BCE Inc (BCE) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the MTS Allstream 2009 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, Friday, August 7, 2009 at 9.00 a.m. Eastern Time.

I would now like to turn the conference over to Mr. Paul Peters, Vice President Tax and Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us for our second-quarter results conference call. Earlier this morning, we issued a news release with our second-quarter results for 2009. The news release along with our MD&A and additional supplementary information are now available on our website at mtsallstream.com.

Yesterday MTS's Board of Directors approved a third-quarter dividend which has been set at CAD0.65 per share. On today's call are Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Kelvin Shepherd, President of the Consumer Markets Division; Dean Prevost, President of the Enterprise Solutions Division; and Chris Peirce, Chief Corporate Officer. Today's call will consist of remarks by Pierre and Wayne followed by a question-and-answer session.

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 expenditure, 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 a change in circumstances, a change in events, or otherwise except as required by law. These cautionary statements are made on behalf of each speaker for whose remarks contain forward-looking information.

I will now turn the call over to Pierre.

Thank you, Paul, and good morning, everyone. Let me start by talking about some of the arrangements that we closed last quarter because I think these arrangements will bring strength and continued stability for the long term for our business.

The largest one is the wireless arrangement with Rogers we announced last week and I think it's important to go through it one more time just to make sure it's well understood and try to give you potentially some more detail.

So as you all know, I think this agreement enables us to deploy an HSPA wireless network across Manitoba in a manner that will see both of our companies share the cost of the network deployment and its operation in a balanced way. As a regional service provider, we believe this is the lowest cost way for MTS to build out the world-class HSPA network in Manitoba and get access to wireless for Allstream nationally. This arrangement improves the strategic positioning of both divisions and supports our future growth without changing the financial profile of our Company.

The arrangement has several benefits for MTS. We gain access to a more extensive HSPA handset lineup in a cost-effective way which is a very important element to us. We will share the HSPA roaming revenue in Manitoba. We gain access to national and international roaming at competitive rates. We gain a much more extensive and unmatched HSPA network footprint in Manitoba at a lower capital cost than if we had proceeded with the [build] alone.

Specifically and because we will benefit from Rogers economies of scale, the capital costs of up to CAD70 million over three years is in line with our much larger industry peers' costs. The total includes about CAD20 million from our annual capital envelope and up to CAD50 million of incremental capital as indicated previously.

We believe that with this arrangement, it enables us to save about CAD30 million of capital for the network build and about CAD3 million to CAD4 million of network operating costs annually when launched. And we gain access to a wireless product focused on the national business market and enabled through a unique and competitive wholesale arrangement. And we will be back to you with more details as we finalize our 2010 plans for Allstream. So in short, this agreement is a major milestone for MTS Allstream.

Likewise and earlier in the quarter, we formed an alliance with Sprint Nextel that enables us to offer a larger and more exciting selection of CDMA handsets to our Manitoba customers on a more cost-effective basis and which provides MTS access to Sprint's data applications. Our alliance with Sprint brings us the benefit of our past arrangement with Bell and further strengthens our wireless market leadership in Manitoba while we deploy HSPA over the next few years.

We also acquired SaskTel's alarm customer account in Manitoba, along with approximately CAD1.5 million in cash in exchange for accounts controlled by our affiliate, AAA Alarms, in Alberta, which was not performing to expected levels. This transaction further enhances our position as the leading home service provider consolidating our position in Manitoba.

And in May, we were one of the first corporate telecom issuers to successfully complete an MTN offering following challenging conditions in the corporate debt market. We raised CAD350 million in long-term debt at good rates and with covenants we believe align to our telecom peers. This reflects our ongoing ability to access the capital markets and the trust of investors.

We also won a number of awards, which you can see on our website, including a recognition from the Disaster Recovery Institute of Canada for our excellence in planning and preparedness in the areas of continuity management, technology recovery, and crisis management. We are the first telecommunications service provider in Canada to receive this award.

Now turning to our second-quarter results. In Manitoba, we had another solid quarter. Our consumer market division continues to deliver what we believe to be best-in-class results in Canada in terms of operating metrics and overall performance. We continue to benefit from the resilience of the Manitoba economy, which in the first six months of the year outperformed the Canadian economy as a whole.

Revenues were up 1.4% with solid increases from our growth services, including wireless, high-speed Internet, and television, which more than offset the reductions of legacy services.

EBITDA from continuing operations also rose by a solid 2.6%. Our Manitoba business is providing a strong foundation for our Company in challenging times and is delivering solid and stable cash flows, which represent over 70% of the profitability and the cash flows of the corporation.

On a national basis, the challenging economy accelerated the declines of our legacy revenues for our enterprise division. This resulted in performance below the level we expected. The performance of the division reflects global economic weakness and the results are consistent with what other operators in the enterprise market are experiencing. And as you know, these legacy product lines declines have disproportionate impact on our bottom line, but by the same token, these declines do not impact our future growth prospects, which remain positive as evidenced by the strong growth in our IP product line.

To offset part of those legacy declines, we are continuing to improve our cost structure as we rebuild the division's business processes. Our 2009 cost reduction is in line with our increased cost saving target and we are already working on an additional cost reduction program targeting new areas of the business nationally. This new program will start later this year and will be completed in 2010, bringing further cost improvements to our business.

Our enterprise division is also continuing to win significant new business. We have continued to see contract wins at the levels consistent with prior quarters, which should bode well for the division when the economy recovers.

So overall on a consolidated basis, our growth services are performing well. On a year-to-date basis, gross revenues are still up a solid 5.7%. Importantly, they now represent approximately 47% of our revenues, reflecting the success of our strategy we put in place three years ago, when they only accounted for 30% of our total revenues.

