BCE Inc (BCE) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to BCEs third quarter results conference call.

I would now like to turn the meeting over to Mr.Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thank you, Colleen. Good morning, everybody. I'm-- as usual I'm here today with our CEO, George Cope, and CFO, Siim Vanaselja. Earlier this morning we did issue a news release and third quarter financial statements, MD&A and supplemental information package which are all posted on our website as well as on SEDAR., also posted on the investors section of our website as a slide presentation that Siim and George will take you through this morning. George will start off with a brief overview of our operational performance. Before Siim takes us through the financials as well as a synopsis of the transitional impacts from the change over to IFRS accounting practices. So once all that's done, we'll move to Q&A.

However, before we begin as usual I'd like to remind you today's remarks will contain certain forward-looking statements with respect to items such as revenue, EBITDA, adjusted EPS free cash flow and capital intensity. Several assumptions were made us in preparing these forward-looking statements, and there are risks that our actual results will differ materially from those contemplated by our forward-looking statements. For additional information on such assumptions and risks, please consult our 2009 annual MD&A as updated in BCE's Q1, Q2, Q3 2010 MD&As and BCE's press release dated November 4, 2010, announcing our financial results for the third quarter. All of these are filed with the Canadian Securities Commission and with the SEC and are also available on our website.

These forward-looking statements represent our expectations as of today and accordingly are subject to change after such date. Except as maybe required by Canadian Securities Laws, we do not undertake any obligation to update any forward-looking statement whether as a result of new information, future events or otherwise. And I am making this cautionary statement on behalf of both George and Siim today.

With that I will hand it over to George.

Great, thanks, Thane. Good morning, everyone, thank you for joining us this morning. I am on page four of the presentation and I will take you through a quick overview of the quarter as Thane had mentioned.

Bell's strategic agenda clearly advanced in Q3, the Company's strong Wireless performance continues and can be seen in the results that we'll talk about this morning. We launched IPTV in late September, we secured a long-term exclusive mobile NFL content deal for our Wireless business, we announced, as everyone knows, the acquisition of CTV, Canada's leading media asset which we anticipate closing in Q2 of next year. We also enhanced our business ICT leadership with acquisitions of Hypertec early in this quarter, the largest hosting facility in the Province of Quebec, and the acquisition of xwave. Our ICT business is over a CAD1.5 billion business unit within our enterprise group. And most importantly, we achieved a Wireline EBITDA growth of 5.4% through our continued focus on cost control.

So let's take a look at page five of our Wireless results. Postpaid net ads were up 31%, year-over-year, driving we believe we'll be one of the leading postpaid market shares in the quarter. And in fact our net ads as of the end of Q3 of 343,000 year-to-date is more than we did in all of 2009 and are up 55% at this point in the year. Just as important as our growth in postpaid is our continual growth now in RPU. It's the third quarter that we've seen a year-over-year increase and for the first time in two years our postpaid RPU exceeded CAD65. And this has been principally driven through data growth, which was up 39%, year-over-year in the quarter.

And what's really important for the Company and our shareholders is we're starting to attract the mix of customers that we anticipated with our new network launch. In fact it's a year ago today that we launched HSPA plus network, we now have over a million subscribers on our HSPA network, and they're generating a postpaid RPU of over CAD80 at this point. So driving the momentum Wireless is really beginning to pay off for our shareholders.

If you go to page six , there's no doubt that our device leadership is helping us drive industry-leading data growth now. Having exclusive access to the Samsung Galaxy S in the quarter, you can see here the photo and line up of customers for the Samsung Galaxy. If we had had access to more Galaxy Ss and more iPhones, we believe we would have done anywhere from 10 to 15,000 more net ads on postpaid.

We also a little later this quarter will launch the new Samsung Galaxy Tab, which we think brings a brand new revenue stream to the wireless industry and, if you will, we think absolutely clarifies that penetration will go well over 100% in the wireless industry in Canada over the coming years because of multiple devices that will be used by subscribers.

Turning to page seven, our Wireline business. Our traditional voice business had its best revenue performance in over five years, with a decline in local access avenue of only 3.1%. This was driven by the 12 consecutive quarter of reduced year-over-year retail residential NAS losses as well as improvements in residential NAS RPU. On the business side, we saw a slight decline year-over-year in NAS loss, so some improvement. In essence, the economy is stabilizing. We still have not seen an increase in what we call orders in as business expands, but we're also seeing a stabilizing environment on the business side.

Turning to page eight. Our TV business had another excellent financial quarter. Our revenue growth of 9.3%, combined with our RPU growth of 5.8% created some strong financials for us in the quarter. Net ads were up 19,000 in Q3, down year-over-year really not a result of much of a reduction in gross ads but an increase in churn as we had seen in the previous quarter, and we've seen that really driven by some pretty aggressive competition with our cable competitor in Ontario.

