BCE Inc (BCE) 2010 Q2 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the MTS Allstream second 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). I would now like to introduce Mr. Paul Peters, Vice President, Tax and Investor Relations for MTS. Mr. Peters, you may begin your conference.

Thanks, Michelle. Good morning everyone, and thank you for joining us on our second quarter results conference call. Earlier this morning we issued a news release for our second quarter 2010 financial results. The news release, the MD&A, additional supplementary information, along with a slide presentation are available on our website at mtsallstream.com.

Yesterday the Board of Directors approved a third quarter dividend which has been set at CAD0.425 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 Pierce, 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 related to the finances, operations, and strategies of the Company, including comments on revenue, EBITDA, earnings, cash flow, capital expenditure, sales, and marketing activities. These statements are based on assumptions made by the Company and run the risks that actual results and actions may differ from those anticipated. Statement 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 it's 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 whose remarks contain forward-looking statements. I'll now turn it over to Pierre.

Thank you, Paul. Good morning, everyone, and first I'll say I'm sorry for my voice, it looks like I have a bit of a cold. So I hope to leave you with three messages today.

First that we have taken actions to support the long-term sustainability of a reduced but still very healthy dividend payout. Second that we announced plans for a multi-year investment in fibre-to-the-home to secure and extend MTS competitive advantages in Manitoba market, and third that we are continuing to advance our plans to make Allstream cash neutral, to capture our share of the growing demand for IP services, and position Allstream for opportunities that may emerge if, for example, foreign investment restrictions are lifted.

Let me give you an overview of our second quarter results. As you will have seen from our press release, second quarter performance was in line with Q1 results, but below last year, and frankly, below our own expectations for the quarter. The same is true for our results through the first half of the year. Results are stable sequentially, but down from a year ago, and below our expectations. This is due primarily to the ongoing impact of irrational promotional pricing by Shaw in Manitoba, and the slower than anticipated recovery of the national enterprise market.

We expect these results will improve as competitive conditions stabilize in Manitoba and as enterprise customers nationally begin to reinvest in telecom services to stay competitive and increase productivity. In the meantime, we're focus on improving our performance, remaining disciplined, investing in the future and taking costs out of our business. In fact in the first half of the year, we have continued to be successful in taking out costs, achieving annualized savings of CAD29.2 million, against our target of CAD30 million to CAD40 million.

I'll discuss the performance of each of the divisions later in my remarks, but for now let me turn to our updated financial outlook and the change in our dividend policy. Contrary to what we expected following the first quarter, and despite the progress we're making on various fronts, our Q2 results did not improve in a meaningful way. Given these results and the fact that we have yet to see spending in the enterprise market come back to historical levels, we're updating our 2010 financial outlook. Wayne is going provide more detail on the changes, but generally we now expect that some of our financial metrics for the year may come in below our original guidance ranges, as detailed in our news release and slides.

Consistent with its statements made in February that the prior dividend level was based on the business performing according to its expectations, the Board of Directors has revised the Company's dividend policy and set a new dividend rate. In doing so, the Board took great care to review our current performance expectations, and to set the dividend policy at the level that it believes should eliminate uncertainty about our ability to sustain or reduce, but still very healthy dividend.

At the previous level of CAD0.65 per share a quarter, our dividend payout exceeded our policy range, and was well outside of the range of most of our telecom peers. The revised targeted payout ratio will be 70% to 80% of the free cash flows generated by MTS in Manitoba. To be clear, this means the dividend payout will be based entirely on the free cash flows from our Manitoba operations, MTS, which have been stable for the past ten years, and which are expected to remain so going forward.

Our new annual dividend rate of CAD1.70 per share represents an annual yield of 6.2% based on the Company's closing share price yesterday. We believe this is an appropriate payout policy.

According to our plans, our revised dividend rate does not require any borrowing to fund ongoing operations. It will benefit from the fact that our Company should not be required to pay cash taxes for at least another nine years, so not until 2019 according to our latest long-term forecast. It should free up cash flows to make investments in our long-term growth and competitiveness. And it leaves room for potential increases once strategic investments are completed and our business conditions improve.

In that regard, we have announced today a plan to accelerate our investment in fibre-to-the-home technology in a number of Manitoba communities including some areas in Winnipeg. Specifically we plan to launch a fibre-to-the-home program with a deployment of close to 120,000 homes in Manitoba over the next five years at a cost of about CAD125 million. This should result in a 65% coverage of Manitoba households with either fibre-to-the-home or VDSL, a unique position in Canada that reflects the network investments we made in the past.

In addition, as funds become available, we will continue to fund the development of our integrated billing platform to further enhance our ability to serve customers, market new integrated products, and reduce our cost structure. We have been prudent in building this plan, and expect to finance these investments through ongoing cash flow from operations with no incremental increase to our debt levels. These investments will further support MTS, maintain leadership across its product line, grow revenue, gain and retain customers, and improve customer service through the [fibre-I] reliability.

As you know, serving customers with fibre is less expensive operationally than copper. We expect [Cusper Ompath] and operating and capital savings to be in line with what you have heard from Alliant and Verizon while reflecting our aerial and buried mix. The new and more aggressive competitive environment in Manitoba played a big role in our decision to accelerate our fibre-to-the-home plans.

As I said before, we believe this plan will provide MTS even more capabilities to retain its leading position in Manitoba, facing our aggressive cable competitor, while providing opportunities for growth for TV and broadband services in many new markets. We're excited about the potential for this initiative to drive solid MTS performance in the long term. MTS continues to stay disciplined in response to Shaw's irrational pricing, and that strategy is working. In fact, I am pleased to report that our innovative new force service bundle is performing better than we expected.

This bundle, having wireless as the lead product cannot be matched by competitors in our market. It is successful in retaining our customers and market share. It is also generating an ARPU in excess of CAD160 per month. More fundamentally many of MTS operational metrics improve in the second quarter. Our wireless, high-speed Internet, and TV customers were all up delivering growth of about 5%, 3%, and 7% respectively, and the number of customers utilizing our bundle services also climbed by 10%.

