BCE Inc (BCE) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to BCE's first quarter results conference call. I would now like to turn the meeting over to Mr. Bernard le Duc. Please go ahead, Mr. le Duc.

Thank you, Operator. Good morning, everyone. Thanks for joining us to discuss our first quarter results. I'm here today with Michael Sabia, George Cope, Stephen Wetmore, Siim Vanaselja, and Robert Odendaal.

As usual, we would like to take you through the presentation that you can find on our website, after which we will move to Q&A. The call is being webcast and the archive of this will also be available on our website.

Before we start, on behalf of all speakers today, I would remind you that today's remarks will contain forward-looking statements with respect to items such as revenues, cost savings EBITDA margin, free cash flow, capital intensity and EPS. Several assumptions were made by BCE in preparing these forward looking statements and there are risks that our actual results will differ materially from those contemplated by the forward-looking statements. For additional information on these assumptions and risks, please consult BCE's 2005 MDNA, dated March 1, 2006 and updated in BCE's 2006 first quarter MDNA dated May 2, 2006 filed with the Canadian Securities Commission and with the SEC. These forward-looking statements represent the expectations of BCE and its subsidiaries as of today, May 3, 2006 and accordingly are subject to change after such date. However, BCE and its subsidiaries disclaim and intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

With that behind us, I would now like to turn the call over to Michael Sabia. Michael.

Bernard, thank you. Good morning everyone and thanks for joining us this morning. As you'll recall on February 1 during our investor conference, we outlined a two-track plan for the Company over the next couple of years. First, great and intense focus on the repositioning of Bell itself. And second, action on a series of opportunities to surface value for shareholders. I would say that on both of those fronts in the first quarter we've seen some quite steady progress and very much, in our view, consistent with that plan and on track to deliver against that two-year plan.

Let me take those two pillars. First on Bell itself. I think essentially we were pleased by this, held our margin stable. That despite a significant step-up in NAS erosion as expected doubling overall from about 1.3% in the first quarter of last year to 3.2 this year. Then on [RES] erosion coming in just under 6% at 5.9 versus the 1.7 of last year. That margin – likely that margin will fluctuate a little bit quarter-by-quarter. As you know, we're very focused on holding that margin as one of our core objectives as we work through the next couple of years.

Second on free cash flow, I think a good improvement driven a lot by very solid discipline within Bell with respect to CapEx at 12.6% CapEx intensity. There are some – that is partly due to some of the timing of investments. But nonetheless a very good start to the year from a CapEx and cash flow point of view.

On wireless, I think our wireless business continues to make steady quarter-by-quarter, step-by-step improvement. Obviously there is always more to do in the coming quarters. A good quarter. A good start to the year with respect to gross adds, which are important to us in terms of the work we're doing to strengthen the quality of our customer base. You've see that reflected in a C$2 step-up in ARPU and on postpaid ARPU, C$4. In fact, if it's beyond wireless, I'd say generally ARPU performance across a variety of platforms in the quarter is quite good. George can and will elaborate on that.

In terms of the residential business itself, revenues were up a little bit, that despite the NAS losses that I've already mentioned. EBITDA was down very, very slightly, less than 1%, in fact better than the average annual performance from last year. So solid performance.

On business. Good quarter in small and medium business and continues a trend of many quarters of solid performance in both revenue and EBITDA – up over 4%. Enterprise was soft in the quarter as it continues to experience re-price as well as some expense pressures in the quarter. There is certainly room for improvement and more work to do there. Overall, I'd say a pretty [big] performance in an environment that continues to be quite challenging.

Let me turn to a quick update on some of the transactions that we've announced and that we're working on. I think very good solid progress on the creation of The Bell Regional Trust. Very pleased with stakeholder reaction to that initiative – stakeholders who live and work and operate in the areas of operation of the Trust.

Stephen's appointment is an important milestone for that organization. It goes without saying that I think Stephen is going to provide that organization with very strong leadership. With his breadth of experience, I think it's very valuable when you consider the scope and the scale of that organization. In addition to that as you know, to avoid a lot of cross duplication, which is certainly in no one's interests, The Trust will outsource significant operations back into Bell. Therefore with that kind of very — pretty high degree of operational outsourcing, having someone like Stephen who knows Bell so well and how to get things done in Bell is a very big asset. So I think that's a very positive important step forward.

Beyond that, all of the transition work in the creation of the regional companies is moving along quite well. The Aliant shareholder vote May 17 is an important milestone. If that is successful – and we certainly hope and believe that it will be – then we'll be in a position to close this transaction in the third quarter.

Beyond The Trust, continuing to work on the regulatory approvals on Bell Globemedia. We don't see anything on the horizon that is a source of concern.

The share buyback is progressing. I think we've done more than 60%. About 63% of that is complete.

Let me make a quick comment on Telesat. As we indicated on February 1, we intend to recapitalize that Company and then take it public. Given Telesat's growth potential over the medium term as we look at it and look at the opportunities in the sector that it operates – when you think about those growth opportunities then bolstered by a Company that would have its own currency, we believe that the approach of taking this Company public does offer us the most significant value creation potential. Obviously, that being said, we are aware that there has been some interest that has surfaced among some strategic and financial players. But nonetheless, we continue to be of the view that the public process is the value-maximizing approach to moving forward with Telesat. So we are currently completing the necessary preparations for doing that. We are on track, as we said we would be, to take that Company to the public markets in the fall.

