BCE Inc (BCE) 2009 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Allstream fourth quarter 2009 results and 2010 financial outlook conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Paul Peters, Vice President of Tax and Investor Relations for MTS, you may begin your conference.

Thanks, Natasha. Good afternoon, everyone, and thank you for joining us for our fourth quarter results and outlook conference call. At close of trading today we issued a news release for the fourth quarter results of 2009 as well as our 2010 outlook. The news release along with our MD&A and supplementary information are available on our website at MTSAllstream.com. For purposes of this call, we also have slides available. I encourage you to have a look at them.

Earlier today, MTS's Board of Directors approved the first dividend, 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 Consumer Markets Division, Dean Prevost, President of Allstream, and Chris Pierce, Chief Corporate Officer. Today's comments may contain forward-looking information related to the finances, operations and strategies of the Company including comments on revenue, EBITDA, earnings, cash flow, capital expenditures, sales and marketing activities. These statements are based on assumptions made by the Company and run the risk that our actual results and actions may differ from those anticipated. Statements made today reflects 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'll now turn the call over to Pierre,.

Good afternoon and welcome to our call. First I want to thank you all for joining us so late in the day. I know many of you had a busy day today.

While facing challenging economic times and not delivering the results we expected in our Enterprise Division, we accomplished a lot in 2009. We met our revised guidance on a consolidated basis. We delivered strong results in Manitoba and ended the year with a strong performance in our Allstream converge IP products, growing 11% in a tough environment. We completed significant strategic transactions that will support and improve long-term performance.

Give you a few highlights. We continued to deliver growth in our principal growth product lines, which include wireless, high speed Internet, television, converge IP, and in fact delivering some of the best results in Canada. Collectively, these services grew by close to 5%. We took actions when we saw our results being negatively impacted by the economy, and reduced our level of capital spend, went to the debt markets to retain our flexibility and focused even more on cost reductions. And as such, we achieved CAD58.4 million in annualized cost savings at the high end of our increased target for the year.

We completed several arrangements that should bring more long-term strength and stability to our business. The largest of which was our strategic wireless arrangement with Rogers. As a regional wireless provider, we found the lowest cost way to build an HSPA network in Manitoba, with access to exciting handsets and gaining access to wireless for Allstream nationally. We also formed an alliance with Sprint-Nextel that enabled us to offer a larger and more exciting collection of CDMA handsets to our Manitoba customers on a more cost effective basis while we deploy HSPA in Manitoba. We raised CAD625 million in debt through the year at favorable rates, while preserving our solid balance sheet. This I think reflects our ongoing ability to access the capital markets, and the trust of investors. So all in all, we believe we took the actions that were required to support our business, our dividend, and the long-term delivery of shareholder value.

More specifically, 2009 was another strong year for our business in Manitoba and I continue to be impressed by the strength and resilience of our consumer division in the face of aggressive price competition. Through the year, we led the Canadian telecom industry on a number of key metrics, with continued solid growth in revenues, EBITDA and in our growth lines of business, while maintaining among the lowest rates of line local losses in Canada. We expect consumer growth services being wireless, high speed Internet and television, to continue to grow in 2010 at similar levels than in 2009.

Wireless revenues were up by a strong 8%, and our customer base grew by almost 5.5% in 2009. We also saw more pricing rationality in our market for the holiday period, something that's always good news. We achieved this continued growth while holding ARPU above CAD57, a decline of only 0.6%, which was significantly better than our peers' performance through the first nine months of 2009. And we expect to continue to hold this position in 2010. I'm also pleased to report that we're making excellent progress with our Manitoba HSPA wireless network build, and expect to launch later this year. And while there has been lots of coverage on new entrants in other markets in Canada, we continue to anticipate that there will be no new wireless competitor entering the Manitoba market in the near term.

In other solid results were the 2009 Internet revenues in Manitoba, up 7% and customer up 3%. Through the year, we continued to enhance our broadband offerings and deliver unmatched speed, leveraging our deep fibre network and keeping us competitive with cable. Last week, we continued the evolution of our broadband network in Manitoba, with the announced launch of a Fibre-To-the-Home build in certain areas of the province. This deployment will provide us with a continued market leadership position and bode well for further success in broadband and television services. About CAD6 million of the CAD25 million we're setting aside for 2010 strategic investments will be used for Fibre-To-the-Home and it will be used to pass about 3,000 homes. We're beginning our deployment through approximately 500 homes in Manitoba in a new Winnipeg neighborhood called Waverly West. The fibre to home investment will help us deliver very high speed Internet, lower our long-term costs and strongly support growth in both broadband Internet and television services. In fact, on the television services front, I'm very pleased with the progress we made in 2009 with the launch of our premium high definition television service.

We said it many times, MTS Ultimate TV is the most advanced television product in Canada, providing customers with a unique PVR functionality as well as access to our fastest Internet speeds of up to 32 megabits. In 2009, we rolled out MTS Ultimate TV gradually in Winnipeg and also expanded to Brandon, the the second largest city in the province. The service now available to about 70% of Winnipeg households. This expanded footprint was reflected by strong subscriber additions, which reached their highest level in the fourth quarter and that with only three months of promotion. Over half of these customers are new, and our ARPU was up by 3.1% at the end of the year.

We're also continuing to enhance the attractiveness of our premium television offering. We're soon going to be offering a feature called winter sports picks, allowing for multi-picture viewing that should be very popular for viewers of events such as the upcoming Olympics. And according to most recent forecasts, Manitoba's economy's expected to grow in 2010, and MTS is well-positioned to again deliver solid results this year and retain its leadership position in Canada for many operating telecom metrics. Turning to enterprise or Allstream. I think as we've discussed many times on this call, the recession and slow pace of economic recovery had a significant impact on our results in 2009.

Importantly, our performance was consistent with what other telecom providers serving the enterprise market experience, and that's including our Canadian peers. The majority of the negative impact has been concentrated in our long distance and legacy data products, which have shown signs of stability over the past few months. The recession also affected our Unified Communications line of business, as customers postpone capital investment decisions. However, we expect this product line to start growing again with the recovery of the economy. Key enterprise products like Converge IP grew by 11% in the year, and now represent our largest product line in Allstream, with very good margins. We expect similar levels of growth for this product in 2010.