Turning to Allstream, over the pass five years, we have taken out unprofitable product line, strongly improved customer relationship, and refocused our business away from legacy to IP based products. While these efforts have been successful, they don't change the fact that business conditions in the national enterprise market remain challenging, and that Allstream performance is not to our prior expectation. The recovery is taking longer than we expected, and Allstream's results continue to be impacted by declining legacy revenues.

In the face of these challenges, we continue to work hard at improving Allstream's performance, and expect that we can bring the division to a cash-neutral position over the next two to three years by increasing our focus on IP services and aggressively reducing costs in its legacy operation and its intelco costs. So our plan going forward is to focus Allstream even more towards its IP product lines to benefit from the double-digit growth and the high margins that the product line can deliver. We believe Allstream is in a good position to capitalize on this opportunity.

But more broadly, we view Allstream as an opportunity for our Company, as its performance improves and new strategic options, such as the removal of foreign investment restrictions present themselves. To give you more data on what we forecast for Allstream. Today, Allstream's IP business generates about CAD200 million in annual revenue, the Canadian IP market is expected to increase annually, by more than 10% over the next five years, which is in line with Allstream's IP performance of the past few years. For the next three years, we expect to see Allstream's CAD200 million IP revenue grow by 10% to 12%, while its CAD300 million legacy and long-distance portfolio is expected to decline by 9% to 11%.

Other product lines, mainly UC, or unified communication, and local access, are expected to remain relatively stable, and Allstream's CapEx envelope should remain around CAD100 million per year. As I said before, our plan is to bring Allstream to a cash-neutral position and make itself fund it's investments on IP. Before I hand it over to Wayne, I would like to close with the following thoughts. We have established a new dividend policy that provides for a healthy, and what we believe to be a sustainable dividend. We continue to believe that despite its challenges, Allstream is positioned to benefit from the growing demand for IP services and an improving economy.

We also believe that Allstream represents an opportunity for the Company, in particular as the Federal government contemplates removing foreign investment restrictions. We're investing to secure and extend MTS's ongoing competitive advantages in the Manitoba marketplace, and we're excited about accelerating our fibre-to-the-home technology deployment in Manitoba to ensure MTS leadership and competitiveness for years to come. Thank you, and I'll now turn it over to Wayne.

Thanks, Pierre. And good morning, everyone. As Pierre indicated, MTS Allstream's results from continuing operations in the second quarter of 2010 were up marginally when compared with the first quarter and were sequentially consistent with the last three quarters, but were lower for several key metrics compared with the second quarter of 2009. The improvement we achieved on a sequential basis reflects some recovery, which is welcome, but more modest than we had anticipated.

For the first half of the year, our results from continuing operations were also lower when compared to the same period in 2009, which is largely attributable to the fact the national economy was much stronger in the first half of last year. When comparing our quarterly and year to date results to our results in 2009, keep in mind that Q1 was by far our best quarter of last year, as we did not start to feel the impact of the economic downturn until the second quarter of 2009. With the full impact on our results showing up by the third quarter. Importantly, our results have leveled off since the third quarter of 2009.

Also bear in mind that our non-cash pension expense has increased by CAD9.6 million for the first six months of 2010, of which CAD5.1 million occurred in the second quarter. For the full year we expect our non-cash pension expense to increase by CAD19.6 million. For the Company as a whole, EBITDA from continuing operations was down by 6.4% when compared to the second quarter of 2009, or by 3.2% when you exclude the CAD5.1 million increase in non-cash pension expense.

Turning to our divisional results, MTS had a strong quarter for both wireless and digital television. This offset the majority of the decline in legacy revenues, leaving overall revenues at CAD233 million, or 0.9% lower than the second quarter of 2009. MTS's wireless revenues were up strongly by 7.3%, which was driven by a 5.3% increase in subscribers, and a solid 2.7% ARPU improvement.

We had outstanding growth in our wireless data revenues, which rose by 58% in Q2, and our post-paid churn was also very low at about 0.8%. For the first six months of the year, our wireless revenues were up by CAD4.9 million or 3.2%. Reflecting a CAD3.4 million sale of FleetNet handsets in the first quarter of 2009. After adjusting for this sales, our wireless revenues increased by 5.6% in the first six months of 2010.

At June 30th, our digital television customer base exceeded 89,000 customers, up 7% from a year earlier. TV revenues grew by 8.1% to CAD14.6 million when compared to the prior year. ARPU was up year-over-year by 1.8%, reflecting increased sales of our premium product, MTS Ultimate TV. Together with increased purchases of pay-per-view events and video-on demand services. Our strong TV revenue growth is also driven by the high quality of our service, and the increasing footprint of our Ultimate TV service. This growing footprint not only enables one of the most advanced TV products in Canada, providing customers with wide variety of HD channels and unique whole-home PVR functionality, but also provides access to Internet speeds of up to 32 megabits.

MTS's legacy revenues, which include, local, long-distance, and legacy data were down in the second quarter compared to the same period last year. This was due primarily to the impact of local competition, and to a lesser extent wireless substitution. However, our local line losses continued to be among the lowest in the country compared to our telco peers.

Allstream's second quarter revenues were down by 3.5% or CAD7.6 million, primarily due to the slow pace of economic recovery which continues to impact customer's spending decisions in the Canadian business telecom market. Additionally, some of the revenue declines can be contributed to our conscious effort to improve profitability and not renew or bid on contracts that do not bring the appropriate margin, such as off-net and certain legacy services.

Allstream's converged IP services increased by 3% in the first half of the year, and now account for over 25% of total revenues. Growth in the second quarter was slower for IP revenues, which were consist with the year-ago, reflecting the delayed impact of lower sales during the recession last year. With the gradual improvement in the economy, and as a result of actions we are taking, our sales team has been more successful in winning service agreements with new customers in recent months. In fact, we saw a jump in sales in June and again in July, with sales levels returning to the amount required to return to double-digit revenue growth rates again in 2011.

