BCE Inc (BCE) 2010 Q1 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference operator. At this time, I would like to welcome everyone to the MTS Allstream first quarter 2010 results 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.

I would now like to turn the conference call over to Mr. Paul Peters, Vice President, Tax and Investor Relations for MTS Allstream. Mr. Peters, you may begin.

Thanks, Amanda. And good afternoon, everyone, and thank you for joining us for our first quarter results analyst call.

Early this morning we issued a new release for our first quarter 2010 financial results. The news release, along with our MD&A and additional supplementary information, are available on our website at mtsallstream.com.

Yesterday, MTS's Board of Directors approved the second 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 MTS; Dean Prevost, President of Allstream; 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 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 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'll now turn the call over to Pierre.

Thank you, Paul. Good afternoon and thank you for joining our call today.

Our first quarter results were not at the level we expected them to be as economic and competitive conditions remain challenging. However, our results were inline with the second half of 2009 as we continued to deliver growth in key product lines, invest in our network capabilities, and continued to aggressively take out costs.

Allstream showed some signs of stabilizing and its results are inline with its peers in the business sector. MTS and Manitoba continued to deliver better margin that its peers for many products, even though its results were not as strong as they've been in the past.

Importantly, we're maintaining our overall market share and retaining our customers through a disciplined response to aggressive promotional price competition from Shaw. In fact, our market shares in Manitoba, which some are the highest in the telecom industry in Canada, remain stable or grew across our growth product lines. These growth product lines, being wireless, television and high-speed Internet, delivered subscriber growth of about 5%, 6%, and 4%, respectively.

Our local line losses, even though they were up slightly from last year, continued to be among the lowest, and our voice share in Manitoba compares very favorably to Alliant, Bell and TELUS.

Our long-term strategy to be the telecom supplier of choice in Manitoba and owning the home is working. The number of customers utilizing our bundle of services climbed in Q1 by 8.4%. The strategy is key to the strength of MTS in the future.

Looking more closely at our growth line of business. First, let's talk about wireless. If you exclude the one-time CAD3.4 million handset sale in the first quarter of 2009, our wireless revenues were up by about 4%. Our customer base grew by almost 5%, and ARPU stayed north of CAD54 and our churn rate remained low at about 1.3%. We're also progressing well with Rogers on our HSPA build and we continue to expect the new network to be operational by the end of this year.

Some of you may have questions about new wireless entrants potentially entering the Manitoba market. And I can tell you that we've seen no evidence of construction activity, so we don't expect that there will be new entrants in Manitoba anytime soon.

We admitted the priority over the past years to roll out fibre deep and enhance our broadband offerings, leveraging that broad-reaching fibre network. We plan to continue the evolution of our network in Manitoba with select fibre-to-the-home builds.

In January we announced the deployment in Waverly West, a new Winnipeg neighborhood, and now Selkirk, a community north of Winnipeg. This will help maintain and grow our market share to continue to win against our cable competition. It is often neutral cost-wise, the cost of putting fibre in a new community, or in communities where outside plan is scheduled for renewal is about the same as copper.

On the television services front, we now have a base of customers exceeding 89,000 and a 34% market share. Our Ultimate TV service launched last year is now available to 74% of households in Winnipeg and becoming more popular each month. The functionality we offer, combined with our HDTV channel lineup, has resulted in a product that is superior to our competitors and consumers agree as we're facing a strong demand, which bodes well for our success later this year.

Looking at the quarter, overall results for MTS came in below our expectations, part of it due to aggressive promotional pricing from cable competition and I'd like to offer a few comments on this.

Our approach to competition in Manitoba has been, and remains, disciplined and continues to be value based. We're leveraging our competitive advantage as the only full service provider in the province, able to bundle up to five services. Shaw's not been keeping up and cannot match the breadth of our offerings.

Beginning late last year, Shaw put promotional pricing points into the marketplace that are, in our opinion, below their cost of providing these services. In response, we have used selective retention pricing and have maintained our market share for our growth products. However, as you can see, we've seen an increase in the rate of local line losses and a decrease in Internet ARPU, which is impacting MTS' EBITDA.

We have recently taken more actions to improve our performance and have implemented plans leveraging our competitive advantages on bundled offerings. Some of our peers are also seeing this type of competitive behavior and I believe that, with our ability to bundle up to five services, we are best positioned to compete against this type of pricing strategy.

Now, turning to Allstream. Our first quarter results in the national enterprise market are still not where we want them to be. As you know, the 2009 recession hurt Allstream's legacy business and has impacted their first quarter results when compared to the first quarter of 2009, which was the best quarter of last year. Our Q1 results are, however, consistent with the third and fourth quarters of 2009 and, importantly, show signs of stabilizing.

Important to our strategy is that Allstream's largest and most profitable product line, converged IP, continues to deliver strong growth, with revenues up 6.1% compared to the first quarter of last year. However, the slow pace of economic recovery continues to impact Allstream's legacy data and long distance business, along with unified communication and security services.

And as I said in February, our plan is to continue to strengthen Allstream, to continue to improve its cost structure and to strategically invest in its fibre network to improve profitability so it can deliver a better performance by 2011. There is solid demand for our IP products and we're working hard to benefit from it.

As part of our cost containment efforts, we recently signed collective agreements with two unions at Allstream that include multi-year wage freezes. And I want to thank our employees' unions for supporting the Company.