Also from a strategic standpoint we launched Bell Fibe TV in a few neighborhoods in Toronto and Montreal in late September. We believe Bell Fibe TV will be a meaningful business for us in the second half of 2011. And we would anticipate exiting 2011 with between 1.8 and two million homes passed for IPTV. Today, it's an stressing milestone, I think I mentioned it last quarter, but we are now generating more TV revenue than we are local access revenue in the home. And that's before we build out IPTV and begin to generate revenue from that portfolio.

Turning to slide nine. Our residential services had an excellent revenue quarter from a data perspective as well, with data revenue growth of 5%, driven principally by the bandwidth usage revenue being up 83% year-over-year. We're also pleased with our net ads of 22,000, which were unchanged year-over-year. Although the mix changed a little bit, we continue to see very positive results in Quebec, and we've seen some churn rate declines with the move to our new five product with our customers. On the business side, we continue to see solid IP revenue growth offset by legacy data declines and pricing pressures and the general slow economy as I talked a little earlier on. So data revenues were flat for our business, that division, overall from a year-over-year perspective.

So in summary, excellent quarter for Bell. We truly did execute well in our focus on our five strategic imperatives and moved our agenda forward with some of the strategic developments I mentioned. Wireless had a strong quarter, the reduced NAS line losses and the slower revenue erosion clearly are important in our landline business, and also the growth in TV, Internet and home RPU. The home phone RPU helped us on a service revenue side year-over-year.

But most importantly is our continued focus on cost discipline in the Wireline business which enabled us to produce, as I mentioned earlier, the 5% Wireline EBITDA growth which I think will stand well against any of our North American peers. I believe the results Bell BCE has produced this quarter puts us in an excellent position for an EBITDA growth rate in 2011 that should enable the Company to continue to execute our dividend growth strategy going forward. With that, let me turn it over to Thane. I guess I won't go to Thane, we'll actually go to Siim to take you through the quarters financials. Siim over to

Thanks, George, good morning, everyone. As Thane said, in addition to my usual review of Bell's financial performance, this morning I'll also spend some time reviewing our preliminary analysis of the reporting impacts that will take place with the upcoming change over from Canadian GAAP to IFRS, and that takes place on January 1 next year. But first let me start with the quarter and the summary financial results on slide 12.

Overall our execution was high, Wireless enjoyed another standout quarter of subscriber acquisitions, data growth and RPU improvement. In Wireline, Bell TV and Internet delivered healthy subscriber and RPU results. And NAS losses continued to ease, if fact this was our best quarter-- quarterly line loss performance in the past five years. A good result. All this contributed to solid revenue in EBITDA growth, year-over-year EBITDA margin improvement, which was supported by reductions in direct operating costs. Our net earnings were strong and we saw a significant 25% increase in free cash flow. Total revenue growth at Bell this quarter was 1.8%, again this was driven by strong Wireless and TV revenue growth. Higher IP broadband revenues also contributed to the improvement.

Two factors however I'd say moderated total revenue growth this quarter. First, the slower pace of economic recovery on our business market unit. And second, as I think you all know, the year-over-year impact of the source in Virgin, which as of the beginning of the third quarter are fully reflected in our year-over-year results comparison.

EBITDA grew 3.1%, and EBITDA margin improved by half a percentage year-over-year. I think that's a great result when taking into account that CAD83 million of incremental year-over-year spending that was incurred to increase subscriber activations and on customer retention upgrades. And EBITDA also continued to benefit from lower pension expense, as it has through the first three quarters of this year.

CapEx spending accelerated this quarter on Fibe deployment and network grooming in support of our broadband footprint expansion and IPTV. And as expected, Wireless CapEx was lower with our HSPA plus network build completed. I think we are still on track with our outlook to achieve a capital intensity level of close to 16% for the full year. And of course that means we expect higher capital spending in the fourth quarter.

BC statutory EPS for the third quarter was CAD0.70, compared to CAD0.72 per share last year. Our restructuring charges were lower year-over-year but EPS decreased slightly due to lower income tax expense in the third quarter of 2009 which was the result of the favorable resolution of uncertain tax positions. Similarly adjusted EPS at CAD0.82 per share before restructuring costs also decreased CAD0.02 per share versus last year due to the tax factor that I mentioned as well as due to higher income tax, sorry higher income tax expense but we benefited from higher year-over-year EBITDA, lower interest expense and a lower share count outstanding. And finally we generated free cash flow of CAD812 million for the quarter, which was 25% higher year-over-year. That's a strong result and adds to our already healthy liquidity position, given our substantial CAD1.2 billion cash balance at the end of the quarter.

So with that high level perspective, let me turn to each of our segments. Bell Wireless performance continued on a upward trajectory. Wireless service revenues increased approximately 10%, reflecting the strength of postpaid subscriber growth. We saw a 39% increase in data revenues as George mentioned and accelerated Smartphone adoption. Wireless RPU grew 2.7% representing a third quarter of year-over-year improvement. The increase was driven by higher data RPU as mobile broadband adoption and data usage continues to accelerate. Data RPU now represents about one quarter of total RPU. During this back to school quarter, in response to competitive acquisition offers, we also lowered our average handset prices, and as a result Wireless product revenues were down year-over-year.

