BCE Inc (BCE) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the MTS Allstream 2008 Fourth 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 on Thursday, February 5, 2009 at four p.m. Eastern Time.

I will now turn the conference over to Mr. Ian Chadsey, Vice President of Investor Relations for MTS Allstream. Please go ahead.

Thank you, Eric. Good afternoon, everyone, and welcome to the call. Earlier today, we issued a news release with our year-end business results for 2008. The news release, along with our MD&A and other supplemental information, are now available on our website at MTSAllstream.com.

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 and 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. Statements made today reflect the assumptions made by MTS and, accordingly, are subject to change after that date. MTS disclaims any intention or obligation to update or revise the 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.

On today's call we have Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Dean Prevost, President of the Enterprise Solutions Division; Kelvin Shepherd, President of the Consumer Markets Division. With that, I'll turn the call over to Pierre.

Thank you, Ian, and good afternoon, everyone. Thank you for joining our fourth quarter and year end 2008 conference call.

We achieved our guidance for the third consecutive year in 2008, with 1% growth from continuing operations, revenue, EBITDA, free cash flow, and a 3% growth rate for earnings per share. Over the past years, MTS has consistently delivered on its guidance and exceeded most of the expectations others have had for us. I think that our track record and actions in 2008 demonstrate that we are disciplined and have a solid management team that can deliver results and stability, even in a challenging environment. We're going to work hard in 2009 to make sure that this continues to be the case.

In all, we continue to make progress against our key priorities--shifting our revenue mix from legacy to growth services; improving our cost structure; maintaining our operating margins; and continuing to build on our reputation for superior customer relationships. And as a result of these efforts, we have delivered growth in revenues for the first time since 2005.

We also continued to benefit from a strong economy in Manitoba while continuing to improve the fundamentals of our Enterprise Division in the face of a slowing national economy.

One of our top priorities in recent years has been to drive the growth of our growth services. We made significant progress against this goal again in 2008, as growth services contributed 44% of total revenues, up considerably from only 35% three years ago. This is quite a fast transition for any telecom provider of size.

And as Wayne will discuss in more detail, we also continued to make good on our cost savings goals and maintain our operating margin at 2007 levels, despite the weaker national economy.

Our Consumer Division in Manitoba continues to deliver best-in-class performance with solid results for both the fourth quarter and for 2008. In particular, our wireless business remains strong, with revenues up about 8% for the year and subscribers were added by more than 10%. Also, our consumer high-speed Internet revenue increased an impressive 19%, and our TV services continued to grow with a 17% rise in revenue for the year.

One of the key reasons for this strong performance is the continuing strength of the Manitoba economy, from which we derive approximately 50% of our total revenue and 70% of our operating cash flow and profitability. While the province may be affected by the global economic slowdown later in 2009, the diversity of the Manitoba business base should help mitigate these factors. GDP growth of 1% is expected for Manitoba in 2009, and our Consumer Division is expected to continue to grow through the year.

And in this context, we are excited about the roll-out in 2009 of our premium high-definition IPTV services in various cities in Manitoba, and in particular in Winnipeg. We believe that these new services will enhance our market-leading television offering with state-of-the-art product and capabilities. This new product, combined with our ability to deliver the lowest line losses in the country, should support our continued growth in 2009.

And before leaving our Consumer Division, I want to make a brief comment on our wireless transition. Our transition from Bell is going well. To date we have converted about 250,000 customers, and we are on plan and on budget.

I have also seen some reports saying that MTS will face intense competition from new wireless entrants in 2009. Leaving aside the obvious challenges new entrants face in terms of the capital markets, I believe it makes little sense for a new entrant to target a small market like Winnipeg when they could pursue millions of potential customers in larger provinces. We have proven that we can compete against the cable companies and wireless incumbents, and we do not anticipate pressure to our growing wireless franchise in Manitoba from new entrants in 2009.

Operating under the Allstream brand, our Enterprise Division also boasted solid results for '08. These results were driven by growing demand for our next-generation growth services, in particular converged IP. In '08 we also achieved CAD331 million in new contract wins compared to CAD243 million in '07, a remarkable 36% increase for the year and a testament to the quality of our products and the growing trust of our customers.

These gains were somewhat offset, however, by the effect of a slowing economy in the fourth quarter. Our business lines most exposed to discretionary spending--unified communication and professional services--were affected. These services represent a small portion of our overall revenues, and we are confident each will see a return to growth over time.

We also know that in challenging times, companies tend to invest in telecom services to enhance productivity and reduce costs. We're seeing this trend at work again today and expect it will continue to motivate customers despite the current economic challenges.

In a minute I will ask Dean Prevost, our President of our Enterprise Division, to provide more detail on the division's results and the reasons why we expect to deliver the division outlook in 2009.

And for 2009, we are pursuing a number of cost initiatives, which we launched mid-2008, including an analysis of major operating processes with a focus on our Enterprise Division. We expect these initiatives will deliver between CAD35 million and CAD45 million in further annualized cost savings this year.

Our balance sheet and financial position remain strong at year end. As Wayne will outline, we have taken the required actions to remove uncertainty around the renewal of our debt maturities.

