BCE Inc (BCE) 2011 Q3 法說會逐字稿

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Allstream third-quarter 2011 results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Paul Peters, Vice President, Tax and Investor Relations, you may begin your conference.

Thanks, Matthew, and good morning, everyone, and thanks for joining us for our third-quarter results conference call.

Earlier this morning, we issued a news release for our third-quarter 2011 financial results. The news release, MD&A and additional supplementary information are available on our website at MTSAllstream.com.

Yesterday, MTS Allstream's Board of Directors approved the fourth-quarter dividend, which has been set at CAD0.0425 per share.

On today's call are Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Dean Prevost, President of Allstream; and Chris Peirce, Chief Corporate Officer.

Today's call will consist of remarks by Pierre and Wayne followed by a question-and-answer session.

Today's comments may contain forward-looking information relating to the finances, operations and strategies of the company, including comments on revenue, EBITDA, earnings cash flow, capital expenditures, sales and marketing activities. These statements are based on assumptions made by the company and run the risk that our actual results and actions may differ from those anticipated.

Statements made today reflect the assumptions made by MTS Allstream as of today and, accordingly, are subject to change after that date. MTS Allstream disclaims any intention or obligation to update revised statements whether as a result of a change in circumstance or 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 information.

I will now turn the call over to Pierre.

Thank you, Paul. Good morning, everyone. Well, first, Kelvin Shepherd is not on the call today. Fortunately, Kelvin's father passed away earlier this week and the funeral conflicted with this call. He will be back for our next call.

So excluding the one-time CAD15 million impact relating to the Bell Mobility settlement and the CRTC deferral account decision in Q3 last year, which many of you have highlighted in your preview reports, EBITDA was up 1.4% in Q3, representing another solid quarter for our company.

Nine months through the year, we continued to deliver results in line with our improved guidance, operating metrics aligned to our peers, with performance improvement for both MTS and Allstream.

And even if some of the economic forecasts around us show concerns about a possible economic slowdown, Manitoba does not seem to be impacted and MTS is still performing strongly.

We also have not seen an impact on Allstream's national IP strategy, which is continuing to produce strong sales and solid results. We will continue to monitor the market closely to ensure that we are prepared if conditions change.

Allstream continues to improve its performance and is gaining strength by remaining focused on selling IP-based services and aggressively taking out costs.

We can see that Allstream's IP strategy is working. Increasing IP revenues resulted in gross margin rising to 56.9%, even when Allstream legacy revenues, as planned, are declining.

To support this IP strategy in the third quarter, Allstream extended its fiber network to 102 new buildings, now connecting a total of 2,313 buildings.

Allstream continued to sell IP at a strong pace in the third quarter. In fact, IP sales wins for the first nine months of the year were up 20% over the same period in 2010. And important to note, our sales team achieved success, winning many second and third contracts in newly connected fiber-fed buildings. And as we mentioned before, the resulting contracts following the first sale in a building connected with our fiber or on net have almost no additional network costs and produce substantially higher margins.

Over 55% of new IP circuits sold in 2011 are now on net, a threefold increase over the on net proportion in Allstream's base earlier last year. This has led to steady improvement in Allstream's gross margin percentage and cash flows when compared to previous years.

At MTS, the trend of customers subscribing to higher value services and bundles continued in the third quarter. More of MTS customers, in fact over 60% of Q3 activations, are upgrading to smartphones from voice-only devices, opting for higher speed Internet plans and subscribing to our premium IP TV service, successes that are all reflected in solid increases in ARPU for all product lines.

Our customer friendly bundle offerings, which cannot be matched by our competitors, continued to be effective in creating revenue growth and retaining higher value customer. The results show it. For example, in Q3, MTS continued to see the lowest residential line loss rate in Canada at 5.2%.