Wireless EBITDA this quarter reflected the CAD83 million higher spending year-over-year, I mentioned, to gain 66,000 more postpaid activations and to convert about 133,000 more customers to high-end handsets. That investment in improving our postpaid and Smartphone mix should yield improved RPU and churn performance going forward. Our Wireless EBITDA margin was nevertheless maintained above 40%. So I'd say really a strong quarter for Wireless highlighted by exceptional postpaid subscriber results, RPU improvement and strong data growth.

In the Wireline segment residential services maintained good momentum in TV and Internet subscriber acquisitions and overall revenue growth. We saw a good pace of customer upgrades to higher priced TV programming packages, we saw growth in five Internet customers, and we saw increased usage based revenues. The pace of local voice revenue erosion improved to its best level in over five years. Residential mass line losses improved for a twelfth consecutive quarter year-over-year. Win backs increased and our home phone service bundle penetration increased. As a consequence, Bells local and access revenues declined only 3.1% year-over-year.

Bell business markets continued to be dampened by secular pressures from the slow economic recovery and competitive pricing pressures, however IP broadband growth was solid and we experienced fewer business NAS losses this quarter. Cost efficiency initiatives and lower pension expense contributed to the good overall EBITDA growth in Wireline at a healthy 5.4%.

If we turn to slide 15, adjusted EPS was CAD0.82 in the third quarter, this is a strong result driven by higher year-over-year EBITDA and accretion from our share repurchases under the NCIB program. And just on that, currently our NCIB program as you recall targets the repurchase of 500 million in BCE common shares and that program is 75% completed, and we have as an objective to complete the remaining 25% in the fourth quarter.

Lower net interest expense due to less debt outstanding and lower interest rates year-over-year also provided some earnings upside. However tax recoveries amounted to CAD0.16 per share this quarter being CAD0.13 per share lower than in the third quarter of 2009. The year-to-date tax recoveries in 2010 have contributed CAD0.27 of EPS, and that's in line with the guidance that we provided at the end of the Q2 call and it corresponds to an effective tax rate of about 17% year-to-date.

Our full year 2010 guidance is for an effective tax rate of about 20%, and consistent with that, we are forecasting an effective tax rate for the fourth quarter that is more in line with our statutory tax rate. So adjusted for the nontaxable earnings of Bell Aliant that we consolidate, that rate should equal about CAD0.27-- 27% for the fourth quarter. Our year-to-date adjusted EPS is CAD2.24 per share, and I believe we're well positioned, comfortably positioned, to achieve our full year 2010 EPS guidance of CAD2.75 to CAD2.80 per share.

Very briefly on free cash flow, as I said at the outset, really good performance in the quarter with a 25% year-over-year increase. Cash generation improved in a number of areas, EBITDA growth, net interest payments decreasing, restructuring payments related to our work force reduction in real estate, rationalization programs being lower year-over-year and our working capital increased due to the timing of supplier payables and higher inventory levels in Wireless, and we'll see that moderate a bit in the fourth quarter. So on a year-to-date basis we've now generated free cash flow of over CAD1.9 billion.

Turning to the outlook to sum up on slide 17, we delivered strong financial performance in attractive Wireless TV and Internet subscriber growth, I'd say in an increasingly competitive marketplace. We continued to invest significantly at the same time in broadband networks and service programs, and that'll support future growth. We continued to reduce costs, which contributed to growth in EBITDA and margins. And we increased our investment in Wireless subscriber acquisition and retention.

So looking forward, we continue to see a positive outlook for the business into the fourth quarter, we expect to sustain strong execution and maintain a solid competitive position across all our product lines. So with all key financial indicators tracking comfortably to plan, I can reconfirm all of our 2010 guidance components.

So before we move to the Q&A, I want to take a few minutes to review the major changes that the transition to IFRS will have on our reported results. In preparation for that change over, which we've been working on for the last year, we've prepared on a preliminary basis our 2010 opening balance sheet and year-to-date income statement using IFRS. And these are included in our MD&A for your reference. I'd say at high level that the key message is that there's no significant impact on our operating results or our key financial indicators. Revenues, EBITDA, adjusted EPS and free cash flow are largely unchanged. Our definitions of EBITDA and free cash flow will remain consistent with what they are today. Subscriber and related metrics will also continue to be reported as they are today under Canadian GAAP. So as a result, we don't foresee any material changes to our MD&A reporting.

The significant impact for BCE is the balance sheet impact of the transition adjustments, which are required as a result of adopting international accounting standards. These balance sheet adjustments have no impact I should say on our credit policies, our dividend policy, or our capital structure, capital market strategy. Over the past year, we did a thorough assessment of all the mandatory and elective IFRS policy changes on our business, and we determined that the two principal areas of impact relate to capital assets and pensions.