And we see no need to change the discipline we have employed to manage our Company. We will work to maintain our financial strength and our balance sheet by prudently managing our expenditures and focusing on profitable growth. We will remain prudent with our capital investments, and we will try to avoid spending and investing if customers do not come to the table.

With respect to HSPA, we are engaged in discussions with the other incumbents in Canada and expect to firm up our plans as soon as possible. Our wireless plans going forward have not changed since our outlook call in December. We are still in the process of understanding everyone's plan and what the landscape will look like to evaluate if there are any opportunities, such as providing backhaul services to new entrants.

Here, again, I have to address some of the recent comments suggesting that our dividend is limiting our growth opportunities. Our dividend is a source of considerable strength for MTS and is covered by our cash flow. We did not acquire spectrum outside of Manitoba in the AWS spectrum auction because the prices far exceeded our assessment of its value. We felt good about the decision at that time, and our decision has only been validated by the subsequent crisis in the global financial markets.

Looking ahead to 2009, we expect to continue benefiting from a number of positive factors, like a solid Manitoba economy and a well-diversified Enterprise customer base and product mix at a national level. It should protect us against weaknesses in certain sectors of the economy. We continue to expect moderate growth for revenues and most of our other financial metrics. This forecast includes solid growth in our growth services and stable revenues in EBITDA across our Enterprise Division. We also expect to continue to drive growth in our Consumer Division.

And over the longer term, we continue to expect our business to deliver between 1% and 3% growth in overall revenues and EBITDA, with associated growth in both cash flow and EPS. In the interim, we will continue to be disciplined and prudent with our expense and investment levels.

With that, I will now turn the call over to Dean to provide an overview of our Enterprise Division. Dean?

Thank you, Pierre. After two months on the job, it's a pleasure to be with you today to provide a brief update on our Enterprise Solutions Division, Allstream. As I mentioned when we spoke last prior to the holidays, we continue to implement the strategy that keeps us uniquely focused, being responsive to the needs of our customers. It is a strategy built on Allstream's significant nationwide infrastructure, rich application suite, top-notch implementation team, and positive long-term customer relationships. As a result, we have a reputation for delivering better solutions that solve complex communication needs.

To this end, the division posted solid results in 2008, while at the same time making significant progress on our overall key initiatives. Overall revenues were consistent with 2007, which is an important milestone after a few years of declining revenues. This was made possible by the strong performance in our growth services, increasing by 11.6% in 2008, and for the first time fully offsetting the decrease in legacy revenue for the year. These results in growth services were driven by converged IP revenues, which are growing well, at over 12%, and unified communications revenues, which were strongly ahead, by over 21% over 2007. Interestingly, our Enterprise Division performed better in 2008 than US comparables like AT&T, who reported a decline in segmented business results.

For the fourth quarter, growth services were about the same as in Q3, which was not as strong as we had seen in the first half of the year. Converged IP continued to perform well, with double-digit growth of over 10% and showing no signs of slowing down. It was unified communications and professional services that experienced slower growth in the second half of the year than they had in the first half, with growth revenues in the fourth quarter of '08 flat compared to the fourth quarter of '07. Our total revenues decreased in line with the fourth quarter of '08 decrease in our legacy services revenues.

I'd like to focus for a moment on some of the underlying performance drivers. First, we expect to see continuing double-digit growth in our converged IP portfolio, similar to the levels seen in 2008. This line of business has seen no real signs of slowing down, with Q4 growth in excess of 10%. The activity levels in our order desk and provisioning teams in January continue to reflect the strong growth that we expect in this area.

Second, in unified communications and professional services, which together represent about 18% of our revenue and where we have seen some recent softness, costs tend to be more variable and the margins are lower, implying that any impact on our overall results is more manageable. With lower volumes in the second half of the year, we have already taken action to align costs in this area, which I will speak about in a moment, and have incorporated this performance into lower expectations for 2009.

Third, we have resilience in our revenue stream--our comparative strength in better-performing sectors of the Canadian marketplace, whether it's in Manitoba or the public sector, and our underweighting to hard-hit sectors like the auto industry or manufacturing. As well, with 60% to 70% of our overall revenue under contract and lower margins for much of the revenue that isn't, combined with solid renewal rates in excess of 80% for those contracts that are being renegotiated in year, only about 20% or so of our revenues require action in any given year. I'm not saying it's easy, but it is indeed manageable.

Fourth, as most of you know, we have consistently succeeded in being right sized for the business environment we face and the intended opportunities we pursue. We did this again in 2008, with CAD20 million in cost reductions, which allowed us to drive the sustainable cash flow we expect from this business. With the latest in our continuing efforts of process improvement already well underway as we enter 2009, I expect continued cost improvements in '09 and beyond.

One important additional point is that these actions are not done at the expense of customer service levels. Those levels are, in fact, increasing compared to our competitors at the same time as we are taking out these costs.

Fifth, and most importantly, we started early in preparing for a potentially tougher environment in 2009. We eliminated our money-losing Calgary professional services office and rebalanced our consultant capacity, trimming in some locations while adding to growing offices in Atlantic, Canada, Quebec, and Ottawa. We reduced our overall work force by approximately 170 positions, where we had excess capacity.