In 2009, Allstream exceeded its customer satisfaction target. The data, as measured through independent surveys, shows that we continue to widen the gap with our competitors when it comes to providing a great customer experience. A competitive advantage for us, in our opinion. And our national enterprise customer connections were also up by 3.7% at year-end. So our plan for 2010 is to continue to strengthen Allstream, and strategically invest in its fibre network to improve profitability and support future growth. Building on the past year's successes in achieving strong growth in Converge IP, we're setting aside up to CAD15 million from our 2010 capital plan to expand our metropolitan Allstream IP fibre network in a very targeted manner. And in markets where Allstream has a proven track record of success.

This investment will help drive unmet revenue growth, mainly starting in 2011 and reduce the import and access cost we pay to incumbents while giving us access to the capacity and the functionality we need so really making Allstream more competitive. Again, the capital associated with this investment is included in our annual capital envelope, and is success-based as determined by new customer wins. These investments are not done with the philosophy, build it, they will come. They are highly focused.

Our second area of strategic investment, which is also included in the CAD25 million we're setting aside for strategic investment, is wireless. We've been looking at this opportunity for some time, as you all know, and believe that we have identified an attractive opportunity that will allow Allstream to build on its wireline strength, with innovative and unique converge wireline, wireless bundles and application for business customers. While not expected to be a large play, our planned wireless offerings represent a niche opportunity, delivering growth while enhancing Allstream's ability to expand and defend its existing wireline revenue base. Allstream already has tens of thousands customers. Wireless application development capabilities that we can all support from MTS in Manitoba, network distribution channel and a skilled sales force, enabling a launch probably late in 2010. Our arrangement with Rogers significantly lowers our cost to enter the business wireless market, under variable cost model where we do not have to build network infrastructure. We would expect our investment in Allstream wireless to be approximately CAD25 million, including customer acquisition costs over about three years. So a part of that is set aside in 2010 in the CAD25 million strategic investment that we've announced.

The smallest side of our planned wireless investment reflects well our strategy. We're basically adding a product line to Allstream to complement its product offering, not launching a new business. However, we're pretty excited about it, and we're going to be back to you with more detail when we announce our formal launch. So taken together, in 2010 we're making targeted investments in Allstream and in MTS, to leverage our existing business and add new capabilities with good potential for value creation. Across both units, we will continue in 2010 to focus on strategic imperatives similar to previous years. These include driving solid and profitable growth, highly focused on growth products, including wireless, high speed Internet, television, Converge IP.

Driving innovation in products and service to retain our market leadership and exceed customer expectations. Focusing on operational excellence including cost reductions, while maintaining or improving customer experience. And as announced, investing strategically using a very targeted approach to lay the groundwork for long-term growth. We expect in Manitoba to once again deliver leading operating performance for our Canadian Telco incumbent. On the Allstream front, we will continue to improve our cost structure and focus on making targeted investments to stabilize and create opportunities for growth, in particular as the economy recovers. Thank you, and I'm now going to turn the call to Wayne.

Thanks, Pierre and good afternoon, everyone.

Overall, our consolidated results for 2009 were in line with our updated financial guidance. Please note that our actual results for 2009 from Continuing Operations and our 2009 outlook were adjusted to exclude revenues from our non-telecom IT consulting business, which we have sold to Price Waterhouse Coopers and have classified as Discontinued Operations. The amount of these revenues was approximately CAD50 million in 2008 and 2009. For comparative purposes, in our news release and MD&A, we have restated our 2008 and 2009 financial results to exclude the portion of the business that we sold.

In the fourth quarter, our Enterprise Solutions Division results were consistent with the second and third quarter performance as we continued to see legacy revenues level off after the declines experienced earlier in the year. While our Consumer Markets Division was lower than the third quarter due to seasonality in some of our revenue streams, and year-end balance sheet clean-up that increased expenses in the fourth quarter. Growth services continued to show strong results in 2009, and now represent approximately 45% of our overall revenues, reflecting the success of the strategy we put in place three years ago when they accounted for less than 30% of our total revenues.

Through the recession, we have continued to focus on improving our cost structure and creating efficiencies in all areas of our business while at the same time maintaining or improving Customer Service. Building on the considerable progress we made in 2009, improving our cost structure, we are targeting an additional CAD30 million to CAD40 million in 2010 in annualized cost reductions. We expect about one-third of the reductions to come from optimizing our use of Telco networks, about one-third from process improvement initiatives, primarily in our enterprise business, and one-third from supplier negotiations, real estate optimization and other efficiencies.

We estimate our restructuring costs associated with these initiatives to be between CAD35 million and CAD45 million. Partly offsetting the cost reductions we have achieved are higher costs related to increasing growth revenues, increased price of direct costs for certain services, and contractual increases in wage rates. Our business plan for 2010 is based on a strategy focused on driving growth in our IP-based services, success-based capital spending and discipline when it comes to improving our cost structure. Our outlook for the year ahead assumes that our Manitoba operations will continue to benefit from a resilient provincial economy and industry-leading performance against cable competition.

Our outlook also assumes that we will not see any significant benefits from an economic recovery in our enterprise operating results in 2010. We expect our enterprise business to continue to face challenges in the marketplace, following on from the economic recession. Overall, we expect our 2010 results to be generally in line with 2009. As detailed in our news release and on our slides, revenues are expected to be similar to 2009. We expect continued strong growth in wireless, high speed Internet, MTS TV and converged IP, offset by declines in legacy services. Excluding a non-cash increase in pension expense of about CAD15 million, EBITDA for 2010 is also anticipated to approximate 2009 levels.

Earnings per share is expected to decrease year-over-year, as indicated in our guidance, since it is also impacted by this increase in pension expense as well as increased debt charges and amortization expense. Our free cash flow from continuing operations in 2010 is expected to be between CAD175 million and CAD225 million. This is slightly lower than our 2009 results, due to higher debt charges associated with higher levels of outstanding long-term debt, as well as higher capital spending. We expect our total capital spending in 2010, excluding our HSPA network build in Manitoba, to be within 14% to 16% of our revenues.