And I'll start with capital assets on slide 20. As part of the transition, we revalued certain capital assets as of January 1, the beginning of this year, taking a fair value write-down to reduce the cost of those assets which had a fair value below amortized costs. Secondly we also changed the method of depreciation we were using to straight line. The fair value write-down, which is a transition election under IFRS, was determined by an independent third party appraiser. And the change in depreciation method is a mandatory requirement as IFRS does not permit the group method which we were using under Canadian GAAP for most of our Wireline assets and that depreciation method really dates back to regulatory requirements.

As a result of the fair value asset write-down and the change to straight line depreciation, which was applied retrospectively, we're reducing capital assets on the balance sheet by approximately CAD1.9 billion. And of this total, CAD1.6 billion is attributable to Bell Canada and CAD300 million to Bell Aliant. On the P&L ,the fair value write-down results in a positive adjusted EPS impact of about CAD0.08 per share. And that consists of CAD0.10 in the form of reduced depreciation expense which is offset by a CAD0.02 loss to recognize asset retirements in other income and expense. So that's capital assets.

I'll move on to pensions. Here there are three main differences in the calculation and presentation of pension plan assets and obligations under IFRS. First unlike Canadian GAAP where all of the components of pension expense are included in operating income, under IFRS, only the current service costs can be charged to operating income. The interest costs and asset return components of pensions under IFRS are included the P&L as interest expense and interest income respectively. This new presentation reduces year-over-year EBITDA volatility from changes in pension expense and that's good.

Secondly under IFRS, net actuarial gains and losses are effectively charged to shareholders equity. And this is different from Canadian GAAP that amortizes those gains and losses to the P&L overtime. So again, the second change will help minimize future P&L impacts from market fluctuations.

And the third difference has to do with the return on pension plan assets, which under IFRS must be based on a current market value approach rather than on the four-year market-related value or smooth value of pension assets as we use under Canadian GAAP. So as you see on the slide, BCE's 2010 pension expense under IFRS is approximately CAD80 million, or CAD0.07 per share higher.

And the difference there is the net results of three items. The most significant is the CAD51 million one-time pension valuation reversal, which you may remember we recognized under Canadian GAAP in the first quarter of this year. That gain under IFRS is not recognized on the P&L. The second item is the higher net pension financing costs, and that's due to the revaluation of pension plan assets at market under IFRS. And the third under IFRS is that we will capitalize a portion of pension costs related to work performed by employees on capital projects. That's pension. One final important observations I'd-- or observation I'd make on pensions is that the change over does not in anyway affect our cash pension funding requirements.

On slide 22 you'll see how the various balance sheet line items are impacted under IFRS. The adoption of IFRS is expected to result in an overall reduction of approximately CAD3.5 billion in BCE shareholders equity. This amount relates mainly to the write-down of capital assets and the recognition of the unfunded pension liability. The write-down of BCE capital assets totals CAD2 billion, which is the CAD1.9 billion I mentioned earlier, but also an additional CAD100 million relating to the deconsolidation of our Inukshuk joint venture. And under IFRS, joint ventures have to be accounted for using the equity method.

On pensions, under IFRS we will reflect the full plan deficit on the balance sheet as well as the full amount of unfunded post employment liabilities. And you can see that under IFRS, BCE's pension obligations total just under CAD3 billion. Now that amount reflects about CAD1.6 billion in, excuse me, in unfunded pension liabilities at both Bell and Bell Aliant, and about CAD1.4 billion of unfunded post employment liabilities at Bell and Bell Aliant. So as a result, the capital asset and pension liability adjustments, our future income taxes are reduced by about CAD1.5 billion.

And finally the last change, our CAD1.3 billion accounts receivable securitization program is recognized both as a current asset and current liability under IFRS, so that comes onto the balance sheet and the two line items are in the same amount. As I stated earlier, while there's still a substantial charge to shareholders equity as a result of the conversion to IFRS, there's no impact on our strong credit profile, our liquidity position, or our credit profile.

On the next slide, we've provided you with an earnings walk down from Canadian GAAP to IFRS for both the first nine months of 2010 and also our full year 2010 guidance. On the table, you see there's no net impact on adjusted EPS from the adoption of IFRS. The impact on revenue is minimal with some minor decreases from the deconsolidation of the Inukshuk joint venture and some minor changes to deferred revenue recognition on some longer term enterprise contracts.

There's also no material difference to EBITDA either, just a slight decrease that arises from the flow through of the revenue adjustments and the higher pension expense. Now given that the higher pension expense in 2010 is mainly due to that one time CAD51 million valuation credit not flowing through earnings, we would expect that the impact in 2011 and beyond should be minimal. And as I described, because we use current market values under IFRS rather than market-related values to determine pension asset returns, this results in a CAD90 million of additional pension financing expense and that happens below EBITDA representing about CAD0.07 per adjusted EPS.

And finally as a result of the write-down in capital assets and the change in depreciation method, depreciation expense decreases under IFRS providing CAD0.10 of incremental EPS, again, partly offset by the P&L recognition of losses on asset disposals of about CAD0.02 per share and other income. So all in all, an immaterial impact on our overall adjusted EPS, but certainly requiring an extensive amount of work on the part of our controllers group.