Looking at some of the growth highlights more specifically, in the wireless market, consolidated wireless revenues and wireless customers grew by close to 6% and over 9% respectively in the quarter, which we believe are one of the best performance year-to-date in Canada. We expect continued solid wireless growth for years to come based on Manitoba's low penetration rates together with the fact that our new wireless agreements gives us access to leading edge handsets, both for CDMA and HSPA and expanded wireless data capabilities which represents the largest growth opportunities for wireless.

Now some believe that with our new wireless arrangement with Rogers, we will be giving up our network advantage and potentially losing market share. But we believe that our strong market share in Manitoba reflects much more than our network advantage. It reflects that we have the best distribution channels, huge brand recognition, the strongest dealers, and the richest bundling capabilities.

More specifically, with the Rogers deal, we will be able to bundle our HSPA wireless products with up to four of our other services, a competitive advantage no competitor including Rogers can match. To put it plainly, we did not compromise our Manitoba needs to obtain better arrangements nationally. Our arrangement with Rogers is a good deal for each of our divisions on a stand-alone basis.

Now despite the recession, our enterprise division continued to experience strong demand in its most significant and highly profitable revenue line, converged IP, growing by 13% when compared to the second quarter of last year. Notable wins in the quarter totaling about CAD100 million of revenues includes Sleeman Breweries, Calforex Currency Services, the City of Brandon, the Calgary Worldskills Competition, Hudson Bay, Canadian Tire, and multiple government agencies.

Even after taking into consideration the weaker than anticipated second quarter and the current economic conditions, we expect that our performance in the second half of 2009 will be comparable to the first six months of the year. As a result, we expect to meet the lower end of our 2009 outlook for revenue, EBITDA, and free cash flow from continuing operations. Our capital expenditures from continuing operations have been scaled back to reflect lower than expected revenue and will be reduced by an additional 10% in the enterprise division based on the reduction of business Allstream is experiencing.

For EPS from continuing operations, the Company's outlook is now approximately CAD2.80 a share in 2009, which is below the original 2009 outlook. The change is based on our first half of 2009 performance, the second half of our 2009 outlook, and the impact of the May 2009 debt refinancing. While the new rates were favorable, overall interest charges are higher than the rates on which our original EPS outlook was based.

As previously announced, the Company also expects to implement further cost reductions and has increased its cost reduction target for 2009 to between CAD50 million and CAD60 million, up from the original target of CAD35 million to CAD45 million on an annualized basis. And as the economy recovers, we do expect that demand momentum for our national enterprise services will grow back to past levels.

The number of new customers signing contracts in key growth product lines like converged IP confirms that we are building a solid base of business to deliver improved performance as the economy recovers. In the meantime, we continue to expect to generate strong free cash flow in excess of our dividend and operating needs.

So to close, there were some good developments in the quarter that were very important to the long-term success of our business. It was a challenging quarter for our enterprise division, particularly in its legacy portfolio, but it was another strong quarter for our consumer division in Manitoba. We are pleased with the results of the major growth product lines, which are delivering growing or stable profitable results. And importantly, our operations continue to deliver solid cash flow and support our strong dividend.

Now I believe that we have demonstrated over the last three years that we have the discipline to successfully face challenging economic times and take the required action to deliver positive results for our shareholders. And we expect that will continue going forward.

So thank you, and I will now turn the call over to Wayne, who will provide you more details and explanations on our results. Wayne?

Thank you, Pierre. Good morning, everyone. [After] six months results from continuing operations include revenues of CAD947.2 million and EBITDA of CAD322.5 million. Earnings per share came in at CAD1.38 and free cash flow was CAD128.6 million.

In the interest of time this morning, I'm going to focus most of my comments today on our financial results for the second quarter, given that our results for the first six months of the year are detailed in our MD&A.

Total revenues in the second quarter were CAD464.3 million, down by 4.5% when compared to the same period in the prior year. This decline reflects the recessionary impact on our long-distance, unified communications, and professional services revenues, which were partially offset by continuing strong growth in our wireless, high-speed Internet, digital TV and converged IP lines of business.

Looking more closely at how each of our growth revenues performed in the second quarter, in the wireless market, revenues were up by 5.7% driven by a 9.3% increase in subscribers. We finished the quarter with more than 446,000 customers and ARPU held steady at CAD55.98, down 0.9% compared to last year.

Our high-speed Internet segment delivered solid performance with the total high-speed customer base growing by 3.6% to nearly 179,000 and revenues climbing by 8.8%. These results indicate that we are maintaining our 60% market share and more importantly, growing our average revenue per Internet subscriber.

Our digital television results were also positive. Our customer base totaled more than 83,600 at June 30, up 4.2% from a year earlier. TV revenues grew by 8% to CAD13.5 million in the second quarter when compared to the prior year. We have remained disciplined in the face of aggressive pricing and promotions by our main competitor and focused on providing leading-edge services to our customers.

Through the quarter, our digital TV team concentrated their marketing and customer service efforts on the launch of the MTS HDTV service in Winnipeg and accelerated the expansion of our network footprint to support this new offering in Winnipeg. Our high definition TV service is the most advanced and feature-rich television experience in the country and by June 30, with a footprint covering 20% of Winnipeg, we had 1800 customers on this new HDTV service.

We are continuing to roll out this premium service and expect to cover the majority of Winnipeg by the Fall as well as about 90% of Brandon, thereby strengthening our subscriber addition opportunities going forward.

Our high-margin converged IP services revenues, which is now our Enterprise Solutions division's largest revenue stream, grew by 13% when compared to the second quarter of last year reflecting the continuing attractiveness of these next-generation services.

Our IP VPN customer base grew to 338 customers at June 30, representing a 20% increase over the first six months of last year. Our Enterprise sales team is focused on growing this line and they are continuing to have competitive success winning business.

Unified communications and security and professional services, which are included in our growth services portfolio, declined in the second quarter as a result of the economic slowdown as customers postponed their capital investment decisions for communications solutions and products. This is consistent with what other operators in North American industry are experiencing. The decline is situational and we do expect the results from these services to improve as the economy recovers.