We are very focused on driving growth in our IP product suite, which includes our highest margin services with an overall average gross margin of 72%. Allstream's unified communications revenues were down by 5.2% in the second quarter, which has leveled off since Q1, given that Q1 of last year was our highest quarter due to a stronger economy. Unified communications and security revenues, however, are lower margin, and correspondingly have a lower impact on our EBITDA.

Local access revenues softened in the second quarter, decreasing by 2.9% when compared to the second quarter of last year, and by 3.2% for the first half of the year. Our long-distance and legacy data revenues have been relatively stable for the last four quarters, once you adjust for the loss of revenues from Rogers and AT&T. But are expected to continue to decline over time as customers move to IP based services. In the second quarter, our long distance and legacy revenues declined by 4.5%, or by 1.9% when you adjust for the impact of Rogers and AT&T.

For the first half of the year, Allstream's long-distance and legacy data revenues were down by 9%. Adjusting for Rogers and AT&T, it would have only been down by 8%. We're working very hard at repositioning Allstream as an IP company to benefit from the fastest growing part of Canada's CAD10 billion enterprise telecom market. Part of these efforts include our targeted success-based expansion of our fibre network to 675 incremental buildings over three years.

In the first six months of this year, we have won 54 new IP contracts through this initiative, including multiple sales in the same connected building, as well as a further 35 wins in Allstream's colocation footprint. 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. Additionally, we are focused on delivering a higher proportion of our revenues on net to improve margins and customer service.

On net and co-located revenues, currently 67% of all Allstream revenues, have an average margin of 72%, which is significantly better than when we leased incumbent networks. In three years, we are targeting for 75% of our revenues to be on net and co-located and 25% off net. The on net and IP focuses are key to Allstream's future profitability and can attract a substantially better valuation in the capital markets.

This is particularly the case when looking at US valuation models for IP providers. There are several examples of successful IP competitive carriers in the US, such as Time Warner Telecom, Cogent, AboveNet and PayTech. We believe Allstream has a better value as a more focused IP provider.

We're also focusing on further improving our performance in 2010 through a continuation of our cost-reduction efforts. At the midpoint of the year, we achieved annualized cost savings of CAD29.2 million against our target of between CAD30 million and CAD40 million for the year. We now expect to hit the high end of our guidance range in that area with the majority of these cost reductions coming from Allstream.

Overall EBITDA from continuing operations was in line with the last three quarters, but was lower by CAD10.2 million when compared to the second quarter of 2009. Half of this decline is due to the CAD5.1 million in non-cash pension expense with the remainder attributable to lower revenues which was partially offset by lower direct costs and other operating expenses.

Similarly, the majority of the pension expense increase impact MTS's EBITDA from continuing operations, which was down by 5.1% when compared to the second quarter of last year, or 1.9% when you exclude the CAD4.2 million increase in non-cash pension expense. MTS EBITDA results reflect the impact of aggressive price competition from our main cable competitor in Manitoba, which began in the second half of 2009. Although lower pricing has impacted our revenues, we have continued to maintain our market share in our growth products.

Allstream EBITDA in the second quarter was down year-over-year by 10.7%, but improved slightly by 2.3% on a sequential basis. This reflects slightly lower revenues, offset by improved margin, which reflect the impact of our cost-reduction programs, our focus on IP services where margins are highest, as well as our focus on attracting and retaining customers that generate on-net revenue.

Capital spending for continuing operations in the second quarter was CAD58.9 million, down from last year's CAD63.3 million, representing a capital intensity of 13.3%. We continue to compare favorably to our peers in terms of prudent timely capital spending. This is due in part to the fact that we have the ability to moderate our capital expenditures, to maintain our capital intensity, between the 14% and 16% of revenue that we target. Based on the success-based flexibility built into our plan.

Our HSPA network deployment remains on track to be operational by the end of the year. We continue to expect to spend between CAD70 million and CAD80 million on this build this year. Free cash flow from continuing operations was CAD62.3 million for the second quarter, up 4.5% from last year, while for six months our free cash flow was CAD117.2 million, down 8.3% from last year. This decrease in free cash flow from continuing operations is primarily due to lower EBITDA and slightly higher debt charges.

The net present value of our tax asset is approximately CAD320 million and we do not expect to pay cash taxes before 2019. At the Midway point of the year, we are trending to the bottom end of the range for all metrics of our original guidance, and slightly below for some, indicating that the majority of our previous guidance range was no longer achievable. As a result, we wanted to provide shareholders with a more accurate picture, and revised our guidance to demonstrate a tighter range of possible outcomes.

Our updated 2010 outlook, which is detailed in our news release, and MD&A incorporates our second quarter results and assumes a continuing consistent quarterly performance for the balance of the year, including continued aggressive promotional pricing by MTS's main cable competitor in Manitoba for the remainder of 2010, and continuing slow recovery of the national enterprise market. We expect our financial results to improve over time, as competitive conditions stabilize in Manitoba, and as enterprise customers begin to reinvest in telecommunications and information technology. In spite of the decreased free cash flow guidance, we do not expect to borrow any further this year. The reduced dividend and cash received from Bell will offset a previously expected cash shortfall without any additional borrowing.

With respect to pension funding, as you know in 2009 the Federal government outlined a series of reform proposals intended to help sponsors better manage their funding obligations, while also providing member benefit security. These proposals were expected to be enacted by June 30th, 2010, although the enabling legislation has been passed, certain new regulations were not finalized and as a result the Company made a solvency funding payment of CAD7.3 million in July 2010. If the regulations are in place before the next quarterly payment is due, we do not expect to make any further solvency payments in 2010.

