BCE Inc (BCE) 2006 Q3 法說會逐字稿

Welcome to the Manitoba Telecom Services third quarter 2006 conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on Monday, November 6, 2006, at 2:00 p.m. Eastern Time. I will now turn the conference over to Hugh Harley, Manager of Investor Relations for Manitoba Telecom Services. Please go ahead, sir.

Thank you, Rachel. Good afternoon, everyone, and welcome to our call. MTS's third quarter news release, MD&A and supplementary package were issued earlier today, and are available on our website at MTSAllstream.Com. The Board of Directors today approved a fourth quarter dividend which has been set at $0.65 per share. On today's call are Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Don MacDonald, President of the Enterprise Solutions Division; and Calvin Shepherd, President of the Consumer Markets division.

The comments made on today's conference call contain certain forward-looking information. Material factors or assumptions were applied in drawing conclusions or making a forecast or projection reflected in such forward information. Actual results may differ materially from a conclusion, forecast, or projection in such forward-looking information.

Additional information about such material factors and assumptions can be found in MTS's 2005 annual MD&A and 2006 interim MD&A's which have been filed with SEDAR and which are also available on the Company's website. MTS disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. I'll now turn the call over to Pierre.

Thank you very much, Hugh, and good afternoon, everybody, and thank you for joining our call today. I'm very pleased to be able to report another solid quarter of performance. The financial results in the third quarter and indeed through the first nine months of the year have been quite positive. All of our key financial metrics from continuing operations including revenues, EBITDA, EPS, and free cash flow are tracking in line with our expectations for the full year. These results reflect the focus of our Management team in delivering our outlook and improving the performance of our business.

Some of the key highlights in today's results include--Consolidated EBITDA for the quarter from continuing operation and excluding the directory business of 162.7 million up by 1.1% from a year earlier. Free cash flow from continuing operations of 70.7 million which is 24% higher than in 2005. The fourth quarter cash dividend of $0.65, ranking MTS as one of the highest yielding stocks on the TSX and continuing our long track record of consistently returning cash to our shareholders. And the positive trends we saw in the first half of the year from each of our divisions continued through the third quarter.

The Enterprise Solutions Division has again increased it's EBITDA margin showing a consistent improving trend. The Consumer Division generated strong increases in it's growth services. Wireless customers are up 12% on strong net adds which increased by 44%. High speed Internet customers increased by nearly 17%, and digital television customers excluding our acquisition were up by about 27% from a year earlier with good organic TV net additions in the quarter at approximately 2,900, and that with a large installation backlog which resulted in strong net adds in the month of October. The Q3 results put our market share at approximately 25% in Winnipeg.

We've also added 3,700 TV customers in the third quarter through our acquisition of Valley CableVision, the rural Manitoba cable and Internet provider helping to further solidify our position as the premier provider of communication services in the province. In addition, our annual wireless and Internet back-to-school student campaign showed excellent results this year as we more than doubled the number of customer additions compared to last year to over 5,000. In the residential telephony market, we continue to see the trends we saw in the first half of the year. Third quarter last declines were consistent with the year-over-year changes we saw in Q2. This, despite offering deep discount pricing which is well below the pricing in any of it's other markets and as well, is lower pricing than any other market in Canada.

The Consumer Markets division also continued to build on it's reputation as an innovator introducing Hi-Definition TV services to customers in September as well as E-mail on the TV. Differentiating our value proposition from competitors and continuing to compete with pricing discipline, our hallmarks of our business and ones which we believe will contribute to our success in the marketplace going forward. Another example of the progress we're making is that 73% of our TV customers are also high speed Internet customers. We've seen an increase of this front over the last year and it speaks to the attractiveness of our value proposition and it adds direct implications on our costs since multiple service customers have significantly lower churn rates.

In addition to the improvement in EBITDA margins, the Enterprise Solutions Division continued to advance it's position in the delivery of IP-based solutions. At the end of the quarter, the number of IP PVPM customers had increased to 158, a growth of about 25% since the beginning of this year and reflecting the attractiveness and growing demand for MTS Allstream's innovative next generation IP-based services for business customers. Revenue growth in next generation data connectivity services in the first nine months has also posted solid gains increasing by 54% from a year earlier. Many new contracts were signed over the quarter by our national enterprise division including Greyhound, Franklin Templeton, the government of Newfoundland and Labrador, Hydro One and PRIMUS.