Turning to consolidated EBITDA, second-quarter EBITDA from continuing operations came in at CAD159.3 million, down 7% from CAD171.3 million for the same period in the prior year. The decrease in EBITDA reflects reduced business from Rogers and AT&T, declining volumes from some of our US-based long-distance customers, and the overall impact of a slowing economy on our enterprise solutions division; partly offset by the continuing strength and stability of our consumer markets division, which posted a 2.6% increase in EBITDA in the second quarter.

It is important to note when comparing our Enterprise division to the prior year that the second quarter last year was one of our best quarters and occurred in an economy that was significantly stronger than today. Although converged IP revenues grew by 13% in the second quarter when compared to the same period in the prior year, this was not sufficient to overcome the impact of the slowing economy, which contributed to lower long-distance volumes as well as softer unified communications and professional services results in the second quarter.

On a year-to-date basis excluding the impact of Rogers and AT&T, our Enterprise revenues would only be down 1.8% for the first six months of the year. We are continuing to closely monitor the effects of the slowdown on our industry by focusing on management of our cost structure, revenue retention, and prudent capital spending, while progressing with our long-term strategic objectives to increase revenues from our growth services and create efficiencies in all areas of our business.

Importantly, our Enterprise Solutions division is still winning business. We have continued to see increasing sales contract wins, which should bode well for the Enterprise division when the economy recovers. Last quarter, we announced that we are working hard to realign our cost base to reflect the current market reality and expected to eliminate an additional 160 positions in the Enterprise Services division this year.

Since the fourth quarter of 2008, we have announced the reduction of 330 positions at our Enterprise Solutions division, representing approximately 10% of its workforce. We aggressively moved forward with our cost reduction plans this quarter and are on track to realize between CAD50 million and CAD60 million in savings this year. By the end of the quarter, we had improved our cost structure significantly, achieving CAD27 million in annualized savings at the end of June. Of our announced headcount reductions, approximately 200 had left the business by June 30.

Given that we were ahead of schedule on our 2009 cost reduction program, in the first quarter, we started on a new cost reduction program targeting additional areas of the business that were not identified in our previous initiatives. We believe there are several opportunities to streamline and gain efficiencies from these areas. The new program is incremental to the CAD50 million to CAD60 million achieved in 2009 and should bring significant cost savings in 2010.

In addition, we anticipate demand momentum for our services will slowly build as the economy recovers and that our Enterprise Solutions division will be positioned to benefit when that happens. Capital spending from continuing operations in the quarter was CAD63.3 million compared to CAD70.1 million in the second quarter of 2008. For the balance of the year in our Enterprise Solutions division, we plan to lower our capital spending plan by an additional 10% compared to our original plan. Our capital intensity ratio from continuing operations for the Company as a whole this year is expected to be in the lower part of our 13% to 15% announced range.

Free cash flow from continuing operations was CAD59.9 million in the second quarter, compared to CAD72.4 million in the second quarter of 2008. The year-over-year decrease in free cash flow from continuing operations is primarily due to lower EBITDA from continuing operations. In 2009, we expect to achieve the bottom end of our guidance for free cash flow by carefully managing our costs including CapEx. Our cash flow is well in excess of our dividend and covers all of our other requirements except for our announced HSPA investments. This includes pension solvency requirements, our wireless transition, and restructuring costs.

We will be borrowing additional funds in 2009 to support our 2009 investments in HSPA and billing systems. This will be funded through existing credit facilities and will maintain our strong balance sheet as well as some of the best credit metrics in our industry.

Although it has been a challenging quarter due to the intensity of the recession, we are making the necessary adjustments in our operations to support the delivery of continuing value across our entire operation. We expect free cash flow going forward to remain strong in support of our dividend, which remains one of the highest yielding on the TSX.

In support of our confidence, I would offer that we have a comprehensive strongly competitive operation in Manitoba that generates 70% of our profitability and cash flow and forms a solid foundation for the company year in and year out. Our Enterprise Solutions division continues to deliver strong growth in its largest and most important revenue stream, converged IP, and we are accelerating our cost reduction programs to position the division to benefit when the national economy recovers. And we have consistently shown that we have the financial discipline to right size our cost structure to market realities and shareholder expectations.

Thank you. We will be pleased to answer any questions you may have.

(Operator Instructions) Jonathon Allen, RBC Capital Markets.

Thanks, first just a clarification on the Allstream CapEx reduction. You said you were going to bring down CapEx by 10%. But you've actually maintained the guidance range for CapEx for the full year. I'm wondering first, can you quantify how much 10% of Allstream CapEx actually is? And why you kept the consolidated CapEx level where it is?

Second question probably for Kelvin I suppose, is looking at the TV business, it's two quarters now in a row that we've actually lost subscribers. And I'm wondering is this just a sign of saturation in the market? You got up to 33%, 34% market share, or is this really just a temporary competitive pressure that you are feeling from Shaw's digital strategy? Thanks.

Well, with respect to CapEx, Jonathan, I think the confusion there is just in terms of the size of the range that we are using, so anyway, let me give you a few details.

Our Allstream capital expenditures are in the 10% to 12% capital intensity, and so you can kind of figure out what a 10% reduction would be from our plan. We are also, as we mentioned, we are sizing our capital expenditures to fit our revenue, which is now expected to be lower than before. So we are keeping our CapEx prudently spent across our business, and then an additional 10% in our Enterprise, which is primarily where we are seeing our revenue reductions.

Jonathan, on the TV question, our TV product has been very successful since we launched it in '03 and we've been at about 33%, 34% share point for a while now. Certainly the first part of this year we have been heavily focused on the launch of our new HDTV service, which is going very well. We have been, as you know, launched that with somewhat of a limited footprint in Winnipeg. So we've been working hard on accelerating that build and we do expect by the end of the year having accelerated the build that we will have the majority of our customers in Winnipeg able to access that service. So certainly some of our promotional and marketing focus has been on that transition from our existing product to the new product.

