BCE Inc (BCE) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the MTS AllStream 2008 second quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS.) I would like to remind everyone that this conference call is being recorded today, Monday, August 11, 2008, at 4:00 p.m. Eastern Time.

And I would now like to turn the conference over to Ian Chadsey, Vice President of Investor Relations for MTS. Mr. Chadsey, please go ahead.

Thank you, Patrick. Good afternoon, everyone, and welcome to the call. Earlier today we issued a news release on our second quarter results for 2008. The news release, along with our MD&A and our supplemental information, are now available on our website at MTSallstream.com. I should mention that today, along with releasing our results, our Board of Directors approved the first quarter dividend, which has been set at CAD0.65 per share.

Today's comments may contain forward-looking information relating to the finances, operations and strategies of the Company, including comments on revenue, EBITDA, earnings, cash flow, capital expenditures, sales and marketing activities. These statements are based on assumptions made by the Company and run the risk that our actual results or actions may differ from those anticipated.

The statements made today reflect the assumptions made by MTS as of August 11, 2008, and accordingly are subject to change after that date. MTS disclaims any intention or obligation to update or revise these statements, whether as a result of changing circumstances, changing events, or otherwise. These cautionary statements are made on behalf of each speaker whose remarks contain forward-looking information.

With that, on today's call we have Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; John MacDonald, President of the Enterprise Solutions Division; and Kelvin Shepherd, President of the Consumers Market Division.

With that, I'll turn the call over to Pierre.

Thank you, Ian, and good afternoon, everyone. Thank you for joining us today. Let me begin by saying that we are pleased with our operating and financial performance for the second quarter. We're on track to meet our guidance for 2008, and to date have not been impacted by the negative forecast around the economy. Both our Enterprise and Consumer Markets divisions delivered solid gains and profitable growth in the second quarter. I especially want to highlight our 15.4% increase in growth services revenues in the second quarter. Growth in growth services--being wireless, television, high-speed Internet, and Converged IP products and Unified Communications--has been a key focus for our management team and the foundation of our operating strategy for over two years.

Over that time, we've taken these growth services from 35% of our total revenues to more than 44% at the end of the second quarter. Given this momentum in next-generation services, our strong balance sheet, solid customer relationships, and the expertise of our employees, we are well positioned to capitalize on future opportunities in the fast-evolving Canadian telecom landscape.

And in this regard, we take great pride in the announcement made earlier today that our Consumer Markets division has been awarded the prestigious 2008 Frost and Sullivan Competitive Strategy Leadership Award. Frost and Sullivan is a global consultancy with offices in 21 countries around the world. Their Competitive Strategy Award is presented to a company whose strategy has been innovative or has yielded significant gains in market share during the research period. This award recognizes what we have been saying for quite some time now--that our financial and operating performance, as well as our innovative leadership in products such as MTS TV, is unmatched in North America. This award is confirmation of the exceptional work that Kelvin and his team have been doing over the past several years.

Let me quickly touch on the quarter's highlights. This was our third consecutive quarter of year-over-year revenue growth, with positive contributions coming from both operating divisions. We continued to deliver on our cost reduction targets--year to date, we've achieved CAD20.1 million of savings on an annualized basis, already reaching our annual guidance range for 2008. And we will not stop there. We expect to continue to succeed in aligning our cost structure to our market realities and have launched multiple new initiatives to help us become even more efficient.

Looking forward, we have recently engaged in the redesign of many of our operating processes to assess whether they are properly aligned with our existing products and customer experience targets. I will have more to say on this initiative over the coming quarters.

Now turning to our operating divisions. Our Enterprise Solutions division delivered another solid quarter. Revenues were up over the second quarter of '07 and the first quarter of 2008, while EBITDA remains stable. Revenues from its growth services, most notably, Enterprise Communications and Converged IP services, increased almost 21% in the quarter, reflecting the continuing strong demand for our IP-based offerings. During the quarter, the division won new contracts totaling CAD80.6 million, including major wins with DHL Express, the Bank of Montreal, the City of Winnipeg, Manitoba Hydro, the Alberta Teachers' Association, and BC housing, just to name a few.

Our Enterprise Solutions division remains well positioned to continue on its growth trajectory, as AllStream continues to win new customers as the demand for its IP-based services remains strong, and as it adds the opportunity to continue to win new business at limited incremental cost through a cross-selling initiative across its customer base.

Our Consumer Markets division delivered another quarter of strong performance, with growth services revenue up by 11.4%, while the subscriber growth was up a strong 10.6% over last year's second quarter. The return to more rational wireless pricing in our markets, coupled with MTS delivering the lowest churn in the country, and the wireless penetration in Manitoba being about 50% compared to the Canadian average of about 62% at the end of '07, means that we have in Manitoba the right conditions for years of strong growth in our subscriber base as consumer adoption of wireless expands.