Importantly, we've exercised discipline in our pricing across our markets but in particular, in the enterprise segments. As we've said before, we're not interested in lower negative margin accounts and we fully intend to continue this discipline. Our margin improvement is a reflection of that strategy and to support our efforts, we've hired in the third quarter a new Senior Vice President of Finance in our Enterprise Division with the mandate to ensure our disciplined strategy is indeed delivered.

Recognizing the highly competitive environment across all of our markets, the major focus for this year has been the alignment of our cost structure. The progress to date has been tremendous. In the first nine months of 2006, we've realized end year savings of 69 million. On a run rate basis, we expect this in year savings to total more than 78 million of annualized savings going forward. We've accelerated our program and we expect to be significantly ahead of our original cost reduction program target which was a minimum of 100 million after two years. We expect to reach 120 million in annualized savings by the end of this year, 20 million more than the original minimum target and the year earlier than originally anticipated when the program was launched in late 2005.

We've also enabled and enhanced productivity and worked hard to get our organization to operate as a single integrated Company maximizing synergies, all of which is enabling us to respond much better to the changes in the market. On the regulatory front, we will continue to make the case that in order for truly competitive market forces to take hold and be sustainable, a fair and reliable all sale access regime must be in place. We believe that we're making progress as others have joined to support our position. We do spend a lot of time in Ottawa to ensure our voice is heard and our case, well understood by the regulator and government.

I'd now like to turn to our business review. As you know, together with our Board, we begin the year with the committment to carry out the comprehensive review of our business, aim at strengthening the fundamentals of our operations, aligning our asset portfolio to the core operations and determining the best strategic course for taking the business forward, all in support of delivering long term shareholder value. The progress we've made in strengthening and aligning the fundamentals of the business are significant and evident in the financial performance from continuing operations that we've posted throughout the first nine months of the year.

We've also been evaluating what is core and noncore and we've acted with the divestiture of the directory business which we've sold at the very attractive price of 281 million representing 12 times EBITDA. The transaction closed on October 2, 2006. We've also listed two buildings in Winnipeg for sale, and expect to close the sales over the next three months. Since making those announcements, our review has been focused on evaluating strategic scenarios including potential growth strategies for our business. We're now near completion of our work which was and is obviously done in the context of our industry evolution.

You all know about last week's announcement by the Federal Government on a new tax plan that will affect the taxation of income trust and corporations. As I've said before, we've explored multiple scenarios as part of our review and this announcement does make one of them much less attractive. We believe it is prudent for us and for our shareholders to fully analyze the implications of the government's proposed legislation while continuing to assess our strategic and capital structure alternatives in the context of both the competitive landscape and the proposed tax regime before proceeding. That being said, we expect to provide our strategy and outlook for 2007 as part of our annual investor communication before year-end. And certainly, with three very solid quarters of financial performance, we have a much stronger foundation from which to consider the various alternatives and opportunities before us.

When I take a step back, I believe that much has been accomplished in a very short time frame this year, both operationally to strengthen our fundamental business and within the context of our business review. We've delivered nine months of solid results firmly in line with guidance, improved the profitability and the performance of the enterprise division, not only executed but accelerated our cost reduction program, improved our cash position through a number of initiatives, identified non-core real estate and listed it for sale, sold the directory business at a very attractive price, and continued to deliver one of the highest dividend yield in the Canadian market.

Shareholders, in our opinion, should see by all that has been done that we are committed to running a successful business and maximizing long term shareholder value, notwithstanding what has been done, there's still more to do, including getting to end of job on our business review which we fully intend to complete in the time frame we initially indicated, and we look forward to sharing details along with our outlook for the coming year on an investor call to be held later this year. Thank you and I'll turn it over to Wayne.

Thanks, Pierre and good afternoon, everyone. After nine months, our results are tracking solidly in line with our guidance for 2006. As noted in our earnings release, we have classified the directories business results as discontinued operations on MTS's financial statements. I want to highlight this in particular because I realized that some of the estimates I've seen for our business going into this quarter are still including the directory operations. For accounting purposes, we have been required to effectively remove the directory business from both our reported results as well as our results from continuing operations.

We've also updated our 2006 guidance to exclude our directory operations for the full year. This information is detailed in our earnings release and MD&A. For your convenience, the historic 2006 and 2005 quarterly results have been revised in the supplemental package to exclude the directory's business from reported results as well as results from continuing operations.