We are progressing well with the expansion of Allstream IT fibre network. As announced earlier this year, we plan to spend up to CAD15 million to expand Allstream fibre network in 2010 in a targeted manner. This investment is part of a three-year plan to extend fibre to 675 select multi-tenant buildings that are within 200 meters of our existing national network, as well as enhancing our Ethernet capabilities in our co-location areas. These will help extend our on-net reach which provides us with margins that are three times better than off-net sales.

While it's still early, after only three months of marketing to customers in the targeted buildings, we won 24 new contracts. Based on the typical sales and installation cycle for enterprise customers, we anticipate the benefits from these sales and investments should begin to impact our results in 2011. We will continue to update you on our progress.

Now, I know that there's a lot of interest and speculation about Allstream and Allstream's value. Some of the valuations I've seen apply little or no value to Allstream at all. I have to disagree. This is a business which delivers more than CAD100 million in EBITDA, has strong customer relationship with Corporate Canada, has 70,000 business customers, and a national IP fibre network spanning more than 30,000 kilometers.

So, contrary to what some of you have estimated, the value of Allstream is far greater than zero, in particular when you consider a recent multiple paid in Canada for smaller IP providers like Blink. Dean and his team are working very hard at improving the performance of Allstream and we're seeing momentum picking up.

As you would expect, the Board and Management regularly look at the number of options for enhancing shareholder value as part of our planning process. Our current view is that our shareholders are best served by continuing to own and build value in Allstream. We believe Allstream's value will be increased once the economy improves and capital spending by our enterprise customers returns to normal levels.

And before I turn it over to Wayne, I wanted to briefly comment about two final items. First, foreign ownership. We welcome the federal government's announcement that it intends to lift the restrictions on foreign investment applicable to telecom companies and are participating actively in the consultation process.

We believe that greater foreign direct investment plays an important role in generating innovation, better and far-reaching infrastructure, and a better outcome for all Canadians. As the only national facilities-based competitor left in Canada, we stand to gain from a prudent policy framework and pro-competitive regulations that increase foreign direct investment in Canadian telecommunication companies.

And a word on our dividend. As some of you have expressed concerns, I would offer the following observations. We recognize the importance of the dividend to investors, as we've said so many times, and it is something our Board looks at very carefully. The Board decided not to be reactive to the economy, but rather to take a long-term view on the basis that the successful execution of our business plan will improve the financial results of our company and provide a stable foundation for our dividend.

Although our first quarter results were not where we would have expected them to be, we have taken action to improve our performance. And while our results are trending toward the low end of our financial outlook, we still believe we can achieve our outlook ranges. As you can expect, we will continue to carefully monitor our performance and market conditions.

Thank you. And I will now turn it over to Wayne. Wayne?

Thanks, Pierre. Good afternoon, everyone. Results from continuing operations in the first quarter include revenues of CAD442 million and EBITDA of CAD145.3 million. Earnings per share came in at CAD0.46 and free cash flow was CAD54.9 million.

When comparing these results to last year, keep in mind that the first quarter was our best quarter by far last year given the change in economic conditions that occurred in the second half of 2009. Also bear in mind that we estimate our non-cash pension expense to increase by approximately CAD15 million this year, of which CAD4.7 million occurred in the first quarter.

Overall, our first quarter results in 2010 were in line with the third and fourth quarters of 2009, which we believe represents a more meaningful comparison than first quarter of 2009. This stabilizing trend is expected to continue in 2010, with some improvement over the balance of the year, driven by the execution of our plans and the expected growth in the economy.

Importantly, through the first quarter our strategic growth services, such as wireless, high-speed Internet, television, and converged IP, which make up 40% of consolidated revenues, continue to perform well. Collectively, these lines of business were up 4.1%, excluding a one-time wireless equipment sale in 2009.

Before we get into the details, I'd like to make a few comments regarding the changes to our reporting that you would have seen in our release earlier today.

Effective January 1, 2010 we aligned our business around our geographic segments and markets. We replaced our two divisions, the Consumer Markets division and the Enterprise Solutions division, with two business units, MTS and Allstream. With these changes, MTS and Manitoba gained responsibility for the Enterprise account base in Manitoba that was previously part of the Enterprise Solutions division. And Allstream gained responsibility for our small business customers account base outside Manitoba, which was previously a part of the Consumer Markets division.

We have also provided additional revenue details this quarter, which we believe provide significant insight into our various lines of business and is consistent with how we are managing the Company.

In prior years, at both MTS and Allstream, local access, long distance and legacy data lines of business constitute what we have called Legacy Services. There are significant differences between these revenue lines. Access revenues have been relatively stable over the past few years and represent continued high margin revenues. On the other hand, long distance and legacy data, which you can see represent about 25% of our consolidated revenues, are experiencing double-digit declines and decreasing margins.

Our remaining lines of business, wireless, unified communications and broadband, which includes digital television, high-speed Internet and converged IP, make up what we have called our growth services, which now represent 47% of total consolidated revenues. Within this growth portfolio we are showing our high margin connectivity business split between wireless and broadband in MTS, and converged IP at Allstream.

The other element in our growth portfolio, unified communications and security, is shown separately in both divisions as it contains non-recurring and often lumpy revenues, like one-time equipment sales, and typically earns lower margins.

Note that the operating statistics in our first quarter supplementary package for 2010 and 2009 have also been restated on this basis.

While I do not want to repeat all of the details in our MD&A this afternoon, I would like to make a few comments about the financial results of both business units.