Our high-speed Internet segment also generated solid growth, with a 9% increase in our customer base and year-over-year revenues rising more than 21%. At quarter end, we had more than 172,000 high-speed Internet customers, resulting in an industry-leading market share of about 60% in Manitoba.

In our digital television segment, our customer base increased by over 13% in the quarter and revenues by just over 20% from a year ago. We also continued to perform well in residential telephony. Residential access line losses remained stable for the quarter, with our year-over-year loss being around 3%. This continues the trend of low residential access line losses over the last seven quarters.

Supporting those results is our ability to offer our customers a unique bundle of broadband, home security, television, and wireless services in addition to traditional voice services. Our bundles are a distinct advantage in the Manitoba market, and our customers agree. The numbers of bundles are up 10% this quarter. The total ARPU for these customers also grew by 5% in the second quarter. Overall, we believe that these results continue to represent one of the best performances against competition from cable operators by an incumbent telco in North America.

Before I turn things over to Wayne, I'd like to briefly comment on our participation in the wireless spectrum auction. From the outset, we entered the auction with a clear and disciplined strategy to enable us to maintain our strong balance sheet and current dividend policy. Prior to the start of the auction, Industry Canada said that it expected to raise CAD1.5 billion from the sale of spectrum. And as you now know, the final tally was about CAD4.3 billion. I can tell you that even with the support of private equity partners, we would not have been bidding outside of Manitoba at those prices, as they simply did not fit the returns we were looking for in our business case.

We were successful, however, in strengthening our position in Manitoba by acquiring another 35 megahertz of wireless spectrum covering 1.2 million people across a province of 40.8 million. The spectrum will be used for rolling out new technologies in the coming years. It also provides options and flexibility for aligning our roaming and other wireless business arrangements with the spectrum used by other Canadian carriers. We said we would be disciplined, and we were, buying the Manitoba spectrum at one of the lowest costs for (inaudible) megahertz in Canada.

Two new entrants acquired spectrum in Manitoba and represent potential entrants into our markets if and when they decide to build a network and launch. Based on their public disclosure, we believe that these new entrants will initially focus their efforts on more densely populated areas of the country, and it will take a few years before they establish themselves in the Manitoba wireless marketplace.

But remember that Winnipeg is the most competitive wireless market in Canada from a pricing point of view. And MTS has been competing--and winning--against stiff competition for a long time by offering strong value to its customers, unmatched in-province coverage, and the most extensive bundles of services available in Canada. And as you all know, the large majority of our wireless customers are under contract, and many have wireless as part of their home services bundle with MTS. My point--that we will be ready to face them when and if they enter our markets.

We also see new entrants providing business opportunities nationally for MTS AllStream to consider once the quiet period ends early September. One of those opportunities is the supply of [backout] services coast-to-coast to those new entrants. This represents a material opportunity, like it was when provided the same backout services to [Microstel] nationally.

Once our post-auction review is completed, we will be in a better position to discuss with you our plans and our intentions around share buyback programs.

In summary, we're pleased with our progress and performance so far in 2008, and we are confident that our strong franchise and brand recognition will result in continued growth going forward. We delivered on our guidance for 2007, and we expect to achieve our growth outlook for 2008. Our growth services are expected to continue delivering double-digit growth rates, with our Consumer division remaining one of the best-performing incumbent telcos in North America. In addition, our Enterprise Solutions business achieved a number of milestones and is now revitalized and growing.

Thank you for your time, and I'll now turn the call to Wayne. Wayne?

Thank you, Pierre, and good afternoon, everyone. We're pleased to report another quarter of solid financial results, building on 2.5 years of steady progress. Those who have been on these calls before know that we discuss results from continuing operations because we believe they assist investors in assessing the performance of our Company. Our reported results include a number of items which are not from continuing operations, such as the cost of our restructuring over the last 2.5 years. These items are outlined in our second quarter results news release and MD&A.

Also as a reminder to those who model our financials, we plan to discontinue the segmented reporting we make on a geographic basis by the end of 2008. It simply no longer reflects accurately how we operate the business. We now segment by customer, regardless of geography, assigning consumers and small business to the Consumer Markets division and the larger business customers to Enterprise Solutions division.

EBITDA from continuing operations in the second quarter of 2008 was CAD171.3 million, 0.5% higher than the second quarter of 2007. Earnings per share from continuing operations was CAD0.81, up by CAD0.02 from the same period in 2007, and in line with our guidance. Revenue from continuing operations for the second quarter was CAD486.4 million, up by 2.6%. This result was driven by strong increases in our growth services revenues, which were up by 15.4% in the second quarter. Revenues were higher on a year-over-year basis for the third consecutive quarter.

We are pleased with the steady improvement of our Enterprise Solutions division, with revenues up 3.2% in the second quarter, the third consecutive quarter of year-over-year growth. The stronger performance demonstrates the growing demand for this division's products and services. Next-generation data services revenues, which include Converged IP and Unified Communications services, achieved a strong 20.7% year-over-year growth in the second quarter, with Converged IP services revenues up by 12.2% and Unified Communications services revenues up by 39%. And IP VPN customers are up 33% from the same quarter last year.