On this basis, consolidated results from continuing operations include revenues of 1.437 billion year-to-date against a full year target of 1.885 billion to 1.935 billion. EBITDA, up by 1.1% in the quarter to 162.7 million. Year-to-date EBITDA was 493 million which is up 0.4% from 2005 leaving us well positioned in relation to our annual target of 630 to 655 million. Earnings per share was $0.62 in the quarter and $1.93 year-to-date which is up by 0.5% year-to-date from the same period last year and tracking well versus our target of $2.10 to $2.40 for the year.

The free cash flow from continuing operations has increased by 25% to to 248.9 million through the first nine months reflecting the strong underlying cash flows our business generates, as well as year-over-year reductions in capital expenditures, and so here again, we are solidly on track in relation to our full year expectation of 260 to 285 million. Reported consolidated revenues of 477.9 million decreased by 5.9% from 507.7 million in the third quarter of 2005. Third quarter results from 2005 include a regulatory decision and certain non-reoccurring revenues. If these items are excluded, 2006 third quarter revenues of 477.9 million represent a year-over-year decrease which is more consistent with our year-to-date results which show a 3% decline.

Reported consolidated earnings per share was $0.60 cents in the third quarter versus $0.67 in 2005. Year-to-date reported earnings per share was $1.23 compared with $2.94 in 2005. Included in these results are a number of items that are not from continuing operations which are detailed in our Q3 MD&A. In the quarterly and year-to-date analysis, these items include restructuring costs and positive retroactive amounts flowing from regulatory decisions this year and last year. In addition, the year-to-date variance has also been impacted by a positive tax audit settlement in 2005, tax rate adjustments in 2006, and the gain from the sale of a wireless venture in 2005. I would now like to touch on a few highlights in the quarter which are noteworthy.

In terms of our 2006 financial performance, despite significant pricing pressure in the marketplace, our EBITDA performance has increased by 1.1% in the quarter and year-to-date is up modestly by 0.4%. Enterprise Solutions posted good results again this quarter with revenues of $261.6 million which is basically flat compared with Q2.

Importantly, the division is posting solid performance on the EBITDA line with the third quarter coming in at 49.5 million representing an increase of approximately 3 million from 2005. We've seen very good performance on the cost side and that's translating into margin improvement which has increased significantly this year. In consumer markets, revenues from continuing operations are up modestly by 0.7% to 646.9 million with third quarter revenues down 5 million or 2.3% from the year earlier primarily as a result of a cumulative year-to-date regulatory adjustment recorded in the third quarter of 2005.

Wireless revenues and cellular revenues grew by 13% and 12.4% respectively. We achieved strong year-over-year increases from digital television with revenues up by 39% in the quarter and customers climbing by 27.2%. High speed Internet customers also grew strongly by 16.6% from a year earlier. Third quarter residential line decreases from competitive losses were comparable to Q2 with a year-over-year decline of 8% which continues to track at the high end of our originally expected range for the full year. Overall, from a consolidated perspective, we've delivered three quarters of solid performance from continuing operations. Quarterly revenues have been relatively stable and we've delivered growth in EBITDA despite ongoing repricing churn.

Underlying these results are our ongoing efforts to evolve our business from legacy services to growth services. We continue to make very good progress with our consolidated growth services posting a collective increase of 14% year-over-year representing 62 million in new revenues in 2006. Additionally, we continue to benefit from our substantial accumulated tax deductions over 4 billion in total, including 1.8 billion in tax losses and 2.2 billion in un utilized capital cost allowance. Taken together, these tax deductions will prevent MTS from paying cash taxes until 2014.

Turning to cash flow as I mentioned, we've seen strong results to date this year in free cash flow from continuing operations. With almost 250 million achieved already, we are very confident that we will finish the year solidly in line with our full year guidance of 260 to 285 million. As we have discussed before, we have two additional items not from continuing operations this year. The first is the restructuring costs associated with our cost restructuring program. As Pierre described, the progress to date on reducing our cost through our TP-2 cost reduction program has been very good. We expect to conclude the program with annualized savings of more than $100 million. The associated restructuring cost envelope remains unchanged at 100 million with the majority of these cash flows for these costs largely completed in 2006.

