BCE Inc (BCE) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to BCE's Second 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, and welcome to the call. I'm here today with Michael Sabia, CEO; George Cope, COO; and Siim Vanaselja, CFO. As usual, we'd like to take you through the presentation of the results found on our website, and after that, we will move into Q&A.

Before we start, I just like to remind you that today's call is being webcast, and the archive will be available on the website. I would also remind you that today's remarks will contain forward-looking statements with respect to items such as revenue, cost saving, EBITDA margin, free cash flow, capital intensity, and EPS. Several assumptions were made by BCE in preparing these forward-looking statements and that our risks and our actual results will differ materially from those contemplated by the forward-looking statements.

For additional information on such assumptions and risks, please consult BCE's 2005 MD&A dated March 1, 2006, as updated in BCE's 2006 first and second quarter MD&A's dated May 2, and August 1, 2006, respectively. These are both filed with the Canadian Securities Commissions and with the SEC.

These forward-looking statements represent the expectations of BCE and its subsidiaries as of August 2, 2006 and accordingly as subject to change after such date. However, BCE and its subsidiaries disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I'd just like to add that I am making this cautionary statement on behalf of each speaker whose remarks today may contain forward-looking statements. With that behind us, I'd now like to turn the call over to Michael. Michael?

Thanks, Bernard. And thanks, everyone, for joining us this morning. Overall, I would say, I'd characterize this quarter as another quarter of step by step progress, it's very consistent with the plan that we have for the company for this year and the quarter. I think we launched a number of important initiatives in the area of marketing and pricing and customer service, cost reduction. And because of all of those things and because of the progress that we are seeing in those areas, we do believe that we have very sound base to go forward on for the rest of the year in a pie degree confidence, and by year end we will have completed and accomplished the things that we set out to do at the beginning of this year. So generally, very much on track.

From a financial point of view, I think I'd characterized it as a steady quarter. We are very pleased that we held our EBITDA margin at Bell. As you know, and we've talked about this before, that is one of the key objectives that we outlined on February the 1st and giving the experience on this call that you all have with the USR box and a comparable period of competition with cable companies, I think you all understand, that holding EBITDA margin is an ambitious goal in a period of like this. And I must say I believe that we are performing quite well against that objective.

Same time, I think managing CapEx with good discipline, lowering our CapEx intensity, while we continue to invest in the areas that we need to, and that's reflected and you have seen the numbers, in almost a $90 million improvement in free cash flow in the first half of the year. Siim will talk about this, but on an underlying basis its even stronger than that.

Overall, I would say, I think we have seen continuing improvement in the quality of execution at Bell. I think this is in a lot of different areas, certainly. Some of the moves we have made in the Quebec market, in particular with DSL, fits very much into that category. I think it's very surgical, very responsible targeted approach to specific market conditions, and I am happy to say, and George can elaborate on this, I think getting some good traction in that market. That's just one example.

I think there are number of others, of that kind of quality of execution where we see for instance in improved customer service metrics, where we are seeing improved customer see across a whole variety of areas of the business. We are seeing an improved customer profitability, whether it's on household basis or on a individual subscriber basis, you have seen the ARPU numbers and the performance in the second quarter, really very steady increase across all platforms especially, I must say, in video, where we think the $4 step-up is really very good performance on ARPU improvement there, but similarly in the ISP, up a couple of dollars on our postpaid wireless, up a couple of dollars that's an area, as you know, that we put a lot of emphasis, on ARPU. And I think there, we're very much on the right path, but of course there is more to do there and we will continue to do that in the coming period.

That being said, I think there is some softness in net ads, especially in video. George will elaborate on this, so I won't take a whole of time on this, so some softness there, as I say in video.

On wireless with post-paid, at about 106,000. I think fairly reasonable post-paid net adds there with our total wireless net ads, of course, effected by the 16,000 zero pay prepaid deactivations that occurred in the quarter. Overall on wireless, my perspective on this is that I think the business is clearly making progress there and is on a better path, but the challenge we have now, and now what we're going to do, is we need to accelerate that progress.

So in that context, given that objective, I was very pleased that we are able to announce yesterday, I think something that was expected by many, and that is that Wade Oosterman has accepted the leadership of Bell Mobility. Wade's track record in marketing brand execution across a variety of areas really, I think, speaks for itself, and there is no doubt in my mind that which Wade's arrival there, he will have a very, very positive impact on the acceleration of that business.

While I'm on the subject of people, let me just touch on another issue, a number of months ago, one of our colleagues Isabelle Courville, the President of our Enterprise Unit came to George and to me to say that she had decided and she wanted to have an opportunity to re-assess where she is from a career point of view and to re-assess her options, and she asked us to begin the process of looking for a successor. Now, given Isabelle quality and potential, we are very fully supportive of Isabelle's request, and we are going to give here that time and that opportunity.

And I might say in addition to that that we are also very pleased that we were able to convince Stephen [Bodier] of Sun Microsystems to join Bell to lead the Enterprise Business Unit. I am sure some of you will know him. He has a deep understanding of the needs of large enterprise, customers, given what he was doing at Sun Microsystems, and I think in particular a very strong ability, a really proven ability to coordinate between a sales, a sales force and a set of solution architect; that skill, we think, is very important and quiet essential in transforming a connectivity business into an ICT business, which is very much the future of the enterprise business in telecom. So I think Stephen, along with Wade - two really great additions to the team, two very strong players.

I just turn now to some of the BCE issues, because you will recall in February we talked about our plan to focus the BCE portfolio in the surface value. I think on that score as well, quiet good progress, Bell Aliant is done and up in running. The distribution of our shareholders is complete. Share buyback that we talked about is 80% complete; it will be finished up quickly this quarter. And [if you take] all that together with the [trust], the buyback, et cetera, that represents a distribution of about $3.4 billion of value to our shareholders. And at the same time, as a result of that, a 13% reduction in the flow to the company. So all of that, again, on plan, on schedule, on track.

