Greg, and by the way, it’s going to be fun to work with you again as well.

Exactly. I’m leading you into something that maybe you’re not going to get hooked on.

I think you saw by my remarks that I’m not confirming that guidance, and that I want to look at it further before doing that. I think we’ll be in a position to do that no later at least than the first quarter results. We’ve concentrated more right now on addressing some of the business issues and looking at our cash and capital requirement, and making some assumption from the preliminary guidance that has been given, and up and down really. But I don’t really want to – or I can’t in fact, really give you much more than that. We’ll be back with the right number as soon as we’re ready. But the preliminary guidance was used as a base for a whole lot of our calculations, but we’ve had to add more assumption to it and some of the changes also that we’re planning in the business. So more to come on that side.

OK, I can appreciate that. Is there a specific area of the guidance that you’re more concerned with? I’m assuming it’s within the Allstream business, but is there a particular concern, whether it be pricing or volume, I mean the theme that we’ve seen in terms of voice over IP migration, anything that you can give us in terms of your major concerns?

Well let me try to answer that. I think you’re reading it right in terms of the Manitoba operation as a well oiled machine that is doing quite well, quite well in the face of competition, and we’re concentrating on our National division and there, you understand that market as well as I do. It’s a highly competitive market. We’re really looking at how we move forward with the company over the next few years, and what customer segment we want to address with what product. That’s what’s potentially delaying some of our announcements in the guidance.

OK, that’s helpful. And then, just very quickly, a definitional question; I want to make sure I understand correctly with the pension solvency issue obligation going from roughly $70 million in ’05 up to $100 million - $220 million in ’06, do I understand correctly that after the end of ’06 there will be a $300 million under funded position, and therefore then, we’re going to be looking at a possible five-year amortization of that $300 million? That would suggest that you’re looking at the $100 million to $120 million going down to $60 million in 2007 and going forward. I just want to understand that correctly.

OK, with respect to pension funding, when you’re in a deficit position your funding is based on a new actuarial valuation each year at the beginning of the year. So, the funding for 2006 is going to be based on that valuation that I referred to earlier, which we expect to be completed some time in the first quarter. That, as I said, implies about $100 to $120 million, with, as you mentioned, a $300 million deficit thereafter. But the funding after that year won’t be determined until that valuation is done early in 2007. So each year, you refresh the funding.

So, all things being equal, it’s $100 million to $120 million going forward for five years? And then, the under funded position is flat?

No-[inaudible].

Is that not the way to look at it?

No. It’s actually, well let me just tell you some of the things that complicate this. First of all, we don’t have one pension plan, we have four, and so each one would be funded in the same manner that I’m describing. And each one would’ve started with a deficit at a different timing, so they all have difference in terms of the funding that’s required each year.

So presently, the funding in that $100 million to $120 million range is in ’06. You probably would see that, you know, given similar interest rates, if they stay the way they are now, we would see that probably for two years after that and then it would go down, fairly sharply.

OK, that’s helpful. Thank you very much.

Your next question comes from David Lambert from Canaccord. Please go ahead.

Hi, first of all, congratulations to you, Pierre, on your new job.

Hi, Dave.

I have a question for Wayne. Can you describe what was in the change in working capital this quarter? You have a big change of plus-$69.

The change in working capital in the quarter—oh, you’re referring to, on the cash flow statement, OK. Sorry, I don’t have that number in front of me. I’ll get back to you on that.

OK. And, my other question is for Pierre. In reviewing the dividend policy, what criteria would you be looking at, sort of what, you know, being at [Dow] and having had to deal with about a 50% pay out ratio in the past, is that something that you feel is comfortable for a telephone company, or do you think that that can be exceeded?

It’s a good question, David, but unfortunately I’m not there yet. So, there’s more to come on this, but right now, I haven’t really spent a whole lot of time thinking about what would be the criteria going forward.

OK, great. Thanks.

And maybe if I could, Dave, in terms of the working capital in the fourth quarter, typically what happens in terms of working capital is that we do see some ramp up in our payables. And, it’s really just a timing issue that typically happens, and, if you look at year-over-year, relatively similar impacts for working capital from each of the years.

OK.

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

Thanks very much. First of all, another clarification on the pension if I could, Wayne; the $300 million obligation at the end of ’06, based on your estimate, could you just confirm that you’d have to do another actuarial review at the end of ’06? And, that $300 million figure itself could swing up or down quite materially, not just the annual funding requirements, but that actual deficit amount could swing too?