We looked carefully at, and through compensation and hurdle rate changes, heightened the focus of our sales teams on the profitability of new and retention of existing business in anticipation of more customers preferring to extend the life of their existing infrastructure. We also looked for and implemented ways to make our cost structure a little more variable to allow for some flex to absorb unexpected shifts in the business climate beyond the natural success-based nature of some enterprise expenditures.

There were some costs to the business of these actions in the fourth quarter, and that is evident when you look at year-over-year fourth quarter performance. But these are investments for 2009 that we expect to really pay off in the latter part of the year once their effects are fully felt.

Looking forward, we continue to see solid sales funnels, bookings, and backlog in our key portfolios. As has been mentioned, we've seen a 36% increase in new contract wins, driven by solid performance in the converged IP services. Our customers increased by 19% year over year. And again, based on what we see in the marketplace and are told by our customers, we expect converged IP will continue its growth trend in 2009.

In our mid-market program, as expected, we entered 2009 with CAD100 million in our qualified sales funnel, the highest level we've ever had. And this program contributed over CAD78 million in contract value in 2008. Our cross-selling initiatives generated over CAD64 million in new contract business, and we expect again continued performance in 2009.

From a run rate perspective, we ended 2008 in our converged IP, unified communications, and professional services portfolio with the right momentum and performance to deliver our plan for 2009. Looking across these same portfolios, we ended 2008 with strong contract wins, a solid backlog of CAD48 million, and encouraging January sales, giving us further confidence in our plan.

There is no question, we are in a competitive marketplace and a challenging economy. We understand that. And we expect to see the impacts of it for another quarter or two. But it is also, and equally important to recognize, that in times of economic downturns, businesses increase their reliance on communications infrastructure and maintain their investment in telecom and technology to increase productivity and reduce operating costs.

Thank you for your time today, and I'll now turn things over to Wayne.

Thank you, Dean, and good afternoon, everyone. I'm pleased to report that our key metrics--revenue, EBITDA, earnings per share, capital expenditures, and free cash flow--were all consistent with our guidance range. This is the third year in a row that we've achieved our guidance, which speaks to the dedication of our management team to deliver on our commitments.

Earnings per share from continuing operations for 2008 was CAD2.98, an increase of 3% over 2007. This increase resulted primarily from higher EBITDA and lower debt charges in 2008 when compared to 2007. Our EBITDA, at CAD661.8 million, represents a 1.2% increase in the fourth quarter compared to the fourth quarter of last year, and a 1% increase for the year. This solid performance reflects the strong gains by our growth services, which collectively grew by 11.3% over 2007 and now represent 44% of revenues. It also reflects our strong focus on driving costs out of our business, where we achieved annualized cost savings of CAD29.7 million in 2008, at the top of our CAD20 million to CAD30 million target range.

Over the past three years, our focus on growth services has transformed our business from one that was predominantly legacy services three years ago to 2008, where 44% of our revenues come from growth services. During this same three-year period, our ability to reduce costs and improve efficiencies in all areas of our business have allowed us to increase our EBITDA by 2.4% and improve our EBITDA margin from 32.7% in 2005 to 34.4% in 2008. These achievements leave us in a much stronger position today to face our challenges going forward.

Total revenue was up for the year by 0.8% to CAD1.92 billion, driven by the strong performance of our growth services. Wireless services revenues for the year grew 7.7% on the strength of a 10.2% increase in cellular customers, partly offset by a 2.7% or CAD1.61 decrease in average revenue per unit to CAD57.40. This decrease in ARPU resulted partly from the elimination of some one-time wholesale revenues from a competitor and partly due to the CAD10.00 plan that we had in the market for parts of the year, which contributed positively to our growth in new customers as well as our growth in EBITDA.

High-speed Internet services revenues also showed significant growth, up 19.2% for the year, primarily due to a 6.3% increase in customers subscribing to our high-speed Internet service, as well as an 11% increase in ARPU during the year, resulting mostly from a lower percentage of our customer base being on promotionally based pricing plans.

Digital television services continued to show strong growth, with revenues up 17.2% for the year, driven by a 10.1% increase in our customer base and a CAD2.52 increase in ARPU for the year, which resulted from price increases as well as increased usage of our pay-per-view and video-on-demand services.

Converged IP services revenues were up 12.6% for the year, driven by strong growth in our IP VPN customer base, which increased by 19% year over year as at December 31, 2008, and reflecting the popularity of our next-gen data products and services.

Unified communications services finished the year with a 21.7% increase as compared to 2007. This significant increase is due to improved performance in the mid-market as well as the expansion of our videoconferencing capabilities and geographical coverage, which are partly related to acquisitions we made in the fourth quarter of 2007.

From a divisional perspective, our Consumer Markets Division continued to deliver best-in-class performance by an incumbent telco, with revenue growth of 1.9% and EBITDA growth of 4.1% for 2008. Importantly, our Consumer Markets Division is showing no signs of any impact by the national economic slowdown, delivering Q4 revenue growth of 1.8% and EBITDA growth of 6.3%, which matched or exceeded the full year performance for 2008. With a positive outlook for consumer markets and the Manitoba economy in general, we expect this moderate growth to continue in 2009 for this division.