Given our dividend announcement today, some of you may be trying to assess its sustainability at this level. So let me give you my perspective. Let's start with a number that you are familiar with. Our guidance from 2010 free cash flow from continuing operations of CAD160 million to CAD190 million. If you deduct restructuring costs of CAD35million to CAD45 million, pension solvency funding of about CAD10 million and one time, HSPA funding of CAD70 million to CAD80 million, you would arrive at our all inclusive free cash flow of CAD40 million to CAD60 million for 2010.

Going forward, we expect HSPA spending to be minimal in 2011 and none thereafter. We expect restructuring charges to be substantially reduced to about the CAD20 million to CAD30 million range, and we expect some improvement in EBITDA for our division, and we expect CapEx to remain stable. When you add this up we expect our all inclusive free cash flow to provide sufficient funds for the new dividend level as well as significant fibre-to-the-home investment.

As indicated, we plan to invest CAD125 million in fibre-to-the-home, which includes an estimate of CAD780 per home passed, along with an assume cost for customer connections, which is largely success based. These costs are in line with the announcements made by Alliant when you factor in the somewhat lower 60% proportion of aerial versus buried cable in our network. We see a significant potential revenue opportunity from this investment, arising from the increase in our coverage area for our most popular broadband services, as well as a cost-efficiency opportunity over time. We will target our investment, first in locations where we see opportunities for revenue growth, primarily smaller cities in Manitoba. Due to the strength of our competitive position with our VDSL network, we have the flexibility to moderate the timing of our investment to match our available surplus free cash flow.

Before we move to the Q&A portion of the call I also wanted to comment on one other item. Yesterday we signed a settlement agreement with Bell Mobility. In this process, we have resolved a number of historical disputes, including the outstanding arbitration related to the wireless dispute that commenced in 1997. We are receiving over CAD20 million of value from Bell Mobility, and it's affiliates, including a CAD10 million onetime cash payment received yesterday. The balance of the value we are receiving is subject to confidentiality obligation, yet I can confirm that we are very pleased with this outcome and are happy to be moving forward. Thank you, and we would be now happy to answer your questions.

(Operator instructions). Your first question comes from Glen Campbell from Bank of America. Your line is open.

Yes, thanks very much. I had a couple of questions on the fibre-to-the-home program. First could you walk through the coverage map a little bit? It sounds like you are going to be over building some of the network that has already been done on fibre-to-the-node. I wonder if you could confirm that?

And are you planning to target only the areas where you have a cable competitor or are you going to some areas that don't, and when you are done with this program you are saying in five years you are going to have 65% of your home's past covered by VDSL or fibre. Does that mean you'll have cable competition in some areas where you are not covered with the new network? And I guess my question on CapEx is just whether we should look at this CAD125 million that's being incrementaled here,14% to 16% or whether you can fit it within? Thanks.

Glen, it's Kelvin here. I'll try to go through those. I think I got them all. But if I haven't, you'll have to repeat them. The initial focus of the program is in the areas where we have no fibre-to-the-node. So most of the 20 or so communities we're talking about will have some ADSL coverage, but really no fibre-to-the-node at all. And those are obviously good opportunities for us.

We do have cable competition in those communities, not necessarily voice competition in all of them, but there is voice competition in some of them today and certainly most of them could be anticipated over the five years. The remaining, roughly 80,000 homes are a combination of greenfield development, which is kind of a no-brainer for us, and we talked about it before, but we will be doing some overbuild, probably focused more in the latter part of the five-year period. Primarily those would be areas, though, that we would be avoiding copper cable rehab, or other types of investment, and again, would be able to position us, I think, with good opportunities in the longer term for even faster Internet services.

In terms of the cable question, I think I answered that one. These communities all would be places where we have some degree of cable competition today, and could anticipate greater competition over the next few years.

And your last question on the 65% coverage. I think our view would be there would be -- with that type of coverage, we would pretty much have our cable footprint, our competitive footprint covered. It may not be 100%, but it would be very close to it.

On the CapEx question. Wayne might want to comment on how that fits into our view.

Yes, Glen, the CAD125 million would be largely incremental to our capital program.

Okay. Great. Thanks. And just could you remind us what is your coverage today in terms of the homes that can receive TV service as a percentage? It must be at least 50%. Am I right?

Yes, I don't have the exact number, but it's about 50% or will be when we finish the Winnipeg program by the end of this year. Winnipeg, Portage, and Brandon which arethe three significant centers.

Yes, Winnipeg is currently at about 80%, and we're intending to get that to about 96% by the end of the year.

Okay. Super thanks very much.

Your next question comes from Gregg McDonald from National Bank. Your line is open.

Thanks, good morning, guys. Two questions. First, quickly, the dividend policy you indicated is based on the Manitoba Tel division, and given the fact that's already a division that is reported separately, I guess what I would ask, is there any indication here to suggest that Allstream has become a less core division to the Company, given the fact that you're focusing on that division -- on the Manitoba division as your cash generator? Or is that simply because you want to indicate (inaudible) (technical difficulty)

That's a good question, Greg. This is Pierre. First goal is to try to reduce the focus on Allstream. Maybe we haven't done a good job on how we position Allstream internally. We position Allstream as an opportunity for us. Allstream -- we had to fund some of its negative cash over the past few years, but the goal has been to get it to cash neutral, and hopefully get it to a better place over time with contribute and provide some growth for the Company, or now benefiting from some of the other strategic opportunities that can move forward. And basing the dividend on MTS only is to provide it also more strength, and MTS has been pretty stable over the years, and we expect will continue to be stable.

And Allstream really has received so much focus around our Company, while MTS has always been the very large contributor to the dividend over the years I have been here. So our goal was to really separate the two now, and clearly position for the market and for all of you. Allstream more as an opportunity where we are working hard to get it to pay for its own cost at the end of the day. And give it the importance it has on our overall business, basically, and, again, treat it more as an opportunity. (Inaudible)(technical difficulty) I'm not sure if I'm answering your question or --

Yes, you are talking around the issues of course, but you are giving me good context on it. Can I ask a follow on that topic then?