I think your question about the competitive environment is valid, though. I mean certainly Shaw has been executing a more aggressive digital TV strategy not just obviously in Winnipeg, but across Western Canada. And so we are seeing some effects from that as they have been pretty aggressive in their promotion and marketing efforts over the last quarter. But we do see this as more of a transition issue than anything ongoing and we do expect to see a return to growth in our TV service as we get our HDTV service more firmly embedded and we roll it out to national markets.

It seems to me though with the new TV overlay that you are doing, it's more just trying to address some of the higher-end customers. So it may be a strategy going forward I suppose to grow the TV ARPU, but as far as gaining market share, it seems to me that the new overlay may not actually be providing it for you. So is the focus more just on the profitability now and no longer really expecting a big ramp-up on the subscriber side?

No, I think it is a balance. We certainly expect to be able to capture more ARPU with some of the service capabilities the platform has, but I think also as the market transitions more and customers transition to HD and to expectations around more capabilities on their TV service that we will be in a position to continue to capture share and grow the subscriber base as well. Obviously not as rapidly as we would have in the first years of the service, but still we expect to see growth with the new product.

Thanks, Kelvin.

Dvai Ghose, Genuity Capital Markets.

Thanks very much. Good morning. If I could just ask you about your revised guidance for revenue and EBITDA and what your factoring in the second half, because on the surface it looks still pretty aggressive, right? You are looking at even at the low end only a 1% decline in revenue and a 3% decline in EBITDA. For the halfway mark, you've done a 2% decline in revenue and a 5% decline in EBITDA. And as you know in the quarter, the revenue is down 4.5% and EBITDA is 7%. So are you building in some big economic recoveries here? Because I can understand the cost side to a certain extent, but the revenue side seems pretty aggressive.

I think that's primarily because the second half or let's say the first half of last year was quite a bit better than the second half of last year. Since that time, I think the results have been more stable. And so that's where if you compare the second quarter to the second quarter or the second half to the second half of last year, the reason why we are having less declines or forecasting is that the base that we are comparing to is lower than it was in the first half. So what we are expecting to see is conditions and results that are primarily similar to the first half of this year.

That's a fair point, but even on a sequential basis in Q2, you saw a 4% decline in revenue and a 3% decline in EBITDA. I know there's some seasonality, but I am not quite sure why Q2 would be particularly weak, so aren't things getting worse?

Well, I wouldn't say that they were getting worse. There was a decline in some more I guess volatile revenue streams such as unified communications and secure UMTS where we do expect those to fluctuate from quarter to quarter and, you know, when we look at the final and the backlog, though, we do expect to see revenues in the second half pretty much similar to the first half.

And with respect to the declines in our legacy business, you know, we have some ability to see where they are going to be in the second half because the customer disconnects would be known and so we can kind of trend those out. So I don't really see that being an issue.

Okay that's a fair point. On the free cash flow side, which you gave us some good guidance on, you talked about how you're covering your recurring costs but you are borrowing a little bit for the HSPA overlay. I think in the first half if you look at the consolidated free cash flow is CAD70 million, the dividend is about CAD84 million, so that would imply borrowing about CAD14 million. What do you envisage for this year and is it a multiyear borrowing? Because the HSPA is a multiyear project.

Well, you know, when we look at our free cash flow at the bottom end of our guidance, you know, that would leave above our dividend just around the CAD80 million. And what we've talked about needing to be funded out of that would be our wireless transition, which we are complete now at just under CAD14 million, our solvency funding which announced earlier to be around CAD35 million, and then restructuring costs of CAD25 million to CAD35 million. So that covers all of those things and leaves us with our HSPA funding.

So the second part of your question in terms of the HSPA being a multiyear spend, we do have about one-third of that that we think will occur in this year, and so that's where we see some additional borrowings.

In terms of 2010, we haven't made any announcements yet in terms of what our outlook for that is, but we do have some of the cash flow requirements going away like our wireless transition and furthermore, we do expect to see better conditions and some growth in 2007 being a possibility. So we will see where that works out later in the year and try to provide some guidance for 2010 at the end of our planning process.

That makes sense, and for 2009 estimate about CAD30 million of borrowings, relatively modest?

Yes.

Okay, great. My last question is on the Shaw front. Obviously they've been quite aggressive with digital, but there's been some rumblings about them testing wireless in Manitoba. I'm wondering if you are cognizant of this and if you expect them to launch wireless in Manitoba at some point in the foreseeable future?

Dvai, I'm not aware that they have been testing anything and certainly have seen no signs that they are doing anything with respect to wireless in the market.

Great, thanks very much. I appreciate it.

Bob Bek, CIBC.

Thanks, good morning. Just if I could follow up real quickly on Jonathan's question on the television. Do you have a sense -- sorry, I guess can you tell us your sense of ARPU on the HD customers, the early HD customers that you signed up for the service relative to the core ARPU?

Yes. I don't have an exact ARPU number for those and obviously if you look at typically what happens is we usually launch initially with some customers that are on a limited free trial period, just to get some early sort of friendly trial going. So if you take those out of the picture and look at I guess what you'd call stable or sort of what we call regular ARPU, we are seeing what we would expect, which is an increase in those customers probably at about 10% to 20% compared to the ARPU of average ARPU of a regular customer.

Yes, [we think], Kelvin, in particular as the new services kick in like the home PVR and other Microsoft suite services, all this that should bring even more so.

Yes, well much of it is -- most of the currently what we are seeing in terms of additional ARPU is really driven by the fact that we are charging for the DVR service as well as additional HD packages. So those are adding additional ARPU, but we will need to see I think a little bit more in terms of growth in that base of customers before we can really sort of give you a real long-term guidance in terms of what the ARPU performance is looking like. But early on, it looks positive.