In our Enterprise Solutions Division, as Pierre and Dean have described in more detail, we delivered solid results in 2008, with revenues that were equal to the prior year. And for the first time, the increase in our growth services completely offset the decreases in our legacy services, while EBITDA is showing signs of improvement, decreasing CAD6.6 million or 2.6% compared to 2007.

In Q4, growth revenues were at the same level as Q3, down about CAD3 million from the average level that we had seen in the first half of the year. Although converged IP, our highest margin growth service, continued to deliver strong results, with a 10.4% increase in Q4, we saw growth in unified communications and professional services flatten out. With growth revenues flat for the Enterprise Solutions Division compared to Q4 of 2007, the decrease in legacy revenues resulted in an overall decrease of 5.7% in revenues for the division.

These trends have been largely anticipated in our plan for 2009, where we expect continuing double-digit growth in converged IP, which has shown no signs of slowing down, has our highest margins, and in 2009 will become the largest line of business in our portfolio of products and services at 22% of total Enterprise Division revenues. Our 2009 plan requires no growth in unified communications or professional services from the levels attained in 2008. These areas of our business are more susceptible to an economic slowdown, but also deliver our lowest margins and have the most variable cost structure, therefore representing a lower risk to our overall results.

We anticipate a reduction in the rate of decline in our legacy business, partly due to the diminishing impact of Rogers and AT&T migrations, along with a slight shift in focus towards retaining legacy revenues in circumstances where customers may wish to defer their move to next-generation services. And we are targeting annualized cost reductions of over CAD20 million in the Enterprise Solutions Division, the majority of which began in Q4 and will be completed by the end of Q1 this year.

In summary, we expect to deliver our 2009 plan for Enterprise Solutions Division, which includes revenue and EBITDA that are in line with 2008. Importantly, our overall results are less sensitive to changes in enterprise markets due to lower margins in this area of the business. Additionally, we've demonstrated the ability to be flexible, and if circumstances require it, we would adjust our costs in capital spending accordingly. Variable operating and capital costs in areas that are volume-sensitive would be quickly targeted, and plans to re-engineer certain processes in the Enterprise Division could be accelerated.

Capital expenditures totaled CAD335.7 million for 2008, including CAD282.5 million from continuing operations, as well as CAD4.6 million for restructuring activities and the CAD48.6 million for wireless spectrum expenditures. Capital expenditures from continuing operations were 14.7% of our revenues for the year, which compares well to other players in the Canadian telecom industry 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 fourth quarter was CAD39.4 million, up significantly from CAD10.1 million generated in the same quarter of 2007. For 2008, free cash flow was CAD261.3 million, up by 1% from 2007, clearly demonstrating MTS's ability to generate strong, consistent, and stable cash flows from year to year.

Free cash flow in 2008 was used for dividends, which at CAD168 million, continues to deliver an attractive yield of approximately 7% to our shareholders, as well as pension solvency funding, restructuring costs, and the wireless transition.

Additionally, our overall debt level rose by CAD69.4 million in 2008, primarily due to the costs we incurred related to our AWS spectrum purchase, along with some temporary changes in working capital levels. Importantly, at 39%, our debt-to-capitalization ratio remains the lowest in the industry, and the strength of our balance sheet provides us with excellent flexibility.

MTS has one of the strongest balance sheets in our business, with ratios and metrics that exceeded most of our peers. This financial strength is an important advantage for MTS and is reflected in our investment-grade credit rating. In addition, we signed an agreement on January 5, 2009, with a group of Canadian banks to increase the size of our syndicated credit facility from CAD350 million to CAD600 million and to extend the term of the credit facility to 2012. This will provide sufficient liquidity for all refinancing needs and speaks to the continuing strength of the Company's balance sheet and illustrates the ongoing ability to access capital.

We have unused and available tax deductions that will shelter us from paying cash taxes until at least 2014. This continues to have a positive impact on our cash flow. With a net present value of CAD400 million, it is also an important asset in determining MTS's value as a company.

Our pension plan is invested in a well diversified portfolio which has demonstrated the ability to provide returns that meet or exceed the long-term return on investment assumptions used by our actuaries to value our pension plan. However, the recent market downturn has had an impact and will likely result in an increase in solvency funding for 2009.

The recent announcement regarding pension plans issued by the Canadian government will partly offset this impact on solvency funding requirements by extending the period over which the funding is required from five years to 10 years. While we have yet to see the final regulation, this temporary change to the funding period represents an important first step to addressing the issues faced by defined benefit plan sponsors and members.

Solvency funding was approximately CAD30 million in 2008, and for 2009, we are expecting solvency funding to increase by CAD10 million to CAD20 million.

Looking ahead, we've not changed our longer-term three-year outlook, with revenue, EBITDA, earnings per share, and free cash flow growth estimated to run between 1% and 3% on an annual basis.

In 2009, we'll remain prudent and cautious in managing our costs, both in the operating and capital investment fronts, to ensure they're in line with the realities of the market. At the same time, we will ensure that we are well positioned to act on opportunities that will add value for our shareholders over the long term.