Globemedia – I was very glad to see that the restructuring of Globemedia that we announced in December was approved with no CRTC mandated benefits, and we will get that deal closed, we think, this quarter. And then finally, on Telesat, we continue to be on track for transaction that we talked about and getting that done later this year.

So, if I can just move to the next slide quickly on some of the work that we are doing on the repositioning of Bell. First, just let me hit a few categories here. In terms of growth and growth services -- getting to that inflexion point where revenue from our growth businesses exceeds revenue from our traditional services. That's a major milestone for us as a business, and we are on course to do that, get that done in the second half of this year.

And I might say in that context, I think we are having some quite good success in managing more finely, more surgically the erosion of our traditional services in the second quarter. You have seen that the overall rate of mass erosion was essentially stable on a sequential basis, residential mass erosion did step up a little bit, but, overall, on a sequential basis pretty stable on mass. Winback performance improving significantly, and what's really important there is that the customers that we're winning back are purchasing incremental products when they come back and, therefore, delivering more value to us. LD, again, more stable than its been for a long time.

And when I stand back from all that, that in my mind is really about our growing ability to manage two critical levers. On the one hand driving growth, and clearly there is always more to do there, I think, in two areas. First in the pace of growth itself. And second, and really importantly, in driving improved revenue flow through the EBITDA; that's especially through in our wireless business, and it's really a top, top priority. And then on the other hand, while we're doing those growth-oriented things, mitigating trends in our traditional business. But I must say I think there is more to do here, but I think the balance between those two things is better than its been for quite a while.

On bandwidth, [our fiber], there's a node plan in EVDO -- continues to roll out, all very important for future data growth and the kind of opportunities that that represents for us for the feature. But I think actually beyond that, those two areas -- really important in making the network a significant source of value creation for the future. Now on that theme, in the second quarter, we also pass another important milestone which was the role out of our Sympatico Optimax product. I think from a shareholder perspective, this is important for a couple of reasons. First, because the consistency of the feed will help differentiate us and strengthen our competitive position. Second, because the use of cap that's in place there, I think, also is helpful in starting to convey to the customer the value of bandwidth consumption, and I think that's something that's important for the future.

A couple of words on service, all year, we've been very focused on service improvement which should provide a basis for eventual differentiation on the basis of service. And again, I think very real and very steady progress. We've fully redesigned the move process that we use to support customers when they are moving, which is such an important point in the life cycle of a customer.

Now, I think we've seen some really -- it's fair to use the word “dramatic” -- improvements there, especially during this very highly concentrated move season in Quebec. A couple of numbers -- for our high value customers, we have met all our commitments 99% of the time. High value customer satisfaction running between 90% and 95%, but beyond just high value customers, I think we have seen big improvements in assignment reliability truck [rolls], etc. So big, big improvements there. I think it's probably fair to say that I don't think Bell has performed at that level of service quality for quite a long time, if ever.

And while we‘re doing that on move, and from a service perspective, we are also having success and driving some incremental revenue -- again, all about better execution in our call centers, our average revenue per install's up about 15%, average incremental revenue for move orders up very significantly above 40%. So, good virtual circle there between our service work, revenue growth, execution, etc. And I just used move as an example, but we're seeing improvements in service quality in terms of first call resolution mean–time-to-repair, etc., across a whole spectrum of metrics.

And then finally on cost -- so while we are continuing to drive service, I think we are also making really sound progress on cost. Just an example, this quarter we reduced the number of calls coming into our call centers by a little over 5 million calls. That's a result of improved first call resolution, more online interaction with customers, one bill, whole bunch of things. Put those together, and that's saving us about $8 or $9 million in the quarter. That's just one area where we're finding, again, that better execution and all of the things that we have been doing for a while -- coming together to help us accomplish both a better customer experience and better cost.

And because of that and a lot of other things, you have seen a big step up in our cost performance in the second quarter at 172 million, and that leaves us in a place where we're confident and feel comfortable about the guidance range that we gave you in February of 700 million to 900 million. So overall, I'd say pretty good cost performance, it's getting better week by week, month by month, so sound progress there. So overall, and I'll pass it over to George now, from my perspective, a quarter that leaves us very much on plan and on track. George?

Thanks, Michael. Good morning, everyone. I will move now to slide 7. Let me start by talking a little bit about our product performance. On the local access side, revenue was down, as you can see, 4.1% year-over-year. [Inaudible] was really essentially stable with Q1 at 3.3%. The LB decline of 12% is actually our best result in over a year on this product. And as Michael indicated, with some finetuning, I believe, we can continue to perform better in that portfolio, and we'll look to do that over the coming quarters. Primarily in this quarter, the benefit was driven by some price increases that, as many of you were aware, were announced in February and implemented in mid Q2. Going to skip over wireless now for the last time, and the next call look forward to being also talk about it, and so I'll go by that.

Overall, our data growth was softer than we would have liked, and I would say particularly in our business portfolio in the quarter, so we'd like to see a better result there and we'll strive to do that going forward. In total, our overall revenue was helped, as Michael indicated, by an increase in the ARPU of all of our growth portfolio products. And from my end, to be able to increase our ARPU year-over-year while maintaining some of the lowest churn levels we've had on any of our growth portfolios is a solid sign going forward for us as we strive to improve our incremental EBITDA flow-throughs in the business, in particular in the growth businesses.

Turning to the residential business slide 8, our NAS erosion of 6.3% was up slightly over Q1, which was 5.9. We are now, though, in the winback business and have had some success in three particular areas. The ARPU of our returning customers is actually $4 higher than at the time we lost the customers, which is obviously positive for us going forward. 20% percent of the customers that are returning are adding a second product when they return. And probably, most importantly, the volume of winback continues to grow as the calendar allows us to contact more and more customers. So we are focused in that area clearly and seeing some early momentum there.