This range is slightly above the previous year, as we have set aside approximately CAD25 million of our capital program for certain strategic investments. These include the expansion of our Allstream IP network, the expected launch of Allstream Wireless towards the end of the year, and the deployment of Fibre-To-the-Home in Manitoba, as Pierre described earlier. At this level of capital intensity, we compare favorably to our peers in terms of prudent, timely capital spending. Since various elements of our capital plan is success-based, spending could be reduced if operating results are lower than expected.

You will notice that we have maintained relatively wide ranges in our guidance for most metrics. This partly reflects a more conservative approach as well as uncertainty regarding the timing of the impact that we expect the economic recovery to have on our enterprise results. As indicated earlier, we are not counting on any significant positive impacts in 2010. In December, we completed a CAD200 million debt offering and have utilized a portion of these proceeds to prepay our 2010 pension solvency requirements, which means we will not be making any solvency payments in 2010 and minimal solvency funding payments in 2011. This is based on our interpretation of the proposed pension funding rules as announced by the government late last year, which we expect to be in place by June of 2010.

We have also prefunded our HSPA build, deferral account rebates and any outstanding restructuring accruals at the end of 2009. We are on track with HSPA, and continue to expect total costs to be about CAD110 million, with approximately CAD70 million to CAD80 million of this occurring in 2010. As a result, additional borrowings expected for 2010 are limited to no more than CAD20 million. Even with this incremental borrowing, we continue to have one of the strongest balance sheets in our industry, with a net debt to EBITDA ratio of 1.7 times. Our business plan for the year ahead contemplates a quarterly dividend payout of CAD0.65 per share in 2010. Assuming our business is performing to our expectations, this is fully covered by our free cash flow, while the additional borrowing required for investing in operating activities is easily fundable under existing credit facilities. Any actual declaration of our dividend, however, is reviewed on a quarterly basis and is subject to applicable law and the discretion of our Board of Directors.

Longer term, we now forecast that we will not pay cash taxes any earlier than 2017. This is based on our longer term EBITDA growth assumptions of 1 to 3% once the economy recovers in 2011. I know that some of you often speculate on what will happen to the dividend when we become taxable seven years from now. On this issue I would make the following observations. If you project cash flows based on our moderate growth assumptions, we would expect the dividend to remain fundable from operations. If you project cash flows based on lower growth assumptions, the year in which we become taxable moves to a later date.

As part of our continuing efforts to evolve our business and to move closer to our customers, effective January 1st, 2010, we realigned our operations into two business units. Our enterprise account base in Manitoba, previously part of our Enterprise Solutions Division, is now a part of the MTS unit in Manitoba under Kelvin Shepherd and the small business account base across Canada, previously part of our Consumer Markets Division is now a part of Allstream unit under Dean Prevost. This move is nondisruptive, a simple change of recording accountabilities for 300 employees, but is intended to further improve efficiencies and Customer Service in those areas. Starting with the first quarter of 2010, we will be reporting our results under this segmentation. You can find our 2009 annual revenue and EBITDA split on this new basis in our supplementary package.

Our EBITDA margin for our Allstream unit at 13% continues to provide positive cash flow for our business. Although the results are not fully comparable to 2008 when we last disclosed a similar segmentation, due to the integration of many functions and the corresponding necessity to allocate costs, this margin percent has decreased, primarily due to repricing in the long distance market, the increased cost of certain legacy services that we resell and the impact of foreign exchange in 2009. We are addressing margins in our 2010 plan through a continuation of our cost reduction efforts, which are focused on Allstream, continued growth in high margin converged IP services, and strategic investments that will reduce our reliance on incumbent networks and drive high margin on net revenue growth.

Before I open it up for questions, I also want to briefly comment on one other issue. Earlier this year we announced the decision from the Manitoba courts in respect of one of our Manitoba pension plans. As we expected, the manner in which we administer the plan was affirmed. It means there will be no increase to the Company's ongoing pension funding requirements.

The court also ruled that MTS was obligated to make a CAD43 million one-time payment, retroactive to 1997, the year MTS was privatized, and the MTS pension plan was implemented. Our lawyers advise us that key aspects of this part of the decision present strong grounds for appeal. Therefore, we are going to proceed with this appeal. We will provide you with further information as this matter continues to move forward. In the meanwhile, as I am sure you can all appreciate, this matter remains before the court and there are limits as to how much we can say about this.

Thank you. We will now be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Glen Campbell from Merrill Lynch. Your line is open.

Yes, thanks very much. I had a couple of questions on CapEx in the wireline network. If I understand it right, you've given guidance of 14 to 16% of sales but the HSPA investment is outside that and if that's the case, what sort of wireless investment would then be happening inside the envelope? Then I had a follow-up.

Kelvin may want to elaborate on wireless more specifically, if appropriate, but our wireless investment we still have would include any remaining capital with respect to our CDMA network. So while we would have a desire to limit that as much as we can to offset some of the costs of HSPA, which you may recall was part of the announcement when we originally talked about the HSPA costs, there still would be some capital with respect to that CDMA network. And in fact, some areas that are underserved where we can still continue to gain customers and make a positive business case with that network.

Okay. Then my follow-up's on the wireline side. Could you give us a sense of what you're hoping to accomplish on your access network in Manitoba on the wireline side in terms of shortening the loops, et cetera, and coverage with VDSL-2 and how much of your plant is aerial? Thanks.

Glen, it's Kelvin here. I'll try to tackle those questions. So I think as you probably know, we talked about rolling out VDSL-2 in Winnipeg, Brandon, and Portage and for all intents and purposes the network roll-out is complete in Brandon and Portage with coverage of somewhere in the 90 to 95% range. In Winnipeg this year we'll build out some remaining cabinets. It's really an overlay of existing equipment. That should take us somewhere in the 85 to 90% range, and we've been testing VDSL-2 bonding technology. We anticipate that being ready to take to market sometime late in the year and our expectation is that by deploying that within the footprint, we'll get potentially another 4 to 6% of coverage from existing fibre to the node placement. So that effectively is going to complete our VDSL build.