Overall, Enterprise Solutions generated over CAD18.8 million of incremental revenues from its growth services products. This strong performance in growth services revenues led to overall growth for the third quarter in a row. With this growth, the Enterprise Solutions division is on track to meet our 1% to 3% target range for revenue and EBITDA growth for the entire year.

In our Consumer Markets division, wireless revenues grew 6% for the quarter and 8.4% year to date on the strength of 10.6% growth in new cellular customers since the second quarter of 2007. Churn for the quarter was 1.3% on a blended basis. The overall increase in subscribers helped offset a 2.1% decrease in overall average revenue per user at CAD56.46 for the first six months of 2008. The decrease in average revenue per customer arose mostly from a reduction in wholesale revenues and by our success with more aggressive rate plans in the fourth quarter of 2007, as we explained in our Q1 2008 call. These rate plans have been discontinued.

You should note that Manitoba Wireless represents about 25% of our total cash flows. Our high-speed Internet revenues also showed significant growth, with consumer Internet revenues up 21.4% year over year. This increase in revenues was driven by an increase in new subscribers of 9% since the second quarter of 2007, along with an 11% increase in average monthly revenue per subscriber.

Our digital television services continued their strong growth, with revenues up by 20.2% in the second quarter, driven by a healthy 13.2% increase in our customer base and a 7.8% increase in ARPU to CAD50.80. Net adds were also ahead in Q2 compared to last year by 22%, for a total of over 80,000 installed subscribers.

Looking ahead, we expect the positive trends experienced in our Consumer Markets division will continue, with near double-digit growth in wireless subscribers and solid double-digit subscriber growth in both high-speed Internet and digital TV for the full 2008 year. Revenues from these growth services are expected to account for approximately 47% of total Consumer division revenues in 2008.

Legacy declines in the second quarter continued flattening out with only a 3.3% decline in local services lines compared to last year. This confirms that we've made significant progress stabilizing our legacy business in our Consumer Markets division while generating solid margins and delivering the best performance in Canada. From the strength of our year-over-year increase of 15.4% on growth revenue, our proportion of total revenues attributable to growth services hit 44.2% in the second quarter, getting close to our annual objective of 45% for this year. As the percentage of revenues from our growth services continues to grow, the impact from the decrease in legacy services revenues will continue to diminish, which should strengthen our overall performance.

Today, MTS is operating with a positive revenue growth outlook and strong positive momentum in both divisions. EBITDA is also growing, demonstrating that we are disciplined on our cost structures as well.

Before reviewing our cost savings and capital expenditures, I want to cover off the one-time wireless charges. We incurred CAD10.3 million in expenses related to our review of the opportunities arising from the AWS spectrum auction and the costs associated with transitioning certain wireless services agreements away from Bell Mobility to other providers for our own platforms. As disclosed, in Q1 2008, we took steps to terminate certain wireless alliance agreements with Bell Mobility, in accordance with the terms of these agreements. We have negotiated a transition agreement with Bell Mobility that ensures the continuity of service for our wireless customers in Manitoba and are finalizing terms with new suppliers to replace the services covered by those agreements by transitioning these services to our wireless platform. This transition relates to agreements dealing with the supply of certain handsets and the provision of some wireless applications that we are transitioning to the same or new suppliers and the applications to our own or new wireless platform. Our work has been underway for many months and has not been customer-affecting. I want to note that this transition does not impact our roaming on the Bell Canada network, and the same for Bell on the MTS Mobility network.

We now have a better view of the costs related to this transition and to our participation in the spectrum auction. We have incurred CAD10.3 million for AWS auction costs and transition costs, and anticipate incurring a total of CAD40 million to CAD50 million, including this CAD10.3 million, over the next two years. We are disputing certain costs being charged by Bell Mobility that relate to transitioning away from Bell Mobility and are of the opinion that such costs are recoverable from them. We have commenced formal proceedings in accordance with the dispute resolution mechanisms in our agreement.

This transition away from Bell Mobility and to our own wireless platform is not expected to impact our operating cost structure or wireless EBITDA, and will give us additional flexibility in providing services to our customers, in particular as we look at the rapidly changing landscape in Canadian telecom.

On the expense front, we are continuing to work diligently on aligning our cost structures to the realities of the market by identifying and executing on potential efficiencies throughout both our divisions. Our target for 2008 in cost savings is CAD20 million to CAD30 million. With the second quarter results, we have achieved a total of CAD20 million of annualized savings year to date and have already reached the lower end of our 2008 target range. I believe this reflects our ability to take out costs on an ongoing basis while improving our operating performance. We expect to continue to achieve savings by gaining new efficiencies organizationally and through our decreasing usage of incumbent networks.