Just very briefly before I turn it over to George, a few comments on some of the pillars of the plan we have for the repositioning of Bell. First, on growth services, they continue to ramp up. We've added almost 1.1 million new subscribers since the first quarter of last year. That being said, clearly there is more do to here. In accelerating both the growth of new subscribers and, as a result of that, the weighting of growth services in our revenue mix – and that is, as you know, a priority for us as we move through the year. Given what we see and how the business is proceeding, we believe we're comfortably on track to deliver the target of about 55% of total revenues and growth services off a base of 47% this quarter.

On bandwidth, a lot of progress. A very successful rollout, so far, of fiber-to-the-nodes, stepping up speeds in our ISP. EVDO now in 18 centers across the country touching about 40% of the population. That is helping us accelerate the growth of our data revenues. Also helping us with ARPU. Our EVDO device ARPUs are substantially higher than non-EVDO devices. Very successful build-out of Inukshuk now in 20 markets with the launch of services right at the end of the first quarter. So good progress on our approach to expanding bandwidth.

Customer service – the third pillar. Very good progress. We're very pleased by this. Very good progress toward creating service as a product in the Company. We've seen significant improvements across-the-board in First Call resolution. A lot of payoff from the investments that we've made in hardening the DSL network with about a 24% improvement in reliability.

The one-bill platform is operating flawlessly. About four million customers on it. We're getting very good reaction from customers to that.

Field services. Big improvements in meeting customer commitments, avoiding multiple visits. Again, a great example of how [that bolt] enhances the customer experience and lowers our costs. As a result of all of that, we've seen our customer satisfaction measures up. That is one of the reasons – not the only – but one of the reasons why we continue to make progress on our three-plus households.

Finally on costs, I think a respectable start to the year from my perspective. What is important is both the progress made in the quarter, but in particular the underlying progress made in the quarter for the rest of the year with respect to the core drivers of that program. A lot of good progress on process redesign touching some of the most fundamental areas of the Company from cost to DSL, etc., corporate center – a lot of good work. Successful pilots have been put in place. We're now broadening those out and implementing them across the Company. So good progress there.

Procurement. Continue to make very good progress as our line-of-sight on opportunities sharpens and, in fact, expands into more and more areas across the Company. We're very convinced about the magnitude of the opportunity. We feel very good about the C$350 to C$400 million savings – the guidance that we've provided on February 1.

Labor force reductions moving along at a good pace. We're doing that while we're able to continue to work on improved service levels. By the end of the second quarter, we should have 2,000 or so of that 3,000 to 4,000 program done.

Overall, I'd say a quarter from my perspective, with a number of pluses. Yes, a few areas – I'm sure there always are – where we can improve. We'll continue to do so. But quite solid progress. I think we got quite a bit accomplished. With that, I'll turn it over to George.

Thanks Michael. It's a privilege to have a opportunity to report Bell Canada's results for my first time. I'm onto slide seven. It will start – just a quick overview about Canada in total. The Company's growth segments of DSL, video, wireless, and data added a little over 230 million in the quarter, well on our way to the C$1 billion target for our growth segments. The growth was offset by C$168 million decline in traditional services primarily caused by the NAS erosion of 3.2%, LD re-price and substitution, and enterprise pricing pressures. The overall growth of 1.4% in revenue combined with the cost reductions was enough to offset the legacy revenue erosion such that the EBITDA was flat year-over-year. Simple free cash flow for the quarter, as you can see, was up 131 million or 11% year-over-year.

Turning to slide eight, the residential segment performed to expectations as NAS erosion of 5.9% and LD revenue decline was offset by growth in the wireless, DSL, and video. EBITDA was essentially flat year-over-year with the operating income decline primarily attributed to an increase in both pension and depreciation costs.

Consistent with our February investor conference, the residential team increased price on LD by raising access fees from 295 to 450 in mid April. This should help slow the rate of LD decline in future quarters. In addition, on April 7, we launched a DSL promotion that matches the discount that Videotron is offering on its new telephone services. The promotion is only available in the Videotron operating territory in Quebec.

As I said in February, we clearly understand that new entrants may discount – or have to discount services up to 10% to gain entry, particularly when they have no differentiation. But when the discount is up to 30%, we will and now have responded in the marketplace.

Turning to page nine, both the video and DSL operating metrics continue to improve. Video ARPU increase of C$5 year-over-year on the entire base, churn of 0.9%, and EBITDA growth of C$43 million on a revenue growth of C$56 million is the type of EBITDA flow-through we need going forward on all of our growth segments. We will be targeting to do that.

DSL net adds of 71,000 were less than last year as results were impacted by the Quebec competition and last year's Q1 new footprint expansion, which was not repeated this year.

I am encouraged, though, by our ARPU, which grew to over C$40 this quarter and has an opportunity to continue to grow as we rollout higher speed services later this year at higher prices.

Turning to page 10, business revenue growth of 2.1% was tempered by pricing pressure, particularly in the enterprise business segment. Strong VCIO growth in SMB, ICT growth in enterprise and overall SMB EBITDA growth was not enough to offset the enterprise re-pricing pressures. A key focus of the business segment going forward will be to align expenses to these revenue pressures. As well, we will be focusing on integrating a number of the small acquisitions made over the past two years and a constant focus on slowing the rate of re-price in the marketplace.