In addition, our residential folks have been, obviously, focused on reducing cost, as we have seen the decline in our NAS, and during the quarter, we were able to reduce our contacts and our costs 14%, and Michael talked about the reduction in our number of calls.

Turning to the next slide, our video results quite frankly were excellent from our financial perspective, seeing our ARPU on our entire base lift $4 on the year while maintaining a tremendous churn level of 1% was a great result. We would have liked a little stronger net ad growth for sure in the quarter, and to that end, have launched new program called All-In-One, which was launched in the third quarter and designed to accelerate our sales momentum, while at the same time, trying not to compromise the significant financial performance we‘re seeing in that area.

Turning to our high speed internet results, our high speed subscriber growth of 47,000 net ads in the quarter was down over Q2 last year. The year-over-year reduction was caused primarily by a slowdown in the GTA market, and this was confirmed yesterday by our competitor when they also reported their results. On top of that, from our Bell perspective, last year in the second quarter, we launched some new footprints which gave us new markets to go after. In this quarter this year, we did not launch additional markets. Despite the slowdown, we were, again, able to raise our ARPU $2 on our entire base from $42 to $44.

From a strategic standpoint, as Michael indicated, we launched our Sympatico Optimax product in July in the market of Montreal at both 10 megabit and 16 megabit speeds. More importantly, though, than the launch was the strategic decision to implement that service utilizing a usage billing model. And we look towards utilizing usage based model as we go forward with our Optimax product in the Ontario marketplace later on this year.

Turning to our business portfolio, our results in Q1 improved over Q2. We are pleased with the results of our SMB group, Bell West which turned EBITDA positive in the quarter, and our wireless sales overall. Our enterprise business had a better quarter in Q1, but there continues to be work to do in that area of our business going forward.

In summary, our operational focus in the slide here is the same slide I talked about on my first call in my role at Bell continues to be the following. First of all, we must continue to improve the flow-through, our EBTIDA, as Michael mentioned, on our growth portfolio. We have to do that while achieving our fair share of net ads within our growth portfolio. At a minimum, we have to get our flow-through levels at that of our peers in the marketplace, and will be attempting to do that going forward in a very aggressive way.

We have to continue to curtail NAS losses. I have indicated already that our winback programs are beginning to see traction particularly as the calendar allows us to enter that marketplace, and we continue to respond competitively in marketplaces when required, and so our program in the Montreal market with the DSO pricing continues and will continue until we see some reasonable pricing on the phone side from our competitor in that market.

We want to make sure we manage the re-price, if you will, on the erosion of our traditional services, and you have seen a little sign of that this quarter with our LD portfolio, and we are doing a lot of that work across our entire traditional service portfolio to that effect. Siim will talk about our focus on driving our cost in a moment.

And finally, to make sure we will continue to focus our capital investments on our fiber to the node and our wireless strategies. And I am certain that both our broadband and wireless businesses have a tremendous future, particularly as we execute going forward with a profitable focus. Investors will find the return on investment [and Bell] businesses, I believe, will be quite rewarding. And with that, let me turn the call over to Siim.

Thanks, George, and good morning, everyone. Before turning to the consolidated financial results, let me take a minute to comment on our wireless business in the second quarter. Overall, I'd say reasonable performance in wireless with steady progress on improving the overall quality of the business, although there is clearly more work to be done. Postpaid net additions were solid at 106,000 with a notable improvement in postpaid churn to 1.1%. Our total net additions were lower at 90,000 due to a higher level of prepaid subscribers that became inactive.

It's important to recall that when comparing these results to last year, the second quarter of 2005 was a record second quarter for additions, so, overall, we are reasonably pleased with this performance, particularly given some of the aggressive acquisition offers by competitors during the quarter. With our focus on balancing profitability in market share, we held firm on handset prices and maintain [rate plan] pricing discipline.

In terms of the work that we are doing to strengthen the quality of our subscriber base, you can see that reflected in a further $1 increase in blended ARPU and a $2 improvement in post state ARPU this quarter.

This reflects solid data growth supported by EBDO, the growing penetration of double ARPU devices such as Blackberry and 10-4 handsets, increased access from the improved mix of higher value customers, and the continued growth that we are seeing in the west. Financially, this translated into revenue growth of 11.2% year-over-year, which compares favorably to quarterly growth rates throughout all of 2005. And if we normalize for the one-time $15 million revenue gain that we talked about in the second quarter last year -- if you recall that was for the recognition of deferred revenues relating to unused prepaid minutes -- then, in fact, organic revenue growth this quarter would be 13.4%.

Wireless operating expenses included an $18 increase in COA to $419 and higher customer retention costs. This helped drive, though, the improved revenue quality with higher ARPU customers and longer-term contracts. In terms of our wireless EBITDA, the increase here, I'd say, was very consistent with the revenue growth in the quarter and reflects lower total subscriber acquisition expenses as well as operational efficiencies particularly in our call centers.

The reported EBITDA growth for Q2 was just over 10%; however, underlying growth was over 15% when normalizing for that one-time deferred revenue recognition last year. This implies improved flow-through of about 60% EBITDA-to-revenue growth, which is going in the right direction, but I'd say there is more work to do here and we will continue to focus on improving on that metric.

So to summarize, we're seeing quarter-by-quarter improvements across the wireless business with good trends in a wide branch of key metrics, but we'll seek to accelerate that going forward.

So now, let's turn to the consolidated financial performance. Overall, BCE had a reasonable quarter, delivering revenue growth of 1% and essentially flat EBITDA growth compared to a very strong second quarter of 2005. Financial performance at Bell was highlighted by double-digit revenue growth in wireless, internet and video, which together with a focus on profitability and the delivery of 172 million in cost savings mitigated the impacts of NAS erosion and the declines in our core wireline business.