Capital expenditures totaled 70.1 for the quarter and included some timing differences which places us ahead year to date by CAD23 million compared to last year. For 2008, we continue to target a capital intensity of 14% to 15% for the year, in line with our 2007 expenditures. This is below the levels that you're seeing at other telcos, as we continue to benefit from the significant investments in state-of-the-art networks that we have made within both divisions in recent years.

Free cash flow from continuing operations for the second quarter was CAD72.4 million, compared to CAD88.6 million in Q2 2007. For 2008, we are expecting free cash flow of between CAD250 million and CAD280 million. This covers all cash requirements, including nonrecurring items like restructuring costs, pension solvency payments, and the wireless transition charges. Our wireless spectrum purchase of 35 megahertz will be funded by a combination of free cash flow and incremental borrowing from our existing borrowing facilities.

Additionally, we have unused and available tax deductions that will shelter us from paying cash taxes until 2014, which will have a continuing positive impact on cash flow.

With our continuing strong results and positive outlook, the Board of Directors has declared a third quarter 2008 cash dividend of CAD0.65 per share, which is payable on October 15, 2008, to shareholders of record on September 15, 2008. On an annualized basis, our dividend ranks as one of the highest-yielding stocks on the Toronto Stock Exchange.

Thank you for your time and attention today. We'll be pleased to answer any questions you may have. Operator, please open up the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from Greg MacDonald of National Bank Financial. Please proceed.

Thanks. Good afternoon, you guy. Can I ask a quick housekeeping question before a more detailed question? It's to Wayne. Can you confirm that the CAD70 million in notes payable on the balance sheet is in fact part of that revolving credit facility that you have broken out in detail on page 12 of the MD&A?

That's right.

Okay. Thanks. I thought so. And then secondly, as for more detail, your cost efficiency program appears to be as you indicated. You're running ahead of expectations. It looks to me like minimum, you're going to hit the mid end of that range--probably more like the high end, possibly higher than that. So I wonder if you just might indicate--I'm not looking for a new target range--but indicate whether it's possible that you could beat that target range and talk a little bit about where you're getting the success year to date.

And then secondly, I'll note that despite that target range that you're hitting, the margin on the Enterprise side of the business is down 100 basis points sequentially. I know there are upfront costs that are associated often with large contract wins, and you have spoken about some of those. That would suggest that the margin weakness, there might be a bit of a temporary aspect to that. I wonder if you might comment a little bit about margin expectations on the Enterprise side of the business, especially since you tend to be seasonally weaker in the second half relative to the first half. Thanks.

Okay. With respect to the cost efficiencies, we do, we have targeted CAD20 million to CAD30 million in annualized costs, and it is part of our targets is to get to those as early as you can in the year, because then you benefit a little bit in the year that you achieve them as well. So it was by intention that we hit the low end of our target range early. And there still are a few more things that we're working on. But I wouldn't expect a huge increase in what we've targeted. I would think that the range is what we continue to expect.

When we look at the impact on margins, as you know, there are pressures in the telecommunications industry on margins and costs and pricing and so on, and so we, like all other players in this market, need to continue to work hard and to succeed at our cost reductions. And we think that we have done that in keeping our margins basically flat over last year, I think is, I believe, a pretty solid achievement. Now, we have, as you noted, some typically seen lower margins in the latter half of the year. We're not anticipating that that's going to occur this year. I think what you've seen is probably--you know, there's more expenses in the fourth quarter. I would probably look more towards the annual margins than the amount you're seeing each quarter, because it can swing by a few points one way or another just because we happened to incur some expenses in one quarter that only happen once during the year rather than evenly over the four quarters.

Okay, just to reiterate in a nutshell, you're looking for flat Enterprise margins year over year relative to last year?

Yes.

Thank you very much.

Your next question comes from John Henderson of Scotia Capital. Please proceed.

Yes, thanks. I have a question on the wireless ARPU erosion. It looked like it was down 4% or a little more in the quarter. Can you comment whether that has settled out now, and what the--is it really driven by competitive forces in the quarter, and is that (inaudible), or is it a decrease in roaming revenue that is likely to continue with the high C-dollar and tough economy, that sort of thing?

Maybe I can give you the historical perspective, and Kelvin can maybe give you a bit of an outlook as to what he sees going forward. But with respect to the in-quarter ARPU decrease, it was about 3%. And as we noted, that's coming from a reduction in our wholesale revenues, and as well as some additional customers that we took on in the fourth quarter and early part of the first quarter that were in price points that were specific to our market, where they were, there was a few players, including us, who had a CAD10.00 plan in the market, which has subsequently been taken out. So there's good and bad to that, in that we added some customers who probably weren't otherwise there, but, and so we added a number of customers and are happy about that. But there is a negative impact on ARPU that was the trade-off. I think when you look at our customer growth year over year, which includes this year, the majority of that time was when the CAD10.00 plan had already been removed, and we still had 10.6% growth. I think that shows a pretty strong performance on the wireless side.