Let's start with revenues at MTS, which were down by 0.9% year-over-year when you exclude a CAD3.4 million sale of FleetNet handsets to the City of Winnipeg in the first quarter of 2009. This decrease reflects continuing strong growth in wireless, converged IP, digital television, and unified communications services, which was partly offset by lower long distance, legacy data and local access revenues.

Allstream's Q1 revenues were in line with the third and fourth quarters of 2009, which we believe is a more meaningful comparison than the first quarter of last year, given the change in economic conditions that occurred in the second half of last year.

On a year-over-year basis, Allstream's revenues in the first quarter of 2010 were lower by 9.4%, which is primarily attributable to the lingering impact of the recession and slow pace of the economic recovery. The majority of the impact continues to be concentrated in unified communications, as well as our long distance and legacy data products.

We expect unified communications to gradually return as the economy improves and customers increase their capital spending. Long distance and legacy data have been relatively stable over the past three quarters, but are expected to continue to decline over time.

Importantly, Allstream continues to experience strong demand for its converged IP services, which grew by 6.1% in the first quarter compared to the same period in the prior year. We expect continuing strong growth from this line of business through the balance of 2010.

Consolidated EBITDA from continuing operations for the first quarter of 2010 was in line with our results for the last two quarters of 2009, but was lower by CAD18 million when compared to the first quarter of 2009. This decrease is attributable to lower revenues and an increase in non-cash pension expense of CAD4.7 million, which was partially offset by lower direct costs and other operating expenses.

On a divisional basis, MTS' EBITDA from continuing operations in the first quarter at CAD119.8 million was down by 6.6% when compared to the prior year, or 2.9% when you exclude the CAD4.7 million non-cash pension expense increase. This 2.9% decrease is primarily due to a reduction in the contribution revenues due to the CRTC's inflation calculations, and aggressive price competition from our main cable competitor in Manitoba. Although market shares have been maintained overall, lower pricing has impacted revenues.

MTS' EBITDA margin in the first quarter of 2009 continues to be industry leading, exceeding 52%, reflecting our continuing operational efficiency initiatives over the past two years.

Allstream's EBITDA from continuing operations in the first quarter of 2010 is comparable to the last two quarters, with a small improvement in Allstream's margins, which increased to 12%. We are focusing on further improving Allstream's performance in 2010 through a continuation of our cost reduction efforts, continued growth in high-margin converged IP services, and strategic investments that will reduce reliance on incumbent networks and drive high margin on net revenue growth.

In the first three months of the year we continued to work hard to align our cost structure, and by March 31st had achieved CAD17.3 million in annualized savings against our target of CAD30 million to CAD40 million for the year. These savings have reflected -- these savings reflect cost reduction initiatives at both MTS and Allstream, and include savings from headcount reductions, our optimization of the use of other carriers' networks, process improvement initiatives, as well as supplier negotiations.

Capital spending from continuing operations in the first quarter was CAD56.4 million, compared with CAD56 million in the first quarter of 2009. This represents a capital intensity ratio of 12.8% in the first quarter.

Our total capital spending in 2010, excluding our HSPA network build in Manitoba, is expected to be within 14% to 16% of our revenues. At this level we compare favorably to our peers in terms of prudent timely capital spending. Since various elements of our capital plan are success based, we have the flexibility to reduce spending if our operating results are lower than we expect.

We are on track with HSPA and continue to expect total costs to be CAD110 million, with approximately CAD70 million to CAD80 million of this occurring in 2010.

In December we completed a successful debt offering debt offering that will fund our HSPA build, our deferral account rebates, and the prepayment of our 2010 pension solvency requirements, which means that we will not be making any solvency payments in 2010. This is based on our interpretation of the proposed pension funding rules as announced by the government late last year, which we continue to expect to be in place by June 30th.

Free cash flow from continuing operations was CAD54.9 million in the first quarter, compared to CAD68.2 million in the first quarter of 2009, which is in line with our financial outlook for the year. The year-over-year decrease in free cash flow from continuing operations is primarily due to lower EBITDA and higher debt charges.

As previously indicated, free cash flow within our guidance range exceeds the dividend, and a portion of our restructuring costs, with additional borrowings expected for 2010 to be about CAD20 million, which can be easily funded under our existing facilities. Even with this incremental borrowing, there would be little to no impact on our credit metrics and we would continue to have one of the strongest balance sheets in our industry. At March 31st, our debt-to-capitalization ratio was 42.8%.

I'm also pleased to announce that our Board approved the establishment of a dividend reinvestment plan. The plan will provide shareholders with the option to have dividends automatically reinvested in additional common shares without incurring brokerage fees. Subject to the approval of the Toronto Stock Exchange, we expect to have our dividend reinvestment plan in place for the second quarter dividend and will issue a news release when we obtain approval from the TSX.

Before I open it up for the Q&A, I'd like to leave you with a few thoughts. Although our results in the first quarter were not where we would like them to be and are trending towards the low end of our financial outlook, we have plans in place that we expect will drive growth through the balance of the year.

We are making excellent progress with our strategic investments and the early results are ahead of plan.

After the first quarter we are on track to reach our target of CAD30 million to CAD40 million in annualized savings by the end of the year.

In Manitoba we have the highest levels of operating efficiency in the industry and the strongest competitive position.

On a sequential basis, Allstream's EBITDA performance has been consistent for the past three quarters and the division's flagship strategic growth product, converged IP, continues to grow strongly.

Our business continues to generate significant cash flow and our balance sheet continues to provide us with excellent financial flexibility.

Thank you and we will be now happy to take your questions.

(Operator Instructions.) Vince Valentini from TD Newcrest.