Importantly, we were successful in delivering a stable year-over-year EBITDA margin at Bell of 43%, which is one of our major performance benchmarks. Also capital intensity improved over last year to drive close to 10% year-over-year growth in EBITDA less CapEx which, as you know, was a proxy for cash flow performance.

At Telesat, the underlying trajectory of the business continues to be strong with growth in both broadcasting and consulting revenue seen in the second quarter. Telesat's reported revenue and EBITDA, though, declined about 12% and 1%, respectively, but that does reflect $20 million of non-reoccurring equipment sales in the second quarter last year relating to the implementation of an interactive distance learning contract.

Bell Globemedia, revenue grew 8% in the quarter from continued strength in advertising and subscriptions, but higher programming and production costs in conventional television and in the sports channels did impact Bell Globemedia in a significant way, resulting in a year-over-year EBITDA decline of 15%.

BCE's EPS before restructuring gains and Bell Aliant information cost, which is what we track for guidance purposes, was $0.54 per share this quarter; that's down from $0.58 last year, and the decrease is essentially attributable to pension expense, which was about $0.3 higher this quarter and amortization costs which increased by close to $0.2 -- all of that being in line with our guidance.

Now, our income tax line this quarter deserves some comments as well. As you know, in the last federal budget, the government proposed to reduce income tax rates for corporations. As a result, we were required to re-value our future income tax liabilities on the balance sheet, benefiting our income tax expense in the quarter and EPS relative to our plan on a one-time basis by about $0.3. Now on a year-over-year basis, this one-time favorable tax impact is offset by the one-time EPS benefit that, you may recall, we recorded in the second quarter of 2005 which was from the BCI tax loss monetization transaction.

With respect to our statutory EPS, that was $0.53, reflecting a $0.01 impact from net gains and restructuring cost in the quarter. Those details are highlighted well in our financial statements in MD&A, so I won't cover them here, but I would be pleased to take any questions you might have on it.

Let me turn to our EBITDA performance and as well how we are progressing on cost reductions. In the second quarter, we were able to grow Bell's EBITDA by 1% while managing through the current market transition. Cost savings of $172 million offset the impacts of our shifting product mix and the incremental cost we invested in the business to fund strategic initiatives which would include service level improvements, fiber-to-the-node bill, wireless expansion, IPTV, and other new product development activity.

With an increase in EBITDA contribution from growth services, more than offset by reduced contribution from our core wireline business, the net effect was an EBITDA pressure of $118 million. So our ability to generate $172 million in cost savings in the quarter, which is up from 38% from the first quarter, was important, and that was very much in line with our plan in terms of the level of delivery. With about 300 million in year-to-date cost savings now as well as the traction we are seeing with our process in procurement initiatives and our ongoing focus on headcount reduction, I do think we are positioned nicely to achieve our overall year-end guidance objectives of between 700 million and 900 million of total cost savings.

In the quarter, we achieved 95 million of savings related to procurement initiatives which we have been able to reduce costs paid to suppliers for handsets and other equipment as well as IT costs and also billing savings from one bill, on which we now have over 5 million customers.

Process improvements also contributed another 77 million in savings. Now, these were achieved mainly at the business unit level, representing operational efficiencies in our call centers and in the corporate center, as well as through just general discipline in discretionary spending across the company.

Contributing to the process improvement savings were headcount reductions in the work force. The second quarter saw a further 443 departures, and I‘d say that was despite an in-flow of over 600 seasonal workers and students to help tackle some of the heavier work load that we have in the summer in network operations.

At the end of the second quarter, almost 1,900 departures have taken place since the latter part of the fourth quarter, both through restructuring and attrition. That represents about 30 million of incremental year-over-year savings in the second quarter. And you're going to see further progress in our workforce reduction program in the second half of the year, in line with our 2006 guidance target of 3000 to 4000 reduced positions.

And now, turning to the slide on free cash flow and CapEx, we generated $64 million of free cash flow in the quarter. That shows underlying improvement, recognizing that in the second quarter last year, we benefited from an increase in our accounts receivable securitization program which we disclosed at that time, and that have added over a $100 million of free cash flow last year.

On a year-to-date basis, free cash flow generation has improved over last year by almost $90 million, mainly due to a decrease in capital spending. That's important because it gives us a positive base from which to build throughout the remainder of the year. As I said before, there is seasonality associated with our cash flows at Bell due to the more significant payments we are required to make in the first half. Those would include taxes, license fees, compensation plan payments, and so on. Therefore, just as in past years, we do expect a significant ramp-up in cash flow over the next two quarters. Overall, we remain well-positioned to deliver our full year free cash flow target of 700 to 900 million.

The pace on a year-over-year basis of capital spending at Bell continues to come down, decreasing by almost 14% over 2005. Bell's lower capital intensity, which is 15.2% on a year-to-date basis, largely reflects a more measured pace of making expenditures on IT and broadband footprints expansion. And in line with my comments last quarter, we did see capital intensity step up in the second quarter. It was 17.9%. That's still significantly lower than the second quarter last year and reflects the substantial completion of a number of key projects like our One Bill rollout and the Alberta SuperNet build.

As always, our focus on capital spending in the quarter was in large part to support strategic initiatives. Priority spending on these projects accounted for about two-thirds of total capital spending, focused on customer service and network quality, wireless and fiber-to-the-node expansion, and then building out our new services and products.

So in wrapping up, I believe our level of execution in the quarter and throughout the first half of the year has shown steady progress, very much in line with our plans that we laid out and the expectations that we have for the year. Our business trajectory and our outlook continues to be on track, and I can confirm all of our guidance for 2006. I would add that with respect to our EPS guidance for $1.80 to $1.90, as a result of the benefit we saw in the quarter from the federal tax rate change, we do now expect to achieve at least the high end of our guidance range for 2006.