I don't know if I have a whole lot to add to that, Wayne. I guess some, I guess a little bit more rationality appears to be returning to the local market in terms of pricing. And certainly pricing at this point is back to where it was, sort of pre-introduction of the CAD10.00 plan. So there's some impact on ARPU, as you have that base of customers that were on lower-priced promotional plans kind of pulling through, but I think to some extent that's mitigated as we go forward and we see some of the pricing action we've taken reflected in ARPU going forward.

So that occurred, and the competition, or the pricing stabilization occurred in Q2. Can you also comment as to when, what your wireless data ARPU levels are, and how much that increased year over year?

Wayne, do you have that?

Yes. The increase in wireless data was about 60%, I believe, year over year, so we're seeing really good growth from that aspect. We haven't itemized the ARPU, though, with respect to that at this point. One other thing I would mention too, on wireless, is that looking at our July results, we were particularly strong in July, so we definitely see continuing growth in that market. And that 8% year to date, I think it compares fairly well with what others are seeing, and that the July results gives us comfort that that's going to continue.

Thanks very much.

Your next question comes from Andrew Calder of RBC Capital Markets. Please proceed.

Hi. Thank you very much. My question is about the charge for the transition for Bell Mobility facilities. You mentioned doing this does not change the operating cost structure, but only improves the flexibility. It seems like a high cost for flexibility, and particularly in light of your current success with the current system. So I was just hoping you could expand on that transition. Was this a decision made in anticipation of going national with wireless, or is this a final decision? Can you get back in the deal with Bell? And can you just describe more about the flexibility benefits and the nature of the one-time costs?

Yes, Andrew, I'm going to try to give you an answer, but unfortunately, some parts of the question you're asking we can't answer because we're in the quiet period, and answering plans going forward, we're not allowed to do that, at least not until September. But let me try to give you an answer.

First, the costs that you're seeing there, remember that if you read our MD&A, part of those costs--in fact, the majority of those costs--we are currently in legal proceedings, as we disagree with certain of those costs. So we expect that some of them will be recoverable, so it's not necessarily the amount. Right now the CAD40 million to CAD50 million is not necessarily the amount that will happen in the years to come. That's the first thing.

Secondly, we started the disclosure on this in the first quarter. The agreements in question add the end date that adds back, and we were already in discussion a few years ago, in fact, since 2006, with Bell on them. And indeed, looking at the spectrum auction rules, there was part of those rules, we had to separate from Bell to bid from the auction, or at least live with the rules that were put forward, which we did. So at the end of the day, we did what we had to do. We were prudent in how we acted, and we'll be able to comment more going forward as we exit the quiet period and as this situation unfolds.

Okay. That's helpful, and I can understand certain constraints that you have. Also, I did have a clarifying question. Wayne, you mentioned the wireless business was 25% of cash flows, but I wanted to clarify if you were speaking in terms of Consumer, or was that MTS as a whole?

Well, I was speaking specifically about our wireless business, which does have some customers in both divisions. You're right. But the majority of it would be in the Consumer division.

Oh, sorry. I thought you had a data point, 25% of the wireless business was 25% of total cash flows? That was of Consumer?

No, that would have been of the entire Company.

Okay. Thank you very much.

Your next question comes from Vince Valentini of TD Newcrest. Please proceed.

Yes, thanks. A couple more wireless questions. First of all, is there any of your commitment to purchase AWS spectrum already factored into the net debt at the end of the second quarter?

The spectrum purchase, the first payment was in August, so there wouldn't be any impact on the spectrum purchase included in the Q2 results.

Okay, great. And then to clarify your answer to the last question, are you not saying the CAD40 million to CAD50 million is the high end? Or if I can interpret it this way, the CAD40 million to CAD50 million is what Bell would say you owe them for these transitions, but your interpretation of it could lead to a lower amount?

I'm not sure what Bell would say, because I'm not sure what numbers they would be looking at exactly. But what I can say is the CAD40 million to CAD50 million best estimates right now, in there is indeed an amount that is under dispute. So it could indeed be lower.

Okay. And I'm a little fuzzy on who you transitioned to. Is there a main supplier that you would use for handsets or other sorts of technology? If it doesn't involve roaming, I'm not sure who these other suppliers are.

Without getting to a lot of detail, just think about handset suppliers, so you're moving to having arrangement with various companies selling handsets or a distributor, or/and a distributor. Same thing on some of the platforms and application. You could build your own platform or buy it directly from an application provider.

Okay. I get you. That makes a little more sense now. And last, to switch gears for a quick one on the AllStream segment, which I know you don't talk to specifically anymore, but you're still giving us the numbers. If I back out the Rogers and AT&T amounts and also back out the CAD4 million contribution from acquisitions, I get 4% revenue growth for the national segment in the second quarter. There is an impressive growth rate, and I think the best you've done in some time. Can you give us any context of how that breaks out between volume and price and what some of the current trends are in the Enterprise market? Thanks.