Turning to slide 11, in summary the operational focus over the next three quarters will be, first of all, to improve and continue to improve the EBITDA flow-through on all of our growth products; focus on slowing the NAS erosion, particularly now as we enter the stage where we can begin win-back programs; focusing on the pricing issues in Quebec as I commented about already; and also slowing the erosion of re-price of our traditional service. An example of that is our strategy recently to increase prices in the LD category. Siim will talk in a moment about continuing to drive out costs. I mentioned already that we want to focus on integrating – completing the integration of a number of acquisitions made over the last two years in order to drive up maximum efficiencies; and finally while lowering our CapEx-to-revenue to 16 % to 17% making sure that our capital is invested in the growth areas, particularly broadband and EVDO wireless.

With that, let me turn the presentation over to Robert Odendaal.

Thank you George. I'll address my comments to slide 13. In summary, BCE Wireless continues to strengthen across all of the key financial and operational [objectives]. We have three objectives in mind. First, solid improvements in the quality of our customer base in both the postpaid and the prepaid segments to drive ARPU minutes of usage, greater usage, and ultimately revenues. Second of all, efficiency with expenses to ensure that the [graph is [background noise]]. And third, to pursue a share of profits rather than a share of market strategy as evidenced by a strong pricing discipline in the first quarter.

So how did we do? From a financial perspective, we had revenue growth of 12.8% year-over-year driven by blended ARPU growth of 5.6%. It was, in fact, 6.5% in postpaid and 20.1% in prepaid with a slight change in mix. We had solid performance on cost of acquisition, which is slightly up – C$21 or 5.6% driven by high-end handsets, which are obviously better ARPU customers for us, and an 80% take-rate on three-year contracts. Naturally this was well managed in the context of the markets.

EBITDA growth of 18.3% year-over-year despite absorbing an increase of 17% in gross acquisitions as well as increased retention costs caused by all of the high-end devices that are being heavily promoted in the markets. And our EBITDA margin of 43% is up 1.6 points year-over-year. We had improving flow-through, up 60.4% EBITDA-to-revenue, which is going in the right direction, but clearly we are not there yet. We'll continue to focus on this metric. We also had strong balance sheet and cash flow management. For example, our day sales outstanding at 36 days is down 13 days year-over-year. We had a healthy capital-to-revenue ratio of 8.6% driven by efficiencies from our CDMA network.

From a marketing and customer acquisition perspective, we had record gross acquisitions, up 17%. Postpaid was 12% up despite not participating in the [mass] zero-dollar handset game and some of the exuberant pricing we saw in Raves and media devices. Our churn was stable in postpaid at 1.3% despite some of the upgrade pressures and in prepay at 2.5%, though these were zero dollar in active customers [inaudible].

Postpaid net additions of 38,000 was relatively flat year-over-year, which given our pricing discipline in the quarter, was acceptable. But clearly we will want to see improvement in this going forward.

In terms of our market presence, we took a leadership position by pushing up [harbor] prices beginning with one zero-dollar handset in the marketplace that [background noise] 16 handsets at zero dollars. As a general comment, I'm proud to see the attraction on pricing some of these, particularly the Raves, which is somewhat of a phenomenon in the marketplace at C$49 and then potentially giving away gift with purchases worth C$50 signaling to customers that wireless handsets are perceived as being worthless. So despite the tougher stance that we took, we believe we had very strong customer reception to our improve value proposition. It's being driven by continued improvements in the quality, coverage, and capabilities of our EDVO network, continued upgrades that we've added to our handset lineup, the unique content deals and applications that we're putting together as well as superior customer service.

So all-in-all BCE Wireless is the story of "improvements" throughout the business. We've got good trends across a wide range of key metrics. I'll now hand over to Siim Vanaselja.

Robert, thanks. From an overall financial perspective, the quarter that we delivered was very much in line with our plans. BCE posted revenue growth of 2.2% in the quarter along with a stable EBITDA. Financial performance at Bell Canada was highlighted by the delivery of cost savings, which mitigated the impacts of NAS erosion and declines in the core wire line market to maintain Bell's EBITDA margin at 42.6%.

Aliant contributed a good quarter of results. Also contributing to BCE's top-line growth, Bell Globemedia revenue reflects continued strength in ratings and return of hockey, which drove increased advertising. However, higher programming and production costs in both conventional television and the sports channels reduced BGM's year-over-year EBITDA slightly.

Telesat continued strong. Operating performance was driven by growth in broadcasting and consulting revenues as well as from the operations at Infosat and Telesat Brazil.

Our statutory EPS of C$0.52 per share this quarter included C$0.03 of earnings from the net impact of gains and restructuring costs. You'll recall that in January CGI bought a 100 million of its shares back from us and we realized a gain on the disposition of C$79 million. We also incurred restructuring and other costs this quarter of C$58 million after tax relating principally to employee departures and the related rationalization of some real estate facilities.

So EPS before gains and restructurings, which is what we track for guidance purposes, was C$0.49 this quarter. That is about C$0.02 lower than the first quarter last year with that decline being attributable to an increase in pension expense, which was about C$0.03 higher this quarter.

Let me turn to some further detail on our EBITDA performance and how we're progressing on our cost-saving targets. Bell's first quarter EBITDA grew by 0.2%. Cost-savings of 125 million offset the impacts of our shifting product mix and incremental service costs. In our product mix, we realized a C$70 million increase in EBITDA contribution from growth services. That was offset by 163 million of EBITDA pressure associated with reduced contribution from our core wire line business. The cost-savings of 125 million in the quarter were very much on track to achieve our targets for the year. In the quarter, we achieved savings of 55 million relating to procurement initiatives where we've been able to reduce costs paid to our supplier for handsets and other equipment as well as IT costs and billing savings from initiatives such as one-bill on which we now have approximately four million customers.