And looking forward, our Q3 operating priorities continued to be focused on generating profitable growth across all our businesses, improving EBITDA flow-through on growth products, and managing the impacts of legacy erosions through customer service and retention initiatives. We'll continue to limit reprice and increase the pace of our cost reduction initiatives. We'll also continue to monitor competitive activity that impacts our market share, and we will take appropriate action where necessary to protect our competitiveness in the marketplace.

Finally, we also remain focused on the various asset review transactions we've announced, and we'll continue to speak about those in future quarters. So with that, Bernard, I guess, we turn it over to the operator for the Q&A period?

Yes. Well, thanks, Siim. Let's now move to Q&A. As always just before getting into this, could I ask you to just restrict yourself to one question to allow other people to ask questions too. So, operator, could you just remind everybody of the procedure to ask questions, and then we will move right into it.

Thank you. [OPERATOR INSTRUCTIONS]

Vince Valentini from TD Newcrest.

Thanks very much. My one question is on share buybacks, and I'm going to come at it from two different angles. First, with better line units trading at about eight times EBITDA vs. BCE closer to five times – I'm wondering how you can justify that gap and whether that forces you to consider selling more of those units to buy back your own shares? And the buyback from the other angle its from a balance sheet perspective, we saw Moody's downgrade your ratings during the quarter, and I noticed your debt EBITDA has bumped up slightly to about 1.86 vs. 1.75 in the quarter. Do you think those balance sheet metrics preclude further share buybacks in the future once this current program is over? Thanks.

Thanks for the question. With respect to our current share buyback program, we have completed about 80% of that project today, so 36 million of about 45 million shares have already been repurchased. And we expect the balance of the repurchase to be concluded shortly after we get into the third quarter.

I think we're comfortable with concluding that program. We did make a sizable distribution of about a 28.5% interest in the trust out to our shareholders. That leaves our ownership position in the trust at 45%, retains the rights we have there. So right now, we are not looking at increasing the -- or selling any additional shares of the trust in the marketplace.

In terms of our debt metrics and the rating agencies, if you recall, the plans that we outlined at the beginning of the year, you know -- we will be receiving 1.3 billion of proceeds on the BGM transaction, 600 million of which we have already received. And on the CGI transaction, we got a billion dollars of cash and then there's 1.250 billion of what I call refinancing cash received on the Bell Aliant trust creation.

So there is $3.5 billion at least of total sources that we have. We'll be using about 1.3 billion of that towards the normal course issuer bid, leaving 2.25 billion. And that will be applied towards debt reduction, essentially 1.250 billion being the refinancing between the Bell Trust and Bell Canada, and then the further $1 billion of debt reduction commitment that we made on the February 1st Investor Day.

So that's a significant amount of refinancing when we look at our debt maturity schedules coming forward. If we just dealt with debt maturities, that would take us into 2007. But I can say that we are looking opportunistically at the possibility of calling some early redemptions of certain amounts of our outstanding debt, and we'll talk to you more about that in due course. But those are our plans. We've distributed, as I say, a sizable stake in the trust back to our shareholders. We're taking appropriate steps to reduce levels of BCE debt. And I think with respect to the metrics overall on the credit side, we're very focused on driving more cost out of the business and reducing CapEx and improving the free cash flow, which I think is going to be very beneficial to the overall credit metrics of the company.

[Thanks].

Peter Rhamey from BMO Capital Markets.

Hi, Peter.

Good morning, Michael. Question for either Michael or George here. In terms of operational inflection points, I noticed in wireless you're still lagging your peers, but nonetheless, you showed, on an adjusted basis, an improvement in results in terms of revenue and EBITDA. And on the NAS side, George, you mentioned that the NAS remains stable, LD improved, local revenues down 4%. So I think, overall, it looks like this represents the high water mark for erosion of your legacy business. So are we in an inflection point? Could you address that through the wireless question and the NAS question or the local legacy business that you have in terms of maybe improved performance on a quarterly basis going forward? Thank you.

Peter, thanks for the question. Let me start with the -- on the NAS. I think it would be premature to make a comment on an inflection point. Clearly, as I say, we are encouraged by the stable result, if you will, quarter-over-quarter. But this is a new area for us and in terms of for our shareholders. And also, we still have some competitive, as you know, restrictions on what we're able to do. So it would be, I think, early to make that comment.

We're obviously going to work hard to try to make what you've talked about happen. But I think it would be too early for investors to assume that or for an analyst to draw that conclusion, I think that's where our instincts and our judgment would be at the moment. On the wireless, I can't make specific comments about our results for another quarter other than to say I would concur with your comments and also your opening comment rather to some peer performance, as I think Siim and Michael both said. We know we have work to do. We now have a 20-year wireless executive operating and running Bell Mobility as of this morning, and I have confidence that our peer performance will improve over time.

Great. Thank you very much.

Thank you. The next question is from Glen Campbell from Merrill Lynch. Please go ahead.

Hi, Glen.

Yes, thanks very much. My question is for Siim, with respect to the headcount reduction that you described, could you talk about how the seasonal and student and consultant headcounts tie into that? Another is, is this a net reduction and could you give us a sense of what's happening with headcounts in those other areas?

Sure. The numbers that I put forward were NAS headcount reductions. So when you look towards the end of the third quarter, that 600 seasonal headcount, which is principally in the network operations area, should begin coming out of the company. We've made pretty good strides, I think, in taking headcount out of our residential services segment and across the corporate segments, including BSP, the corporate center of the company.

We've been careful in the level of incremental headcount that we're taking out in operations. And that's a focus for us in the second half of the year as we will have executed on a majority of our service level improvement initiatives. So we see some significant opportunity there in the second half of the year. I think with the plans that we have across all the business units, we're in a good position to get ourselves into that 3000 to 4000 net reduction target for the year.

George, do you want to talk about what we're doing internally?