We have two or three other I guess what we would consider sort of Tier 2 communities that are in the 4,000 to 5,000 home range that have been part of our build plan. One of those is in our plans for 2010 but to your point, after some analysis, we've decided to build that with Fibre-To-the-Home technology rather than VDSL-2 deployment. It has about an 80% aerial component in that particular city, so it makes a lot of sense, very economic I think over a short time frame to use the technology. In terms of our overall aerial percentage, I don't know why I anticipated you might ask this question, but I did a little bit of quick checking. Winnipeg, which as you can anticipate, is by far the largest portion of our residential wireline base, is about a 60/40 ratio in terms of buried to aerial, so it's only about 40% aerial. And that, as you can see, is also where we've invested pretty heavily in our fibre to the node plant which probably will be our main plant there for quite some period of time. We are deploying Fibre-To-the-Home in Winnipeg but it really is in a greenfield situation where it's pretty economical. Where you've already got the ground open. In you get out into the rest of our network, the ratios really vary quite widely and you really to look at it scenario by scenario and certainly there's some kind of a break point at which Fibre-To-the-Home gets quite interesting, if you have high aerial ratios and other locations where probably DSL will continue to be the economic alternative for some period of time.

Just to wrap up. By the end of 2010 in Winnipeg, pretty much all your loops will be 650 meters or less?

Either 650 meters or less, probably for in excess of 90%, and when we look at the blending capability, that will take that loop length that we can deliver our service out, probably in the 1100-meter range.

And then that leaves the potential I guess for CapEx to step down a chunk, at least potentially, after 2010. Would that be fair?

Well, at that point, yes. It really gets driven then by subscriber growth. I suspect demands for higher speed Internet will continue to place some demand on expansion of capacity in that network but it won't have the same level of expansion CapEx required for sure.

Thanks very much.

Your next question comes from the line of Greg MacDonald from National Bank. Your line is open.

Thanks, good afternoon, guys. I have a question on the margin outlook and then I have a quick follow-up after that. So looking at the margins, you continue to face some headwinds on the enterprise side. It's enterprise I'm focusing on. Migration from IP, from legacy services to IP represents some margin pressure but if I add to that a new product launch in late 2010, Wayne, you're commenting on -- that you're hoping for stable margins or focusing on stable margins for 2010. How comfortable are you with that? And in particular, as you exit 2010, starting to launch that wireless product, should we be anticipating that there will be more margin pressure in later 2010 relative to early?

Just a couple things on that, Greg. First of all, I think that when you thing about IP services, you mentioned that that creates margin pressure moving from legacy and that's in fact not the case. If you look at our connectivity revenues for legacy as well as growth services, there really isn't a difference. In fact, it's driven primarily by whether it's on net or off net. So we have very high margin for our IP services, as long as they're on net, and that is facilitated this year by our incremental investment to improve our cost structure as well as create opportunities for more on-net revenues, which as I mentioned are the -- where we achieve our highest margin and are able to provide the best service. The second part of your question you're talking about the new products or new services and rolling that out. What I would say is that it's a very small impact in 2010 and we don't expect to have a real meaningful impact on margins and in 2010 or 2011, in fact. I'm comfortable that that margins can be maintained through that.

Okay. Thanks for that. And my second question, you can -- you might want to tell me that I'm searching for something here that's not there but I guess that's why they call us analysts. On page five of your MD&A you make some commentary on the dividend, contemplating CAD0.65 for 2011, then you indicate assuming the business is performing to expectations. That's cautious language, and it's new language relative to previous indications. Could you give some comment on that, particularly given what is new recently and that's that court ruling on the pension liabilities. I know you're going to be appealing it but any time you go into court it's risky. Thanks.

Well, first, it's Pierre, Greg. Thank you for your question. Just go back to the reef previous question just for one second. Just back to Allstream wireless, the plan we have right now is really, again, I want to really emphasize it, this is not a major wireless play for us. This is a targeted launch to support really our wireless business and create some growth opportunity. But we recognize the model under which we're launching this, and we think that we have an interesting niche where nobody offers the type of products or packages that we're planning to offer, so we think we'll be quite competitive under the model. But we are talking about adding a product line and not launching a full-fledged wireless business out there across the country. So there's more to come as we announce our plans, we'll give you more detail, but it is not something as you've seen by the numbers, CAD25 million for three years, including, it's clearly not a big, huge effort there. So just keep that and put that in perspective.

That is helpful.

Now, back on your question about the MD&A dividend, I think, first, what you see and what you call new language is basically one more recognition by us that we know and understand that the dividend is an important part of the value that investors are looking at when they consider MTS. So the new language is linked to that. It is not linked to a pension decision that we got recently. You know, that's something that a judge decided something on one of the court case, as you saw the announcement, we said we're going to appeal this. That's going to take probably a long time. We'll see.

We're not in control of the justice system, but most appeals take many years. And then more potentially. So it's not linked to that. It is much more linked to we can't guarantee a dividend and I think you know that. It's a Board decision and they have to consider a whole bunch of things as they've done in the past, so no change there, and that's just a recognition of that. It's just so far, as we can go in terms of the dividend. What we're seeing is with the plan that you have in front of you and the guidance that we're putting forward, assuming we realize this plan, we're contemplating to continue with the dividend that we have today.

Thanks for the clarification.

Your next question comes from the line of Dvai Ghose of Genuity Capital. Your line is open.

Couple of questions for Wayne. On the recurring free cash flow of CAD175 million to CAD225 million what numbers should I take out to reconcile your consolidated free cash flow guidance? Because you prefunded the pension so anything should be coming out of that. I believe the CAD25 million of strategic CapEx should be taken away from that. Should I take any cash restructuring out of that? What is your consolidated free cash flow guidance?

Yes, just a couple things. First, our free cash flow guidance would include all CapEx except for HSPA. So you don't have to take out the CAD25 million out of that. It's already out in our 14% to 16% of revenues going to CapEx. So that's already out of there. So out of the CAD175 million to CAD225 million, the only thing that remains is the restructuring cost that we talked about being CAD35 million to CAD45 million. So everything else has been prefunded with debt that is already on our balance sheet and that would include as you mentioned, HSPA and the pension solvency being the big ones, but also any impact of the deferral account and any past restructuring accruals that are carrying forward.

Right. But just from a cash flow statement basis, I understand you prefunded some of these issues with issuance of debt at the end of last year. Just trying to reconcile the change in net debt. You mentioned about CAD20 million additional. I'm trying to reconcile that. So while you prefunded the HSPA, it's not in your recurring free cash flow guidance; correct?