Yes, thanks very much. I have two questions. One, the dispute with Bell over the wireless agreements, can you tell us where that stands and, if you get a settlement on that, where that would flow through your numbers?

Let me answer the first part of the question, Vince. That's still progressing in front of the arbitrator. It's a long process, as we said. So, no, nothing to announce on that front other than it's moving forward, progressing, and has been for many, many months. But I think as we said in the time, we didn't expect a quick resolution on this and have to follow the schedule of the arbitrator. Wayne?

We would record that in our -- as a recovery of our expenses, but we would record that outside of continuing operations as that's how we recorded it when we paid it.

Okay. And the second question. You talk about the aggressive pricing by the cable competitor. I just found it a bit strange that you had better performance in all three wireline subscriber categories, your residential adds or your video sub-adds and your DSL sub-adds, all better than first quarter of last year by what I saw. It seems to me, if Shaw was really aggressive on pricing, you would feel it on the subscribers first and then gradually it would filter through your financials, but that didn't seem to be the case. So, I'm just trying to figure out what might have happened.

Yes, good point, Vince. In fact -- and I'm sure Kelvin will want to add to this, but it shows what we've done basically, which is protecting our market share and retaining our customers. But for that, that means that the way to react to this type of CAD30 bundle that we have in our market with mass market advertising, in fact, is to react and not match it necessarily, but match it with the tools that we have, where we see we have more discipline, where we have more products to bundle.

So, we've reacted with bundle offers, basically, that are pretty aggressive and are impacting our ARPU and EBITDA at the end of the day on those products. That's how we've faced it. But we felt it was more important to retain our customers, and clearly did not want to match this type of irrational pricing that's been put forward, and trying to leverage it with customers that have multiple products with us and that's what we've done. I don't know, Kelvin, if you want to add, or--?

I think the only other big change, really, from Q1 of last year that has helped us is we didn't have Ultimate TV in a big marketplace last year. And that was the big difference this quarter and it's actually helped drive both Internet, wireline, voice, and TV as we've seen strong demand for that product. And so, that's actually helped on the subscriber side although, as Pierre mentioned, we have had to do more on the retention side than we did previously.

And Kelvin has a good point; an excellent point, in fact. IP-TV, or the type of TV products we have that now some of our peers are slowing introducing, is a very competitive and superior product to cable and has enabled us to have a lot of success. We have quite a bit of demand for the product that we're selling at premium as well. So, pretty exciting on that side.

Great. Thanks.

Jeff Fan from Scotia Capital.

Thanks very much and good afternoon. My question is on Allstream. And Pierre, you mentioned that shareholders are best served by keeping Allstream at the moment. You also mentioned earlier with respect to the dividend that you understand shareholders value the dividend quite a bit. So, my question is, is it fair to interpret that your belief is that Allstream's results are not going to really have an impact on the dividend? And the second part is, if it starts to have an impact on the dividend, that you will consider doing something with Allstream.

Yes. I don't think the dividend question is necessarily linked to Allstream, but to the whole performance of the Company. At least I think that's how the Board looks at it in terms of the type of market conditions that we're both facing with each of the divisions. What are the prospect for growth in the future? How can we add value? A series of factors like this that the Board looks at. So, I don't think it's directly to Allstream.

As you know, the large majority of our cash and EBITDA comes from MTS, our incumbent business in Manitoba. Allstream contributes less, requires less investment into it as well, but offers potential for growth if the economy recovers and if we can get the recipe right which, as you know, we've been working on for a few years and downsizing it and refocusing it and changing the skills from a low-priced long distance provider many years ago to now a full-fledged solution provider in the enterprise market.

So, it's hard to answer in the way you're asking it. It's not a question of I think Allstream. It's a question of what cash does the business produce? What's around it? What are the growth potential? Can we achieve our plan? And I think those are all factors that the Board considers in looking at the dividend.

Can you -- on the numbers front, can you give us a little bit on -- color on what the cash flow was this quarter for Allstream? What was the CapEx this quarter for Allstream? Maybe that's an easier way.

Yes. I don't have the CapEx broken down by division handy. But our overall CapEx was CAD54 million.

Okay. Maybe we'll take that one offline. One other quick question on the tax.

Yes. Maybe -- sorry, Jeff, just one thing, though.

Yes.

In Allstream, the majority, large majority of CapEx is success based. So, we have a sale to a customer with payback -- the period that are pretty short, so we're not doing the 10, 20-year payback here. But payback at a pretty short, and then we invest. That type of capital for the large majority of Allstream that we're spending.

Thanks, Pierre. And just a quick question on tax perhaps for Wayne. My understanding is the Allstream tax losses that you had from when you acquired it expired at the end of 2009. And I believe that you're still saying that those losses have been -- it can still be used to shield the income going forward. Can you perhaps explain the mechanics a little bit on that front and why they have not expired, and why you can still use them going forward?

Sure. The losses that originated from that transaction had an expiree date that has expired now, in May of 2009. And what happens is that those losses were, after the transaction with Allstream, included in the combined entity, our subsidiary, MTS Allstream Inc.

And so, the losses in there were used in two ways. One would be to shelter income each year, taxable income each year. And the other way was to differ our capital cost allowance. So we spend, as you know, between CAD250 million and CAD300 million of capital spending each year, which is deductible for tax according to the rate structures set out by the CRA.

Now, we -- you don't have to deduct those if you don't want to. So, we haven't deducted any capital cost allowance over that same time period, which has built up, through the utilization of those losses, about CAD1.5 billion in unused capital cost allowance.