That's helpful, thank you. I guess the main question is on wireline. Looking at the wireless loss number, it ticked up a bit to 4.9% again, not a crazy ramp up here, but it is the highest loss rate you've had since Q2 07. Any thoughts that this -- is this strictly a telephony play off of Shaw continuing there or are you seeing any wireless substitutions starting to rear up or is it just the economy at this point?

No, I would attribute most of it primarily to just strong competition in the marketplace and from cable, including not just Shaw but Westman Cable, who are still really in the first six months of their rollout. And I think it just reflects kind of the ongoing battle on all fronts that we have with cable. I think we are doing quite well, although the line rate has ticked up a bit, it's still I think the lowest or among the lowest in the country. And certainly we think we have things that we will do in the marketplace not just on the wireline front but really on our whole strategy around full service, Internet TV bundling to compete successfully and to keep that loss rate stable or bring it back down again in future hopefully.

Certainly the HD footprint I guess would play to that as well with the stronger level?

Yes, well that's exactly right and that's one of the reasons we're focused so strongly on the rollout of that DDHL 2 platform, because it will deliver not just a stronger TV service, but we think a premium kind of first-class Internet offering and certainly one that we think we're going to need to compete with cable going forward.

Thanks. I will leave it there for others. Thank you.

Vince Valentini, TD Newcrest.

Thanks very much. Pierre, a strategic question for you. I know you did this strategic review a couple years ago. I'm wondering if you guys give any consideration to something dramatic on the wireless side rather than spending all this money you're spending on HSPA. I mean it seems like you are always trying to catch up because of your scale disadvantages in terms of handset and network equipment, so you need to do these partnerships with Sprint and Rogers.

Have you ever considered with the Board just selling wireless to Bell, Rogers, or Telus, taking a big premium multiple for it, then using all that cash to buy back shares and just become a wireline operator? I know you will say strategically that's not ideal, but Bell Aliant does it quite successfully. As long as you retain a bundling partnership with whoever you sell wireless to, I don't see why you couldn't operate that way. And given how low your stock is trading, it would be dramatically accretive if you could sell wireless or anything close to what past transactions have gone for. So any comment on whether you've given broad consideration to strategic alternatives before doing this deal?

I think a few years ago, Vince, you know when we did the full business review we did look at all potential possible scenarios. And you know, you saw a conclusion at the end of that review. Now I would tell you that for us to consider that or I guess for the Board to even entertain that option, we would have to be convinced that there is a long-term future and some long-term strength into being a wireline-only player. I know about Alliance. You are right about that. Now I still have some doubt about the long-term model, wireless being our strongest growth engine in the province of Manitoba, and as well, you know, with more and more data applications being put on as we roll out the HSPA, which should bring new revenue streams that we may not have in other product lines at least on voice or legacy voice.

So at least for now, I would say unless we could become convinced of a different scenario, wireless is our most important product line and we are moving forward with this. We are happy with the deal we have made with Rogers. We think it will bring more value to both of our divisions and better performance over time.

Okay, may I switch gears for you on the Enterprise Services division? I know myself and others on this call are probably going to have a real tough time trying to figure out what is cyclical versus structural going on within Allstream and it's going to be tough I think for us to hang our hat out on some big cyclical recovery in segments like legacy data and long-distance in 2010 or beyond. So I'm wondering given how big this decline has been in the second quarter, can you point to any data points from past recessions? I guess most notably 2001/2002 of any cyclical recovery that the Allstream business experienced coming out of the recession to give us some hope that there could be somewhat of a bounce back?

Yes, no, I will pass this to Dean. I'm not sure we have all the data here on this call, but clearly when you look at Wayne's explanation of some of the results -- you know as you look at some of the product lines like unified communication and professional services, they seem to vary in fact month by month depending on the mood of the economy. And we believe that those ones will be back to normal level as the economy recovers or even as there is hope of an economic recovery.

As for the legacy side, a chunk of it is linked to reduction of volume by US customers operating in Canada and operating call centers in Canada often which we believe that volume will be back as the economy in the US comes back. So it's not structural, but much more cyclical. And having said that, maybe I will pass it to Dean to see --.

Sure, hi, Vince. So I was here in the 2001 timeframe and the ICT spending broadly, it did come back, although it came back a little later. It wasn't immediate on the turn of the recession. It came back frankly as a bit of a lagging indicator 12 months or so later. I don't have all the data in front of me, but I do recall the time period pretty well. And what basically happened was for projects delayed, it was just that, it was delayed. So you had a pile up of good projects that needed to happen, but there had been a shortage of CapEx or EBITDA -- within customers to fund it. Projects didn't go away. They just came back on the table at an accelerated pace a little bit later on.

Frankly that's what we are seeing here, which is the surprise of the difference we think is fundamentally a timing issue, which is -- we saw downs in the legacy portfolio more than we had expected and frankly, it's just catching us off guard in that the changes that we are making won't yet recover that difference, but it will over time. So really it's a question of time, not -- we think.

And I would add to that that on the other side of this, we have our largest product line in the Enterprise division, which is IP or converged IP, which is now I think 23% of our diverse revenue. That one is growing double-digit still and has not slowed down. So -- and as you know, has margins that our legacy like, so that's pretty positive. That's growing, and that's taking more and more room in the division and replacing in fact some of those declining revenues as they happen.

So that bodes well for the future as it's providing a very solid base for the division to build on and to grow in the future regardless of legacy performance. That's why we are focusing quite a bit on it as well to ensure that this one stays healthy so the business as the economy recovers can go back to past performance.

Great, I apologize but I'm going to slip one more technical one in for Wayne. Just unclear that this wireless evolution CapEx line that you are showing, that is the HSPA and new billing system spend that you started with CAD7.5 million in the second quarter?

No, I believe you are referring to if I'm right our wireless transition spending, but I'm not sure where you are looking at.

On your supplemental disclosure on CapEx, there's a line -- we would call the wireless evolution. Okay, I can take it up with you off line. Was there HSPA spending in the second quarter?