Process improvement initiatives contributed another 70 million in savings. These were mainly achieved at the business unit level including an intense focus on operational efficiencies in our call-center operations and in the corporate center as well as, I would say, through general discipline across the Company in our discretionary spending.

Contributing to our process improvement savings was the impact of significant headcount reductions. At the end of the first quarter, over 1,400 departures have taken place since the latter part of the fourth quarter last year both through restructuring and attrition. That represents about C$25 million of incremental year-over-year cost-savings.

For the balance of the year, we expect a progressive step-by-step quarter-by-quarter ramp-up of cost-savings with greater results materializing in the second half of the year. As you know, our focus in driving efficiencies is in three areas – our headcount reduction program; our supply chain initiatives; and the efficiency benefits from our end-to-end process transformation work.

On headcount we expect to continue to see further significant progress in reducing overall workforce as the year progresses. Despite the impact of the summer months when operational loads tend to be higher and we traditionally see escalation in the workforce, we now expect our second quarter headcount to further decrease by about 600 positions largely driven by process improvements. That will put us on track with our total 2006 workforce reduction target of 3,000 to 4,000 positions.

In regard to our procurement initiatives, we have completed business cases and contract renegotiations in the quarter, which will crystallize over C$200 million of annul cash savings on a run rate basis both OpEx and CapEx. We have another 300 million in opportunities under review presently.

The main areas of opportunity include about 150 to 175 million annually in network savings, both from suppliers of network equipment and suppliers of network operating services. There is about C$100 million annually in ISIT-related opportunities that we are looking at driven by savings in billing and other operating systems. And over 100 million of annual handset and equipment savings opportunities principally in the wireless and residential services units. And finally over 100 million annually from corporate-level procurement efficiencies and from carrier settlement opportunities. So in total, we expect all of those opportunities to deliver at least C$350 million to C$450 million of OpEx savings in year for 2006.

I think the further we get into this area, the greater opportunities we see. So we'll talk about that each quarter going forward.

Our work on end-to-end process improvements is also gaining traction. We have now substantially completed the documentation and redesign of the Company's principle order-to-cash processes for our traditional voice services, for DSL, and for our gateways businesses. The piloting of the redesign processes themselves has commenced. We expect final implementation to begin shortly. That is on schedule to deliver cost-savings in the third quarter. Combined with the ongoing delivery of a variety of local business unit level initiatives, this process work will deliver about C$350 to C$450 million of targeted savings in 2006. So overall, after the first quarter, we're squarely on track with our objective of C$700 to C$900 million in 2006 total cost-savings.

I'll now turn to slide 17 and talk about free cash flow and CapEx performance. While our free cash flow is negative 48 million in the quarter, that represents an improvement of 124 million over last year with the improvement driven by a decrease in capital spending of about C$130 million. As you know, there is seasonality associated with Bell's free cash flow. It has traditionally been weaker in the first quarter of the year due to the timing of some outflows for things like public utility taxes, property tax assessments. There are a number of pre-payments and license fees incurred in the first quarter as well as payments under our compensation plans. Having said that though, I'm pleased with the improvement in year-over-year cash flow. I believe we are where we should be on the delivery of our full year cash flow target of C$700 to C$900 million.

Capital investing for the quarter slowed down, decreasing by around 19% on a year-over-year basis. Bell's lower capital intensity, which was 12.6%, largely reflects a more measured pace of making expenditures in IT and broadband footprint expansion. The lower spending also reflects the substantial completion of various projects like our one-bill rollout and the completion late last year of the Alberta SuperNet build.

So while absolute level of capital spending declined, I can say the majority of our capital investment in the first quarter was nevertheless focused on our key strategic priorities, including customer service, customer retention, wireless, and fiber-to-the-node footprint expansion, and building out our IT services. Priority strategic initiatives accounted for about two-thirds of total capital spending this quarter. We do expect capital spending to ramp up over the next few quarters in line with our overall capital intensity guidance, which is 16% to 17% of Bell revenues for the full year.

In wrapping up, I'd like to say that our level of execution in the first quarter was consistent with our performance expectations for the start to the year. Our business trajectory and outlook continue to be on track. I can reconfirm all of our guidance for 2006. Our operational priorities continue to be focused on generating profitable growth across our businesses, managing the pace of our core wire line erosion through customer service and retention initiatives, and executing various cost reduction initiatives to improve the level of cost-savings progressively quarter-by-quarter. As George discussed, we're taking appropriate actions to protect the competitiveness and market share in a very targeted manner where we need to. We're trying to drive disciplined pricing and help year-long-term economics across all our markets. Lastly, as Michael detailed, we're making good progress with respect to the various asset review transactions we've announced. We'll talk about those in future quarters as well.

With that, I'll hand you back to Bernard.

Thanks Stephen. We'd now like to move into Q&A. In order to get through everybody on the queue, I would ask you to just restrict yourselves to one question. Operator, could you remind everybody the logistics of placing a question. Then let's go to the first question on the queue. Thank you.

(OPERATOR INSTRUCTIONS) Vince Valentini of TD Newcrest.

Thanks very much. The question is not really on the quarter, but on the budget last night. Have you had a chance to review the change in pension funding that the Government laid out moving from five years to ten years and also being able to consolidate various plans into one deficit. Would that have a positive impact on your billion dollar estimated deficit or C$300 million of funding for this year?