For the end of September, total cash costs expended on the program were approximately 46 million. This, together with the further costs of 20 to 25 million earmarked for the workforce reduction we announced early in October and some additional expenditures yet to occur should put us close to to the 100 million total by year-end. Secondly, our pension solvency funding for 2006 is expected to be approximately 90 to 95 million. We had anticipated that the Federal Governments amended rules that were announced back in May would be in place prior to our last 2006 quarterly payment in October so that solvency funding would be lower in 2006; however given that the new rules are now expected later in the year, we are forecasting reduced solvency funding to start at our next quarterly payment in early 2007.

After including these two items and considering all cash requirements, we still expect to finish the year with no incremental borrowing. We are confident that our dividend, which at approximately 175 million, provides one of the most attractive yields in the market, is fully supported by our strong and consistent cash flows from continuing operations. With cash, we've also now received the proceeds from the directory business and as was mentioned earlier, we expect to close on the real estate sale this quarter. In terms of the use of proceeds from these transactions as part of our business review, we are considering all options to improve the financial position of the Company and enhance shareholder value, including, but not limited to, share buybacks and debt repayments. In due course, we will be sharing more information about the conclusions from our review including cash utilization plans.

So to summarize, we had a very solid quarter. We're firmly on track operationally. Our cost reduction program is succeeding, and the business review is accomplishing it's objectives. We look forward to continuing to build on this progress and our fundamental strength to deliver long term value. Thank you and we would now be pleased to take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Greg MacDonald from National Bank. Please go ahead, sir.

Thanks, good afternoon, guys. The question is on your cost program. I'm wondering, it still appears to me looking at the EBITDA break down that the majority of the cost rationalization is still being experienced at the national division. I'm wondering if you could communicate where you're seeing greater than earlier anticipated opportunities there. You're indicating that your run rate is closing in at around around $120 million annualized right now relative to 100 previously and very clearly you're hitting those targets well beyond or well earlier than you originally anticipated, so I wonder if you can comment a little bit there on where you're seeing that and then secondly, in terms of whether there is a majority of that or a significant portion of that that is being experienced by consolidating operating processes between the incumbent and the CLEC division. Thanks.

Well, thanks, Greg. You're right that the achievement of the cost reductions in 2006 has been in the majority in our enterprise division. Our further opportunities, however, are that we announced earlier are concentrated in our Consumer Markets division where we're targeting approximately 325 headcount reduction which will deliver upwards of $20 million in operating cost savings.

Now, that will, we expect to take out the positions through the end of this year and probably spilling over a little bit into next year, so naturally, the savings will be realized in 2007 in that area, so that is primarily the increase from what we had announced previously. In terms of your second question, the cost reductions really are widespread and include virtually everything, including consolidating similar operations or similar processes to the extent possible wherever we can find duplication, we will target that and bring the costs down accordingly.

Just -- thanks, Wayne, and just two quick follow-ons to that. Number one, can I assume therefore that there will be some severance expense in '07 related to the headcount reduction?

The severance expense will be in the fourth quarter of this year, and that as announced will be approximately in the, around $20 million.

Okay, so then in fact there's no change in severance assumptions; right? These 325 headcounts in the consumer division that are expected to decline, these are not new?

Yes, actually, they are new. Just maybe to take a step back, we did announce in the fourth quarter of last year a cost reduction or voluntary incentive program and that was expensed in the fourth quarter of 2005. The headcount reductions occurred throughout this year and we've got those largely under control and the costs are for the most part spent and the savings in fact being realized.

In the fourth quarter of this year, October 2, in fact, we announced a further 300, so the first one was somewhere around 6 to 700 and now we've targeted a further 300 and those will be reduced through to the end of the year as well as a few into the first quarter of 2007. So those are different and the costs likewise will be in different times.

And the second quick follow-on is if there is widespread consolidation among the operating costs or divisions of both the national division and the consumer division, can we therefore assume that the targeting of non-core assets is now largely complete?

Yes, hi, Greg. This is Pierre. As we said, I think on the directory announcement, you talking about non-core assets?

Yes.

Yes, the material one I think are done and you can conclude that on the non-core assets, at least for material companies or material assets, it is completed.

Okay, thanks very much.

Your next question comes from Glen Campbell from Merrill Lynch. Please go ahead, sir.

Yes, thanks very much. Just following up from the last question. On the strategic review, if press conversion is for all practical purposes off the table and there are no major non- core asset sales left to consider, what's left to be done? Is it mainly sort of housekeeping and clean up or are there major decisions that are being considered other than the ones I've mentioned?