MTS also succeeded in creating a sharp drop in the number of customers on promotional plans when compared to this time last year. This is quite an accomplishment in the highly competitive market and reflects MTS management focus on innovation and value and not only on price. The results show strong revenue and ARPU performance across all MTS growth services.

Highlights from the quarter also include 47.8% wireless data growth, which will be well supported in the future by our recent launch of the new iPhone 4S.

These results demonstrate that customers are clearly seeing value in MTS product leadership, unique bundles, network reach, and customer experience in Manitoba.

And on a positive note, the return of the Winnipeg Jets has put MTS at the forefront of media coverage. As a main sponsor, the company continues to benefit from the huge media and customer exposure the team and the MTS Center have received in Manitoba and throughout Canada. This is really becoming a national story.

Related to this relationship, MTS recently launched a TSM Jets channel, so customers can enjoy the Jets home and away games as well as pre- and post-game coverage.

And talking about broadcasting content, we were pleased by the CRTC's decision in September to prohibit vertically integrated carriers from limiting access to content and are equally happy about the suggested arbitration process.

Last month, we announced deployment of LTE in Winnipeg and Brandon in 2012. Our LTE network will provide a growth opportunity for MTS and will build on the success of our 4G HSPA wireless network.

Planning and infrastructure development for the rollout is well underway. The LTE network will operate on the AWS spectrum acquired in the 2008 auction.

MTS initial investment for the serve and LTE is expected to be approximately CAD25 million to CAD30 million over those two years, much lower than the HSPA network costs and in line with our competitors. We plan to accommodate this investment within our annual 2011 and 2012 capital envelope.

Plans for a potential LTE deployment outside the initial two cities in Manitoba will be considered once the 700 megahertz auction rules and results are made public. We expect Industry Canada to announce those rules sometime prior to year end with the auction taking place in the second half of 2012.

So all in all, we are delivering on our 2011 improved guidance and plans successfully and are pursuing our strategy of investments in both divisions to build a stronger company in the years to come. I will now turn it over to Wayne. Wayne?

Thank you, Pierre, and good morning, everyone. MTS Allstream reported solid third-quarter and year-to-date results, keeping us on track to meet all key metrics of our revised 2011 guidance announced last quarter.

These positive third-quarter results are mainly due to strong revenue growth in our strategic lines of business, including wireless, converged IP, high-speed Internet, and IP TV along with diligent cost management. Through our efforts to improve our cost structure, we have achieved CAD25.1 million in annualized cost savings in the first nine months of the year, already reaching our target range of CAD25 million to CAD35 million for 2011.

At MTS, strong growth in wireless data at 47.8% in the third quarter, along with a 3.8% increase in subscribers, led to an overall growth of 7.3% for wireless revenues.

We also achieved strong growth in broadband and converged IP, driven by a 19.9% growth in IP TV revenue and an 8.3% growth in high-speed Internet revenues in the third quarter.

Allstream demonstrated strong growth in IP revenues in the third quarter with a 9.8% year-over-year increase. Allstream continues to work hard on its strategy by focusing on high-margin, on-net revenues, exiting low-margin business, and reducing costs.

Now turning to the specifics of our quarterly financial results, our consolidated revenues at CAD443.2 million for the third quarter were down 1.7% over the same period in 2010. The decline is attributed to a decrease in legacy revenues and our decision to exit lower margin business at Allstream, partly offset by strong gains in wireless high-speed Internet, IP TV and converged IP revenues.

Consolidated EBITDA of CAD146.9 million for the quarter is lower than the CAD159.9 million we had in Q3 last year as a result of a one-time CAD5 million deferral account rebate adjustment and a CAD10 million wireless transition recovery, both recognized in the third quarter of 2010.

Excluding these items, consolidated EBITDA would have increased 1.4% in the third quarter of 2011 over the same period last year. Year-to-date EBITDA, all in, including all these one-time items, is up CAD18.2 million or 4.2% over the same period in 2010.