Yes, we've seen it and done some preliminary work on the implications that it has. This morning, just because this is a complex area, I don't want to give you specific numbers on that. I think we'll certainly be prepared to as we work our way through what the implications of that are. I would say that, based on the work that we've done since late yesterday afternoon when the budget became available, I would say that we do see a positive – certainly a positive impact of this on our in-year funding obligations for it. That is, I think, a meaningfully positive step forward and I think probably a good piece of public policy given the issues that virtually all defined benefit plans have today.

The other thing I would say on this issue of pensions is that we are very much watching what is happening to long-term rates. As you know, they have moved somewhat. Given the leverage that that has on the calculation of our liabilities, this is an area in a considerable state of flux. That improvement in long-term rates – because from our perspective, at least in this issue, it is an improvement – is too having a significant effect. So there is a lot of work underway on this. I would say overall, both the Government's actions yesterday afternoon and then second the movement in rates, does open some opportunities for us that we are very keenly focused on and will, as we work through this, be able to be more specific about that in the coming weeks.

Can I just follow-up. Do you think that the budget allows you to get relief in '06? Or nothing till '07? The wording is unclear to me.

Our reading of it today would be that there are positive implications for us in 2006. But I underscore that, our reading of it. We do have more work to do. But we do believe that there is positive benefit to us – a meaningful positive benefit to us in 2006.

Thanks very much.

I would also add to Michael's comments that late last week, the Canadian Institute of Actuaries also issued some more explicit guidelines for the calculation of solvency valuations. Hopefully we benefit from that as well. That certainly is applicable for 2006.

Jonathan Allen from RBC Capital Markets.

Thanks very much. First just a quick follow-up on Vince's question on pensions. Of the, I guess 470 million or so of cash funding for defined benefit plans, what amount of that would include current service costs? Would you have that figure on hand, Siim?

Yes, I do. The current service cost for 2006 is approximately 200 million.

So the remaining 270 or so would be actual minimum pension funding?

That's correct.

Okay. A question for, I guess I'll ask George on this one. You indicated that with the win-back rules it is certainly going to provide you a benefit of trying to get back some customers in slow NAS erosion in some of your markets. But with the local forbearance decision – and specifically I am looking at the quality-of-service measures – seem to be a high hurdle for you. Is this something that you are going to be focused on now to try to bring those QOS numbers up to be able to meet the thresholds? I am curious what is your focus on there and whether or not this would result in higher costs associated in meeting those targets.

I'll take a shot at trying to answer without getting into the decision on forbearance. I think our ability now, because of the clock and with some relief on win-back in terms of timing, allows us to go into the marketplace with win-back programs and – I guess you would call it – in a way, it's trying to extend retention programs through win-back programs – is really the execution that we will follow through with. It really is block and tackle. What helps the organization going forward in an interesting way is, now that we've gone a year, for the first time our competitors will not just have gross activations. They also will have churn on their base. Some of that, we intend clearly to get back on Bell's network. That is the strategy.

In terms of the decision itself, I would almost turn that one over to Michael to talk about if he wants to make any comments at all on the forbearance decision. In terms of our [indiscernible] for the business, clearly the Company's view is, it's not anywhere enough. Given the competitive side of the world I came from, I find it quite frankly unbelievable. But we'll deal with it and go forward.

So I imagine you will certainly be appealing the decision. I am curious though. Looking back on the record, I haven't really found a quarter or month that you have actually been able to hit most of those quality-of-service measures for competitors. Is it something that you believe can actually be achieved in the next six months?

Yes, I believe we can.

With some of the headcount reductions that you are putting through, do you think you could perhaps have slightly higher costs associated with meeting those goals?

We can't do that. We obviously have a challenge, which is in the organization – and we've talked about it earlier on – which is to pull costs out of the business on the legacy side of the organization and on our traditional services and at the same time be very careful of the incremental costs we've put in place on our growth businesses. Both those areas of focus. There is certainly – there is not an opportunity for increased costs to provide service levels. We have to drive productivity out in the organization. That is the reality and that is what we're driving towards.

Okay, fair enough. Thanks very much.

I should probably say, just so there is no ambiguity about this. On the forbearance decision, I won't comment with respect to – just in the interest of self discipline – our thoughts on the quality of that decision. What I will say is that we are making the necessary preparations. I do think it is an extremely high possibility event that we will appeal that decision.

Simon Flannery of Morgan Stanley.

Thanks. It's Vance Edelson for Simon. Could you give us a little color on Virgin and the progress you are seeing there after a year, what the growth potential looks like. Is it tracking ahead of plan? Would you say that they are taking customers from others that have a prepaid service? Or are they grabbing customers that are new to the industry? Thanks.

We obviously don't give out guidance on Virgin 's results other than to say that we are pleased with the way things are going at the moment. They are adding higher value than we typically have in our base. That is helping to improve our overall prepaid segment results. They are continuing. They are proceeding pretty much against plan.

Okay. Thanks.

Greg MacDonald with National Bank Financial.

Thanks. Morning. The question I have is on the price increases that you announced in February. George, you were good enough to give us some more details on when the long-distance price increase goes through. Could you comment on if and when price increases on ExpressVu and on DSL have gone through in the quarter, or if they did go through in the quarter.

Yes, they have all gone through or are going through in this quarter implemented as announced and planned in February. I did notice a couple of notes from some analyst who may have missed it at the conference. I said those price increases would happen in the second quarter. Some had assumed that they would happen in the first. There is a time process to do those things and implement them and notify the market, particularly our clients.