To summarize then, no real impacts on how we manage our business. Revenue and EBITDA remain essentially unchanged. Higher pension expense under IFRS offset by lower depreciation expense and consequently adjusted EPS is unaffected. Free cash flow is impacted slightly positively and that's due to the deconsolidation of joint ventures and that necessitated the reclassification of spectrum purchases to investment activities.

And finally while we see a material reduction in shareholders equity on the balance sheet, no changes to our dividend policy or credit policies. In fact, we'll continue to maintain a very focused capital market strategy directed at increasing cash distributions to shareholders on a consistent and sustainable basis going forward. So that's a lot to digest. We can take questions and I'll turn it back to Thane and the Operator to begin the question period.

Great. Thanks, Siim. So given the time that we have left, I please ask that you keep your questions short and to the point in respect to getting as many people to the line as possible. So with that, Colleen can you please explain the polling instructions?

Thank you, Mr. Fotopoulos. (Operator Instructions) Our first question is from Simon Flannery of Morgan Stanley. Please go ahead.

Thank you very much. Good morning. Could you talk a little bit about what was going on in the prepaid segment, you had some losses there? I'd assume that you've got some competitive impact which we really didn't see on the postpaid side, you've done some things around Solo, perhaps you could give us commentary on how things are proceeding and what to expect there? Thanks.

Yes, prepaid is pretty straight forward. We've moved Virgin's focus almost dramatically away from prepaid to postpaid. So you can see that in our postpaid numbers, where everyone knows the money is in the business. On the prepaid side if we've seen any impact on the new entry competitors, it's the prepaid customer base going to some of those plans where they say they don't do any credit checks and et cetera. So that's probably where we've seen the impact.

And as far as the Solo Unlimited, as we thought it would be a competitive offer in the marketplace, but as we also said to people, unlimited voice isn't really where the market is today it's about the data opportunities. So it's there, but frankly it's there as a competitive item not that it's particularly material. So we would anticipate quite frankly, strength and focus by us on the postpaid side and prepaid we may continue to see trends like this, we'll just have to see.

Thank you.

Thank you. Our next question is from Maher Yaghi of Desjardins Securities. Please go ahead.

Yes, thank you. I wanted to ask you a question regarding the use of cash. I mean you mentioned on the call earlier that cash generation continues to be solid. Is there an opportunity to use some of that cash before the end of the year to make a special contribution to your pension in order to get some lower taxation next year like you did last year? And also just maybe your thoughts about how taxes could look for 2011.

Let me start and then it over to Siim. I think first of all to remind all of our investors, of course we have the acquisition of CTV, which will close in the second quarter of next year and so clearly part of our strong balance sheet and cash position will be used for that. Secondly we will, at the same time, as we get to the end of the year look at our cash position and at that point we have our guidance call in February talk about where we are on usage of cash. And one of the considerations will be exactly the question that you've raised, which is do we look at our pension planning game given the return that we see on that type of investment for our shareholders in the sense of the cash tax returns we see and dealing with our pensions. So that will be on our list of considerations, as it was last year we have not made a final decision at this point in time. Siim is there anything you want to add to that?

Yes, just to say that while we have CAD1.2 billion of cash on the balance sheet today, we expect to end the year in fact with CAD500 million to CAD600 million of cash. In the fourth quarter we have a dividend payment in October, that's about CAD350 million, at the Bell level we also have a series EC debenture that's coming due in the amount of about CAD270 million, we've got completion of our NCIB in the amount of CAD125 million, and then we've got the purchases of Hypertec and xwave as well. So with all of that, we would expect to the end year with CAD500 million to CAD600 million. As George said, we are giving consideration to how to apply that remaining cash balance recognizing there's the acquisition of CTV, the opportunity to potentially put more money into the pension plan and other alternatives to consider. So we'll be in position when we provide our guidance for 2011 to review all of that with you.

And none of that, no one should be concerned, none of that takes away our focus on our dividend growth model. That'll continue to be the focus of the company.

Yes, and I think the other question you asked was our tax outlook for 2011. What we have consistently said is that we expect a manageable gradual increase in cash taxes over the next three to five years. With the acquisition of CTV there's about CAD100 million of tax value that that brings us, so that improves our tax position. But again we'll be able to provide more detailed guidance on what type of tax expense and cash tax position you should expect for 2011, but there should be no surprises there.

Thank you.

Our next question is from Ric Prentiss of Raymond James. Please go ahead.

Thanks, good morning. Appreciate all the color. Particularly interested in the HSPA point that you made that CAD80 RPUs. Can you update us a little bit about how many devices you have and how it seems like for next year as far as additional devices? And what percent of your base is on Smartphones now?