I can give you maybe some of the numbers, and John can fill you in on what he's seeing in the market. But our, it's coming from our growth services, which are primarily Unified Communications and Converged IP, where I mentioned previously that we're seeing 12% growth in our Converged IP portfolio and 39% growth in our Unified Communications portfolio. So that's what's driving it, primarily, and as well, because the growth services are becoming a much higher percentage of our overall revenue base, the declines in those services are having a diminishing impact on our overall results which--as we've been saying for a couple of quarters now--leads us to that overall growth number that you're talking about.

Yes, and if I just add to what Wayne is saying, we see it mostly as being volume-related, as we are signing up new customers, and existing customers are buying more products and services from us. We believe we've got a world-class MPLS offer that we continue to enhance with security offers, more types of service, and customers recognize that, and they're actually buying more of that service.

Also, being able to bundle together, tearing a piece from what Kelvin is doing, looking at the linkages between Professional Services Engagements, Unified Communications, and Converged IP, and in the Province of Manitoba, wireless as well, are all things that are becoming more part of a complete solution. And so we're seeing great success and traction in that regard as well.

Okay. Thanks.

Your next question comes from Jeff Fan of UBS Securities. Please proceed.

Thanks very much. I do want to follow up on Vince's question regarding the transition costs of CAD40 million to CAD50 million. I guess I'm just trying to get some clarification as to what the Bell Mobility arrangements originally, and how they were structured between you and them, and how the payment terms were structured, and what has changed, and how that will change going forward as you bring all that stuff in-house. I'm not clear as to why the operating cost going forward isn't going to go up, and I guess what the CAD40 million to CAD50 million, what exactly are you spending this on? Are you bringing a lot of these application developers in-house now? Are you doing a lot of these apps yourself? Just trying to get a better understanding of that. That would be great. Thanks.

Yes, let me try to answer it without getting into too much detail here. The CAD40 million to CAD50 million of projected costs includes our own transition cost and new platforms, of building new platform or moving to new platforms in the case of applications and tools. It includes charges that are under dispute with Bell, and as well includes some costs associated with the AWS auction. So these are the categories, and in terms of operating costs, with such as our operating costs--and Wayne can answer better than I can--but we're talking about the price of handsets, we're talking about costs to operate platforms and things like that. And the pricing in the market, probably some handsets will be more expensive. Some others will be cheaper. And that's started already, so we already see a bit of what's going to happen and what we're going to face in the market.

And the statement we're making is that right now from what we see, we don't see major changes into our operating costs around wireless nor margin, and again, we're talking about supply of handsets and supply of application and tools. Other costs are under dispute, and those ones will get results once we resolve them through whatever legal proceedings that we've started.

Jeff, I would just make sure you understand that transition costs are nonrecurring. They're one-time and therefore don't impact our cost structure going forward. And the reason why our cost structure going forward is going to be roughly the same as it is now is quite simply that our arrangements with Bell were on commercial terms, and that basic market value for those services. And so when we go to a transition to other suppliers, it's not a surprise that those other suppliers are charging about the same amounts as we see with respect to Bell, as Pierre's getting at. So it wasn't that we were getting a below-market cost by virtue of our relationship with Bell. It's just providing, they provided services on commercial terms.

So I guess building a new platform and tools, does that mean you're going to be hiring your own R&D staff to do all this? It sounds like you're still going with a third-party supplier, which is why we're a bit surprised that there is this transition cost.

Well, Jeff, in some cases there will be other suppliers that we're getting an application or platform or, in some cases, it may be us doing that ourselves. But either way, we would have been charged our share of the costs when we were with Bell, and now we'll pay a different supplier or we'll have the costs in-house. But either way, the costs are what they're relatively going to be going forward. So our wireless margins stay about the same.

The transition cost is a totally separate issue, and it's really getting from Point A to Point B. And that, as Pierre is mentioning, we have some costs that are under dispute, and so we're going to follow that process that we've started to recover those costs, and we'll see where that takes us.

And Jeff, the majority of these costs are under dispute, so that's why the amount may look big, but these costs are under dispute indeed. So they're not the cost, all of it, at least, are not the cost of building our own platforms.

Okay. Thank you.

Your next question comes from Peter MacDonald of GMP Securities. Please proceed.

Thanks. I also have questions on the transition costs. Can you give us the actual breakdown on the CAD10.3 million and the CAD40 million to CAD50 million between the three categories that you gave us?

No, we're not providing that detail at this point in time.

And the costs in dispute with Bell. Are those break fee costs, or are they related to something else?

I would say they're for services in the transition period. We can't really say too much about it, as it's a matter that's under dispute, as Pierre is mentioning, and through a process that is formal and we'd rather not disclose a lot of detail about it at this point.

And when you originally told us about the breaking of the agreement with Bell going into the auction, did you know there would be costs at that point in time?