Yes, in fact, that’s exactly right, Vince. What that valuation is most sensitive to is long-term interest rates. So, if we see an increase in long-term interest rates of, say, 150 basis points, that would probably be what would be required to reduce our funding to zero.

Right, OK, perfect. And, Pierre, on the comprehensive review, you’ve mentioned that everything will be considered. Can you therefore confirm that things such as selling off certain assets, maybe even an entire division like Allstream, is something that would be on the plate to be considered? And also, income trust conversions of some of the assets is something as well that would be considered? I don’t expect you to pin down to say what you will do, but are those things that are given, you say everything will be considered, those things on the plate?

I think there you’re right in the second part of your question that I can’t really give you all the things that we may have in mind. But really, we’re serious when we say that every type of scenario could be considered.

Now, some are less obvious right now than, you know, some people may think. You know, whatever their income trusts are, selling Allstream or some large assets for the company, but clearly we’re starting from a clean slate, yes.

OK, and can you tell us, are there any external advisors that are being hired to help with this process? Or is this just an internal review at this point?

Absolutely. They’re already hired for most of them.

OK. Does it mean there are separate advisors hired for different files you’re seeing, is that what you’re implying?

No, but our review is looking at various things, you know, from strategy to valuation to various alternatives. So there are different skills required to do that.

OK, and the last thing, you mentioned minimal incremental borrowing would be required to meet all the obligations in 2006. I think, Wayne, you said the same thing. Can you give us any context on what minimal is? Does that imply less than $50 million in your view?

Yes, that would be less than that, is what we were referring to as minimal.

OK, thanks very much.

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

Hi, I have a couple of questions. One is on, I guess, the GAAP pension expense. We keep harping on pensions here, but can you comment on how much that increases in ’06 from ’05?

John, the increase in that expense is about $6 million, year-over-year, based on the decrease in the discount rate that we’re using for accounting purposes.

OK, you probably mentioned that, but there are a lot of numbers flying around. And then, on the Cap Ex side, I understand that your intent is to shorten [inaudible] blanks to 650 meters or so and boost the speed. Is that, maybe if you give the timing of that, is that going to be lengthened out, in terms of timing? Or, how quickly can you do that?

It’s Kelvin Shepherd here. What we’re looking at is we’re still continuing with that program, but we are looking at more like a two-year program now in 2006 and 2007. And that is included in our capital estimates that we provided.

OK. And then lastly, a question in terms of the approach taken by Shaw, in competing with you is more aggressive on price than it uses in other territories. I just wonder if you can comment on why you think that is, and, what actions you might take in Manitoba Tel to maybe change the sort of competitive in pricing dynamic there.

OK, I don’t think I can really provide too much insight into Shaw’s thinking, but I can tell you a little bit about our own. Certainly what we see happening is, obviously Shaw is gaining some customers but they are gaining customers that we expect them to gain. In other words, they’re practically all Shaw TV or Internet customers that are going to them for voice. So, obviously their pricing is attractive to that segment.

That isn’t a surprise to us. We anticipated that last year. We clearly did some work in targeting acquisition of high speed customers and had some good success last year. In fact, I gained a few points of market share in Winnipeg against Shaw, in terms of high speed share. So, I think we’re going to continue focusing on that. And clearly, we’re going to focus on our current bundle strategy, which, I think, is working. It’s generating some up sell. And certainly, we’re seeing improvements in churn in our base because of that.

To give Shaw their credit, they’ve done a reasonable job in managing customer expectations. But they’ve also raised their TV prices here in Q4, and so we certainly see some opportunity coming from that to perhaps do some targeted increases of our own. And, you’ll see us doing some of those things some time in Q1.

OK, very good. Thank you very much.

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

Yes, I’ve just got a follow on from John Henderson’s question on the cut in Cap Ex and you know, you talked about the two-year program Kelvin, but part of that program, if I’d look at it in another way, was increasing the bandwidth from 22 to 24 Meg to 24 to 26 Meg. I see that’s also been delayed a year. I wonder if the geographic expanse to the TV strategy to Brandon is also being delayed a year and whether these are for Pierre, just really knee jerk reactions to support a dividend, which, in the longer term, given that you’ll eventually be fully [inaudible] doesn’t seem supportable anyway. Isn’t this a damaging strategy and a bit of a knee jerk reaction?

Well, I’ll take a crack at that because I don’t think that’s the case at all. We’re really strongly committed to making the right investment for the business and we believe we can do that with the $270 million we’ve outlined.