I'll give you some of the answers, some we-- I think we've shared a lot this morning on HSPA. We really want the shareholders to get a sense that we are getting the right mix of clients. So this-- I thought I said it, but maybe I didn't. We have over a million clients on HSPA plus and generating about CAD80, a little over CAD80 on the postpaid side.

And so that comes from two places, it comes from a migration of clients from CDMA, as their contracts come due at HSPA plus, and it comes from our growth in gross ads on smartphones. But I don't think we've been sharing our percent of base on Smartphone and it's not where we're going to go from a competitive perspective but we are obviously trying to be very transparent on the data revenue growth to give people a count for we are getting the right mix of clients now which was one of our challenges a few years back.

Great.

Hopefully that's helpful. It is, thank you.

Thank you, next question.

Thank you. Our next question is Greg MacDonald from National Bank Financial. Please go ahead.

Thank you. Good morning, guys. It's another kind of variation of the cash usage question, and really it's focused on the bond market, it was very strong bond market QE2, means that things are getting better for bonds, if that's possible. There was very low debt costs out there, you guys are in a pretty good position with respect to debt maturities, I note that you do have I think a CAD500 million 2012 note.

Right.

That's plus 6% coupon on that. Siim, what's the potential for Bell to prefinance or mature those types of credits? I know there's not much left that you can do, but what's the opportunity there to give yourself a little bit more flexibility on cash? Because I'm looking at things like the CTV acquisition and the possibility of making a special pension contribution. And I'm wondering with that dictating your flexibility, where does the buyback for 2011 stand relative to things like increasing CapEx on Fibe to the home? I'm trying to know-- I'm trying to figure out where in order of magnitude where the buyback's going to be standing as time goes on, and if flexibility on pre-financing some debt out there gives you more flexibility than what I think you do?

So I'll let Siim talk about the bond market and that. I mean our capital market strategy continues as we've said number one priority will be the dividend growth model and then uses of cash we'll clarify. In February we do have the CTV acquisition, we do have to consider buybacks, and we also consider the use of the money for the pension, and which one we think is optimal for our shareholders is what will drive that ultimate decision. But maybe what I'll turn it over to Siim now, you were right about attractiveness of the bond market for sure and so Siim over to you.

Right, well we're very fortunate to be in the healthy liquidity position that we're in. And Greg you're certainly right in drawing attention to the attractive bond markets that are out there. And I think notwithstanding that we have sufficiently a three-year term facilities in place or bridge facilities in place for the CTV acquisition, it makes it very attractive for us to want to go to the market as soon as that acquisition is completed and lock in as favorable rates as we can.

In terms of looking at the debt maturity schedule and opportunities for early refinancing that debt, we look at that on a daily basis. Last year we refinanced CAD1 billion of debt calling that debt early and that saved us a considerable amount of cash in the form of reduced interest expense. The opportunities are a little bit more challenging today. It depends on your outlook as to what interest rates are going to be over the medium term. But I wouldn't rule out that we'll act over the next quarter, as I say it's a question of assessing where we think interest rates are going to go over the next three to four years.

Okay, that's helpful. And just as a very quick follow on, on the pension side of things, rates down 50 beeps means--

Yes.

Liability is likely up, how have your assets performed?

Asset performance has been strong through the year-to-date they're over 9%. You're right, discount rates have gone down. And just at the end of October the Institute of Actuaries announced what companies will be required to use as the discount rate both for the, there's a commuted value rate and an annuity purchase rate, and you use a blend of those rates Depending on the mix of your pension plan. So we expect that when we file our pension valuation at the end of 2010, we will have to use a slightly lower discount rate, that could be as much as 50 basis points lower. So I suspect that's going to have an impact on the solvency deficit at the end of this year, it's going to be partly offset by the solid returns that the pension fund has earned.

But we'll, again, be in a position to talk about that and what our funding obligations are for 2011 when we announce our guidance. I would say though that all in all I don't think the discount rates or-- and the returns that we've generated are going to materially change the level of annual funding as we go into 2011, the question is more the appropriateness of doing some further pre-funding of the overall pension liability.

Of the tax benefit, great. Thanks very much, guys.

Thanks. Thanks for the questions.

Thank you. Our next question is from Jeff Fan of Scotia Capital. Please go ahead.

Thank you very much and good morning. I wanted to ask a question regarding the broadband Internet's RPU up 4.5%, I was wondering if you can help break down a little bit the drivers between as you mentioned broadband usage, but what about the upgrades to higher tiers to Fibe Internet and price? And just wondering how, George, how you see this changing overtime in terms of the overall RPU trends for Internet and also each of these drivers?

Yes, the-- it's a good question. The-- there's on our slides we note that our FTTN or our five customers are up 28% year-over-year. So there really are two things happening, it was three things I guess on the revenue side on the Internet that are happening. One is just the consumer is moving to the Fibe network that we have because of the access to the quality of the service and the speed of the service. And when they do that of course they upgrade to a different rate plan, because they're using a product that's superior to where they were before. So that's one piece of driving RPU.