Sure.

You mentioned foreign ownership and strategic opportunities in the same sentence, can I assume that is in relation to Allstream?

It is.

Okay. And then finally, can you give us an update on the pension solvency issue? It's always -- pension accounting is kind of tough for the best of people, but for me it's extra tough. I'm just trying to get a sense of what the -- if the regulations are not in place -- let's assume they are not in place in 2011. Is the run rate on cash pension funding CAD45 million, or CAD30 million? Where does it land? And what is -- I think you are suggesting with the breakdown that you gave that the cash funding would be zero if the regulations are actually ratified. Is that the case?

Yes, Greg, I don't think that the rules not being in place in 2011 is a realistic scenario. The government has passed the enabling legislation as part of the budget package, and currently they are in the process of drafting the regulations that allow the use of letters of credit and various other rules that need to be clarified. So there's an issue with respect to timing, whether they are going to finish in the next week or the next few months, but I don't think 2011 is realistic to think that they wouldn't be there by then.

So what I mean by that is really our risk in terms of cash funding is primarily in 2010. In 2011 there is some variability potentially, depending on how the rules look when we see the final draft, but we expect our solvency funding to be somewhere less than CAD10 million a year going forward in 2011 and on.

Okay. And what if it's not in place by next quarter? Is that another CAD7 million?

It would probably be higher than that. I don't have the number in front of me, but it isn't exactly linear.

Okay. And you mentioned the foot dragging that is going on here. Is there anything that we should be wondering about here with respect to the politics? I mean could an election further drag this out?

I'm not suggesting that there's no regulation change coming. Obviously it has been passed. But what I am suggesting is there is a possibility that this drags quarter-to-quarter-to-quarter, and the market is going to start drawing conclusions at some point.

I don't think so. The legislation that was required to be passed which is what you need the politicians for has in fact been passed, and so the rest of the work is done by bureaucrats, who aren't really impacted by an election.

Yes, Greg, I think we're down to bureaucrats being bureaucrats. And it seems to take an awful lot of time now to tell you that many companies, including us, have voiced our concern on the time that this takes to implement; both to the politician and to the bureaucrat, so we'll see if that helps them focus on it.

Given the cost on a monthly basis for not only you but other companies, you guys might offer to subsidize them on this round.

That's a good idea. We didn't think about that one.

Okay, thanks very much, guys.

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

Good morning, thanks very much. Couple of questions. First on Allstream, can you remind us how much money you pay each year to -- related to wholesale and to carrier payments? Can you just remind us of that number? And further, do you have a breakdown of how much this is paid to Canadian domestic carriers very non-Canadian? And then a follow on regarding the FTTH investment and your CAD780 blended number. Can you just give us a little more color on your mix of aerial versus buried? Just wanted to get a sense as to how that breaks down. Thanks.

Dean, you want to --

Sure. Hey, Jeff.

Hi, Dean.

We spent about CAD250 million a year in terms of payments to other carriers. The vast majority of that is to Bell and Telus. There are some other payments that go out associated with other players that we buy services from are both in Canada on a smaller basis, and as you rightly describe into the US. But, again, the vast majority is out to Bell and Telus, and in that order, as you would expect.

In terms of US?

Yes, so buried there. I don't have the US number at the top of mine, but it's not a very large number. We have got -- and there's a lot of complexity to this conversation, because it's both a combination of physical purchases, as well as trade of minutes and voice and settlements and so --

However, there is a lot of traffic in Allstream between Canada and the US both ways that we have with multiple partners. For sure AT&T has been associated with us more closely at one point, still a very tight relationship there in terms of moving traffic and with other partners as well, Global Crossing, Level 3, and others, are big customers, and we're customers of theirs as well.

Exactly. So if you think of it not in terms of necessarily actual payments, but actually services sold and services bought as opposed to settlement, there's hundreds of millions of dollars in what we buy and sell to US carriers.

And just as a quick follow-up to that. Can you remind us what the legacy revenue that you are still receiving from AT&T and Rogers for the quarter?

Per quarter it would be about CAD15 million to CAD1 million in that range.

And do you have a breakdown between AT&T and Rogers still?

It would be probably -- let's say half and half.

Okay.

Jeff, on your question on fibre-to-the-home, and the cost there, I think we used the CAD780 per home pass number. There's probably a range there. I think that's the high end of the range. It's probably CAD750 to CAD780 is the number we're looking at. That's based on a mix of 60% aerial, 40% buried, which is the actual mix in the initial set of communities that we're doing.

Obviously, as we get in to Winnipeg and the area there, we have probably a little more flexibility about which -- whether we do aerial or buried, but when you go into a smaller community, you pretty much want to do the community. So the 60/40 mix is what gets you to that blended rate. Now I have gone back and had a look at some of the other benchmarks out there, and if I recast that in to say, a 90% aerial ratio, which is I think is more similar to what Alliant might be doing. I come up with a rate right in the middle of their range that they've talked about I think they have talked about CAD550 to CAD580. And on a similar basis we would be right in that benchmark.

So that 60/40 mix applies to the initial community, which sounds like it's around 40,000 homes.

Yes.

And the rest we would totally have to use a different assumption.

We've carried through 60/40 ratio into the other 80,000 homes as well--

Oh, you do?

-- and even though, for example, in Winnipeg our ratio is closer to 50/50 in terms of the actual plan, obviously we can choose to do aerial plan earlier, and so that's I think a realistic assumption. We haven't assumed we're going to do all aerial, or all buried. We have assumed a ratio that we think is pretty realistic, given the environment we're in.

Okay. Thanks.

Your next question comes from Jonathan Allen from RBC Capital Markets. Your line is open.