So with respect to ExpressVu and DSL, that was in the first quarter – part way through the first quarter?

No. I repeat what I said again. The price increases on all three happen in the second quarter. As I had said at the investor forum, they would happen at that timeframe – just so everybody. But they have gone through. Clients have been notified. We'll begin to see some of those benefits going forward.

Is the timing, George, similar to the April timing on long-distance? Or was it slightly earlier?

They are pretty well around that time. In fact, I would say second quarter is the way to think about it – some in different months of the quarter, but happening.

I guess it's too early to tell whether there has been a subscriber increase on gross-adds or not – on churn.

You mean whether or not churn has been impacted by it?

Yes.

When you go into the marketplace, you do it in such a way that we are tying to make sure we have minimal impact on demand and make sure that these price increases recognize the competitive dynamics in the marketplace. I am very confident that they do.

Thank you very much.

Peter Rhamey of BMO Nesbitt Burns.

My question is on wireless. Robert you indicated the 60% revenue flow-through for EBITDA, which I think is terrific. When I look at the historical quarters in [cube], [W-net] gets challenging because of the rapid improvement in EBITDA you experienced over the course of last year. Could you give us some input or views? You mentioned that 60% target was hit. Can you improve on that, given that challenge of historical quarters? And as well, give us some insights into where Bell stands with data revenue as a percent of ARPU that helps us judge voice declines versus data. Thanks.

With respect to the data revenues, we haven't specifically given out, for competitive reasons, what percentage we are actually achieving other than to say that we nearly doubled in terms of our data revenue. We are making a lot of headway, in particular as a result of our EBITDA, our network where it is representing a huge consumption of our overall data network – if you wish to put it – a big chunk of it.

With regard to the point of around flow-through, I think the point that we are really making is that clearly that is a key metric for us. George alluded to it in more general terms across all of the products. It's something of a key focus for us going forward. Clearly there is always a balancing act. We want to achieve a like level of growth and have an acceptable level of performance, particularly in the postpaid segment. While at the same time, it's really important for us – and we consider it an issue for us – to focus on delivering an increasing level at the margin of flow-through. We were happy with the 60%. We are going to continue working on that number to be as efficient as we can with the new revenue dollars that we're bringing in.

Very good. Just on the data again. Some of the carriers in the US and Canada are reporting 9 to 10%. Are you in that ballpark? I know you can't comment specifically.

That's correct.

Very good. Thank you.

Glen Campbell of Merrill Lynch.

Yes, thanks very much. My question is on the deferral account balances. If I read the disclosure right, the balance is estimated at 480 million with a future commitment of C$81 million, I guess, to take effect starting in June. I want to confirm. Should we then assume that your local revenues, local pricing will drop to the tune of C$ 81 million? As a follow-up, how are you working this with respect to The Regional Trust given what the CRTC is looking for is investment in rural broadband capability, which now won't be wholly-owned?

We view the deferral account decision largely consistent with what we put in place for our assumptions in the 2006 plan. We had a process where we are going to go back to the CRTC – we are in the process now – and agree with them on how much of that deferral account we can clear through investment in broadband programs for underserved communities. Then the fallout of that will be what level of price reductions we need to put in place.

We are also currently assessing the split of that CapEx spend between Bell and the regional lines. But we recognize that the obligation of the deferral account drawdown is shared by Bell and the Regional Trust. We're working together to get that resolved.

Just to clarify. The agreement with the CRTC is with respect to drawing the 480. That wouldn't affect the C$81 million in price reductions that would be needed from June on. Is that correct?

That's correct.

Okay. Thanks very much.

James Lung of McKenzie Financial.

Good morning, gentlemen. Michael, on one of the two tracks that BCE will embark on a going-forward basis – this is on track two – I don't believe the data is in the package. Can you give us an update on the part of Bell that is going to be spun out, excluding Aliant and Bell Nordiq, how the quarter has performed on a revenue and EBITDA basis, NAS account, and on customer account like dialup and internet. How did those numbers stack up against the pro forma numbers that [rescinded] in the Q4 numbers?

We're not breaking that out separately. I am not in a position where I am going to be able to give you that this morning. That is not – certainly for this quarter we are just in the process of creating the organization itself. We're not going to go there in terms of that kind of detail.

The pro forma numbers in the Aliant circular are based on the future mode of operation with various outsourcing arrangements in place between The Trust and Bell. We are currently not reporting on that basis for the first quarter. We can tell you that the regional lines that Bell would be contributing to The Trust are performing consistent with our planned expectations.

I guess in future, will this information be made available prior to the formation of the new entity?

No. It will be made available – we expect The Trust to close early in the second half of the year. Its reporting on a going-forward basis will be under the new mode of operation.

Thank you very much.

Rob Goff of Haywood Securities.

Thank you and Good morning. You highlighted the two wins with TD and RBC for the managed IP telephony. How far do you see that model going into the enterprise marketplace? Can you describe the advantage you have in working together with IBM and CISCO?

In terms of how far into the marketplace, those announcement are consistent with our strategy in the marketplace. We would look to add to that client group over a period of time. It's a core part of our execution strategy. Then in terms of working with various partners, we a number of different partners be it on the supply side and the distribution side. Depending on the particular transaction, in some cases we'll actually compete with distribution partners. In some cases, we'll partner with them. They will be different organizations. The model will change based on the particular customer and their requirements. We'll continue to execute on the strategy. Hopefully that answers your question for you.