Allstream's EBITDA was up 6.2% for the period and 35.7% year to date. While total revenues at Allstream declined by 4.6% in the third quarter, we saw direct costs reduce much faster at 12.1%.

Allstream's gross margin increased from 53.8% in the third quarter of 2010 to 57.4% in the third quarter of 2011, supported by strong growth from converged IP, which has generated gross margins of 73.4% in 2011.

This, along with diligent cost reduction efforts, contributed to an improvement in Allstream's EBITDA margin to 13.8% compared to 12.4% last year.

While there's still work to be done, we feel that these results demonstrate that we are on the right path as reflected in Allstream's fourth consecutive quarter of year-over-year EBITDA growth.

Earnings per share of CAD0.56 in the third quarter of 2011 compared to CAD0.76 per share in the same period of last year, mainly due to the one-time items received in the third quarter of 2010 and higher amortization expense.

Year to date, earnings per share was CAD1.99, a 15.7% increase over the same period of 2010 as a result of higher EBITDA and the favorable impact of the SR NED tax credit adjustment recognized last quarter, partly offset by the one-time items recognized in Q3 2010 as noted above.

MTS Allstream's capital expenditures for the third quarter were CAD81.1 million compared to CAD78.6 million in the same period of 2010.

Year-to-date capital expenditures decreased 12.5% year over year due to the impact of the CAD20.7 million one-time research and development tax credit achieved last quarter and higher costs in 2010 related to the completion of our HSPA network build, partly offset by incremental capital spending for our fiber-to-the-home project in 2011.

The 15.3% capital intensity ratio for the first nine months of the year reflects our continued commitment to make timely capital investments in the business. Capital spending is cyclical and tends to increase in the third and fourth quarters of the year. We do not expect the capital intensity ratio to be as high in the fourth quarter of 2011 as it was last year because last year's CapEx included the cost of the HSPA build. We expect that our CapEx spend for 2011 will be in line with our 2011 outlook.

Now turning to free cash flow, free cash flow is on track to meet the range provided in our 2011 guidance and fully fund our dividend while keeping our payout ratio in the range of 70% to 80% of MTS free cash flow.

For the third quarter, free cash flow was CAD29.3 million compared to CAD44.3 million for the same period in 2010. The CAD15 million year-over-year decrease in free cash flow in the third quarter was due to the favorable one-time items received in the third quarter of 2010.

Year-to-date free cash flow was CAD111.5 million compared to CAD98.2 million in 2010. The increase of CAD13.3 million is a result of higher EBITDA and lower capital expenditures in 2011, partly offset by higher pension solvency funding due to the delay in implementation of the new federal pension regulation and higher wireless COA.

Free cash flow for the full year 2011 is expected to be in line with our guidance range of CAD110 million to CAD150 million. Contributing to the expected positive free cash flow in the fourth quarter of 2011 are substantial reductions in HSPA capital spending, pension solvency funding and restructuring costs that were incurred in the fourth quarter of 2010.

At this time, I would like to provide further clarity on our pension funding strategy. We made CAD25 million in pension solvency payments in the first quarter of 2011. Given the new federal pension regulations that came into effect at the beginning of Q2 this year, we are not required to make any further solvency cash contributions in 2011. Given current market conditions, we estimate that cash funding for pension solvency would also not be required in 2012.

During the quarter, we successfully issued CAD200 million of seven-year, 4.59% medium-term notes maturing on October 1, 2018. Net proceeds were used to refinance the company's September 27, 2011 debt maturity.

Our ongoing ability to access capital markets at competitive rates during difficult market conditions speaks to the strong foundation of our business and the strength of our financial profile.

To conclude, our strategy and execution continues to produce solid results as reflected in the third-quarter and year-to-date financial metrics that are in line with our revised guidance.

Thank you, and we would be now pleased to take questions.

(Operator Instructions). Greg MacDonald, Macquarie Capital.