That's right. So HSPA will flow through the cash flow statement this year as I mentioned, about 70 to CAD80 million.

70 to CAD80 million on HSPA?

Yes.

Okay.

And so if you take that, it will basically come out of our cash on hand. So it will show up as a reduction in cash, but we already have the cash in place to fund it.

Okay. So when you're talking about the change of debt of CAD20 million or so, you're talking about gross debt, not net debt?

That's right. And it's up to CAD20 million, you know, based on our guidance ranges.

And what would it be on a net debt basis, sort of CAD90 million to CAD100 million, because of 70 to 80 on top.

No, it wouldn't did -- as I said, that's the total increase in debt that we would anticipate, up to 20. So that we wouldn't be increasing debt to that amount because we already have the debt on our balance sheet from our December issuance.

Right.

We borrowed the money. It's sitting there in cash. If you look at our balance sheet in fact, you would see that we have over CAD100 million in cash.

Right.

So that reduction in cash for HSPA is going to come out of that balance, not out of additional debt.

Okay. Understand. But if I talk again, on a net debt basis as opposed to gross debt, which is what you're referring to.

I suppose so. I'm not sure I fully understand what you mean by net debt.

Net of cash.

We can walk through it offline.

Yes, that's fine. The other question, real quick, on your comment. So you rereleased Allstream EBITDA and there was a 13% margin and you suggested in your earlier comments that it's still generating positive cash flow even though the margin's only 13%. I was wondering if you could back that up and give us some idea of what CapEx to sales you're using and presumably you're apportioning some of the pension and restructuring items to Allstream as well.

CapEx is kind of in that roughly 10 to 12% in that area.

Right.

So we would have a slight positive cash there. I guess the other thing that I was trying to say is that while we're using the same names as we used to in 2008, it's really not 100% comparable. Many functions have been integrated and so there's a need to allocate costs now, so it's not directly comparable to when you would have or if you try to compare it to when we last released results under similar or names of segments.

Okay. That's great. Thanks very much.

Your next question comes from the line of Philip Lang from UBS Securities. Your line is open.

Great. Thanks very much. Just wanted to go back to the dividend, if I may, just looking at the footnote there. I know, given this conditional language on the dividend is new and I understand that it's not guaranteed, but there may be a perceived higher risk of a change to the dividend as a result of this language. I was just wondering if you might be able to talk a bill about the scenario that may lead the Board to or what type of situation would lead the Board to reconsider the dividend or a change to it and maybe just clarify the footnote there, what type of legal requirements are you guys referring to aside from the Board approval on the dividend?

Yes, I really think there's no difference in the language anywhere, and if there was, there's no intention at all around it. We're talking about very standard stuff that any Company has to face in terms of the Board has to approve it and the Board has to approve it under certain conditions and if you go I guess in corporate law you're going to find these conditions. It's pretty standard. I think so. I would ask you not to make anything out of it because it is really nothing different than what any companies have to follow all the time. And you've noted that we have reviewed our MD&A and changed some of the language to update it after a few years. In fact, we did a full revamp of it this time and that's just part of the update, if there was any change, but it was clearly not the intention that I can tell you.

As for the situation that the Board would consider impacting the dividend, pretty hard to say other than a serious -- one of them a as an example, and only an example, because again, the Board decides on the dividend, but a serious issue in terms of results and ability to fund the dividend, would be an issue. But our Company today as you look at it, similar performance in 2009, as were putting in the guidance and a solid balance sheet. So at the end of the day, it's hard to look at that, but clearly not having the funds available to pay for it would surely be over time an issue, but again, you've seen the numbers we're putting forward and you've seen the cash flow we're generating so we think that we're making progress in some areas and particularly doing extremely well in Manitoba, or projecting to do extremely well in Manitoba and for Allstream you're seeing the moves that we're making to try to strengthen the business as the economy recovers.

So maybe I can just elaborate from a numbers perspective. I think we're trying to show with our guidance that our dividend is fully fundable from the cash flow that we expect from our business and maximum of CAD20 million of additional debt, I think you would agree is easily, if that happens, easily fundable from our existing credit facilities and so we are trying to say that on that basis, on the basis of our guidance, we're committed to the dividend and as Pierre said, having said that, it's not something that we can promise or guarantee but the numbers show that we can fund that.

Great. No, thank you for that clarification. Just a quick follow-up on the Rogers and AT&T migration pieces. How much of those are still left to go?

Well, there is -- I think we have somewhere in the neighborhood of CAD60 million to CAD70 million in revenue from those two customers. We do have, as part of our ongoing agreements with Rogers, a closer relationship that basically stabilizes that piece of it, so we aren't expecting to see the kind of decreases that we saw in the past. We will still see some decrease on the AT&T side, especially in certain areas that are legacy related.

Got it. Thanks very much.

Your next question comes from the line of David Lambert from Canaccord Adams. Your line is open.

Thanks. Couple questions around your free cash flow. If I just take the 2009 cash flow statement and try to get to your guidance for 2010, essentially what I'm trying to get to is how much of the CAD80 million in pension funding that you spent in 2009 was the prepayment for the 2010?

It would have been about CAD15 million.

Okay. And so if you exclude all of the CAD80 million that was spent in 2009, your free cash flow before -- essentially your free cash flow before dividend would have been equal to the dividend of about CAD168 million. And so I'm just trying to get to how you get to CAD175 million to CAD225 million in 2010, when your EBITDA is essentially flat year-over-year and your CapEx is going up.

Well, I guess it's a little hard to answer in detail because I'm not sure of all the numbers you're working with, but basically if you take our EBITDA range at the CAD585 million to CAD635 million, if you took our CapEx range from 14 to 16%, you would roughly get somewhere between CAD250 million and CAD300 million then the other items that would come off of that would be net charges, our cost of acquisition on the wireless side, and also the normal cost of our pension which would be about CAD15 million, in addition to the expense that's already taken out of EBITDA. So when you reduce those, you get to that CAD175 million to CAD225 million. But I mean, to the extent that you're having trouble following that, I mean, we can -- if you'd like, have a call and I can go through the numbers with you and show you how to get there.