Thanks George.

Marje Soova of Goldman Sachs.

Thank you. I want to go back to the wireless segment for a second and understand the prepay versus the postpaid performance a bit. On a total basis, when you look at the normalized net adds last quarter, normalizing for the 45,000 of active postpaid customers, the activation – net adds on a total basis were actually down 28%. At least according to my numbers, it looks like prepaid churn picks up quite a bit. And that was the cause of lower net adds. On postpaid gross adds were slightly lower, while churn was a really good improvement. I want to understand this. Could you talk a little bit about the dynamics in the different segments – prepaid and postpaid.

Quite a lot of different points you covered off in your question. To start with postpaid, clearly that is an area of focus for us. I mentioned in my opening comments that our postpaid was flat year-over-year even if you normalize it for the adjustment that we did in the first quarter of last year. It's an area where we will be focusing increasingly on. That is a key part of our overall strategy to grow our overall postpaid base.

With respect to the prepaid, prepaid is higher. But the customers that are falling off there, are, in fact, zero-dollar customers outside of their policy. It is not an area that is particularly concerning us. In fact, as you have seen, we've had a 20% increase in terms of our year-over-year ARPU on prepay.

Did I address all your questions?

In terms of postpaid in terms of the gross adds and then overall gross in the market, does that still seem like it is picking up from last year when you had billing migration related issues and such. Or do you feel like you are impacted by the overall slowdown in the industry?

Well again – to go back and pick up one point, our overall increase in gross was 17%. We were up 12% year-over-year in postpaid. We demonstrated a material improvement, notwithstanding the fact that we exercised considerable restraint in the marketplace. I think that is consistent with what we are saying about focusing on our postpaid base.

In terms of the actual market, it is difficult – it's early stages at the moment into the year – to say whether or not it is accelerating. If anything, it is probably staying flatish to a little bit more in terms of the overall rate of growth in the markets.

Great. Thank you very much.

John Henderson of Scotia Capital.

Good morning. Could you talk a little bit about Microsoft TV, your IPTV rollout status, the number of homes passed with IPTV capability – that sort of thing.

I think our strategy – we continue to invest in fiber-to-the-node – puts us in the position in the marketplace to execute IPTV in a broader way as we continue to build that out. In terms of timing to market and what have you, quite frankly the style you'll get from me is, I am not going to talk about it. Because the one who will be listening the most will be the competitors. And it's least material to our shareholders in terms of – it's better for our shareholders to see us launch it than to tell our competitors ahead of time. So we continue to do work in that area. We're really pleased with our video results as they stand today. We are in a unique competitive position in North America as an ILEC who already has video in its competitive arsenal to deal with situations like you might see in, for instance, Videotron's territory today. We're going to execute this in a very prudent way. In terms of timing, the ones listening the most on the phone are just going to have to wait for later on, which will be our competitors.

In terms of your CapEx, which was cut back significantly in the quarter, is that a reflection that you are cutting back on the fiber-to-the-node build-out?

No, not at all. We're on strategy. There is always the seasonality to capital in organizations and in some cases sometimes fairly consistent. In telephone companies you will see some first quarter issues. Our guidance for the year, as Siim mentioned, hasn't changed on capital. Our CapEx to revenue line will be down over last year, but hasn't changed. We're not going to be maintaining 12% CapEx to revenue for the year.

Okay, thank you.

Jeffrey Fan of UBS Securities.

Good morning. A quick follow-up on the previous question regarding the deferral account. The 80 million price reduction, that is going through in the second half. Is that 80 million an annualized number? Or should we look at the second half as 40 million price reduction?

That is an annualized number.

Okay. And then just a quick follow-up. In terms of you win-back efforts in Q1, this part of Montreal actually saw the 12-month anniversary come off. Could you shed some light on how some of those win-back promotions have helped you gain back some residential lines in the quarter.

What I would say is you are right. The clock has just passed an hour that is important for us, which means we can begin that process. All I can say is, you can rest assured the organization has every client we've ever lost diarized. We will be dealing in this as a competitive market and not to some other type of things that Robert Odendaal leaves on retention programs in the mobility business. One of the great things is, the organization is used to lifetime management of clients from the wireless side. We can import that knowledge into the landline business. We'll be doing that.

Is it fair to say that the win-back impact on your Q1 line loss is not that significant yet, given the [multiple speakers].

That's a fair comment. But I am not going to give much more there. Other than I think people should expect us to – as this market gets more competitive – make sure we're playing in that appropriately. While at the same time recognizing the restrictions we have on us.

One very quick one then, if I may. The growth services business, it looks like the incremental margin as you just said, George, is about 30% -- 70 million EBITDA flow-through off 230 million on revenue. Where do you think that margin goes to? Do you have a target that you would like to see on the growth services margin?

I can talk about overall. Each business is a little bit different in terms of their profile, something like our video business has content in its margin calculation, which not quite the variable flow-through that something like Robert's Group might see on mobility. Let me say that 30% isn't enough – not close to enough. We will be working that very hard. The way you do that is to put the expenses in after the growth, not the other way around. That is what we'll be doing as much as we can going forward. These are not easy things to do, but we are going to be focused on them.

Okay. Thank you.

Dvai Ghose of Genuity Capital.

Thanks very much.

Welcome back.

Thank you sir. How are you? A question Michael. Through Q4 and into Q1 you've made a number of asset changes, which on the surface seem to have added multi billion dollars to the Bell and AV – 3 to 5 billion. I am sure that you are very disappointed that the only real value that has been created in the market seems to be at the Aliant level rather than the BCE level.