The second piece of driving RPU is obviously as we see a growth in video usage on the Internet, making sure we're monetizing that for our shareholders through the bandwidth usage charges, is a second contributor to that growth. Those two things. And then I think earlier in the year there was a small price increase on the base, but that's been flowing through over the entire year. Those are really the three keys and obviously to a lesser extent 22,000 net ads adds overall revenue, but your real question is about I think RPU. So those are the mixes.

We would anticipate going forward each of those elements to move in our favor because we anticipate over time all of our clients will move to our Fibe network and we would expect obviously as our FTTN footprint grows, that adds to that and we obviously do not expect less usage on the Internet going forward, we would anticipate people using the Internet more and more over the years. And so we think the revenue per customer opportunity through our significant investments we think it could be quite positive for our shareholders over time.

Okay, thanks.

Thank you, next question.

Thank you. Our next question is from Dvai Ghose of Canaccord Genuity. Please go ahead.

Yes, good morning, thanks very much. My question is on your Fibe IPTV strategy. George you mentioned that the video ads were a light in the quarter, it wasn't a gross issue, it was a churn issue because of increased competition in Ontario from Rogers. But arguably your IPTV product is superior to their cable product, but they will catch up with better interactive guides, better two way connectivity, and so on one set-top box remote control use of TVR and so on. So shouldn't you really be making hay when the sunshines and perhaps driving your IPTV strategy more aggressively while you have this lead time advantage over cable?

Well, first of all as the-- great question, Dvai, and obviously we've got to consider all those points on the competitive dynamics. The only ILEC in North America that has two million subscribers on TV already, we think that's one of the key parts to the strategy because obviously satellite competes pretty well. There's no doubt in Toronto, Montreal, [Acore], [Auto Acore], IPTV rollout will add to that competitive footprint for us, we would agree with you on that.

And so frankly 2011, we do want it to be an important year for us in Fibe TV. We're not as concerned about people catching up to us completively in the product portfolio as we see Microsoft roll out. So yes, the faster we can do it, the quicker we will. Obviously with the focus also recognizing we have a pretty powerful TV franchise already. So I think it's additive. I think it puts us in a great spot because then we-- and we think given the proven technology and the execution we're seeing by both AT&T and TELUS on the product, it only encourages us more to move as quickly as we can.

Thanks very much.

Thank you.

Our next question is from Phillip Huang of UBS Securities. Please go ahead.

Great. Thanks very much for taking my question. First just a quick follow up on taxes, I know your affective tax rate in recent quarters have benefited from favorable rulings. Just based on your current visibility, should we expect the effective tax rate to be sort of closer to the statutory rate in the year ahead? And my question is on Wireless retention spending, just given the heightened competition this quarter and your postpaid churn up slightly, wanted to get your thoughts on whether you'd expect to sort of further increase your retention focus going forward? Thanks.

So I'll start with the question on the statutory tax rate. As I said for the fourth quarter we expect our effective tax rate to be at about 27%, which is our corporate tax rate adjusted for the nontaxable earnings of Bell Aliant that are in our results. I'd prefer to defer your question on effective tax rate for 2011 until we provide all of our guidance. It's always an exercise for us to look at the status of our tax audits, the status of R&D claims and that's an exercise that is underway right now and I prefer to comment on it in conjunction with all of our guidance. Because there's elements on how much pension we fund can impact that kind of tax rate as well.

So we'll come back to you on that if you'll let us a little later on this year, when we do our guidance in the new year.

Got it.

On retention spend, yes great point, I think we would anticipate our expenditures on retention to continue to grow and also probably we've been a lower expenditure there because of what our network was historically and our competitors have been higher. We certainly took that number up in Q3 and we would anticipate that to continue to grow. One of the keys for us obviously there to provide EBITDA growth we want next year is to continue to see the right mix of RPU, if you will, stable to hopefully growing as a function of the data growth that we see to offset some of those upgrades. Because I think it is part of the structure of the industry now that we've got to expense through P&L and we have a real focus on that.

And should we correspondingly expect churn to go back down or-- ?

Yes, I would say that's a-- it's also a real focus of our organization now. Because one of the things we clearly see is our mix has changed and the clients we're attracting, there obviously are some that haven't stayed with us and may have been a different mix than we had in the past. And then I think the tougher one on that to call for us, and I gather probably our other competitors will be the impact of the new entrance on one that we see and an increase stay or do we get it back down to the retention. The Company's goal will be to get it back down. But we have to execute that I think to show that to the street.

That's very helpful, thanks.

Thank you. Our next question is from Vince Valentini from TD Newcrest. Please go ahead.

Yes, thank very much. I'm wondering within your NAS declines in residential if you're tracking how much of that is going to competitors versus going to substitution, and if you've seen any change in the rate of substitution with all these new wireless unlimited offers in Toronto?

Yes, we do. I mean what we do probably is what you're probably doing at the end of the quarter, which is we take a look at the NAS moving to the cable companies and their ads and then obviously what we lost and generally I think it's probably safe to assume the gap would be wireless substitution. And I think a couple of people started to pick that up and make a note on it. And we're obviously following it the same way.