There was some, yes.

And do you include that in your core CapEx as part of your guidance for free cash flow and CapEx?

We wouldn't have included that in our core cash flow or CapEx, no.

So how does that work over time as HSPA spend replaces CDMA spend? How do you decide which buckets to put it in? It seems to me like it's all pretty core to your long-term future, is it not?

Well, the part that we are talking about separately is really the part that we announced last -- it is the buildout. So you're right that over time that will be part of our core spending. We just thought it important that first of all, when we were announcing our guidance, we did talk about that that didn't include HSPA, so the people would know that we had a potential transition. And at the time, we had yet to decide on exactly how we were going to proceed in that regard.

So this is the year where it is counted separately, but over time once the implementation is complete, then there will be some CapEx involved with maintaining the network. I think importantly in that regard, a big chunk of the CapEx will be shared as we share the network with Rogers.

Okay, thanks.

Peter Rhamey, BMO Capital Markets.

Yes, thanks very much. One operational question on the quarter and one strategic. Start with the operational. In the quarter, we talked about weakness in Enterprise on the legacy side. We haven't had the chance to do all the detailed numbers, but to what extent has there been an acceleration in what Rogers and AT&T are doing with regards to the business that they are giving them over the last little while? To what extent is that driving the results? I would imagine from a cyclical point of view, the traffic there will not recover. I think they are bringing the traffic in-house, if I'm not mistaken.

Yes, I would say, Peter that we are -- in our MD&A, we talk about the declines in the volume from those two customers being about CAD16 million in the first half versus last year or about CAD8 million a quarter. So you are right that that business is migrating to their own networks. We are, though, expecting to see next year a slowdown in that line just because of the fact that they have much less revenue with us. So that -- I think what we've talked about before we expect to see about CAD30 million in declines from those two customers year-over-year, and that brings the total revenues to around the CAD60 million range. So part of which we expect to have in the long-term as they don't have facilities that can completely match the services that they are currently using us for.

So you think it does stabilize at some point?

Yes, we believe it will and the decline will slow down next year and, you know, probably stabilize in the following year.

So we are relying on the remainder of the legacy revenues to recover cyclically -- to improve the numbers (inaudible)?

Yes, if you take the remainder of the legacy declines -- and it's difficult to tell exactly -- but certainly a big chunk of that is we think volume-related rather than customer loss related. So we are seeing same customer volume changes that are related to their own businesses having lower volumes. So as they recover, then we would expect certainly to see their usage increase, which should provide an increase to our revenues over time.

So you don't have exposure to Verizon and AT&T insourcing more and more of their traffic?

No, I don't think that's a big factor (inaudible).

Okay, great. The strategic level and getting back to the agreement with Rogers on the wireless side, I'd like to get a bit more insight into where you are on developing your strategy for -- to become an MVNO outside the province. What are the key decision metrics you are looking for? What do you need to accomplish over the next little while to be in a position to launch that service if that's what you want to do? Then getting back to management of free cash flow, you are borrowing to build your HSPA, but I would imagine any losses on the MVNO, which I would imagine there would be some on startup would result in increased borrowing. Could I get any color on those points?

Well, let me answer the first part of the question. We are working as fast as we can to finalize our plan, our plan based on the agreement that we made last week. We have done a lot of work on it in the past, as you can imagine when we were looking at it as part of the -- our central business spectrum option. So what we have in front of us is quite a unique arrangement because as you know, there's nobody else in Canada that would be in a position we believe to launch a business offering on the wireless through an MVNO offering, so we're pretty well positioned there.

We're basically adding a product line to our business and not creating a new wireless business, and we have all intention to have a niche there that will be based more on the wireline/wireless bundle than anything else. So for us it needs to be integrated to the business. So we are working through that, putting the resources in place. And yes, there may be and we will disclose our plan as soon as we have them and I would say hopefully no later than when we talk about our 2010 plan that we will come back to all of you.

Hopefully we will be ready by that time, but there will be some startup costs, but they won't be of the magnitude that they would have been if we had done the deal with anybody else or do it on our own. That's clear and I think you all know that.

So more to come there and we are going as fast as we can right now to build this, and we believe that the offering that we can put together will be unique in the market and potentially can bring us some good success without though thinking that it is going to be huge growth opportunity. It will be a nice growth opportunity for the division, but I think I've seen in some reports that some people thought that we would create like high growth and at high cost and all that. I don't think that's the type of plan that we are trying to put in place.

Just as further color, any risk that you delay your launch because of the economy if a lot of your customers are delaying big investment decisions?

Yes, that's a very good question. You know, clearly we wouldn't launch if we thought that we had no chances of success. So if the economy was to continue to go down, we would clearly look at it very carefully to make sure that we are doing the right thing for the business. I think we've shown that we have tried to be very disciplined in what we do, so we would carefully look at it and will carefully look at it to make sure that what we are putting on the table there with all the knowledge that we have on wireless and of the business market can be successful that we put all the chances that we can behind us to succeed.

Thank you very much.

Jeff Fan, Scotia Capital.

Good morning, thanks very much. Questions on Enterprise, one on revenue and one on the cost. On the revenue front, your Enterprise revenue was down about CAD25 million year-over-year. You mentioned that CAD8 million of that is related to Rogers and AT&T. There is still a significant amount that's pertaining to remainder of the decline. I'm wondering if you can give us some color because when we look at some of the other -- your peers or your competitors' enterprise segments, the decline seems to be related to more equipment or low margins. But it looks like your decline is having a huge impact beyond what Rogers and AT&T is contributing to on the revenue front.

And then on the cost side, one thing I wanted to ask you is on the carrier costs, just wondering if you can review for us how much you pay annually on carrier costs to your wholesale providers, because we have had some comments I guess that we are seeing rate increases on the wholesale front from some of your wholesale providers. Wondering if you are seeing an impact on the cost? Thanks.