Although we have widened our guidance ranges to reflect the volatility of the current economic forecasts, our expectations for 2009 from continuing operations represent moderate growth over 2008. More specifically, our guidance for 2009 is for growth of up to 2% as follows--operating revenues of between CAD1.9 billion and CAD1.98 billion; EBITDA of CAD645 million to CAD685 million; earnings per share of between CAD2.90 and CAD3.20; and free cash flow of between CAD250 million and CAD280 million.

The Board of Directors has declared a first quarter 2009 cash dividend of CAD0.65, which is payable on April 15 to shareholders of record on March 16, 2009. On an annualized basis, as Pierre emphasized, our dividend ranks us as one of the highest-yielding stocks on the Toronto Stock Exchange.

Thank you, and we will be pleased to answer any questions you may have.

Ladies and gentlemen, we will now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS.) Your first question comes from Greg MacDonald from National Bank Financial. Go ahead.

Okay. Thanks a lot. Good afternoon, guys. I wonder if you might give us a little bit more color on the revenue stream or revenue trend in the Enterprise Division? I know that fourth quarter last year was a strong quarter in that division. I suspect the year-over-year decline of 6.5% on the revenue line was partly due to that. So I wonder if you might, number one, strip out what was uniquely strong last year? And then secondly, you talked about some weakness in that line for this year related to converged services and professional services. What was uniquely weak this year in the revenue line? And then if you could also, you mentioned the Rogers and AT&T revenue declines. If you could just give us an update on where that stands. Was that a material impact in the quarter? Because, as you point out, that's supposed to be a little bit. Thanks.

Okay, Greg, maybe I can start and Dean can add some color as he sees it. The revenue trend, you're right. And Q4 last year was by far our strongest quarter of 2007. And in this year, the timing of revenues was a little more evenly distributed amongst the quarters. We saw in our, also mentioned in our growth services, that we had seen them flattening out over Q4. And growth services were in line with what we saw in Q3 and was about at the same level as in 2007. So we saw a lot of strength in 2007 in some of our one-time sales areas. And so the growth was about even--or the growth services revenues were about even with the fourth quarter of 2007 as well.

So as a result, the reduction in our legacy services, which is following the trend that it has been over the last couple of years, basically resulted in an overall decrease in revenues. So we had in long distance in legacy last year was a little higher than it had been in the previous months with some wholesale revenues that were lower this year and also with the decrease in Rogers and AT&T.

It was CAD27 million, the decrease in Rogers and AT&T for the year, which was a little bit less than what we had seen last year. It was around CAD40 million. And probably a little bit less in 2009 is what we're anticipating. So I think that gives you a bit of an overview.

Maybe I'll just add one piece, Greg, and Wayne touched on this during his speech. But really, when we look forward into '09, what we're really counting on is our consistent and high-margin performer in '08, which was our converged IP platform. That set of services, which is really MPLS, IP VPNs, those services are universally needed by all of our customers. They have long contracts associated with them, and they tend to also renew very significantly as well. That's what performed very well consistently in every quarter last year, and that's what we're expecting to perform in a very similar way in '09.

What we're not expecting is that our unified communications or professional services do anything different in '09 than in aggregate what they did in '08. So really, or frankly, in aggregate what they did towards the end of '08. So what we're looking for, really, is just some kind of pretty steady performance from them, not really needing them to be growing at all in order for us to do what we expect in '09. And that feels prudent, given that those, as Pierre mentioned, those two portfolios are the ones that are a little more discretionary. And fortunately, they're also--I mean, they're discretionary but also a lot lower margin for us. And the cost structure is more variable, as Wayne mentioned.

Thanks, Dean. That's helpful. To be honest, the thing I worry more about--I have comfort with your growth revenue streams. I have less comfort with the legacy in terms of how fast it falls off, particularly in a time of recession. So if there's anything more that you can add to that, that would be helpful. In particular, I might just wonder, in terms of the one-time sales, Wayne, that you indicated in '07, were those things like product sales, for example, or equipment sales, those types of things that usually have low margins or no margins but can add to the lumpiness? If that was the case, I'm a little bit less concerned. If it were more material things, I'd be a little bit more concerned. I hope I'm--.

No, I think you're right on, Greg. The one-time sales are mostly unified communication. And for those, I think we're basically now about out of just the equipment sale. Like we attached to it a network and recurring revenue, and over the past few years, we've tried to stay out of just selling boxes.

Also, just back on your comment on the legacy side, one thing that's a bit different for us is, again, those famous Rogers/AT&T services or revenues that we're losing year after year. On that side, the decline of those revenues is coming to a smaller and smaller number, which doesn't reflect the rest of the business, even on the legacy side, at all.

Okay, thanks, Pierre. And just a technical follow-up. The equipment sales normally show up in the Other Revenue line.

No, there would be in the Data line, primarily.

Data line, okay.

It's a small number.

Thank you.

Your next question comes from Glen Campbell from Merrill Lynch. Go ahead.

Yes, thanks very much. First a question on pensions. Can you give us a little more clarity on what you think the actual loss was in 2008? And as you project the impact on expense for 2009, how much of that is amortization of the accumulated losses, and how much of it is current service? And I have a follow-up again on the Enterprise segment. Thanks.