Thank you for your question, Glen. Let me try to answer that. Clearly, as you're saying, following last week's announcement by Minister Flaherty, things have changed and the trust scenario I guess provides less opportunity or advantage for a company like ours; however, a trust scenario was one of many scenarios that we were looking at and we do have a range of opportunities to increase shareholder value, and we've been working on this and we've said many times that everything was on the table, so we have analyzed multiple scenarios and while one is a lot less attractive right now, we're still continuing other work with the goal of increasing long term shareholder value as we come out of the business review.

Now, we expect to have something more to say before year-end and as you've heard or as I've said before in our scheduling and investor call, before year-end, so we can talk to you about how we see 2007 and forward and our strategy around that, so I don't think you expected that I can say more for now. Again, we think it's prudent to see the current events through and both for us and for our shareholders, analyze the implication of last week's announcement as well as some of it's impact on our shareholders and try to get back to you as quickly as possible before year-end.

Okay, thanks. Just a follow-up. The government's going to be auctioning spectrum some point next year or maybe early 2008. Is there a scenario you can see, I mean, with, let's say the right set of rules, where MTS would look at sort of expanding it's wireless operation out of footprint and taking advantage of the new spectrum?

Well, again, you may have seen us providing some opinion in Ottawa about what's coming up in terms of wireless. Wireless is an interesting business, an interesting growth is an interesting business, an interesting growth opportunity in Canada and something that we've been looking at as well.

Now, would it ever conclude into a serious move-in through it? I think there's a whole lot more waters going to flow under the bridge before we get there. I think we've got to see how this is going to be done, what would be the rule, what exactly would be auctioned, and I think we'll see, but I think it's still at least, or close to a year away and no rules have been issued yet and no details either, so more to come there, depending of how the auction proceeds if it does proceed.

So you're not ruling it out at this point?

I'm not and I shouldn't I think like most Telecom players in the country, because it is an opportunity but I think we have to learn and know a whole lot more before we get there.

Okay, thanks very much.

Your next question comes from Rob Goff from Haywood Security. Please go ahead.

Thank you very much. My question would be on the payments that you made to other Telecom providers. I believe you said in the past it's roughly 250 million annually. Could you address what percentage of that would be regulated on pricing? And what trending you might see in the non- regulated pricing services, i.e. Centra?

Yes, I don't have the break out there, Rob, in terms of what would be regulated and not regulated, so I'd have to get back to you on that.

Okay, thank you.

Your next question comes from Dvai Ghose from Genuity Capital. Please go ahead.

Thanks very much. Wayne I was just hoping to go through your free cash flow and dividends sustainability thesis just really quickly because as you report out you reported 249 million of free cash flow but the actual free cash flow is actually about 191 million. I understand your pension solvency payments will probably go down, I doubt your restructuring will go down much because with 4, 5% revenue declines I assume you have to restructure next year as well so not quite sure why you don't put them in continuing operations when you take the advantages, but net-net you also had something like $31 million of one-time gains from regulatory and other decisions so let's say it all nets out with with a lower pension next year.

You produce 191 million of free cash flow, 132 million was spent on dividends, that's a 69% payout ratio and almost exactly 100% on a full year tax basis so I'm not quite sure why you're so comfortable with your dividend payout unless you assuming you're doing no more restructuring charges or the pension solvency is going to zero. Can you just tell me where I'm wrong?

Well, thanks for the question, Dvai. That was quite a bit and I'm not sure that I fully kept up, but let me give it a try and in terms of that. We do have, as you explained, 191 million of free cash flow and if you take out the various one-time items which does include the pension and restructuring and on the other side some regulatory decisions that we've received on the positive side this year, and that gets you to a 248.9 million in free cash flow from continuing operations.

We have those items detailed on page ten of our MD&A for those who would like to look at that more closely, and I think is a fairly good reconciliation and I know it is hard to follow with the number of unusual items that we see in a year like this, but just to get more detailed on your question in terms of the answer, we do expect the pension solvency funding to be reduced next year as the government follows through on their budget submission that they had promised at that time. That would take our funding from somewhere in the $90 million range down to the $40 million range so a very substantial decrease.

You're right in terms of restructuring expenses will continue into next year and on that basis, I can see or understand your comment on that looking something like things that do reoccur; however, we don't expect that to reoccur for in the long term and so we have classified it separately and also to help shareholders to understand just what we are spending on that particular initiative. So when we look at those, the cash flows from that perspective, I think that the one item that you didn't mention would be tax.