On the revenue side, Jeff, if you look at the second quarter, we mentioned that the big customers, Rogers and AT&T, accounted for about an CAD8 million decrease. There's a further -- I think it is about CAD13 million in legacy declines and a big chunk of that would be volume-related and then some due to migration to next-generation services and repricing and so on.

So the other part is that on our growth side, we did see some declines as I mentioned earlier in our unified communications and security and PS business, so that's the cyclical part. And offsetting that is we had the 13% growth in the converged IP, so the balance between those two resulted in about a CAD4 million reduction in our growth services between the second quarter this year and the second quarter last year. So that represents the components.

Carrier costs, I don't have the specific number. It is about the same as last year. I don't think we are seeing a huge increase there in our costs. There is a difference in what we are using, so it's not a perfect comparison, but I don't think there is a big increase in costs there.

Maybe the way to get at that is on the different component that you are using from your wholesale providers, are you seeing like your growth revenues that the costs that are contributing to your growth revenues, the rate of those costs or the rate of those services increasing, whereas others are not going up? Just maybe help us break that carrier cost out a little bit better.

I would say that there is some increase in the rates, but I would say that in general, we see in our converged IP product suite that we continue to see very high margins there, so there's a difference in configuration. Our overall costs have -- in terms of an estimate since I don't have the specific number is probably about CAD200 million to CAD250 million of our costs are in that nature. And it's been that probably last year as well because remember we continue to have programs to migrate services to our own facilities where it makes sense to invest some capital. And that brings down our costs and then you have some rate increases that may increase it, so we are working hard on that. Clearly it is an important cost line to us and also working hard on the regulatory front to ensure that we continue to have access to services there for -- to provide competition for customers.

I would say one important piece of work that we've done this year though is to look at our other options and move some of our needs to other types of carriers, whatever they are cable, hydros, or some of the new providers as well, whatever they are [Entry] or Cogeco or some of those, to increase the volume of business we do with them at potentially better rates than the big service provider. So we've done a lot of work on that side also to move some of our business there and benefit from these new arrangements.

Maybe just one final question looking out longer-term. Given all these factors, it seems really difficult for us to really see that margins will stabilize or even improve even with the better economic backdrop. Can you give us the scenarios and drivers that would help us think that margins would -- in the Enterprise segment would actually improve over the longer term?

Well, I mean, the one factor that we continue to work on is our cost side. So we are working pretty hard on driving our costs to be down to be more efficient and clearly we have challenges that we need to meet. So there are some margin challenges in terms of some of our legacy revenues. But also when you look at our legacy revenues, they are coming down as a proportion of our overall total, so we have -- that is going to serve as a stabilizing factor as well because there's less high-margin revenues to lose as we go forward and I think as Pierre mentioned earlier, the converged IP is our highest growth service and our highest margin service. So there's a number of factors there, but when we put that all together, we see stabilizing margins going forward.

Yes, I would say, Jeff, that and as IP grows and some of the new product lines grow and become the majority of the Enterprise business and legacy continues to decline, you know, just de facto because it becomes the majority of the business, the margin will indeed at that point be stronger than some of the declines that you were seeing.

And for an overall company basis, because of these declines, the Manitoba portion of the business takes more room into the calculation of the overall margin for the business itself overall, which brings it to an even stronger performance at that point.

Maybe just one final quick one. What percentage of your Enterprise revenue base now would you consider as legacy? I know you have given us the AT&T and Rogers piece, but overall?

Yes, I think it is about 53% is legacy.

Thank you.

Glen Campbell, Bank of America.

Yes, thanks very much. First a question on the consumer business. We have seen the total subscriber count in the consumer business drop this quarter and that compares to growth a year ago. We talked obviously about some of the impacts of new cable competitors. But it seems that Shaw is competing aggressively in the sort of lower end of the digital product range as well as with their triple play. You've got a new product coming on that more serves the high end.

Can you talk about things that you might do to return, say, that subscriber growth into positive territory and maybe just talk a little bit more specifically about what Shaw is doing promotion wise in your market that's resulting in these kind of numbers? Thanks.

Okay, Glen, I'll take a crack at that. First, I'm not sure about your comment on customer connections declining. I think our overall customer connections on the consumer side did increase when you look at everything, but --.

Leaving out wireless, I'm sorry.

Okay, leaving out wireless, okay. Anyway, to your point, I guess a couple things I might comment about. Although clearly our new HDTV product is a very capable product at the high end and it's got features and things that we think are going to deliver a lot of value, it is going to also help us more down market as well because when you look at some of the characteristics of the technology and the way it can be deployed, we think it's going to appeal across all segments. So I wouldn't characterize it as only a high-end product. It clearly will have some penetration down at the lower end of the market as well.

You know, I don't want to obviously talk a whole lot about our competitors' strategies. You'll have to ask Shaw what they are doing, but clearly, they have been aggressively promoting and they've been using similar tactics perhaps as I think they have in the rest of their operating territory, a lot of direct marketing, targeted marketing, quite aggressive offers that are pretty deeply discounted in some ways.

So to respond to that, we've been pretty disciplined. We haven't responded directly by trying to match those offers. We thank our whole bundle approach and pretty disciplined approach to targeting key segments with the right offers is the way to go. Overall, I think some of the pressures we've seen in TV and Internet and even on the wireline side in the quarter, you know, it reflects the fact that there's a pretty strong competitive fights and I think we are doing well in that fight, but it is a fight.

And so we will continue to do the things that we have been successful at doing, working our bundling strategy, marketing effectively, being disciplined in our pricing. I think if we do that, roll out new services like our HD products, we just announced a Windows Live service launch today which is going to significantly improve the value on our Internet offering. We've increased our speeds on Internet this year and are very competitive with our Internet product. I think all those things in the long term will serve us well in terms of competing against cable.

Thanks very much. And I had a follow-up on the Enterprise side. We've seen a big drop in long distance traffic. Presumably most of that is coming on the Enterprise side. Are you able to give us a bit more color in [terms] of first, if we separate out the impact of customer losses what the traffic loss would be?