Well, with respect to pensions, I think what we said is that we do expect an increase in pension expense year over year. We talked about that in the outlook conference call. So it, I'm not sure about the portion that's due to current service costs or that detail, but we do expect an overall increase in the expense.

Our return on assets is a little bit better than the market, but we have roughly 55% to 60% of our portfolio invested in equities and the balance in fixed income. And so on a blended rate, you're probably looking at maybe a 12% decline year over year.

Okay, that's helpful. Thanks very much. Then for Dean on the Enterprise segment, Q4 is an unusual quarter in that companies will often spend what budget they have, or they'll adjust their spending. Do you think that this quarter's results reflects some of that? And can you comment a little bit on the extent to which employment reductions came into your numbers in 2008 and how you think they might flow through in 2009?

Before Dean goes there, I think one thing that's different, and I'm assuming a whole lot of companies, they'll bid like what we tried to do is this year, looking at the economy or the potential challenges of 2009, I think a whole lot of companies have already moved to a more cash conservation strategy. And then I don't think the fourth quarter for most companies reflected what you see normally in people trying to spend at the year end their budget. So despite that sometimes we get, even in telecom, which we got clearly a year ago, probably this year was a lot smaller than what it has been in many years.

But Dean, I don't know if you want to add to this.

No, I agree with you, Pierre. And on the question of looking forward and layoffs and the effect on us, remember first in terms of the portfolio, it's really a mix of types of services. And they're not at all in any significant way usage based. There's some usage, but there's also some just incidence based by the very fact that you're buying a data pipe. Whether there's 20 or 25 people using it, for the most part, it doesn't make a difference in terms of the pricing or the revenues associated with it.

What really drives, or where we would see the impact on our business is to the extent not that people are sizing a business up or down a little bit, but if they're actually making choices to end or terminate entire locations, as it were, given we're an Enterprise business. But it has to be a more extreme change with respect to their business, whether it's closing up a branch or a retail operation or a full data center. That's when we would start to see the impact.

Now, we tend to have relatively large networks, so adding or subtracting a single or double location won't make all that much of a difference. So it's got to be a bigger event in order for us to see it.

Okay, thanks. Maybe I'll squeeze one last one in if I can. When those sorts of events occur, how much of a cost reduction is there typically on that kind of service to offset the revenue loss? Is it pretty much a complete hit or a complete flow-through, or is there a cost of goods sold reduction that's seen in there, too?

Again, we have a mix of on-net and off-net services, as you know. And they are paired with the individual locations. So there are reductions in cost that can come. But by the way, also, we'd not assume that, because these are contracted revenue that necessarily that the overall revenue will necessarily change, right? Again, we make long-term contracts with respect to the business with minimum commitments associated with them. So it's not, again, doesn't follow directly that even though a location is changing or going away, that the overall revenues necessarily, in that moment, will decrease, because there's that, the march of time and the contracting of revenues that already exist.

Okay, that's very helpful. Thanks very much.

Your next question comes from Dvai Ghose, Genuity Capital Markets. Go ahead.

Yes, thanks very much. Three things which confuse me in totality. So, as you correctly point out, you have a very high dividend yield of 7.5%. It's in fact greater than your cost of debt. And you have an under-levered balance sheet, as you yourself acknowledge. You've voiced no real interest in investing in future growth vehicles like wireless and so on, which could be dilutive for some time. So if that's the case, why don't you buy back shares, when clearly your cost of equity is so much higher than your cost of debt?

Yes, good afternoon first.

Hi.

I don't think we said we voice no interest in investing in growth businesses. I think for the right deal, the right opportunity, we will look at anything and everything, I would say, like any other company. So on that side I would not conclude by my comments that we voice no interest in growth here. We're trying to grow this company and trying to do it in a very disciplined, responsible way. In particular, in the current market conditions, we're trying to be prudent and want to make sure that we know what we're doing and what we're getting into. So on that side, please don't read anything in my comments more than we're trying to be prudent.

And as for share buyback, now, I think we want to see the state of the economy a little bit more, and want to see how the business will do in 2009 and what are those opportunities that are out there before we make a decision on other things like share buyback.

Yes, no, fair enough. But when you're talking about investing in growth, it means many different things, right? You've invested in certain small acquisitions and so on to fuel your growth, which does not really have any impact--materially, at least--on your balance sheet. And then there's some large opportunities potentially, like investing in an AWS new entrant and so on. So when you're talking about investing in growth, what are you referring to?

I'm referring to whatever would be a good opportunity that would make sense for the Company.

Yes, fair enough.

And the story on that one, until we have something that we can really discuss, it's hard to say. But as we said before, we're looking at all of them and, again, trying to be prudent as we do that. But it has to be the right deal for the Company, it has to be complementary, and we'll see where that takes us.

Yes. No, that's fine. The second question is on the SMB market. If you listened to the Bell Aliant call earlier this week, they saw an acceleration of business line loss, attributed to various factors including increased competition from cable and the SMB space. Obviously, at a time when cable cos are planning to deploy DOCSIS 3.0, which significantly increases their bandwidth. So I'm wondering whether you see an incremental threat, both in Manitoba as well as the exposure that Allstream might assess, and b, which I assume is less from cable, and in particular, DOCSIS 3.0. And in particular, the impact on your legacy data services like T-1 lines.