Okay. All I'm saying is there's only an CAD80 million difference between what you guys did last year and this year which is the pension funding because everything is pretty much the same except for a little bit of increased CapEx.

Well, on that --

last year you did CAD168 million. So my follow-on question to that is is the Board okay with a dividend payout ratio of 100%, is essentially what it comes down to.

David, I think the biggest difference when you're talking about the CAD80 million, so that's our total pension cash requirement, so if you take that, it would be I think roughly CAD60 million or CAD55 million in pension solvency payments, and about let's say CAD20 million, CAD25 million in regular pension payments or normal pension costs. Our pension solvency funding is actually as I mentioned earlier going to be -- is expected to be zero in 2010. So CAD50 million in additional cash flow that's available for other things that we've talked about.

And I think, David, it's Pierre, you know, one more thing. I don't think we can answer your second question directly but what I can tell you is the Board approves every quarter the news release and the MD&A with all the information that's in it, including some of the pieces that you're talking about. Okay. All right. Thanks.

Your next question comes from the line of Jeff Fan from Scotia Capital. Your line is open.

Thanks very much and good afternoon. My question is on the reorg that you're doing on between MTS unit and enterprise. Going back to a few years ago, seems like you had reorganized it and now going back to more of a geographic. Just wondering, seems to be a reversal what you did a few years ago. Now you sold the consulting business. Seems a few years ago you guys said that was important to drive some of your conversion IP services. So where does Allstream fit right now? What's the strategy for this business? Seems like a lot smaller than what it used to be, especially now you don't have the Manitoba corporate business in there.

Yes, it's Pierre. Let me first answer part of the question, I'll pass it to Dean for what we're doing and why Professional Services was sold. In terms of reorg, a few years ago, in fact, when I came in the Company, we did change the structure at that time to create the Enterprise Division and consumer and basically moving the small business national small business group under our consumer division, where we thought it would be more appropriate to have it to operate it with lower cost structure and moving the enterprise business of Manitoba, so the incumbent side, with Allstream so they could sell similar products and benefit from similar skills.

You have to remember that at that time, and you may not know that because you weren't really inside the Company, but when I came in, there were a lot of duplications between the organization and we were running a high cost business, so we centralized all the corporate groups, all the back office groups, all the support groups, basically, and created those two divisions with the mandate for each of the presidents to really integrate, take out all this duplication and reduce costs. Which over the years, if you've seen, we've succeeded quite a bit in doing that and we made the product lines uniform, and I think now we got everything we could out of that structure and have learned also a few things, where it's pretty hard to run an incumbent business like Allstream. It's still different. There were duplications. We took them out. We're not going to recreate it.

All the corporate groups are staying centralized in the Company and serve both divisions, but I think we learned certain things and now think that we can better operate putting the incumbent all together and closer to its customers for both markets and leave the CLEC operating on its own nationally, though. And benefit from all the integration that's behind in terms of the network, the technology, the IT group. The rest is all integrated. So it's only the customer-facing groups that are not integrated for us I think we're now at that point and we gained as much as we could from the previous structure and we think now that we will benefit from that one and that our customers also will benefit more from that one. I'll just pass it to Dean so he can talk to you about PS as well.

Thanks, Pierre. Hi, Jeff. What we sold really we called it Professional Services but that's such a broad set of language. I think we should be a little more explicit. What we really sold it had two key components to. It was very specialized application department and integration. It was also a large Oracle ERP practice. That's really the bulk of what was sold. And those two elements weren't dragging or driving a lot of integration with the rest of our connectivity and Unified Communications business. We actually added to our infrastructure related PS business over the last number of years including an acquisition in the fall of last year and what I mean by that is that that Professional Services capacity has been growing inside the organization but as it relates to things like hosting or storage or Unified Communications or managed services on the connectivity business so we've actually kept back and have a very large Professional Services practice. But it's integrated to the supporting product lines and is kind of purpose-built to drive that business.

What we sold to PWC was not really relating to the rest of the business in that way. And more importantly, we took back from PWC that partnership arrangement that was described that has us working together so if there are relationship elements or leads or connections that need to be made between the broader PWC-led kind of strategy, IT and application world, then we could still benefit from that. So I think we've kind of had a bit of our cake and ate it too in this space. So it's still important. I told the team internally here, Professional Services is core to what we do. It's actually an element of what we do and it's really embedded within our core portfolio. It's not a practice separate and apart.

Just a quick follow-up on the numbers. If I look at the adjustments that you guys make from your previous structure to the new one that you're going to report in 2010, it looks like the net effect is that the margin that you're -- of the business that you're transferring back to MTS, it's a pretty high margin business and that would reflect the Manitoba Corp.?

That's the incumbent enterprise business.

Okay. And that's mostly the government work, government contracts and -- ?

Large customers in Manitoba but an incumbent basis. Indeed, the margin, the incumbent, much higher.

The margin looks like it's around 80%, is that true or is there some offsets there?

There would be some offsets. As I mentioned, it's not completely comparable because we do have to allocate costs that are integrated that Pierre talked about earlier. But I mean, basically the gross margin would be very high in much of that business because it's all on network in incumbent territory.

And just one last one on Allstream. You mentioned I think earlier that the business -- the Allstream unit is still cash flow positive. Is that correct? And if so, what kind of CapEx is still being spent on Allstream?

Well, I mean, I think what you would find if you look at the numbers, that the positive cash flow is very slight. We have cash from operations and we spend a fairly similar amount on CapEx.

Okay. So it's nominal?

That's correct.

Okay. Thanks.

Your next question comes from the line of Maher Yaghi with Desjardins, your line is open.

Thank you for taking my question. I just wanted to maybe dig deeper a little bit into your revenue outlook. When I look at the assumptions that you are making to get to your revenue outlook, you guys mentioned that you expect consumer market to remain growing at the same rate it was in 2009. And on enterprise side, you're not expecting any improvements in the markets that you are in. If I apply those assumptions, looking at your 2009 numbers, I get a decline of 2.4% on your revenue year on year. That gets you directly onto your lower end of your 2010 guidance of 1780. I'm trying to understand what assumptions you are using to potentially deliver the high end of the guidance or the mid-range of the guidance, because the assumptions that you state in your MD&A are mainly targeting the low end of guidance.