Thanks very much. Wayne, thanks for walking us through the dividend sustainability numbers, but I just had a couple of questions, just to clarify. If we look for 2011, the current year guidance is free cash flow of CAD160 million to CAD190 million, so let's just assume it's flat at CAD175 million for now at midpoint, and restructuring CAD20 million to CAD30 million, so let's take CAD25 million in the middle. Pensions you said would be less than CAD10 million, but let's take CAD10 million for simplicity. And then you said that the fibre-to-the-home CapEx, the CAD125 million would be incremental, so let's just divide by CAD25 million a year. I'm coming out with a free cash flow number after all of that of about CAD115 million. Your dividend going forward looks like it is about CAD110 million after the cut. Are those numbers correct?

Well, you are leaving the cash flow the same, and I think what I said was that we expect some improvement in our EBITDA in our divisions.

Okay.

So other than that, that's probably a reasonably accurate. We have the ability to moderate our fibre-to-the-home investment, so we may accelerate the program or bring it back, depending on our cash flows, as Pierre mentioned, our target would be that we would not be incurring incremental borrowing here. We are in a good competitive position overall, a very strong VDSL network with capabilities that are really ahead of the industry I think, and as a result I think we have some flexibility in terms of timing. We think that fibre-to-the-home is the right way to go, and we're happy to have that flexibility to invest as we see fit.

So, you said going forward you have the flexibility on CapEx just to maintain a free cash flow neutral. So if I put on a credit hat, basically for the next five years or so, we should just expect similar balance sheet leverage, with not much room for either up or down.

Yes, that's probably fair.

Okay. Thanks.

All of this is still based on the performance of the business, so if we perform better, then Allstream would start to improve, and it may give us more flexibility.

Your next question comes from Vince Valentini. Your line is open.

Thanks very much. Two questions on segmented margins. One, can you give us an update on the wireless sector. I know you don't disclose it separately all the time, but would the margins for wireless be in line or higher than your overall MTS segment margins these days?

Wireless margins would be higher than the overall.

Materially or are you talking about --

It would be in the 60s.

For EBITDA margins? Oh, Okay. Not including the equipment subsidies. Okay.

That's right.

Second is within Allstream, I greatly appreciate the disclosure you are giving on the revenues and the different revenue trajectories for the different pieces. Can you give us any color on the margins for the converged IP segment? Would those be well above the 13% margin you are reporting for the overall Allstream unit?

What we have talked about in the earlier discussion was the gross margin, so net of our direct costs. We have a 72% margin on average. So then the operating expenses are really nonspecific, but you could probably allocate them proportionate to our revenue would probably be the best way to go.

Sorry, I missed it a bit when you went through the first comments, Wayne, but 72% is the blend or that's the IP segment?

That's our IP gross margin, yes.

And the overall gross margin is 65% is that the number I heard?

Just over 60%. Probably closer to 60%.

So almost a 10-point difference could translate to EBITDA margins as well, if you allocate fixed cost evenly.

Yes.

Fair. And last one. The lag effect here maybe more for Dean or Wayne if you want, but if June and July sales are back up over 10%, how many quarters do you think it is before that starts to flow through reported revenues? Is it just a one quarter lag or does it take three or four quarters to get a full flow through in what we see in revenues?

It's closer to two to three then. So what you'll see, just as we're still living through first quarter and second quarter, we're living a lot of the issues of slower sales during the recession of last year. Now that we have got the sales pace picked up, and rather markedly frankly, we won't really see that until the Q1 of next year. It just takes a while from install, and also to bill and to payment, right? Each of those has sometimes material 20 to 30 day lag in it, so you quickly get to a couple of quarters before you see it turn into revenue.

Great. Thank you.

Okay.

Your next question comes from Dvai Ghose from Canaccord Genuity. Your line is open.

Thanks very much, good morning. I just want to go back to Jonathan's comments. I understand you think there may be improvements going forward, but they may be aggressive assumptions. I guess my question is you came to the painful decision you have to slash your dividend. Why are you cutting it to only a level which seems to be about a 100% payout ratio when the world seems pretty ugly out there in terms of competition because we're still going to have the same issue every quarter about dividend sustainability. I'm just wondering why you didn't go to a lower payout ratio such that you would never have to cut it again?

Thank you, Dvai for your question. I will tell you, according to our forecast and the action that we're planning and some of the results we're seeing today, we think the dividend is sustainable. If you go back to the calculation and even take out the investment on fibre-to-the-home, if you want to, and you see that there is flexibility there, I think if you make those calculations. And again as Wayne said, because of the investment we have made in VDSL, we're in pretty good shape in at least our major market.

Now we're trying to expand to go after more growth and more ability over many years to defend and win, but we have the flexibility to slow this down if the Company doesn't perform to our expectations. According to our forecast, it is solid and sustainable. I don't know about your forecast, but as we look at it, and it's improving as we go over the years, and there's hopefully in there in our forecast no dream expectation in terms of things getting a whole lot better here. I don't think we're dreaming on that side either.

I guess what confused me those is you've just said the fibre-to-the-home is a very important initiative, and then said if we can't cover the dividend, we'll cut fibre-to-the-home. So it sounds like the dividend takes precedence over fibre-to-the-home. Is that really the way you are looking at it?

No, it's a good point that you are making, and that's not what I meant at all. But I meant if ever there was a lot of financial pressure, we could decide to slow it down if we wanted to. But that would have to be a decision at that point, compared to the benefit that we can get. And also based on what the competitive environment at that time. In launching this initiative, we are making assumptions in terms of what the competitive landscape will be in Manitoba over these years in these various communities. If we are wrong, and it's more positive, some of these investments are not as urgent.

I don't want to be negative, but let's look at the negative risks here. Shaw does not seem to be suffering from the competition in terms of the pricing against you or Telus. If I were Shaw I would see no reason to change my pricing strategy. Why would assume that they do?And Shaw has yet to launch wireless in your territories, nor have any other new entrants, so why would the competitive environment improve?

I didn't say the competitive environment will improve, I said in those communities --

Right.

sometimes faraway communities think of it different potentially. We are not assuming -- in fact our forecast assumes that Shaw is present in our market with wireless at one point. We all have potentially different forecasts there on when exactly they will do that.