Hi. Kelvin here, so maybe I'll talk on both of those segments. So we have seen Shaw, who's the main competitor here in Manitoba, in the market for a while now with business services. The losses in that small business segment have been very small to date, and have really been what I would say in a few areas where clearly they have some capability to serve. So I haven't seen a big impact, haven't seen any acceleration of that. And on the DOCSIS 3.0 front, at some point in time, I think our expectation is most cable companies will deploy DOCSIS 3.0. I don't see that as something in itself that is going to have a huge impact. Clearly, it will simply be additional competition in that high-speed Internet and data area. I think we're pretty well positioned in Manitoba to deal with that.

Outside of Manitoba, we've seen--actually, what we saw was customers making decisions, not necessarily to discontinue their service entirely, but we did see in the small business segment a number of customers that would downsize, so they would go from 10 lines to five lines, that type of thing. I probably saw more impact in the GTA area back in Q3 in terms of some early sign of distress in the segment, but probably Q4 actually leveled out a little bit and was really stable compared to Q3.

Great. A couple of really quick last ones. So for Wayne, unusually high tax rate in the quarter. That was the case in Q4 '07 as well. Obviously, it's not a cash tax item. Why was it so high, do you think, the tax rate?

There was in the fourth quarter an adjustment to the valuation of the tax asset, so the--as you know, the tax rates that have been implemented by the various government levels decline over time. So when you schedule out your tax savings into the year in which you expect to use them, they are impacted by a lowering rate. So if you, for example, if something like the increased solvency payments that we're expecting would shift the timing of the utilization of our tax asset to later periods, and in which case, then, it's a lower tax rate, so there was an adjustment made at year end to reflect that.

Is that in your baseline EPS number or not? Your continuing operations, rather, EPS number or not. I'm a little confused.

No, it wouldn't be.

Okay, good. And then the last question is on the restructuring. So I see you've doubled your restructuring target for this year to, I believe, CAD35 million to CAD45 million. Should we assume restructuring charges of a similar amount versus your previous guidance of CAD15 million to CAD20 million?

No, there are a couple of things on that. The restructuring expense you saw, we are sticking to our, the same as we said in our outlook, which was CAD15 million to CAD20 million. And also, we had indicated at that time that part of that you would see in a fourth quarter charge, so we did have about a CAD10 million charge in the fourth quarter that's part of our 2009 program. So it was expensed in 2008, but it's related to the headcount reductions that were partly completed in Q4 but will extend into 2009.

Thanks very much.

Thank you, Dvai.

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

Yes, hi. A couple questions. First for Pierre. On, it's no secret that some of the new entrants are coveting your backhaul capacity on Allstream. I was wondering if you can comment on what the factors would be in deciding whether you do a deal where you get actual cash for your capacity versus a potential equity interest in a new entrant? And I'll ask a second question on the Enterprise side, if possible.

So what, just to make sure I get your question right, David, you're basically asking what would be a condition that we would get equity for providing services to a new entrant like backhaul compared to charging them?

Yes. In making a decision to, what kind of a deal you do on a backhaul side.

Yes, I will tell you, I am not sure that it would be meaningful enough, depending on the new entrant, but it would be meaningful enough to give us anything on equity that would be large enough to be interesting. We right now, in terms of backhaul services, are in discussion with all the new entrants, basically, trying to sell them our services and not obtaining equity for it. And that's part of our Allstream plan, basically.

Okay. And just on a second part, second question on the Enterprise side, we've seen a lot of large contracts and large contract announcements, Canadian government, City of Montreal, Department of Defense. I think the Canada, both contracts still out there. Your Allstream doesn't come up in the bidding for those contracts very often. I was wondering if there's an opportunity for you guys to start moving into those larger contracts, or are you content with playing in the SMB market?

Well, let me try to answer part of it. Maybe Dean, after a month and a half to two months on the job, wants to add to it. But first, just at the end of your comment, where the whole key would be SMB market, we're not really in the SMB market but in the large, medium to large. So we're in between the medium business to small business and the very, very large, which are the ones that you are basically naming, like the City of Montreal and the other government and all that stuff.

Now, we have businesses with all these customers, by the way. We have very interesting businesses. But the contracts that we have stopped bidding on, at least since I'm here, are the contracts that have no margin or where we believe we cannot make money at it, or not an interesting margin for us. So we have retreated over the past few years of some of those, or when we bid--because we did bid for some of those--we bid at prices that we feel are acceptable or giving us a return that is acceptable to us.

So indeed, some of these contracts have been won, in our opinion, at extremely low prices, which we would not have been able to make them profitable and decided not to go there, and we'll see if that's the right strategy or not. But we are still bidding and can bid on equal footing with the other incumbents in terms of skills and capabilities, whereas some of those large contracts if we feel that we can make money at it, absolutely. And you see a whole lot of other announcements from us, though, but with medium to large-sized customers that are not multi-billion dollar businesses, necessarily, but at CAD1 billion to CAD2 billion, yes.