Could you comment on the general trends in the national enterprise segment? Looking to me like at least sequentially, the trends are coming down. Bell Canada in its conference call an hour ago talked about a tough environment there. Can you comment on the pricing and the volume trends? Is there weakness in your eyes 3Q relative to the first and second Q? And what's the sustainability outlook for that? Thanks.

Dean?

It's Dean here. It seems -- I don't see it as dark as that I guess is the way I would start. It seems a lot more stable than the way you've describe it.

Now I didn't listen to BCE's call, but certainly we are seeing the volume coming in. You can see it in the progression in terms of our IPC sales. And in looking at the pricing that is happening within that portfolio of 5 million or 6 million services, the price trends that we've been seeing really haven't changed quarter over quarter. So I don't know precisely what would have them saying that.

But are we generally as a telecom business looking at the financial markets and the way people are buying? Probably a little more worried now than we would have been back in the spring? Sure. I mean we've seen this before, right? You remember 2008, 2009, and some of the delayed effects that came out of buy decisions, so I'd say we're probably all a bit more hawkish about how people are thinking about their telecom services. But again, in terms of the numbers I see, the volumes, our sales, I'm not seeing those kind of early warning signs in any significant way.

Greg, you may be also seeing the difference here between the incumbent and the new -- and the competitor like Allstream was gaining on the market and not impacting us much by re-price of legacy technologies than the bigger incumbent would be. So it may be a bit of a different environment because of that or a different type of performance because of that.

Well, I'm thinking, it's commentary from BCE as much as what they reported. But I'm looking at your reported number for Allstream on revenue and it looks to me like you'd seen some stability in the first couple of quarters and we've seen a bit of a dip down.

Is there anything to explain that in the more legacy parts of the business that may be more volatile? I'm trying to just think about sustainability of revenue trends on the Allstream division.

Yes, Greg, it's Dean. So, don't -- there's going to be some small movements in our revenue still because remember this year, we're still making movement away from things like one-time equipment sales, which can be, they look relatively large as in CAD2 million, CAD3 million, CAD4 million or CAD5 million numbers, but they're really low contributors to the business. So if you look broadly across what's happened with Allstream, we're down or will be down in the CAD40 million range in revenue, but our actual gross margins from a dollar perspective will be up substantially.

So the revenue picture for us is a little bit murky for the year in the sense that I wouldn't worry about those small changes because some of that has happened because of strategic choices that we're making about trading very, very low margin revenues off and focusing on the monthly recurring run rate. So it will be a more stable environment next year.

Okay. And just one final question. Were there any restructuring costs in the Allstream division in the 3Q? And if so, can you tell us what they were?

There was some small restructuring cost, but nothing significant.

Not different than 1Q or 2Q?

We would have maybe CAD1 million or CAD2 million in total in consolidated numbers.

Yes, Greg, we did not only in Allstream though, but also throughout the company, we did a small re-organization where we did close some vice president positions. I think you're seeing that in other also. So there is some severance costs in there as we made the structure more efficient, and in fact I think Allstream and more than the others in that one, but nothing hugely material.

Great. Thanks, guys.

Glen Campbell, Merrill Lynch.

Thanks. First, just a clarification. In the segmented numbers, there's a negative for other EBITDA, and I was wondering if you could tell us what's in there and then I had a follow-up. Thanks.

Yes, the other is just some project costs that we have written off and some restructuring costs, primarily from our corporate group.

Okay. So those restructuring costs would be different than the ones you were -- just talked about in response to Greg's questions which would be within the business unit EBITDA. Is that right?

Well, it's the same. As I mentioned, we've got a couple of million if you look at consolidated, so some of it is in this other and then there would be a little bit in Allstream and I don't think there's any in MTS.

Okay. Thanks. And then for Dean on Allstream, could you talk about the sales pipeline? It looked very good a quarter ago and it sounds like there was significant lift in revenue, that it should be hitting around Q4, and I was wondering if that's the case.