So there's no doubt this year we've seen some acceleration in wireless substitution because we've seen obviously some pretty weak growth from our cable competitors in terms of NAS additions, and so that's where we would see it. I don't think we've seen, Vince, an acceleration that I could link to the new entrance to be completely transparent on it. We just know that the number is bigger and-- but it hasn't all the sudden rapidly accelerated. But the good news is everybody can calculate it I think to take our NAS to clients and the other Telco NAS to clients the cable ads and gap generally you would think would be wireless substitution. It's hard to think of what else it would be especially when you have home growth, right, going the other way. It's not like we're having a decline in population in Canada.

Great, thanks.

Thank you. Our next question is from Glen Campbell of Bank of America, Merrill Lynch. Please go ahead.

Yes, thanks very much. You made a very interesting comment about our home phone RPU on the voice side rising 3.4% year-over-year that's a remarkable result considering some of the retention in acquisition offers you've got out there. Presumably it's rate increases offset by more retention acquisition discounting. Could you comment on the balance there and what else might be contributing to that? Thanks.

Yes, Glen part of the contribution we see when RPU mix goes up is also making sure we're losing it so such a thing as losing the right clients. So you tend to keep-- if you keep the user of the heavier packages as your base declines, if you're keeping the right clients, you also see an RPU increase, so that's part of the contribution, because we've done a lot of bundling pieces that have advantage for our wireline clients who have had many services with us. So that's helped it stay a little stickier with that base.

And secondly, yes, there were some price changes during this year that have also clearly been able to hold in the marketplace and we had seen, as you know in Ontario one of our competitors had implemented a pricing change as well. And so I think that's what's really boded well for us on the RPU side there.

And any increase in the long distance attach rate there that might explain it?

Yes if it's total that would be-- we've done a number of bundling on the LD side that has these unlimited packages. But frankly, you see LD rates, the decline you've seen in our percentage, it's not contributing a lot it's more helping us maintain that improving NAS retention rate in terms of the number of clients we're losing.

Okay, great quarter. Thanks very much.

Thank you.

Thank you. Our next question is from Jonathan Allen of RBC Capital Markets. Please go ahead.

Thanks very much. Just a quick question about the deferral account and how we should be modeling that. Siim, should we be-- has it already been accounted or should we look at the, sorry, the home phone revenue dip down in the next quarter or two as you handout some of those rebates and promotions? And similarly on the CapEx side, should we be modeling on higher CapEx in the next couple of quarters or will it fit into the existing budget?

Yes, so first thing I didn't mention this on the call, but in the quarter we took an additional CAD95 million restructuring charge to reflect the final CRTC decision which included an interest factor in the deferral account. So in terms of the P&L impacts, the deferral account has been reflected 100% at this point. We will be spending CAD306 million for rural broadband deployment. Our plans are not entirely finalized and it'll be a number of years that we incur those expenditures. And then there's CAD250 million of the total deferral account balance of CAD583 million that has to be returned to residential local service customers by the end of March next year.

So over the next four years the aggregate free cash flow impact is going to be about CAD580 million. We see that in terms of the buildout side being absorbed within the existing 16% capital intensity that we're kind of operating at now. And the rebates we're just working through the form of rebates that we're going to provide. We've built some of that into our plans and our free cash flow guidance for 2010 I suspect that the larger portion of it will be rebated in the first quarter of 2011.

And would those rebates show up as a lower revenue or is it fully reflected as you said in the P&L?

It's fully reflected in the P&L, there will be no further impact on our statements.

Okay. Thanks, Siim.

In the interest of time, Colleen, this will be our last question.

Thank you. Our last question is from Bob Bek of CIBC. Please go ahead.

Lucky me, good morning. Just my question is on Wireless RPU, George obviously a very strong quarter for data, which is key to the story. By our take your blended voice RPU declined only by about 3% or 4%, which is really quite good relative to your peers in the industry. Can you talk at all about what's driving that improved voice RPU performance as obviously a lower anchor to the data growth as key to the story?

Yes, it's mix. It's mix. The story for Bell and the move and growth in RPU isn't about premium pricing strategies to our competitors, because it's a competitor market. It's having the network, the distribution, the brand and the product platforms to compete now head-to-head against our major competitor who had an advantage over a number of years in that area, so that we are attracting now the categories of the-- all categories that frankly have higher RPU whereas before we had some competitive challenges there. So it's really mix driven. And we would see therefore the same mix on voice.

And then of course we have the benefits overall of now global roaming with our handsets that we didn't have before and all those things are probably helping us a little different than our competitor who would add some of those advantages to themselves a few years ago.

That's helpful, thank you.

Great, thanks, everyone.

Okay, thank you, Colleen. Thanks for your participation this morning. As always I'm available for follow ups and further questions throughout the day. So on that, have a great day. Thank you.

Thank you. The conference has now ended. Please disconnect your lines, thank you for your participation.