So my question is, have you come to the conclusion that asset restructuring, the benefits that have added have really been withered away by an increase in [whole code] discount and that structural change is no longer a priority? Or do you think that that value will surface over time? If so, why? Indeed, if structural is no longer the priority, if it's not, what are the priorities? Is it regulatory change? Is it operational change? What will your focus be over the next couple of months?

First, we embarked down the path of bringing greater focus to the Company and dealing with some of the other assets of the Company for reasons that we think that sharpening the focus of the operation of the Company is the right thing to do. I'll leave it to the markets to assess how to value that. I do believe that as we continue to work through the transition that the Company is currently engaged in, that step-by-step more and more of that value is there to be recognized by the market. I'll leave it to you folks and the buy-side of the market to evaluate that from a value recognition point of view.

I don't – we will continue to look for the right kinds of opportunities to continue to surface incremental value for shareholders. I think we have done quite a bit. We've quite a bit to complete now still with BGM outstanding, with a small piece of CGI that still has to be dealt with, with Telesat that has to be dealt with, with the completion of The Trust and the creation of standard operating procedures between the two organizations with respect to that. All of those are priorities and are very much at the center of our radar screen for the next number of months.

At the same time, in terms of moving the organization forward, yes I think that ongoing regulatory change is an important priority. I do believe that when the industry looks back on March of 2006 a year or two years from now or whenever, I that they will look back on the publication of the Telecom Policy Review Report as a very important event in the evolution in the reshaping of the regulatory structure for this industry in Canada. I continue to be optimistic with respect to the impact of that very high quality piece of work that it will have on shaping the public policy agenda. That is a high priority for us. We continue to work with government on that.

Overall, as we continue to move down these other – this other path about surfacing value for shareholders, which we will continue to do, we do have a very intense focus on improving and strengthening the operational execution focus of the Company. That is a huge priority for George. In fact, I guess I would say the centerpiece priority that George has in helping take the Company forward. That – sharpening our operational execution and moving forward on that basis, driving profitability, beginning to accelerate a bit more the growth opportunities that the Company has, moving the Company into new areas where we can find new sources of profitable revenue growth on the basis of a substantially revamped cost structure. These are – this is a very full agenda of actions for the Company.

We'll continue down the path of duly completing these transactions. We'll bring really intensifying focus on operational execution and excellence in execution. I would say that is what the nearer term outlook for the Company is in terms of our overall priorities. I believe that if we are able to do that, that is going to offer substantial opportunities to create value for our shareholders, which at the end of the day, is what it is all about.

The only thing I would add is it's a focus on execution and operations. The challenge for us, I think, is quite clear. It is to mitigate the new competitive realities in local, within whatever the current regulatory rules are, and increase the margin dramatically in our growth segments to offset that in such a way that we're accretive on an EBITDA basis. That is the challenge. That is what we'll be focused on relentlessly.

That sounds good. Also a quick follow-up though. Because both of you referred to the regulatory conditions. The May 12 anniversary of the VOIP decision is fast coming upon us. Cabinet has to respond to your appeal within that year. Can we expect anything, in your opinion?

Well, I don't know. I guess you should probably ask the Minister of Industry. We continue to keep our fingers crossed. I believe that there is recognition within government that the voice-over IP decision is utterly at odds with the recommendations that have come out of the Telecom Policy Review. I think the Telecom Policy Review and the new framework that it has proposed provides a context and a basis for Government to reassess both the voice-over IP decision and the forbearance decision because on both of those scores, the Commission is utterly at odds with the thinking of the Telecom Policy Review. I think therefore having the TPR on the table, and having that framework on the table is something that is helpfully constructive in the decisions that the Government has to make in the coming days with respect to VOIP, or for that matter, other decisions that may come from time-to-time from the Commission.

We'll see. I think we'll see in the – May 12 is upon us. I do regard that as a meaningful signal of Government thinking. So we'll see.

Yes, good luck with that. Thank you very much.

Operator, I think we have time for just one more quick question.

Patrick Grenham of Citigroup.

Good morning. Could you talk a little bit about the enterprise business and how your market share is going there. Secondly, the migration issues you have moving away from the legacy platforms to the new IP-based platforms, should we see around [indiscernible] your EBITDA margin on those businesses in the second half of the year as that migration gets going?

I won't go into the granular level of a quarterly EBITDA. I will say, as I try to answer your question as best I can. I think [everybody knows] that on the enterprise side, some of the re-pricing pressures that we've seen have impacted that segment this quarter. We do need to ensure that our cost structures reflect the reality of that re-pricing and also, as we move to new technologies, the pricing that flows through. It's not a market share issue for us per se in the enterprise category. It really is making sure that as we rollout these new services, (1) we are pricing them in such a way that the benefit flows and not just the client. Then secondly, that as we do the migration, we effectively as we can pull the costs out of the legacy side of the business. Those are not easy things to do, but things that we'll be focused on from an execution standpoint. It's not a one-quarter issue for the Company. This is a long process for us to make sure that happens. I will say that it's very clear to me that we've got to align the expenses in that category with the revenues that we're seeing in the new technologies. We're not there yet and we know that.

Okay. Thank you.

Thank you everybody. If there are any further questions, please don't hesitate to contact us. Otherwise, thank you for joining us on the call today.

Thank you. The conference has now ended. for today. Please disconnect your lines at this time. We thank you all for your participation. Have a great day.