Sure.

In terms of pricing, we're not assuming again that there will be a whole lot of improvement. We're assuming a whole lot of competition in the market. I'm not sure if it's with some of the irrational pricing we have seen. In fact right now we have seen some changes in offers from Shaw, and we'll see if indeed they will be continued. Don't know. But right now it looks like they are changing their strategy a little bit, and going to a different place, and that's potentially good news for us, and I don't know if they are doing it in Alberta, BC. But I think they realized they were leaving money on the table. Now we'll see, they could come back with something similar or more or less, so we'll see. But, again, our forecasts are not projecting major improvement in the competitive environment in Manitoba.

Okay. That's fair. Sorry, go ahead.

Maybe if I could just add a couple of things. With respect to Shaw, you're -- one thing you should remember that their pricing, which has been quite aggressive has also been the same for probably about a year now, so whatever impact that has had on us is already in our results, so if they continue to be aggressive at that level, then we wouldn't see improvement, but also we would see pretty good stability at this level, so --

Good point.

-- the other thing too that I think you are missing in -- when you look forward is that the fibre-to-the-home investments also bring benefit, and so to the extent we spend those, we would certainly expect to see those drive some improvement in both our EBITDA, and our cash flow.

That brings me to my last question. I appreciate the segue. The best example we have in North America is Verizon which has the worst line loss in North America, the lowest wire line margins, some of the worst stock price performance and no obvious return on capital. So I'm a little confused as to why Canadian telco is looking at Verizon as so excited about fibre-to-the-home to the home as a financial decision.

Yes, I'm not sure we can compare with Verizon exactly, but in particular as you go to communities like Thompson and Le Pas and Steinbach, potentially a different environment there, where we're there with products that we can deliver with our current network on copper. Cable is there as well. With some ability to take out customers, basically these investments are made, and at that point if we're going to make it, it's probably more economical to do fibre than to do something else. So if we're going to do that and avoid also replacing copper, by copper, well, we think there's a gain both on cost, and on our ability to fight with cable and get new revenues on broadband and on television, which we don't today. I'm not sure how Verizon does it exactly, but for those close community, which are not that large when we look at it, we think that the expectation of return is pretty good over time.

Appreciate that. Thanks very much.

Your next question comes from Maher Yaghi from Desjardins Securities. Your line is open.

Yes. Thank you for taking my questions. Just wanted to come back to the dividend policy you mentioned in the press release, and I'm trying to understand why did the Board believe that setting a dividend policy on just a division of the Company, but not the whole Company's cash flows is better than setting the policy on what the Company makes on cash flows? And when we look at the sustainability of the dividend, don't you think investors would feel more comfortable with a dividend policy set on overall cash flows of the Company rather -- because you have a division that is cash flow negative, and still seeing negative year-on-year EBITDA growth from a visibility point of view on the dividend, why did you believe that would not be better for shareholders?

That's a good question. Thank you. And I would say that the Board's objective was to really strengthen our dividend in terms of sustainability by basing it on the division that has been contributing for years at least 75% to 80% of the funding for the dividend, if not like today, over 100% in fact. And basing it on the Division that is more stable that has the largest cash flow in our Company, was really the tool taken by the Board to try bring more sustainability and trust into our dividend, which had been put in questions for years.

Now we're not expecting, though, as we look at the future years hopefully, and we're talk more about it in our outlook at the end of the year, but we're not expecting to continue for years to have declining EBITDA, and a declining performance as well. And as mentioned, we are working very hard to get Allstream to a cash-neutral position so it can be managed more as an entity that can over time improve and deliver growth instead of creating negative cash for us. So that was the goal. Really go on sustainability with the most stable part of the business that is contributing all of the cash today to the Company.

I appreciate the response. I just wondering somebody is going to have to sustain the negative cash flows of Allstream until it becomes positive, and during that time, the Company's -- unless you jettison out that business somehow. Somebody is going to have to fork that cash out, and at this point we're all listening to the call, and we're figuring out that your distribution is about 100% of your free cash flows. I understand that you want to focus on a profitable business and show it into a good view. But investors looking at the dividend, I'm not seeing how they could feel more comfortable about the sustainability at this point.

I think if you base it on the division that pays for everything in the Company, and largely pays for it, I think it does provide some strength it to, more strength, potentially, than having the whole Company together. The same thing at the end of the day. Because clearly, the cash of the Company is going to fund the dividend. But the policy is based on MTS on its own, and MTS today funds everything as you have seen, and as you heard Wayne giving you the numbers.

Now I'll just go back to one of your comments though, in terms of cash flows 2010 is one thing, and we have an HSPE investment of one time in there of about CAD70 million or CAD80 million that will not be repeated. So as we look to future cash flows, starting in 2011, we're not expecting to have the same type of position as we have today. And we're expecting, particularly as you remove HSPA, and as you remove some of the restructuring costs to be at a better place, and have MTS even provide a cash flow that's potentially a bit better as we improve its performance. Same thing for Allstream, and same thing as we take out some of these onetime costs.

Okay. Thank you.

Your next call comes from Peter Rhamey from BMO Capital Markets. Your line is open.

Yes, thanks, and good morning. Just further on that one question, I mean, you talk about free cash flow at Allstream. It is free cash flow positive pre restructuring, is that not true? And your asking us, looking at the free cash flow for your Company to adjust that out anyway. So I'm not sure I understand the nuance between a consolidated view versus the segmented view in funding the dividend. If you could give me a comment on that.

And the other one I would like to ask about is -- a better understanding of the FTTN roll out? The numbers I heard was today your 50% coverage with your existing network, presumably that is mostly VDSL, and you are going to go to 65%, so you are spending CAD125 million to expand your footprint by 30%. If I do the numbers correctly here. I'm just wondering is that the right way to look at it? It seems like there's a significant overbuild of about 75%, 76% overlap to your existing system. So there's something I don't understand there. Thank you.