Yes. Let me add also, you know, one of the targets we have is we've talked about the number of reduction overall headcount, and we are doing that. We're also making sure that we're vectoring our focus also on our total labor cost. So it may not be seen in the reporting of headcount, but investors should be comfortable that we are also aggressively looking at two other areas of labor we have, which is contract labor and also consultant labor.

And so we're taking, I think it will be fair to say, a little more holistic approach on those two lines as well. And so, although it won't show up in a number in terms of reduction of our FTE, it does drive our labor cost down in total, which Siim was talking about. So that is also another key focus of ours throughout this year and going forward to make sure all labor's [caught] as we're looking at that and making sure that areas where we may have temporary resources those are removed certainly ahead of dealing with some of our full time people. It's also the right cultural thing to do for the organization as well and what we're doing.

Just to help our modeling, can you give us a sense, George, of what the starting point is on the contracting certain labor cost or…

No. I think we're going to do there is say that it's in the cost reductions that Siim's reporting on a quarterly basis, and it does, obviously, flow through on our cost side benefits. But I think getting into specific numbers isn't where we want to go today. And secondly, again, I'm just trying to give the investment community a sense of how granular we are getting on this and also pull all those expenses together, make sure as we pull those labors, we're pulling them where we can pull them with the minimal impact on our customers, first of all.

Okay. Thank you.

John Henderson from Scotia Capital.

Hi, John. How are you?

Good morning. I am well, thanks. A question around wireless, I guess, maybe with two sub parts. First is with Vivo moving to GSM announced this quarter and Sprint delivering on a subject, I guess once the spectrum option is concluded here, what are your thoughts on the need to move kind of in that same direction?

Did you have more, John?

Yes. The second part on wireless is really -- don't take this the wrong way -- you've done a lot of work on trust conversion and so on, I just wondered though, you know, wireless probably generates a bigger tax liability than anything in your business and certainly more free cash flow than anything. And I just -- you know, the valuation of wireless in the market today is probably something like a 10% free cash flow yield, according to your peers, you would have a huge value lift there. Has there been any thought of that as a trust candidate or any other sort of assets in your organization?

Okay. Let me take those two. Look, first on the issue of CDMA, GSM, I think that's an issue that we continue to monitor, continue to track. And I think that issue is essentially going to get resolved by the decisions of large carriers in the US market. And I think we will wait and see how that situation unfolds and then take whatever decisions we need to take in that context. So that's kind of our view on that issue. Clearly, we continue to be in touch with a lot of people and continue to keep an eye on it, but we'll see what unfolds there. That's number one.

Number two, with respect to the issue about wireless and income trust etc., a couple of things here. You know, John, I think it's pretty clear that we have been and continue to be very focused on trying to find ways to create value for our shareholders. You know, I don't think we should ever lose sight of the fact that the real path to durable value creation lies through high-quality execution. That's how you create value, no matter what capital structure you put around a set of assets. The right way, the long-term durable way to create value is to execute at a very high level, and that's the primary focus that we have, and that's clearly a centerpiece of what George is going after and, now the way has joined us in the wireless and across the whole management team, there's a very high focus on that, and you are seeing it beginning to flow through into some of the performance of the company. That's principal number one, and it's really fundamental.

Second, you have seen us, you know, to state the obvious, we have -- I think we have created I think what is the largest business trust in Canada and the creation of Bell life. So clearly, we're alive and responsive to the value creation opportunities, the value surfacing opportunities that exist through an income trust structure, and we continue to look at that situation and to look for others

I would say though that I think decisions with respect to capital structure around specific assets that are at odds with the operating model of the business, an operating model that has more to do with bringing a variety of different services together regardless of the technology that they run on, be they wireline or wireless, and subdividing within that with different capital structures at a time when the customer market is evolving at a direction where more of those things -- where the customer wants more of those things unified and delivered on that basis, be it in the business market and the consumer market, I think what you will not see us do is take a set of financial decisions that are at odds with the operating model, our view of the operating model, of telecommunications in general as it evolves in the future.

So, you know, with respect to that wireless issue, you know, no, I don't think that's a path that we would go down. If there are other opportunities for us to surface value for our shareholders, I can assure you we are going to be all over it.

Thanks very much.

Marje Soova from Goldman Sachs.

Thank you very much. Just wanted to go back to the wireless business for a second and just wondering if you could help us think about, you know, the growth as trajectory? Growth has been down year-over-year. You know, what are the steps that you are taking maybe on brand or marketing standpoint to improve the trajectory going forward, or do you expect to kind of slow down to continue throughout the rest of the year?

And then secondly, in terms of the bottom line on wireless margins, you know, they were down year-over-year in second quarter. Is there anything, you know, for the rest of the year, extraordinary cost from a year ago or, you know, what's the trajectory going forward? And then finally on wireless, in terms of data, is there any numbers you could give in terms of the actual contribution to ARPU? Thanks.

With respect to data, we are not disclosing the data contribution within ARPU. I can say that data is becoming a more significant component of ARPU as we go forward. We are very focused on trying to improve the profitability of our wireless business and our market share. At the same time, we are trying to be disciplined in pricing and be a leader in pricing in the market. So all the things that I commented on in my formal remarks are, you know, the type of actions that we're taking. We continue to build out our EVDO network that now has quite substantial coverage across Ontario and Quebec in our key markets.

Our marketing efforts are focused on trying to bring in higher value customers, and we see that as well as the retention initiatives that we have targeted in improving the overall ARPU base of the company, and the type of step-ups that we have seen in ARPU this quarter are certainly heading in the right direction. As George said, one of the key objectives we have within the wireless business and other businesses is to improve the overall rate of flow-through of incremental revenues to incremental EBITDA each quarter. This quarter, that picked up to about 60%, and that number needs to get higher. So we have to find ways of stimulating ARPU and taking some levels of costs out of the wireless business.

And on margin, Siim?