So now, in our first tax return after those losses expire, we will start to claim our capital cost allowance to the maximum allowable, which creates a tax shield which could manifest itself in new losses with a new expiree date. So, the losses were used in those two ways. And by deferring our capital cost allowance, we effectively stretch out the duration of the tax shield out to 2017.

Right. So, the losses now no longer belong to Allstream, they belong to the combined -- or amalgamated corp.

That's right.

Okay. Thank you.

Glen Campbell from the Bank of America.

Yes, thanks very much. On the question of capital intensity, now that we're seeing the business broken out in a new way, Pierre, I wonder if you could give us your view as to the sort of medium to long-term capital intensity segment? I mean, in wireless I'm thinking it could be quite low as a result of your network share with Rogers.

In Allstream, I guess we've heard in the past a number of around 10%. And I was wondering if you could confirm that. And then, on the wireline side, perhaps there's room to reduce it as you kind of complete your fibre build out. I wonder if you could just walk through the three segments and give us a sense of where it might settle out.

Glen, it's Wayne here. You're right that wireless, once we complete the HSPA build, will have a much lower capital intensity than this year, where we're building out that network. So, it'll go down a little lower. I don't know if we have a number in terms of the long-term plan. But certainly, it's back to where we were just before the HSPA build, I would say. So, just over 10%.

If you look at Allstream, you're -- in terms of the number we've used in the past, it is around 10% as well. As you know, though, we are expanding our network in a very targeted way. So, that is something different. The 10% is more like in the normal course of business. And the expansion of our network would be -- the investment of that would be on top of what we would spend in the normal course.

So, that was around CAD15 million that we've targeted this year. And again, that's -- it follows the success-based approach that Pierre described a little while ago. So, when we win a customer we extend our network out to the building that they're in.

And the third segment, sorry, Glen, was--?

It would be the MTS wireless segment.

Oh, MTS wireless. Okay. Now, the local network is a higher capital intensity. In the past we've talked about the 18% to 20% range. And probably it would continue in that type of a range. Now, that doesn't include anything like what you may have seen from other telcos when they have announced fibre-to-the-home builds on an accelerated basis. So, that's the upside.

Yes, it includes the ones that we're doing right now, which are very targeted and special situations.

So, 18% to 20% there. Now, presumably once you've sort of wound down your fibre-to-the-node, there's room there to do some fibre-to-the-home in that 18% to 20%. Is that fair?

Yes, that's right. That's why -- it really depends on the timeframe that you choose to do it over and when you think you need to with respect to your competitive situation. We have quite a good competitive situation and good products. And especially, Kelvin described earlier MTS Ultimate TV, which give us some leeway there to be pretty focused on our capital spending over a longer period of time.

Okay, thanks. And then just switching gears, now, you used to report Allstream in a way that showed cost of goods sold so we could work out a gross margin percentage. The new reporting doesn't show that. But, I'm wondering if you could give us a sense of where your gross margins are in that business.

Our overall gross margin would be between 50% and 60%.

Within Allstream.

Yes.

Okay. And when we look sort of year-over-year at the impact, at the decline in EBITDA, has there been a change in the gross margin percentage, or should we think of it as being just the impact of revenues on the fixed cost part of the business?

I would say that -- well, we are getting cost reductions in both cost of goods sold where -- I mentioned earlier where we're optimizing the utilization of other carriers' networks. That's an important part of our cost reduction efforts, as well as headcount reductions, which impacts the OpEx. So, I think that those have all kind of moved in a proportional way.

Okay, great. Thanks. And just one last one, then. Could you give us an update on your plans for the wireless MB&O?

Well, it's Pierre -- and if Dean wants to add. I think we're on track, as we mentioned when we first talked about it, for a launch near the end of this year in some specific markets. So, not a whole lot more. We're working through it right now. The relationship with Rogers is working very, very well. No real issue or anything really to report. We're moving forward as per what we announced originally.

Okay. Thanks very much.

Dvai Ghose from Genuity Capital Markets.

Thanks very much. Pierre and Wayne, I understand you have two financial objectives which are admirable, which are maintain the dividend and maintaining an investment grade rating. But I am finding it very difficult to see how you maintain both.

In the quarter your real free cash flow was CAD22 million. Annualizing it may be wrong but, as you know, the Q4, in particular in the second half, is generally weaker for free cash flow. So, if you do annualize it, it's only CAD88 million. Your dividend's CAD168 million, so that's CAD120 million borrowing. I'm not quite sure how you get to the CAD20 million in borrowings. And while your net debt to EBITDA on the surface seems to be about 1.7 times, if you talk to rating agencies who include capital leases and pension obligations, it's nearer 2.3 times.

So, I'm wondering if you can just continue business as is. You've said you don't want to sell Allstream, which others have suggested is a solution. You said you don't want to cut the dividend. And you are going to continue to borrow. This will be your third year of borrowing. So, something has to give at some stage, doesn't it?

Well, I can help you with the numbers on the borrowing side and Pierre may have some comments on sort of your strategic question.

But, I guess the difference between what I talked about in terms of CAD20 million and the number you have is really that the cash on hand in the balance sheet, if you look at it, it's just over CAD100 million. And that's the result of our -- the debt issuance we had in December.

So, what we indicated there was that we were going to prefund our HSPA build, which would happen throughout this year and a little bit into next year. So, the -- I mean, that's largely the difference between the two numbers. Because when I talk about borrowing, I'm talking continuing operations. And the numbers you're quoting are the overall numbers.