Although we’ve somewhat slowed our 26 Meg build, I can tell you we would have certainly in the mid-70% range coverage at 26 Meg by the end of this year. And, in fact, when we look at the other investments, we’re making in things like rolling out high definition, which we expect to do later this year and PBR capability and some other things, we think we’re going to be very competitive in terms of TV.

And we’re going to invest in other key things. We’re certainly going to continue to invest in the wireless business and we’ll be rolling out things like EVDO this year. And, we’re making investment in our national network in terms of upgrading our converged IP Core. So, we’re convinced that with that level of funding that, in fact, we can do the things that we need to do and be quite successful.

But just to follow up before perhaps Pierre can talk about the dividend sustainability post tax, you’re slowing down your build as you yourself by a year at a time at which you’ve just reported the worst access line loss on the residential side ever for a Canadian Telco. Now we haven’t heard from Bell [inaudible] yet, so I’m not sure of putting it in the right context. But a 5% decline in residential access lines I would consider quite alarming. So, a 33% decline in Allstream may be [inaudible] when your competitor’s accusing you of under spending in your network and being uncompetitive on the IP side, I would consider alarming.

I’ve just never seen a company come out with Cap Ex guidance without your operating guidance. It just seems very, very backward focused to me.

Dvai, it’s Pierre let me try to give it a shot here. Some of our Cap Ex reduction is not related to investment in the network. You have to consider that. Secondly, you know, we’re not doing this on a knee jerk reaction. People from both our National division and people in Manitoba have met together and looked at synergies and looked at joint investment and duplicate investment that existed and have been able to reduce that. That process had started a while ago and has continued, and we’ve put the [inaudible] more emphasis on it, no doubt.

But, you know, we would not for one year shut down the business and take long term strategic risk just for a few tens of millions of capital, I can assure you of that. And you’re back on Manitoba here, but there’s a big off stream piece in there that where we’re making choices and not investing in certain customer segment that we’ve already announced in fact, and where we’re not going to make investments in product lines because they’re not profitable for us.

So there’s multiple elements here and I think when I hear you comment about how negative it is in the market here, I would tell you some of the numbers in light of strong competition in some areas, are quite solid I think. And we have the network deployed plus the plan to deploy it and improve it in areas where we feel that we need to do that. You’ll be the first to really tell us if we’re spending too much in some area where there’s no competition.

So I agree on some of your comments, but at the same time I think we’re doing our homework here, and we’re doing what needs to be done. While we’re not confirming or giving specific guidance right now, that doesn’t mean that behind that there’s absolutely nothing. I think we’re working on some assumption that we need to close on before we give you the guidance. But they’re not all capital related there.

Dvai, John here. Like for example in terms of the National network, we’re actually in the process of deploying the Ciscos here as one backbone core router, and we’re the first national player in Canada to actually do that. We were pretty close to being the first player in Canada to actually deploy it at all, but Sastel beat us to the punch. But this I think speaks volumes in terms of our commitment to make sure that we do have a modern, state of the art, converged core network. I don’t feel constrained at all within the spending envelope that we’re dealing with right now.

OK, just as a really quick final then, the 270, how does it break down between incumbent and Allstream?

We’re not releasing that at this point, Dvai.

OK, thanks.

The next question comes from Rob Goff from Haywood, please go ahead.

Thank you very much. My first question would be for Pierre. Can you discuss the extent to which you and the board assign an additional value to Allstream as a competitive retaliation lever, beyond considering it simply as a stand alone operation? My second question then would be for John, could you give us sort of an order of magnitude what the impact of reprice will be in ’06 vis-à-vis what we saw in ’05?

Let me try to answer your first question. I’m not sure I understand fully what you’re asking. But when MTS acquired Allstream it wasn’t as a retaliation move, it was to operate the business and move forward to become a national player, and attempt to grow that business profitably.

Sorry Pierre the too subtle suggestion there was, to the extent that Allstream, having a national presence allows you to defend your in-region enterprise business perhaps more effectively, is that a consideration when you look at Allstream?

Oh, correct, correct. In fact more and more the people in Manitoba are working very closely with Allstream and we’ve created synergies between the two organizations in using the same platforms, similar processes and suites of products that can be ported from one to the other, so absolutely on that.

On the reprice, I don’t see any change, fundamental change, in the behavior of the market in terms of reprice. I think its pretty consistent, our expectations next year are pretty much what we’ve been seeing over the past little while, which is on legacy data and voice services, in the range of 10% to 15%.