Yes, in terms of response to your question on margin, I just want to remind you of Siim's comment during his comments leading off the call to be careful about drawing out the comparison on a quarter-over-quarter basis because of the prepaid deferred revenue, one-time item of the second quarter of last year. And if you normalize for that, then I think you see a different and, I think, a truer reflection of the margin performance of the business.

So there is nothing like that expected for the second half? I guess that was my question around that.

No, nothing now is expected for the second half.

Okay. And there is no specific, you know, promotions or any sort of contains that you can point us to toward more kind of detailed granularity around the exact plan for improved growth or margin performance, or is that something we should just wait for third quarter?

You know, I think what you will see is with Wade's presence in the business, some of the other very talented people working in Bell mobility, and the success that they will have with respect to new product and data, different kinds of services, stepping up customer service, etc. -- I think you will see a variety of different actions, some new and interesting things that will do from our market point of view, customer point of view that I think you will see over the coming period a variety of those things, and I think you'll see there through that continued improvement with respect to the growth of that business in a particular profitability of that business.

Ok, thanks. We will stay tuned.

Simon Flannery from Morgan Stanley.

Okay. Thank you. Good morning.

Hi, Simon.

I wanted to just talk about your broadband plans over the next couple of years. You've talked about the fiber-to-the-node deployment on a couple of occasions, but really little update on IPTV, AT&T and Deutsche Telecom, seems you're pushing it back a little bit on some of the technology and software issues. Can you give us perspective of what we can expect from you in the next few quarters? Thanks.

Yes. First of all strategically, it is the intention of the company to enter the IPTV market, as we have talked about in the past and even prior to my arrival. Clearly, we have been pushing that date out. And those are reasons driven by making sure when we go to market, we are completely comfortable that we have a differentiated product in the marketplace, one that we don't have to enter the market, say, the way our competitors have on the local phone business, which is nothing but a discounted product.

We want to enter the market with something differentiated that also ensures that we can monetize that investment for our investors going forward. And clearly, also watching very carefully developments in the US because scale in any of these businesses is critical. And so, following some of the developments in the US, we have talked about, obviously, have impacts on our plans.

The other thing I think investors will should be encouraged by and not miss my comment about our strategy to make sure -- also looking for ways to increase the return on capital on our broadband business, in terms of what we've launched in July, we've launched higher speeds and more, if you will, consistent speed strategy. We also did that with a usage model much more similar to that you have seen in the wireless industry and one that you will see, as we evolve our broadband strategy, depending on market, conditions evolve even further, and that we more brought to our investors in that way in coming quarters.

So those two things, hopefully, will give investors a sense of where we are in IPTV , and obviously, the exact launch of IPTV, our investors will know the day we launch. For the obvious competitive reasons, where the last thing you want us doing is talking about the day we're going to launch the service because I know our competitors are there listening to this call.

Thank you.

Jeffrey Fan from UBS Securities.

Thanks very much. Just a quick housekeeping question for Siim, you've said EPS at the high end for the year $1.80 to $1.90, that includes a $0.03 in Q2 from the tax. Is there an inclusion? How much of that -- is that $0.03 going to continue in the second half of the year as well?

No, that is a one time adjustment. What we do is, once a federal tax rate changes or is enacted, we effectively re-value all of our future tax liabilities on the balance sheet based on the new rate, and the adjustment goes into income in the quarter. That's what we saw with the $0.03 this quarter, so that's one-time.

Okay. And a quick question for George, wanted to get may be a little bit more details on the status of the Quebec market, especially on the video side, you did mention that video was a little bit soft. Can you talk a little bit about some of your efforts, particularly in Quebec and whether this softness is driven by that? And also, on the high speed side, there was some softness in Ontario, but can you talk a little bit about the Quebec market on high speed?

Sure, I'm going to try to pick up both. I think on the video side, as I said, obviously happy, and I imagine the community of investors will be happy with the financial results that we've seen there.

We did move, at the end of last year, to more of a rental model in that business. We believe we need a little more balance on rental and sale as we go forward, and we think that may have had some impact on us with our distribution channels specifically. And so, we're addressing that. And if you will, just turning the dial back a little bit so that we get some more out-rate sales, and, again, there may be some of the market that we are missing. And also, as I mentioned, we launched some new products in the third quarter. So we'd like to obviously, see if we can lift that growth while at the same time maintaining these tremendous financial growth on EBITDA and ARPU and low churn levels.

Specifically to the market of Quebec, we continue with our pricing strategy on DSL, and not in the whole market of Quebec, I want to make sure people are clear. It's in a territory that our competitor Videotron competes in, not where Cogeco is. It's a specific program that recognizes that if we're going to see 30% discounts on voice phone service, then we are going to be competing with that with aggressive DSL pricing.

I indicated where our softness was in our high speed business, and that was in the GTA market. So the inverse would be that, that wasn't what happened in the Montreal market, and so I would say we continue to execute on that strategy and will so until we see what we would call a reasonable discount on the phone business offered by our competitor.

Okay. Thanks.

Dvai Ghose from Genuity Capital Markets.

Yes, thanks very much. Question for George. George, when you arrived at Bell, you suggested the biggest challenge of the company is that every access line you lose has should be replaced by 3 growth customers, so you've got to stem the loss of access lines, stem the margin impact of the loss access lines by cutting cost and increase gross margins.

So what do we see in the quarter, we saw 169,000 residential lines loss and only 156,000 combined growth customers. Now, I know growth is more in Q4 and the loss of lines is more evenly spread out over the year, but how much confidence can that give us about margins, especially given the fact that on the wireless side, this company been talking about major improvements since the last two years, since its billing system issue. I know you have new management, and I am confident on that regard. But, nonetheless, you have disappointed this company for two years.

On the ExpressVu and DSL side, margins are clearly increasing, but as a result your prices increases, it seems the growth is slowing. And DSL in particular is maturing, and ExpressVu is in a mature segment. So how much confidence can you give us that you can actually maintain margins?