No, that makes sense, but it's still net debt going up by CAD120 million, right?

That's fair. If you take the net amount as shown in our MD&A, you're right.

Yes.

Yes. And Dvai, it's Pierre. You know, you're looking at it a certain way. We're looking at it clearly a different way where we're looking at the potential of the business and, in particular for this year, looking at the plan that we can achieve or believe that we can achieve.

And you're absolutely right, the first quarter results are not where we expected them. And I can tell you that, with the Board, we are monitoring our performance. We are monitoring market conditions closely. And you've heard me saying what's our current view on all of this and we seem to disagree on it.

Now, hopefully you know that we've been around this industry for a long time and that we understand how things go as well. So, we're basing those decisions on a lot of discussion, analysis and plans. And we're going to monitor the whole thing and see where that takes us.

No, that's fair. But I'm just trying to get an idea to understand your plan as to how you plug a CAD120 million hole here in terms of free cash flow to dividend. Because when, A, you talk about Allstream and the economy recovering, in the time that you've bought Allstream, from 2004 onwards, revenue's gone down every year and EBITDA's gone down from about CAD250 million, CAD260 million to now a current run rate of about CAD100 million. And most of those years we had a very robust economy.

And second of all, when you're talking about cost cutting, A, it requires restructuring charges in the near term and, B, we're talking about a very big hole here of CAD120 million. So again, I'd be more than happy to support you if I could understand the methodology.

Dvai, just -- I guess a point of reference. I understand where the CAD120 million comes from. But, I mean, I think you would say that a big chunk of that is HSPA spending, which is clearly not going to happen every year. So, CAD120 million let's call it this year. But that's not the amount that we would add to our debt every year, even if we continue with where we are. So, that's where I'm getting the -- trying to reflect the increase in dividend this year as -- barring the HSPA piece, which is about CAD100 million, somewhere in the CAD20 million.

So, when you look at the metrics on our debt coverage and so on, I think that we are well within our credit rating metrics currently. I think that we would agree that you can't continue to borrow forever and expect to keep the same credit rating. So, when we talk about, as Pierre says, looking at the long term and where does this take us, clearly seeing some improvement in our financial results is going to be required. And that's what we're monitoring now. That's what we expect to see. And that's what we're basing our plans on.

No, that's very fair, especially about the HSPA point. I completely concur. But my last question then I'll let you go, is obviously you talk to the credit rating agencies consistently. How much more leverage will they allow you, do you think, before they do threaten a downgrade?

Yes, I don't know that number exactly and they certainly wouldn't tell me. I do believe that we're very comfortable with the plan this year. And I would say for -- even if we were to continue at this level, would probably be okay for a while into the future. But clearly, they're looking at momentum and trend. And they look at your long-term view as well. So, all of those things factor into it. I'm not sure there is a specific break point that they would quote, or that I could quote to you.

Okay. Thanks very much. I appreciate it.

Peter Rhamey from BMO Capital Markets.

Thank you. Two specific questions. One, and it's pretty broad based, Pierre you indicated that the Board believes that it's better for Manitoba to keep Allstream. And I'm wondering, is that a repetition of a view -- after your strategic view from I guess getting on three years ago, or is that a result of a formal strategic review and your firm beating the bushes with regards to any interest there might be for that company?

And the second part of my question is, you both mention that you've reason to be optimistic with regards to improved outlook for Allstream then, in the same breath, mentioned how weak the first quarter was. And your initial guidance was February 4th, only two months ago. So, I'm just wondering, have you taken specific additional steps over and above the original plan to ensure you get there, or is this reason for optimism just based on your current plan in place and what you see in terms of momentum into the April timeframe? Thank you.

Thank you. Good question. Well, first, in terms of the performance in the first quarter, I think where we got impacted more than expected was for MTS. The impact of the aggressiveness by our competitors has been surprising and forced us to take more action. And there, we did launch new plans, new bundles, that have been effective in helping us maintaining share. So, it was more that.

On Allstream, I guess we would have expected a better recovery or a faster recovery of the economy in certain product lines. It didn't happen to the level that we expected, like in unified communications, for example. There was some momentum. There was more in April. But it wasn't at the level that we expected. So, that's one thing.

And in terms of Allstream -- and I know, and I see it in your reports, too, lots of opinion and discussion. Would tell you, clearly both the Board and myself, Dean, the Management Team, we are not planning and looking for operating a business that's declining every year and going down and not performing. That's clearly not our goal. We're also not hard headed in the sense that we must do that. That's not at all the case, either. We believe that we're taking the right action right now to bring the best option or the best available value to our shareholders.

You asked if there was a specific strategic review or it was the view of a few years ago. It's not the view of a few years ago. The Board has changed in that period. There's a lot of new members. We're constantly looking, and in particular when the business is not performing, we're looking at the business to see how we can deliver better value to shareholders and if there are other options. And right now, the view of the Board, and my view, is to operate Allstream and attempt to make it grow and, for sure, make it perform better. That's our duty. And we're working very hard with Dean to make this happen.

And the strategy that we've put forward in focusing even more on the IP side of the business, in trying to extend in a very focused and targeted way the business seems to be paying off. The problem, as you all know, in the enterprise sector is when you get these contracts you don't see the return very quickly. It takes many months before you finish installing and you start billing.

But as you look in the US as well, there's a lot of players there that are growing pretty fast on the IP demand in very competitive markets and that are of a smaller size than the large incumbent. We're looking at some of those models. We're also looking at the multiples that these companies seem to attract and the type of growth that they can deliver.