Peter first maybe on the cash flow side. You are right that Allstream does fund its CapEx, and if you include the CAD15 million that we are spending on our fibre expansion program, it would be slightly cash negative prior to restructuring costs in 2010. We expect that will improve going forward, and in fact that they will be, next year, cash positive before the restructuring costs. So we also expect restructuring costs to be substantially less, as I mentioned next year, so as a result we see a much-improving cash flow profile for Allstream from where it is this year to where, as Pierre said, within two years we expect to be cash flow positive in Allstream.

(Inaudible) clarity. Your payout ratio of 70% to 80% on free cash flow, that's adjusted for restructuring charges. Is that not correct?

No, the 70% to 80% is all in cash flows for the MTS division.

Which excludes the restructuring charges at Allstream.

Yes.

Okay. My second question, please?

Peter on your fibre question, so let me backup to make sure we have the benchmark right. On fibre-to-the-node, we have got our VDSL platform deployed in three centers today, Winnipeg, Brandon, and Portage. Brandon and Portage are pretty much fully deployed. Winnipeg will be fully deployed by the end of this year. So when you look at that, we probably have close to say 50% coverage of homes. The initial focus of our fibre-to-the-home deployment is going to be in 20-odd communities where we have no fibre-to-node, so there's absolutely no overlap there, and clearly that's the focus in the initial two or three years of the deployment.

There is overlap in the latter years of the program to some extent. Primarily in Winnipeg, where we do see some opportunity to use fibre-to-the-home to displace upgrades or maintenance of copper cable. And we think that program -- although there's some overlap with the fibre-to-node program, when you look out to the end of the fourth or fifth year of the program, it makes a lot of sense in terms of positioning as well for the longer term. But in the near term, really, the focus of the investment is in areas where we have no fibre-to-the node. So the choice really is to probably invest in media cell, or invest in fibre-to-the-home, and we think the fibre investment is the right thing in those communities.

So what I hear in your comments is that you are thinking that at the end of life for VDSL is in the next five years, in terms of being economic? Otherwise it could be very difficult to justify the additional investment in fibre with the incremental revenues you get off the VDSL platform versus a fibre-to-the-home platform, I would imagine? You are still doing video, you are still doing Internet, the revenue per customer will largely remain unchanged, I would imagine.

No, I wouldn't go quite as far as what you are saying, Peter, I certainly think the VDSL investment we have made has got a good life in it, and certainly for the next five years, it is going to be strongly competitive. But even with that, when you have copper clients, there's lots of drivers, and continued investment in that plan. So we think by doing some targeted overlay of fibre-to-the-home, and investing in that versus continuing to invest in copper, we think that positions us well for the longer term. And clearly, though, as I said, we have focused our investment initially in areas where we don't have the capability and where we can drive TV and additional broadband revenues.

Very good. Thank you for the answer.

Your next question comes from Glen Campbell from Bank of America. Your line is open.

Yes, thanks very much. I just wanted to follow up on the cost to connect. You didn't give us a specific number, but indicated it might be in line with Verizon. So can you help us out a little bit there? And can you also give us a sense of what the incremental cost would be beyond that for TV installations, the set-top box, et cetera?

Yes, I think what we have talked about is our cost-per-home cost being in the CAD750 to CAD780 range. There are connection costs. We have included some connection costs in our program. Obviously because we have a five-year program we have assumed probably about a third of the homes get connected.

The costs do vary depending on whether it's strictly a broadband customer or TV. What I would tell you is that if you look at all-in, the average customer to connect, it's going to be probably in the range of what it costs for a media tel customer. There is -- if I just have a quick peak here, probably a VDSL connection today, when you look at the connections, the line cards, all of the components, it's probably in the CAD450 range. Fibre-to-the-home is going to be more than that mostly around the costs of putting in the electronics and from the optical termination. So you could probably take a connection cost per customer, again, in that CAD500 to CAD750 range, depending on exactly what they are taking.

And overtime, you'll get the savings and the operation of that fibre, and the increased reliability and all these attributes.

Yes, we haven't talked a lot about the benefits. We have talked about the revenue, and clearly, we are initially strongly focused on driving new revenue. But as you get more homes connected, clearly there is a strong operational cost-saving opportunity associated with it that we expect to see.

Okay. The last numbers you gave, the CAD450 and then the CAD500 to CAD750, does that include a TV set-top box or two?

No. If you are going to deploy TV in there, the TV costs typically -- the set-top costs are above that.

And can you help me on what that would be, ballpark?

Well, I think if you assumed an average in TV set-tops for an IP set-top range, depending on what you are deploying, Peter. But for three set-tops in a home, which is fairly typical, I think our average is more like 2.5, but call it three because it's hard to get a half of a set-top. You are looking at probably for two regular HD set-tops and PVR set-top something in the CAD300 to CAD350 range.

You charge for some of it depending on the package.

Well, that's right. There's different models. In some cases people are paying for set-tops outright. In other cases we're renting them or leasing them per month. So generally, there's a payback associated with the set-top outside of the actual fibre or VDSL connection.

And importantly, that part of it is no different than it is today. It's not incremental because we have fibre, right?

No, the set tops are really identical between the two scenarios, so that's really part of your TV service [package].

Okay. Super. Thanks very much.

We have time for one final question. Your last question, comes from Jeff Fan from Scotia Capital. Your line is open.

Thanks. Just a very quick follow-up on the restructuring charge. Can you remind us of the CAD35 million to CAD45 million this year, what proportion of that is related to Allstream? And what is your assumption going forward if we're to take CAD20 million to CAD30 million, how much of that is Allstream?

This year, just under CAD10 million would be MTS, the rest would be Allstream. And going forward, the majority of it would probably be Allstream.

Would the same proportion apply, reasonable assumption going forward?

Yes, 80/20.

Okay. Great. Thank you.

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

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

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