Thanks, Dvai. There's a lot of comments on what you said. Let me go back to ground zero, your opening comment. Clearly, when we [lose in that], while I talk quite openly with the investing community that that can be up to $0.80 on the dollar. And if we are only getting flow through of 30% on our growth products, then we need three growth products to offset for the loss of a NAS. So first of all, we need to make sure that our EBITDA on our incremental growth products are comparable to our peers on all segments. Wireless, by one example, Siim's talked about this morning, where we need to get into the 60% range consistently, and obviously that being our biggest area of growth, can help to mitigate that NAS issue that you are talking about.

Secondly, obviously, is making sure also on our traditional base, Dvai, that we are tweaking price where we can there to try to have the offset of $0.80 maybe mitigated somewhat by what we are able to do on the current portfolio we have. I don't agree with your comment at all that the ARPU changes have impacted our net ad performance in the marketplace. In fact, most of those moves were matching our competitors in the marketplace when we did those and -- announce those in February, and I mentioned specifically on the high speed side, you've seen that result in the GT from both us and our competitor. So that's part of the answer.

Secondly -- this one might be third and fourth depending on how many questions you asked me there -- I think, also, I'd be disappointed in your comment if you didn't also address the fact that, you know, a move to a usage base model in our high speed launch services, I think, answers your question of what we may be able to do on incremental margins going forward.

Not under-estimating the challenge we have and don't want to dismiss your comment -- because you are right, there is challenge here -- but I don't share your view that people shouldn't have some confidence in what we are achieving. And finally, having -- knowing the new President of Bell mobility for 20 years, his execution in two places in Canada speak for themselves. And now the results will be what people can measure us on going forward and we look forward to being measured on those wireless results.

Just as a reply though, George, I agree with you about Roger's also increasing price taking, but their internet growth really slowed as well. So I am not saying you lost market share, I am saying the whole market is growing slower

Yes. I agree with that Dvai, but that is what happened, and as a result, it is important that we manage the revenue stream of the 2 million clients we have very carefully to make sure our investors are seeing, as monetized, the type of investment we're making in fiber to the node. But I will say we're seeing increasing appetite of our current customer base to use the product more and more, which is different than -- you can't say a [segment has slowed or the client's] using it more and more, you are more going specifically to the number of new ads. So there are two areas of growth, remember. There's usage and there also is new clients. And we're seeing explosion in usage, and our job is to make sure we monetize that for investors.

Yes, fair point. Thanks a lot.

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

Thank you. The next question is from Jonathan Allen from RBC Capital Markets. Please go ahead.

Thanks very much. Managed to just slip in their under the wire. Just a couple easy questions for you. First of all, as far as the prepaid deactivations, can you quantify the number that were involuntary deactivations of the 16,000? The second question, either for Michael or whoever would like to take this one, with the Telesat and the IPO or sale monetization later this year, was wondering if there is any impact or delay from Industry Canada's announcement to auction off another 29 satellite licenses?

And sorry if I'm taking up the time on the last question, here, but the last question specifically for Michael. Siim addressed some of the free cash flow usage from the proceeds of the various sales and IPO's have done earlier on this year, but looking forward, it looks like you are now at a roughly a 70% dividend payoff ratio going forward. And I'm wondering, on an on going basis, once we are done with this current share buy back program, I was wondering what your view is either on dividends or could we see an extension of share buybacks continuing? Thanks.

Jonathan, I can answer your first question with respect to the deactivations. What we do is deactivate inactive accounts after a period of 240 days on the prepaid side. And this quarter, there was about 45,000 deactivations.You should know that, that is substantially higher than what we would normally see in the quarter, and part of that is that, you know partly, through 2005, we had some promotional opportunities to entice customers that were becoming inactive to keep their subscription current, and there was probably about 25,000 of those included in the 45,000 deactivations on the prepaid side this quarter.

Okay. And, Jonathan, just on your other two questions, you know, on Telesat, we continue to be on track, and we don't think that Industry Canada's call for applications for [formal] positions is something that has a particular impact on the process that we have in mind. If anything we'd probably see opportunity there rather than any things else, but that's not something that would cause us to move off the path that we are on with respect to a transaction on Telesat and IPO, on Telesat in the second half of the year.

And then with respect to your last question on free cash flow uses, you know, what I am going to say there, Jonathan, is, we as I said before, we continue to be very focused on taking steps, every step we can that's consistent with where the business needs to go to surface and generate value for shareholders. I think if you look at our record over the last six or eight months, it's a very significant amount of activity that's going on and a very significant levels of distributions to shareholders.

So we want to get those things done. We want to continue to drive, improve the execution and profitability of the business, and as we are able to do those two things, get those things finished and improve our execution in profitability. Then, I think, you know, that then opens the opportunity for us to assess further actions that we'll continue to be open to, but I'm certainly not going to commit us one way or the other to taking those step. And when we may some further progress on the Telesat transaction, then we'll have more to say with what we're going to do with the proceeds generated from an IPO there.

So I think the most honest answer I can give you there is I think you know what kind of focus we have on this. We're going to stay focused on it, and stay tuned for other actions that we will take as things unfold in the coming periods.

But suffice to say, though, with the current dividend payoff ratio being roughly 70% or so, that's probably a little high for your taste to increase the dividend going forward or could we just probably have to hold of a little while before we see the next increase?

I think dividend decisions get made on the basis of the operating and the overall financial performance of the company, and as those continue to improve, we'll assess what our flexibility is. In the near term, are we expecting something? No, we're not.

Okay. Before Bernard cuts me off, I just want to ask a clarification of Siim. You said the deactivations were 25,000 or 45,000 this quarter?

45,000 this quarter.

Okay, thank you very much.

Okay, thank you, everybody. For those of you who we didn't get to in terms of the questions, please call investor relations. We'd be happy to deal with that during the course of the day. So thanks everybody for joining us.

Thank you.