We know that there's going to be costs for transition, and I think, obviously, the costs that are under dispute, we would have had a very different view on what those costs should be than Bell does, and that's why we're disputing them.

I think just to be clear, you're using the word "break" here, "break fee," "breaking an agreement." We didn't break any agreement, and that's one of the matters in dispute indeed. So on that side, there's no breaking of agreement. I think what you have to look at also is that in Q1, we disclosed that we had taken some action around the Bell agreement. In fact, some of these things were under discussion for over two years, and now we have a better view on the situation, and that's firmed up over the past few months, as well as our own costs recently. And we're now disclosing what we have as part of the disclosure following our first quarter disclosure, which was basically at that time in action. Now we are following up with a better estimate of cost, and we'll see if the matter in dispute will be resolved one way or another.

But again, we're not breaking any agreements.

Okay. I think the issue here is we're, the answers all seem very vague, and CAD40 million to CAD50 million is a pretty material number. So what I'm trying to--I mean, if there could be some level of greater clarity, it would help us understand. Is there a surprise number that you received this quarter that all of a sudden you didn't realize you had before? You talk about having to build out platforms. You would have known that previously. So I'm just trying to compartmentalize where the costs of this CAD40 million to CAD50 million actually fall into, and I'm just not getting any comfort in that.

Yes. Sorry the answers are vague, because we can't give you a whole lot of details around them other than telling you a few things. First, that the majority of these costs are in dispute. That gives you an idea of it. Secondly, the CAD40 million to CAD50 million is an estimate over two years, and as a one-time charge. And it's an estimate of various costs of transitioning away from Bell or building our own platforms, and some costs linked with the AWS spectrum. But I think it's pretty clear in terms of the majority of the costs being in dispute linked with this transition. They're not necessarily our own costs that we're going to incur in the transition to create new supply arrangements.

Okay. Thank you.

Your next question comes from Sanford Lee of Genuity Capital Markets. Please proceed.

Hi. Good afternoon. I have a couple of quick questions on the wireless side. Now, if you're assuming that the wireless free cash flow is over 25% in total, I've done some back-of-the-envelope calculations, and maybe you can just confirm if I'm correct in some of these numbers I'm going to say. So if we take your unlevered free cash flow as EBITDA minus CapEx and this excludes the (inaudible) subsidy, I'm doing it on 2007 numbers. It's 655 (inaudible) minus the CapEx number, and I get an unlevered free cash consolidated to 339. If I take 25% of that number, I get CAD85 million. And then if I assume that MTS is wireless capped in sales, as you know, around the national average, we'll say 14%, I've got that at CAD38 million, I derive an EBITDA figure of CAD47 million. And if I do the CAD47 million of 2007 EBITDA implied over the CAD269 million revenue, it's only a margin of 17%. Am I doing something totally wrong here? So that's my first question, if you can confirm whether my methodology is correct or incorrect.

The second question--sorry for taking so long here--but you also mentioned, Pierre, that you don't expect wireless AWS new entrants to enter Manitoba for some time. And I'm just wondering what you're basing on that. You mentioned what's been said to date, which basically is nothing, because no one can actually say anything at this point. So can you please answer those issues--why you don't expect wireless new entrants are going to focus on Manitoba? Is it because the margins are so low?

No, I think that the first, there were some public disclosures in terms of where new entrants would concentrate. I think I've read it in the paper, so I think there was on that side. And I think if you look at the economics of the wireless business and our own projections, or whoever else, Manitoba is probably the most competitive market in the country with the lowest pricing in the country and with a small density of population. It is not, in my view, at least economical for a new entrant to launch in a market like this.

However, if they come here, we will be ready, no doubt. I'm just referring you to Micro selling Clearnet and the fact that I have not looked, not only at Manitoba, but at smaller provinces and concentrated in higher density area where they can operate a network with much more potential customers to put on. Whatever their choice or not, or whether they follow what they've disclosed up to now or not, it's their choice. And if they come here, we will be ready, and they will have to compete with us, Telus, and Rogers.

Right. And that's just sort of interesting that you mentioned that Manitoba is one of the most competitive, but you only have two competitors at present, and is it because it's--I'm just wondering why you expect them, other incumbents--or, I'm sorry, other AWS new entrants--not to come in considering from a number of competitors perspective.

Again, it's their choice. It's pure economics and density of population.

I understand that. Okay.

I'd like Wayne to answer the other one.

On the free cash flow, I'm not sure that I followed the detail, and if this answer doesn't suffice, we can, we're happy to follow up offline with you. But the way I would look at it is perhaps a little more simpler. You see what our wireless revenues are, and if what we've said in the past, that our margins on wireless are in the 50% to 60% range, and then if you look at the deferred wireless cost, the cost of acquisition that is shown on our free cash flow statement, and then you factor in our capital expenditures, which we talked about in the context of 14% to 15% of revenues, you would result in a free cash flow number from wireless which, when you compare it to the overall free cash flow, which was about CAD258 million last year, or CAD250 million to CAD280 million is our guidance for this year, if you take the percentage there, you would get somewhere in the 25% range.