Now, as I mentioned earlier, we do have substantial tax deductions that are unutilized that will prevent us from paying income taxes out until 2014, so we continue and will continue for quite some time to save, I guess, or not pay somewhere in the neighborhood of 80 to $100 million in taxes each year, so when you put all of that together, I firmly believe that our dividend is fully supported with our cash flows.

And I think one more element that may be helpful is when we disclose our outlook for 2007 and on, we'll be in the position to give you much more data on our cash projection and in our business projection going forward, so that may be helpful at that time as well.

That would be helpful. Just two real quick follow-ons. The use of proceeds for directories I assume you'll tell us of that time as well in the overall context and a quick operational one. Very strong wireless subscriber growth, nice to see, but only a 1% increase in ARPU, 1.2% is much lower than your peer group nationally. Can you explain why your ARPU growth was less than your peers?

Yes, and you're correct in terms of -- in fact our plan is to put everything together and basically because it all is connected together and all interlink in terms of strategy, outlook, and user procedure, we'll do that all at the same time before year-end. As for wireless I'll let Calvin answer.

Thanks.

Dvai, on the wireless ARPU, I think there's a couple of factors there. One obviously is that we're starting from a very strong ARPU position to begin with, but secondly, we have got a very, a little bit different market here in that we are competing primarily against Rogers and Telus and in particular over the last probably year, year and a half, we've certainly seen much more intensive price competition, in particular from Telus, so we've responded to that really in a very disciplined way, but in a way that we're going to maintain our share and maintain our share of additions as you've seen, but it certainly has limited the amount of upside ARPU growth that we've been able to generate from some of those additions.

Thanks very much. Appreciate it.

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

Yes, thank you. Just a question on your new guidance without directories. How do you treat the proceeds in that guidance? Do you use it to reduce debt or just consider interest proceeds on that or what?

There wouldn't be any interest that is included in the guidance at this point so that the proceeds as Pierre mentioned we'll talk further about that at our investor call, but we wouldn't have made any assumptions with respect to the utilization of the cash in the guidance.

Okay. And this quarter, I guess there was a gain on sale of property. Is that included in your adjusted earnings of $0.62 or could you say how much that was?

The gain on sale of property this quarter would have been in other income. It's fairly small surplus real estate that we had identified a warehouse in Toronto effectively, and that as it is in other income, it is excluded from our EBITDA and also would be excluded from our earnings per share from continuing operations.

Okay. And just a question on the Valley CableVision acquisition. I wonder if you could sort of talk about rationale and whether you would extend the same rationale to something like West Man if it ever came on the market?

Well, let me talk a little bit about Valley Vision. First of all, as you might imagine, it's a pretty small operator, but operating in 13 communities of which three or four I would say are kind of reasonably sized communities, kind of in the Heartland here, so certainly, rural communities but an area that was certainly important to us and an area that has got some pretty good growth in it, so certainly this wasn't what I'd call a real strategic acquisition.

It was more opportunistic an opportunity to pick up a pretty good asset and something that we think we can drive some revenue and some cost savings from as we go forward. In terms of extending that to other cable acquisitions, I think we would have to look at those as the opportunities came up. You mentioned West Man and certainly they are a cable cooperative and a very strong one, but I don't know that they are for sale but certainly if the opportunity came up for that type acquisition, it would be something that we would have to look seriously at.

Thanks very much.

Your next question comes from Jeffrey Fan from UBS Securities.

Thanks very much. I wanted to follow-up on the free cash flow for a second. Maybe a few clarifications here. So Q4 2006, are you expecting Wayne, restructuring payments in the neighborhood of about 55 million for Q4?

Well, there could be restructuring costs up to that amount, yes.

Up to 55 million. And then in the quarter, there was a tax gain, I think, related to Bell West, 16 million. Is that kind of a one-time item?

Yes, effectively, the tax that was paid some time ago. We have some tax planning opportunities that were paying through after recover those taxes.

And then on your comment regarding no incremental borrowing in 2006, I mean -- sorry? Sorry--. Think was a voice in there. Let me just repeat. You mentioned no incremental borrowing expected in 2006. In the quarter, it looks like you did come up with some new debt, issue some new debt in the amount of 25 million. Your debt to total cap actually increased quarter to quarter and then with Q4 you've got 55 million restructuring payments. Is there an assumption in that statement that you are going to use some of the proceeds from your directory sale to support the dividend and hence, no incremental borrowing?