Okay, great. Thank you.

Thank you.

We have time for one more question. And your next question comes from Peter Rhamey from BMO Capital Markets. Go ahead.

Thanks and good afternoon. My question is for Dean on the Enterprise segment. In your comments, you gave some interesting statistics, some of which I'm unfamiliar with. I was hoping you would take through and provide some context for what the meaning of these statistics are and perhaps some comparisons to where you would have been last year.

You talked about CAD100 million in qualified contracts. You've contracted CAD78 million. You've got a backlog of CAD48 million. And you did cross-sales for CAD64 million. So perhaps you could take us through and just tell a bit more of a story on that and as well perhaps talk about what percentage of your sales, of CAD850 million or so per year, comes up for rebid every year. Thanks.

Sure. Hi, Peter. Maybe I'll take them in reverse order a bit, which is the first piece is, how much of our sales come up for rebid every year? And by the way, there's a couple of components to that--not just rebid, but how much of those that are being rebid actually do we typically win because we're the incumbent provider? So how much do we actually win?

In my remarks, I mentioned a number of 20%. And you get to it from a variety of math. But it is basically that number, and it's a function of the number of years of services that we have under contract and our success rate, which is pretty significant in renewals, and where we try to keep the customer that we have because it's already employed, it's already deployed, and the services are there. So we're tending towards about 20% of our revenues every year are coming up where some action is needed.

Now, I wouldn't call them, go so far as to call them "at risk," but it's just action is needed, where we need to either actively try to renew them or we need to go out and sell for someone who has actually turned away from us and sell someone new. Or it's more of a one-time sale that has a natural need for replacement during the year. And that number runs about 20%.

Dean, does that includes contracts where you might be, let's say, in year three of a five-year contract and, or at the request of your customer, you have to reprice it or you would feel inclined to reprice it?

Yes, I'm including that repricing element in there. So it's basically, it's new sales required, it's renewals of existing, it's repricing and dealing with churn. That whole combination is in that 20%. Now, we're not naturally inclined within a contract period just--though we kind of say it out loud--to reprice contracts. Because usually we would be looking for more than just simply taking a price decline, either through an extension or an addition of services to an existing contract.

Right.

In terms of some of those other statistics I gave with respect to backlog, which is things that have been sold but have not yet been installed, or total contract values, which we've been talking about, which are up pretty significantly year over year, on any of those metrics or work in progress, which is installs that are making their way through the system, year over year, the metrics actually look pretty good. We tend to be in the 20% to 30% increase year over year in any of those metrics, including--although I have a little less data on this one--in the terms of the size of the funnel. So if you've got the prospective look in terms of the funnel, it's grown materially. If you have the amount of total contract value that we've sold, again, it has grown materially. We've got, as a result of that, we're building some inventory in the system as we try to process through that. We call that width. And so generally, all of those metrics right now, they look pretty good, Peter.

And we're giving you some of these numbers to try to show you that there's still a lot of new business coming in that will position us better to offset some of the potential softness in the market and deliver our outlook for the business.

Right. So the risk to this is, Pierre and Dean, you don't have confidence on what the pricing is on new business coming in the door, and hence--? All these statistics look very positive. It's surprising to see you expect flat revenue out of Enterprise.

Oh. Well, no. I think when you look at it, then you have to look at the annual basis also. We still have a portion of our business that's declining, and there's still some softness that is expected through the year. Now, as we said in the outlook call, if the economy is better than what's expected out there, we're going to deliver a number that's better than the low end of the range or the mid range of our guidance. So it's going to depend on where we end up with the economy at the end of the day. We've made some assumptions in our outlook about the economy, and we'll see what exactly is going to be out there, which is very hard to read right now.

Fair enough. Thank you.

Thank you.

We have one final question from the phone line. Your question comes from Vince Valentini from TD Newcrest. Go ahead.

Thanks very much. My question is on CapEx intensity. You probably saw that Bell Aliant guided to about 13% CapEx intensity. Now, they're 100% ILEX. You guys are about half (inaudible) CLEX. You obviously have off-net and on-net within the CLEX. So I'm wondering if you'll look at that, you'll look at your business, and you've said in the past that your CapEx is scalable to revenues. Do you think your CapEx intensity can be reduced, especially if you see even greater pressure on your revenues because of the economic environment?

I think that's the outlook that we gave in December, which showed a range that had a reduction of our CapEx in it. Now it depends, really, what's happening again in the economy, and where, if it becomes challenging, where it will be challenging. Because right now, we're still seeing good growth in Manitoba and our growth services are still, for most of them, growing double digits or close to them, still adding a whole bunch of subscribers. So on that side right now, it's hard to say that we're going to take it down. But if indeed it comes down, then we won't need to add capacity and things like that in our network.

In terms of the Enterprise, a chunk of the CapEx is success-driven and customer-driven as they add services and we win new contracts. So there, too, if these contracts are not there or the customers are not there with added need, we don't need to spend as much CapEx at that point.

Okay, thank you.

Thank you.

There are no further questions at this time. Please continue.

Thanks, Eric. Today's call will be archived and available on the Investor Section of the MTS website. That concludes our call for today, and once again, thank you for joining us.

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