I see what you're doing there. I was trying to do some back (inaudible). I think I would like to go offline in regards to that.

Sure. In regard to that.

(Inaudible).

Your next question comes from Peter Rhamey of BMO Capital Markets. Please proceed.

Yes, two questions. The first question, collective agreement. I'm not sure you've addressed that in the past, but certainly, could you benchmark, perhaps Wayne or Pierre, how this agreement, contract to your prior agreement, just the flexibility to outsource or reduce costs on a go-forward basis?

And as well, the second question would be more operational. You had the seasonal uptick in the line, but it's a bit larger than last year, and I'm wondering what the undercurrent there is in terms of residential line on this case being during the quarter, whether you were more successful at win-backs during the quarter or not? Thank you.

Let me just try to answer the question of agreements one. First, we're pretty happy to have renegotiated with our five union partners. The agreements over the last 18 months, that was quite a task, and showed a whole lot of collaboration between everybody. But I don't have specific numbers on it, other than what you see reflecting on our guidance in terms of total performance of the business. But also to say that we think that what has been negotiated between our various union partners and the Company, ensured that, are the good step into getting the Company to remain competitive and have a cost structure that's aligned to its market. So I think they were good steps. There were a lot of discussion in terms of the Company and what it needed to succeed, and I think we made good progress there.

The full impact of the new agreements was in the quarter, or is that yet to come?

Well, the costs for the collective agreements would be reflected in our salaries and benefits over this period of the contract. So the contract had just ended, so there really wouldn't have been that much impact in the first couple of quarters of this year. So it would be more so going forward.

And so what I hear from Pierre is there should be no change in trend at a very high level?

Yes, I think that's fair to say, that the cost increases or wage increases aren't out of line with what we're seeing in other businesses.

So up from the level that we saw in the previous round of contracts? Would it be fair to say it's between (inaudible) percent?

Well, I think it's a combination. If you're looking at overall costs, we have, there's always a wage increase when you look at collective agreements. But then we have some flexibilities to manage our costs, including implementing efficiencies that we have to keep our business competitive. So it's a combination of that. We don't expect to see cost increases, and I think that when you look at the bigger picture, that we are managing our margins to be the same as in prior years, and so that we can continue to see the growth in revenues fall to the bottom line.

And if our wage increases are in the second quarter, in the first and the second quarter, I have to assume.

Great. Thank you. And the second question on line losses?

Yes, the line losses were a little better than the corresponding quarter last year. The increase in seasonal lines was about the same as prior year, somewhere around 9,000. So the residential line losses are still in line with where we've seen in the last seven quarters. But I have a little bit of an improvement over the prior year.

Very good. Thank you.

Your next question comes from Glen Campbell of Merrill Lynch. Please proceed.

Yes, thanks very much. A question on wireless. HSPA conversion--it's been talked a lot about by your telco peers. If you elect to go that route, would the cost of that, is that included in these wireless transition costs that you're talking about, or would that be on top?

I'm not sure it would be on top, because right now we don't know exactly what they would do, and there hasn't been an announcement, really. So depending on the announcement, we'd create additional costs, or would impact some of these costs. It's hard for us to make a call right now. We've been looking at this for a while, and what would it mean for our business, but clearly we're not driving this. You know, if Bell and Nortel decided to go HSPA or something else, at that point, we're going to have to look at our option and see what type of transition they're contemplating and what exactly they're contemplating of doing. So it's a bit hard to give any ideas of the numbers. It would potentially impact the numbers we gave you and would probably add to it to some degree, depending on exactly what we're talking about here.

Okay, thanks. And I have a follow-up on the margins in the Enterprise segment. Could you give us your sense of about where those margins might settle in the longer term? You've been making decent gains on the revenue side. Margins have been creeping up a little bit lately. Could you talk about where they might go to over the next two to three years?

Well, I think in the short term, probably holding our margins where they are. And in the long term, there is some potential as we focus on efficiencies and also selling services that utilize our network or on-net services, there is a potential for that to go up. But as you know, there are some pressures that go the other way as well that we need to continue to manage, and whether that be pricing or whatever in terms of legacy services, and as I indicated, as those legacy services become a lesser and lesser proportion of our total, then there is some opportunity there. But the short term, I would say, we're going to be maintaining pretty stable margins.

Okay. Thank you.

Ladies and gentlemen, that's all the time we have for questions. I would now like to turn the call over to Mr. Chadsey for closing remarks. Mr. Chadsey?

Thanks, Patrick. Today's call will be archived and available on the Investors Section of the MTS website. That concludes our call, and once again, thanks for joining us.

Ladies and gentlemen, this concludes our conference call for today. Thanks for participating. You may now disconnect your lines.