Let me just -- I'm not sure I'm totally following you but I can tell you what our assumptions are. We have -- we are assuming that we will have growth in our MTS Manitoba business and so similar in the growth areas like wireless, high speed Internet and TV and a similar on the legacy side where we're seeing some declines as well. So we had growth there this year and we expect to see that again. On the enterprise side, where we had a fair amount of a decrease there last year in 2009, we are expecting that to level off a bit. So you've seen in the last let's say three quarters, we've been pretty much similar in terms of revenue whereas in the first and second quarters where we saw fairly large declines. So things have kind of leveled off and that has resulted in on the legacy side, anyway, we're seeing the decreases being less steep than they were earlier in the year and we're expecting to see significant growth continue in our converged IP line of business. So when you put all that together, it's basically at the mid-point of the range, anyway, fairly flat in terms of revenue.

Okay. Now, I just wanted to ask you on your tax losses, you seem to have increased since the last update. Has that been due to an increase in the tax losses or mainly from lower expected profits going forward?

Well, the 2009 as you know was lower than what we had anticipated that it would be, so basically that you might just say that that pushes out the forecast by a certain period of time.

Okay. So you don't update those numbers on a quarterly basis because last quarter you were targeting 2015 in terms of when you use up your tax losses. You update them once a year, that's what you're saying.

Yes, pretty much. We're talking about an eight-year forecast, so it's pretty long range forecast, so to update that quarterly isn't going to make much sense. So that's something that we would probably do each year.

Okay. Thank you very much.

Your next question comes from the line of Peter Rhamey from BMO Capital. Your line is open.

Yes, just want to continue with the competitive environment on the Allstream side. Maybe for Dean or Pierre. Bell indicated that they thought things were improving on the enterprise side, actually even citing that there had been some sales of consulting businesses, that would mean that there is more revenue opportunity for them. I was hoping that you could talk about your business a little bit more in depth, as you did with the other analyst, maybe talk in terms of backlog, whether that's actually growing and what the pricing environment is. And then I've got a few follow-ups on some housekeeping items. Thank you.

Yes. I'll pass it to Dean but first one thing, I didn't listen to the Bell call but they may not be talking exactly the same things as we're talking about. Because I thought when I looked t at their results that their business were down 4 or 5%, if I recall. So that's still an indication that it's not all rosy out there. My impression, at least from the numbers. I didn't listen to what they said. Just looked at the numbers. While there's not a whole lot disclosed, didn't look like a lot of improvement on the customer growth, at least. I'll pass it to Dean.

I think it's always helpful if Bell is the largest player in the enterprise market is they're commenting on they're seeing pricing stabilize. It's a helpful thing. I've heard not to be too optimistic on that one. I think long-term there is a structure to see that improve, particularly as folks start to use up their fibre facilities and build a bit more. But I wouldn't say I've seen any drastic change in the last couple of quarters. Having said that, we did see some stabilization overall in the business at the end of last year that we talked about. In terms of the backlog, no concerns at all on the kind of IP connectivity space. Did see a little positive bounce in the Unified Communication space at the end of last year which is nice because that's a little green chute associated with what business might look like for this year, again, too early to comment on whether it will and how long it will play or how long it will take to kind of have impact in this year.

But the demand for that IP connectivity set of solutions, whether it's wavelength or MPLS or obviously any of the Ethernet services embedded in that portfolio seems pretty positive right now. We've got a couple of nice wins under our belt at the beginning of this year which were big enough and kind of as expected in the sense that they really were of size, they're national, and they're very long-term contracts. So for me, I've got some optimism now but more of it's coming from small examples than really a long pattern of four months of improvement.

Are you seeing more activity requesting for quotes from businesses at all?

I am. It was relatively quiet heading into the Christmas time and we seem to be out bidding heavily again, at least from an activity point of view, post January 4th. So right now it's looking good. I caution you all recall the time line associated with this business so it's good to see the activity level but that turns into revenue over a longer period of time.

Pension costs, what were the pension costs in 2009? I think there's a CAD15 million increase if I'm not mistaken in 2010. Is that correct?

Well, the pension costs in 2009 were I think as talked about earlier, about CAD80 million in total in terms of cash flow. We are looking at -- basically, it would be we would have split between regular or normal cost, pension and our solvency funding, so our solvency funding in 2009 was let's say CAD45 million to CAD50 million, roughly. And we would have had normal funding of about 25. So somewhere in that range. We are still going to have normal funding in 2010, but our solvency funding, assuming that the government rules are put in place the way we expect, should be reduced to zero in 2010 because we have prefunded that in 2009.

Fair enough. What is the accounting credit that you used for pension in 2009?

We would have had a credit, I think in the neighborhood of CAD5 million in 2009, and we would have a -- as I mentioned, a CAD15 million increase, we would have an expense in 2010.

Very good. And I guess the accrual for restructuring you still have CAD14 million on your books and that gets spent in your forecast in your free cash flow number in 2010; is that correct?

Well, free cash flow we take out the impact of working capital, but we have, as I mentioned, we've counted that as part of what we would fund with the cash on hand, so we don't expect any impact of those accruals on our debt levels.

Perfect. Thank you very much.

Your next question comes from the line of Vince Valentini from TD Newcrest. Your line is open.

Yes, thanks very much. Want to go back to the Allstream reorganization. You have a new Chairman as of December. I'm wondering if there's any new strategic review of the business going on and is there any way that this reorganization could make that business a little easier to sell and strip away if a buyer ever surfaced? And related to that, can you remind us what the tax structure is now? Are there really any tax loss carry-forwards still left in the Allstream segment. Have you basically used all those up and now you're into capital cost allowance? In which case it shouldn't really matter if you divest assets or not, you still get the tax benefit for the next several years, thanks.

Thank you, Vince. Pierre. Thank you for the question. Our new chair, David Leith, which I think many of you know well, you know, David is just coming on the job there. It was January 8th, if I recall. So clearly no change on where the Company is going and how the Board is functioning. I would tell you that you can ask him directly but I don't expect any major change of direction of the Company because we have a new chair. We've been on the strategy and the same strategy for a few years. The Board and the management team believe this is the right strategy. And we're pursuing it. We're not concerned making decisions. If we have to make decisions on things and act, if needed, and our main goal continues to strengthen the business to deliver more value to our shareholders and the arrival of David I think just reinforces that as a new chair and I'm sure at one point you'll have a chance to chat with him about it.