Our issue in Allstream is that we still have a fair sized legacy base that we are not really focusing on, but focusing more on the IP. And that's making us go down. But we have a piece in Allstream that's growing very profitably and very fast. And we're trying to make it grow faster and bigger.

Great. Thanks very much. That's a good answer.

Greg MacDonald from National Bank.

Thanks. Good afternoon, guys. Two quick ones. As you mentioned, Pierre, there has been some changes at the Board level, a pretty important one in January. Can you indicate whether there has been a formal strategic review committee set up at the Board to look at the Allstream division? That's the first question I have.

And the second is with respect to S&P in particular, the rating agency. I noticed that they've recently increased -- well, as of Q4 they've increased their debt-to-EBITDA definition to 2.7 from 2.0. And I think part of that has to do with operating lease increases. This might be a little bit of a detailed question for a conference call, but could you define what those lease increases have been and sort of what that's about? Thanks.

Well, maybe I can take the last one first, that you're right that S&P has a more complex methodology to determine their numbers. They do include some kind of a lease adjustment. I don't think that -- and they also include, I believe, some kind of an inclusion for the defined benefit pension plan that we have, and other companies in our industry do as well. So, they somehow include pieces of those things. And I think it's probably more so the pension that's caused the increase, if any. There hasn't really been any change in our operating leases. If there was any, it would have been down, so --.

No change in leases between 4Q and first Q.

That's right.

Okay. Thanks.

And Greg, to answer the first part of your question, currently there are no strategic planning committee at the Board looking at Allstream. We've had on and off strategic planning committee at the Board, and you can see that in our proxy design to -- the beginning, do the full strategic review when I joined the Company. But after that, they work with us on some of the wireless options that we have looked at.

I would tell you that now the discussions are happening at the Board level. We have a small Board and it's pretty easy to work with all of the members. And I have a very open relationship with the Board, so we do work together with Management. So, it's happening at the Board level, all those types of strategic discussions that, in a large corporation, you would probably find in a committee. Our Board prefers to have them at the bigger Board.

Okay. Thanks for that, Pierre. Wayne, can I just ask a follow on? Have you spoken with S&P? And you seemed to indicate that it's the definition or the capitalization of the pension solvency issue that they're probably focused on. I find it tough to believe that there's been an increase between last year and this year, or at least between 3Q and 4Q. Have you spoken with them and do you have an idea of what -- that's a fairly substantial increase in the multiple, no?

Yes. I'm not sure I can give you a great answer without checking into this. We do speak to S&P every quarter. And we will be speaking to them again. So, I'm not familiar with -- when you say the amount has increased, that -- I don't think that it has. So, I'm kind of speculating on what the answer could be. So, I may be wrong. We should probably, if you like, follow up and I can maybe get the numbers specifically that you're referring to and then give you a better answer.

Okay. That would be helpful. And when do you meet with them usually? End of quarter? Beginning of quarter?

Well, we talk to them every quarter, usually after the results are released to see if they have any questions and to keep an open dialogue with them. We also -- they have their own process in terms of ratings reviews, so we would meet on their -- at the timing of their choice for that purpose. So, we'd be talking to them within the next few days, probably.

Thanks for that, Wayne.

Maher Yaghi from Desjardins Securities.

Yes. Thank you for taking my question. I have a question maybe that could help us understand a bit better also your dividend policy. Going forward, does the Board have a target policy in terms of dividend as a percentage of EPS, free cash flow, that sort of metric we can use to identify if a change is warranted or not? I mean, a lot of your peers do give certain metrics that the Board uses to determine what the rate -- the right dividend should be. This will probably spare you a lot of those questions in future quarters.

Thank you very much. That's a good question. We do not have -- or the Board does not have a target like that. You may remember that a few years ago we had put a number, that was after the business review, that was around 70% to 80% from a continuing operations basis. And however, over the past few years there has been a lot of change and a lot of one-time investment. So, it's been difficult to follow for our company on that side. But a few years ago, that was the view of the Board at that time.

So, at this point your dividend policy is based on -- can you explain maybe how you determine your--.

--Yes. Well again, I can talk to you about the past, which is, the past, the dividend has been -- the dividend had been established, in fact, before my time at the level that it is currently today. And the target or the guide that the Board was trying to follow at that time was 70% to 80% of the cash flows from continuing operations.

But again, since then life has changed quite a bit. There's been a lot of events around the Company. A lot of work done on the one-time basis in there that you've heard some of that today on the call again. And so, that's been a guide, but a policy difficult to follow. And I wouldn't take it as this is the policy of MTS today.

As I said earlier on this call, the Board considers a lot of elements around the Company, including our ability to deliver plan, the whole market conditions, the ability to create value to our shareholders before setting the dividend.

Okay. And maybe my -- just my second and last question is more to do with -- when you look at operationally on the pricing side in your territory, and you mentioned Shaw as being aggressive. We heard about that coming from other player in the industry.

Do you feel that the drive to win market share by Shaw in your territory is just starting, or it's a drive that could take -- I mean, I could ask -- that's probably a better question to ask Shaw, but do you feel that they're getting more aggressive as time progresses, or they're driving at a certain level and you basically just confronted them with, as you said, the bundling strategy?

And it seems that you're holding your shares quite comfortably. So, how do you feel that the market is going to be in the next few quarters? Is it going to be continuing pricing declines or somebody's going to back off and rational behavior comes back into the market?