No. That excludes any impact of the directory, so we expect to be cash flow neutral to positive all in, excluding any directory proceeds, so we do have some additional impact primarily what we see in working capital, changes, coming through in the fourth quarter that probably makes up a good part of the difference that you're looking at, and that's primarily one that is just a seasonality issue. Working capital does tend to fluctuate throughout the year, but primarily, the fourth quarter, it's a positive.

Where do you expect to end the year at? Can you just give us some sense for working capital?

Roughly the same as last year.

Okay. Thank you.

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

Yes, both of my questions have been answered. Just a follow-up on Jeff's. So where do you expect net debt to be at, at the end of the year then? It's currently including accounts receivable, I think it's 1.082 billion.

It would be, we expect to see that come in roughly the same as where we were at the beginning of the year. So now that's notwithstanding where we happen to have our proceeds on the directory at the time.

Okay, and are you assuming accounts receivable securitization from that calculation?

That would be an element of debt that we would count in the entire picture, yes.

Okay. And just a follow-up on, you said you're going to sell your real estate business or your real estate in the fourth quarter. How much do you expect to receive from that and what can we model into our, I'm not sure how you account for that for lease back, but how would you account for that next year?

Well, the accounting on sale leaseback, you record the gain and defer it over the term of the lease, so you wouldn't see a big accounting gain on the financial statements. With respect to the proceeds, we're currently in discussions with a prospective purchaser, so I'd prefer not to discuss in detail the dollar figure at this point in time.

And I guess, Wayne, there's no material impact in cost next year because of those.

No.

Okay, thanks.

Your last question comes from Peter MacDonald from JMP Securities. Please go ahead.

Thanks. I have a follow-up question I'd like to ask a question on HD as well. So first, following into your assets maximization comment. It sounds like from your comments that now that the trust window is closed that your efforts have moved more to maximizing shareholder value through operating the asset than it has to selling core assets. Would that be a fair assessment?

Well, let me try to answer that first. Again, we were looking at the trust scenario, but it wasn't the only one. I think we've said many times that we were looking at all of the scenarios so we were doing that and in the attempt of increasing shareholder value, and I think right now we would prefer to stop my answer there and wait until we get to our announcement related to the business review. I wouldn't conclude anything that you are concluding but instead, wait until we are ready to disclose our strategy and plan going forward.

So in December, when you sit down and talk to us, we'll know at that time what your plans are with operating or selling the business?

I expect that we'll be in the position to do that, unless we have some surprises coming from left field.

Okay. Just on the HDTV offering. How is it being received in the market? How many households are you able to -- are able to receive it now, and then can you give me a little bit of understanding on the capacity that's required for HD standard definition high speed data programming guides or whatever else you have to put on your network and then compare that with the capacity that you have within your network as well?

Okay, Peter. Maybe I'll just start with a brief description of how the service works. First, it is a service that we operate over a separate set top and using a separate access line, so a prerequisite to obtaining HD service is that our customers have to have taken our regular, call it, basic MTS TV service and then they can purchase a Hi-Definition set top box we've priced at about $349 I think for the set top plus an installation fee.

That service in terms of capacity, really, we need about 20 megabits of line capacity on the actual access line to deliver HD to the set top, and as a result of that, we have some small percentage of our foot print where customers can get, call it, regular TV but not HD. I think the numbers are approximately, and don't hold me to the exact decimal point here, but we're past about 95% of the homes in Winnipeg with our basic TV service, and if you looked at the number that could get HD with our current offering, it's sort of in the mid to high 80% range that would be able to get an HD service.

So we've launched the service. I think reception from customers has been positive. We haven't positioned it as you might imagine as a big acquisition kind of tactic. It has been launched really with some limited channel line- up initially in response to really request from the customers that we had, and to give them a sense of where we're going and give them access to HD as we go forward, so certainly have launched it very carefully and methodically and ramping it up now, but we only have in the first month or month and a half here, a few hundred customers installed but I think the reception from the customers that have had it has been good and certainly our priority going into next year is to ramp up the number of channels with only I think seven channels at initial launch, obviously we know we have to add some additional channels into the service to meet our customers expectations over the next few months.