OK so when you look at ’05 and you look at the reprice, the AT&T and Rogers, was the impact there like $30 million and we should expect a similar amount next year?

I’m taking the AT&T and the Rogers events and just looking at the overall performance of the market. The AT&T is very unique, it’s a singularity as it were in terms of a conversion from existing bilateral contractual arrangements into more wholesale kinds of arrangements, and the Rogers purely a result of a restructuring event as well. When I was talking about the reprice percentages I was referring to the overall market itself.

But in terms of what we anticipate in ’06 relative to the impact of AT&T it would be maybe a little bit larger in terms of ’06 is what we forecast in the plan. From a Rogers' perspective, we’ve seen in the fourth quarter of last year a lot of the LD traffic being moved onto the CallNet network, and we would see most of that being completed as we speak. So most of that, in terms of the changes to our relationship with Rogers on the LD side, has taken place already. There could be some more impacts on lower margin services for the balance of the year.

One more question, if I may sneak it in. To what extent are there most favored nation clauses out there with existing contracts, and to what extent are they being triggered by new contracts coming up, perhaps the move to IP?

You would see from time to time MFN kinds of clauses within contracts. In some cases customers will actually insist in audits be conducted, or reviews be done to actually validate that they have the right pricing in place. But for the most part very large contracts don’t get repriced. In some cases it could be on a yearly basis, but more frequently than that would be highly unusual. I don’t see that as being a big factor at all in terms of doing one contract with a customer repricing your whole book of business. I don’t see that at all.

OK, great. Thank you very much.

The next question comes from Jeff Sun from UBS. Please go ahead.

Thank you very much. I’ve got a few questions here. First, on your savings of $100 million, I think I heard that $30 million was related to employees. Can you give us some visibility into the other $70 million, what that entails, what kind of activities should generate that kind of savings?

its $30 million to date annual run rate on the employees that have left up to date, so it’s not only $30 million on the positions. Wayne can give you a bit more info.

That’s correct Jeff, just to give you some reference points, the total program is, for Phase II 750 to 800 employees, of which we’ve achieved reductions of 360 to date, and it’s the 360 that relates to the $30 million, as Pierre has just indicated.

So of the $100 million, what is coming from employees and what’s coming from other activities?

I think in terms of the employees you can probably just extrapolate the numbers that I’ve given you in terms of the headcount reduction and that would be pretty close. Until we actually see the specifics I wouldn’t have any better estimate than that.

OK so what are some of the other activities that generate the non-headcount savings then?

Well some of the big items would be in terms of reducing our network costs, third party costs that we pay, and things like that.

And synergies between Manitoba and the National division.

In our purchasing, for example, we were able to achieve further synergies on that combining with our work with suppliers on that basis.

OK and then the next two are just clarifications, on the $270 million Cap Ex for ’06; can you just confirm that that does not include the restructuring amounts?

That’s right, the restructuring amount is about $70 million to $80 million next year, and so we’ve separated that. What we’ve found is that it’s difficult to specify how those numbers are going to be classified before you actually have the plans pretty detailed. So to make an estimate on that is difficult to do at this point.

OK, and the $300 million pension deficit, is that at the end of ’05, or is that what’s projected for the end of ’06?

That’s the end of ’06.

What is it today?

It would be just around $400 million.

OK, and lastly, on your TV business, I know you guys stopped disclosing churn on the TV subscribers a few quarters back. I just look at your net adds, they seem to be falling. Granted, you cover most of Winnipeg now. So can you just give us some color on whether gross adds are slowing down, or churn is picking up, which is causing your net adds to fall.

Churn is generally continuing to improve over all.

OK so your gross adds are falling.

Where you see the biggest improvement in churn is in terms of the bundles, where there’s a substantial reduction, where a customer takes two or three services. But with respect to the gross adds, we’re around 5,000 I think the last two quarters, and with some challenges that we had in the fourth quarter with respect to our own install logistics, that being slightly less in the fourth quarter. But we don’t see the run rate decreasing from that.

If you look at the net adds in ’05 I think we feel we should be able to do similar in ’06 even with the increased penetration that we’ve achieved.

OK, great. Thanks.

I will now turn the conference back to Mr. Woods.

Thanks operator. As a reminder, a taped rebroadcast of the call will be available until midnight February 9, and as well today’s call will be archived and available on the investors section of the MTS website. That concludes our call today, again thank you for taking the time to join us.

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