And second, can you give us a bit of a sense of what the in-quarter trend is, whether we are seeing stabilization in the year-over-year change rates or a continued deterioration? Thanks.

Glenn, it's Dean here. Not a lot to do with customer losses. Actually it's a lot to -- in fact, we've seen very few customer losses. What you are seeing is its customers for whom long-distance is a part of a they themselves sell or they themselves use and they are seeing less demand. And primarily it's coming out of the US, as Pierre and Wayne mentioned, which is as you see maybe broad consumer needs reflected through retail, use of call centers, transport, and delivery. All of that seeing a down and their call centers effectively reflecting that down.

Include airlines in that and anybody who really uses call center as their touch point for consumer marketplace. That is predominately what we are seeing. With respect to the trend, you know, I said it a little bit in my first comment. The speed of this caught us a touch off guard. I don't think we are seeing anything either increasing in that as in a worsening. It seems to be, but I'm going to reserve forecasting that until we see a little bit more time ahead of us for the rest of the year.

Okay, fair enough, and one quick one to finish up. The HSPA [draw bill] with Rogers, CAD70 million budget, you indicated that you were saving CAD30 million relative to what it would have cost to do it on your own. I would've thought it would've been more like 50% given the JV nature of the deal. Could you help me out on that?

Well, part of the costs that we are spending would be -- and as you know, we are sharing the network, but we still will be maintaining, each of us, our own customer capabilities, and so the core part of the network we would be building on our own. And then in addition, there is some service development costs that would be included in there that again would be ours rather than shared. So it doesn't work out to 50-50, but if you took those things out, then it roughly does work out to 50-50.

So just to be clear, you are building the core jointly or you are building that entirely on your own?

That's on our own.

And the core includes the back haul?

Back haul would be -- each party is contributing their own towers to the joint network, so each party would be building their own back haul, yes.

Okay, so the elements of the core then are, could you help me?

I might have to get Kelvin to help you with that one.

I was kind of waiting until Wayne ran out of gas there. I guess the best way to describe it is the part that's shared is what you would call the radio access network. And so that's clearly shared and it is basically a 50-50 or pretty close to 50-50 share. We are building our own core. The core or the simple way to think about it is it's the equivalent to what would be the switch in the old environment. But it is things like the central IT switching core, the call server, the HLR capability, and additionally obviously, we have to integrate and provide infrastructure for many of the services. So that's a simple example of things like voicemail or WAP browsers or those types of things.

Many of those we already have, but there is a cost to take over existing platforms and integrate them into the new HSPA network. So that part is clearly our own investment. We are not sharing that with Rogers. We are really just sharing the radio access component. And what that means I think in terms of practical terms, it means we'll have our own service capability and our own ability to differentiate and provide services that we want to provide to customers. And Rogers has the same independent capability to do the same thing because after all, we really are still competing in the retail space here. So the part that is being shared, call it the dumb radio access pipe part.

Okay, that's helpful. Thanks very much.

Rob Goff, Haywood Securities.

My first question would be on the wholesale services that you provide to cable providers such as Mountain, could you discuss your exposure on that front and what your growth prospects may be? The second question would be on the wireless. We have a very aggressive bundled product at CAD34.95. Could you talk to your objectives there?

Sure, Rob, Dean. I will talk about Mountain Cable. So that's an arrangement that has been around for four or five years now and as you know by the nature of your question, we are the underlying provider. What we call it is network resident IP telephony and that portfolio has a few customers within it. Mountain is the largest within that set and what we'll have to see is what their acquisition by Shaw brings to the table. But again, I emphasize that they are one of other customers. They are not the only one on that platform.

And what we are effectively providing them is as the name suggests, is a voice service capability integration into the PSTN and all the call features that you would expect, but all of it done on a wholesale basis that they basically take it and convert it into a retail service. It's true for all of our customers in that space. They convert it into a retail service for consumers and small business in their territory using their trucks, their install, and their last mile access as it were with the hybrid fiber correct cable that they have.

It's a great service and we will have to see -- and it's under contract, as you'd imagine, and we will see what Shaw decides to do with respect to that acquisition.

Rob, on your question on our all access plan, which you know is roughly a CAD40 plan but can be bundled to the CAD35 level, we launched that plan earlier obviously in the quarter. It has been a very I think good launch. We've had good response from customers on it. Our objectives there when we launched the plan were really first of all to ensure that we had a very attractive kind of offer out in the market that we thought would generate a lot of interest. But we also wanted to drive traffic to our stores and we felt a lot of people when they actually looked at the plan and understood what was in it probably would be just as interested in some of our other offers.

And that's really what we are seeing. We are seeing strong traffic come to our retail locations for wireless. You saw our results in the quarter. They were quite strong. The results, early results from our all access plan are actually in line or better than what our plan assumptions would have been. So we are seeing about 2 to 1 in terms of people taking the plan. Two of them would be upgrades from existing customers with one, the third one being a brand-new customer coming in, so it is stimulating new customers.

But we are also only seeing about 10% of the traffic that that plan is driving to the store to take that plan. About 90% are taking our other existing plan. So that's in line with what we had projected. We thought it would generate a lot of excitement, a lot of interest, but at the end of the day, it actually is a more expensive plan than our other plans. And so many customers come to the store, they are interested, they are attracted, but they may sign up for a student plan or insider plus plan which might have a CAD25 price point rather than the CAD35 or CAD40 price point of the all access plan.

So we're quite happy with it. We think it has done well so far and still evaluating sort of the results from it to see how long we keep it in the market.

Very good, thank you very much.

Ladies and gentlemen, that's all the time we had for questions. I would now like to turn the conference over to Mr. Peters for closing remarks.

Ladies and gentlemen, we've reached the end of the second-quarter 2009 conference call. Once again, thank you for joining us today.

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