On the tax losses, Vince, there is one of our slides that details the tax losses. We, I think as we talked about in the past, our businesses or divisions or business units, whatever you want to call them, are together in one corporation for tax purposes and the value of our tax losses is in that corporation. On our slide we talk about those tax losses having a net present value of CAD350 million. But you're probably remembering that we had -- of the losses that we originally acquired, they technically expired in May of 2009 and part of the strategy to use them up was to not claim capital cost allowance for that five-year period and in fact that's what we did.

So when you take that capital cost allowance that we have built up and you file your first tax return, you're going to take the maximum reductions available to you, regardless of whether they're -- how they relate to your income. So what ends up happening is you create new losses, if you will. So you convert some of that available capital cost allowance into losses and then the combination of the two over the next seven years is what reduces our taxable income to nil. So the advantage now is that we really no longer have an expiry date to worry about because the capital cost allowance doesn't expire and new losses that are created now have a 20 year life. So we're not faced with an expiry.

And I think lastly, we commented before on if you're trying to do any kind of strategic scenarios like you're talking about, it gets more complicated as to what happens with respect to tax and can you move things around in the tax world. I can't really comment or tell you anything for sure as to how that would work without actually looking at what the scenario would be specifically.

Okay. Thanks. One follow-up on the pension court decision. Correct me if I'm wrong, but your pension funding on a go-forward basis is a function of the pension deficit you had. If you did lose this appeal and you had to put up CAD100 million into the pension, would that just not reduce the deficit that exists and therefore reduce the go forward amount of funding that you have to make so it's really just a timing issue on making that payment as opposed to the CAD100 million being a purely incremental amount.

That would certainly be our view on things and as this is subject to a dispute in court, so there's probably a number of ways to look at it. But that would be ours.

Okay. Thanks.

Your next question comes from the line of Peter McDonald. Your line is open.

Maintenance questions first. The accounts receivable securitization level, what is that at right now? Is it in your leverage of 1.7 times?

Our AR securitization at December 31st 2009 is zero.

And your debt leverage of 1.7, what is your comfort level there? Is it two times? Are you comfortable going above two?

I guess I don't know that we have a hard and fast number there. We're currently at a BBB credit rating and we would like -- we think that's a good place for our business to be with the Canadian debt market the way it is. And there's probably a fair amount of room from where we are but I don't think that that's the only metric that's used by the credit rating agencies as to determine where the break point is. So I don't have an issue with moving that or seeing that move but we don't anticipate it increasing at this point in time anyway, because we're not anticipating additional debt in our guidance.

Okay. And then just a couple of questions on pension, first a follow-up to Vince's. Your interpretation is that it has no impact on your total deficit but is the court's decision, is their interpretation that it does?

Yes, that's a little difficult to answer and I don't know that we can really get into the detail on the court case. I think we tried to, to the best of our ability, interpret what was in the decision and included those things in our news release. So the decision talks about a one-time payment which we believe there are strong grounds for appeal and we're going to appeal that part of it. And the balance of the decision kind of favors us with respect to governance issues.

Okay. And then the last question is on the prefunding of the pension, can you tell me exactly what you did there? Did you actually pay down any of your deficit? I don't see anything in the financial statements towards that.

It would be included in the cash flow statement under the line called pensions. We funded an additional roughly CAD15 million which was the first couple of quarters that we would have had to make in quarterly payments under our funding that we had in place. The funding rules that were in place, and with the government's announcement and our expectations with respect to how that's going to be implemented and the timing of that implementation would result in us having no further requirements in 2010. You may recall in terms of the details on that decision, that letters of credit are allowed and various other things that were incorporated into that government announcement and all of those things combined do provide some relief for companies in our position.

Essentially your interpretation is that you have letters of credit or raised CAD200 million in debt, you set that aside for the deficit, you don't actually have to make the payments?

Well, you're allowed to use letters of credit in lieu of cash funding and then the next actuarial evaluation would determine how that changes. So you're still doing annual evaluations so it's hard to predict too many years into the future but in 2010 we have a fair amount of visibility into it and that's why I think we can make a stronger statement with respect to that one.

It's a very different way than what the other incumbents are looking at. Do you have a comfort level? Have you received some sort of a comfort level on whether or not that would be acceptable to them?

I can't comment on what the other guys are doing or whether their pensions are similar to ours or their funding situations are similar to ours, but the government made their announcement. They have indicated that they're committing to having the detailed rules in place by June of 2010. So at this point we're operating under the assumption that they will indeed have the rules in place by June of 2010. If they don't, then we'll have to let you know after our second quarterly call how that impacts us, if at all.

Okay. Thank you.

Your last question comes from the line of Glen Campbell. Your line is open.

Thanks very much. Two quick clean-up questions. First, Wayne, you mentioned some true-ups during the quarter on the operating expense side. I wonder if you could just elaborate on what they were and how big they were. On the Allstream side you highlighted higher cost of sales on resale. I wonder if you could quantify that, when it took place and what products were affected. Thanks.

Sorry, on the first one, I think that's just standard year-end stuff so it's probably expenses you would see on our quarterly -- if you look at the supplementary and our quarterly expenses in the consumer division being higher in the fourth quarter, so if you take a difference in the fourth quarter versus what you're seeing in the other one, that would probably be pretty close to what we've done in terms of clean-up because expenses don't vary that much from quarter to quarter. So I don't have that quarterly analysis in front of me but I think that will give you the number you're looking for. Sorry, I missed your second question.

Just on the cost of sales, network costs on the Allstream side that created some margin pressure on your resale products.

Okay. Yes. No, I'm talking about, as you know, we do use the incumbent networks for part of our customer service. And in some cases in some services that we use, we've seen price increases that would have impacted us in 2009.

And can you quantify that?

It's a little tough to quantify specifically, so yes, I don't have a number for you there.

Okay. Thank you.

This concludes the question-and-answer session. Mr. Peters, please continue.

Ladies and gentlemen, we have reached the end of our fourth quarter 2009 conference call. Once again, thank you for joining us today.

This concludes today's conference call. You may now disconnect.