Well, I can tell you that they have been more aggressive in the past two quarters, kind of, when they came out with their CAD 9.99 plan for every major growth products. And is the same in TELUS territory, I think. And I don't think it's necessarily directed at us. There may be a bit more aggressiveness here because we are successful in competing with them. But I think others are facing the same thing at the end of the day, maybe with a bit less mass advertising around it.

But in terms of what's their plan, I don't know. I hope that they become more rational. I think they are leaving money on the table. I think they're going under their cost to offer this type of promotional offer. I don't think it's sustainable over the long term.

But right now, they are, from what we can see following the strategy, that they are trying to buy market share and pushing hard to make it happen. I'm not sure how they're succeeding in all their territory. Here, we're pretty well equipped to fight them and I hope that we continue to be successful on that side. And we'll see where they go. But, there is room here for more rationality in the way they're approaching this, in my opinion.

Okay. Thank you very much.

Vince Valentini from TD Newcrest.

Okay. Thanks. Thanks for letting me back in. First, Wayne, foreign currency. Was there any big hit there or benefit this quarter? I noted in the first quarter last year you said, because the Canadian dollar depreciated versus the US dollar, it actually negatively impacted you. So, I'm wondering if it's swung back the other way this quarter.

There would have been probably some small benefit this year compared to last year. The dollar has improved in value. So -- now, part of that we would have hedged as part of our budgeting process so that we can sort of lock in what our costs are going to be. But I think that we would have some small benefit versus last year for sure.

Okay. On a couple others, then. More strategic maybe for Pierre. You mentioned that no AWS players are constructing any network in your market at this point. In order to maybe ensure that they never do, would you consider like giving them long-term roaming agreements?

Because I'm just thinking down the road here to five years from now when they lose their mandated roaming privileges in the Province of Manitoba, at least the one that bought Spectrum in your market will. Will they maybe feel threatened to think, gee, those no market opportunity in Manitoba, but we have to build a network there anyway to make sure our customers can roam there. Can you circumvent that by giving them a long-term deal?

Well, I think, first, if I recall, according to our Rogers agreement we can't do that without the consent of Rogers. So, we would have to reach agreement between all the parties here, which may prove to be difficult. As well, they are our main competitor on the home services side, so I'm not sure I would want to enable them to be stronger.

Now, I'm not sure we drive their overall wireless strategy at the end of the day. I don't think they will be focused on Manitoba first. Maybe, but we'll be ready if they do. I would tell you that I, like you may have heard in other territories by other players, from what we can see right now, most of Shaw customers are not our wireless customers. They are customers of others of our competitors. So, that's interesting, too. I'm not sure that big competition is going to come against our wireless customers, at the beginning at least, from what we can see or what we know of their customer base.

So, I don't think -- because of the way we're set up with Rogers right now, I don't think that's possible.

You've probably answered my question anyway with that, but I apologize. I didn't actually mean Shaw. I meant Wind.

Oh, Wind.

I would assume Shaw will build in Winnipeg at some point, not matter what you do. But I was thinking Wind. To void them ever building, could you give them roaming. But your answer on Rogers probably answer it anyway.

Another -- just moving on to Allstream. Two last ones. You talked about those extra fibre CapEx and extending the network 300 meters to get more customers on net. It seems to certainly make sense. I'm just wondering why does it have to be fibre? Aren't there fixed wireless options that could be cheaper and quicker to deploy if you only have to cover 300 meters?

Hey, Vince, it's Dean. There are wireless solutions and they can be inexpensive. But really, we're spending very little to extend the network. So, each drop into a building is literally in the CAD 30,000 to CAD 40,000 range. And when you start looking at the equipment take up and take down, while you might get a quicker deployment, you don't necessarily get a cheaper one. And certainly, your cost to maintain and your throughput and your ability to serve all floors in a large building, those all go down if you're using wireless.

So, we're not -- we have no -- it's not like we have a bias against a wireless access, but what we're talking about here in terms of brining up a large building or bringing up a data center or bringing up that kind of -- a campus location, wireless for multiple customers with gigabit services into those isn't really the best solution.

And the wireline solution is actually, as I was just saying, relatively inexpensive. It's kind of the one -- it is one of the very good benefits of the big broad network that we have, that we can do pretty significant footprint expansions relatively inexpensively, and literally add a ton of new market capacity to our on-net profitability. So, we're -- I think we're good with fibre for this round.

Okay. That's good. And one last one then I promise I'll let everybody go. Probably for you as well, Dean. Can you give us an update on the mix of revenues in the Allstream segment on two metrics? One, what approximate percentage is enterprise customers versus small, medium business. And secondly, just geographically, can you give us any sense how much is in Ontario and Quebec these days versus the rest of the country?

Well, I can give you broad -- a broad set of numbers. The revenue stream, if I can say almost explicitly because really, the revenue stream for Allstream, which is obviously outside of Manitoba, follows very closely population count. So, it's a little bit more skewed to Ontario than the Ontario population would suggest, but it's very, very similar. That's the first part and that's a second part of your question. So, kind of what you would do for pop is what you would do for revenue.

And sorry, Vince, repeat the first part of it again?

Oh, enterprise customers versus small and medium business.

The vast majority is medium and large customers, which we would call our enterprise base. The small business is relatively small, roughly 10% within our revenue stream.

Great. Thanks very much.

You're welcome.

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

Ladies and gentlemen, we have reached the end of our first quarter 2010 conference call. Once again, thank you for joining us today.

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