Now, Peter, just to come back to your question, and one thing, while I prefer not to comment on your specific scenario, let's just remember that we're working quite hard as a management team here to increase shareholder value in the long run and we have to recognize that regardless of the announcement last week, we are in a strong position for income seeking investors right now, having one of the IS-dividend yielding stock in Canada as well as the 4 billion of tax losses that will enable us not to pay cash taxes before 2014 so -- and with the result of our strengthening in the business, when we look at all of that, that's the basis of which we're looking at other strategic scenarios going forward and how we think we're going to move the business forward and that we're going to discuss with you before year-end.

Okay, thank you.

We have time for one last question from Vince Valentini from TD Newcrest.

Wayne, first of all on restructuring costs, if I'm right I think you're expecting to be around 95 million for full year 2006. In answer to an earlier question you indicated that spending would continue in 2007. Are you indicating that somewhere around that same level as high as 95 million would continue in 2007?

No, Vince, sorry if I wasn't clear, but the total costs of our TP-2 program are 100 million and continue to be. We had thought that we would be around 70 to 80 million in 2006 , so the remaining 20 to 30 million would flow into 2007. Now, when we achieve some of the things we were trying to do earlier than expected, we now believe as announce on October 2, that we can begin the reductions that were targeted there which amount to around 20 million in costs earlier than expected. So if you take the 70 to 80 that we thought we would get done in 2006 and add-on this 20, that gets you in the 90 to 100 million range which is the entire TP-2 program. So when you look at some of the cash, it may spill over a little bit into 2007 but that is the extent of TP-2.

So when we're thinking about full free cash flow, forgetting about recurring free cash flow, we should see a dramatic reduction in restructuring costs in 2007 versus 2006?

With respect to TP-2, yes.

Okay, but what you're hinting here is there could be a TP-3 that would lead to restructuring charges in the same magnitude? Is that what I should be--?

No. Vince, restructuring is something that we continue to look at. I can't really tell you specifics about our 2007 at this point in time, but I would say that the restructuring costs that we're looking at will not be anywhere near as high in 2007 as they are in 2006.

Maybe an easier way to answer that, Vince, is that we're thinking of close to a thousand people really in 2006. I don't think we could take another thousand people next year or the business would be in difficulty if it was that, so magnitude wise I think you can see the difference.

Fair enough. Second thing is on the unused capital cost allowance you mentioned 2.2 billion. Can you just explain to me a little bit where that resides? Is that technically within the consumer or the national division or is it just spread across the country, you can allocate it wherever you want and also do you know the tax rules if an acquirer were to buy MTS, does all of that unused capital cost allowance transfer to the acquirer or does some of it expire worthless?

I don't have the split on that divisions, Vince. Part of it is building up each year because as you know with our income tax losses, we don't take our capital cost reductions each year because we don't need to, so we build our unused capital cost allowance by say 270 million this year because of our capital spending, so it is building up a lot of that over the last couple of years. It's spread across the Company. I think you can probably, on the consumer side is more capital intensive. I don't think if you used kind of the ratio of our capital spending you'd be that far off.

And does it transfer to an acquirer as far as you know?

That I couldn't say for sure in terms of that scenario.

Okay. And related to that, Pierre, can you tell us -- you say there are other options now that trust conversion is off the table. Was selling the entire Company ever one of the options and is that something that could be considered?

Well, again, we've said from day one that we're looking at all scenarios if everything was on the table, so we did look at a full range of opportunities but obviously, I'm not going to comment on this scenario and again, we're all focused on increasing shareholder value and we'll be back to you by year-end with more details on that.

Okay, fair enough. One last thing, sorry, Wayne, is on debt leverage. I mean, you alluded to possibly share buybacks being used with the directory proceeds and possibly even more than that. Is there some sort of debt leverage target or comfort range that management has, you've always been sort of sub-2 times debt to EBITDA in the past. Do you think that in this new world it's possible to go higher than that?

Well, Vince, you're kind of getting into the 2007 outlook again, but I mean, until we discuss that, I would say we haven't changed anything in terms of what we've talked about in the past.

Okay.

I mean, I would continue to use what we have have said and that is that around 40% of capital and being a comfort level.

Great. Thanks, guys.

Gentlemen there are no more further questions at this time. Please continue.

Thanks, Operator. As a reminder, a taped rebroadcast of this call will be available until midnight, November 16, 2006, as well today's call will be archived and available on the investor section of the MTS website. That concludes our call. Once again, thank you for joining us.

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