And I was wondering as well, with -- Cogeco Data services having expanded now into Montreal, I was just wondering if you could comment on where you do and don't compete with them and how you see them as a competitor. Thanks.

Sure. Maybe do them maybe in reverse order, which is with Cogeco acquiring MTO. MTO was in the space already in Montreal, so they were already in that marketplace.

We know them. We actually use them. Actually we use Cogeco as they use us, (inaudible) traffic, so we're both competitors and fliers and partners with each other.

But the competitive aspect, we don't come up against them that frequently, and that's true for both the MTO that they purchased in Montreal and for Cogeco more broadly.

Our service set tends to be a little different in terms of its breadth and the level of managed services and security that surrounds it. Plus, because we are national as well, we then play into multi-site services, kind of true network requirement well beyond individual cities or regions. So it leads us to little bit of a different space.

And let's admit it, we're both -- we're a smaller market shares each of us, so really the ones we come up against more are of course the major incumbents by far.

In terms of the funnel and the pipeline, it still remains strong. It's now an issue of more delivery, which is always interesting when you are doing a lot more build. You'll notice I think -- and Pierre mentioned it in his opening remarks -- that we are still very, very strong in terms of turning out new buildings, maintaining a high on-net or on co-lo presence in all of our sales. And that is excellent, which is leading the gross margin increases that you have seen.

What it is though, it is a lot of work from a delivery point of view for that initial install. Worth every ounce of effort because of what it means from a long-term expansion for the business. And that's the focus we have right now is, Glen, to get what we sold installed. And that's kind of our fall program right now, making sure we turn that into revenue.

That's great. Thanks very much.

Jeff Fan, Scotia Capital.

Thanks very much. My question is also on Allstream. So Dean, when I look at your EBITDA trends, I know you talked about gross margin, which continues to improve. When we look at the EBITDA trend, it looks like the growth has slowed down from what we saw last quarter. My question is around the scalability and whether you need to spend more both on capital to extend the number of buildings connected or just spend more on OpEx to support the growth and the change in mix that you are talking about.

And then maybe longer term, can you help us on where you think the EBITDA margin on Allstream is going to settle out? You've seen some real improvement over the last year; we have 14%. I'm just wondering where can we go from here?

Well, I will leave the last one which is where EBITDA goes. Why don't we leave that for the kind of future-looking meetings that we will have when we will talk about guidance for the upcoming year if I could, Jeff.

But let me talk about the pattern of change that we are seeing overall. So it will not -- so start with a CapEx point of view. Our cost per building to install is bang on where we expected, which it is the same cost it has been for the last 18 months that we have been on this program. So we're not seeing CAD1 increase in terms of our cost to bring up a new building.

So right now, if there's a slight increase in a quarter, it is only driven by volume of buildings, not by some kind of per-building increase. And I have high confidence that it will remain that way because the math is very helpful in that as you expand your presence, you pick up a whole bunch of new buildings that happen to be a lot closer than they were the day before that you completed your next building. So, we've got a long runway for increasing the size of the network with the kind of economics we still see which is the cost of that extension to a new building is handily paid for within that first contract that we win. So no concern on that one.

The second one is in terms of the ability, whether we're going to face increasing OpEx as we continue this expansion? No, in fact, it's the opposite. What we're working through is a continued reduction in OpEx that we have associated with the business because remember, the other half of our operation, which is legacy services that continues to see some volume declines as people may switch or migrate from old to new, and it gives us an opportunity to start to take cost out or at minimum reposition costs without any net increase.

But our plan, frankly, and we're in that season right now, is the continued reduction in our OpEx so that you've got the benefit of the gross margin increases and a steady and declining OpEx leads you to the EBITDA increases we're looking for.

But if I look at the quarter and the year-over-year trend on OpEx, your OpEx seems to be flat. It doesn't seem to be coming down.

Yes, it's -- not all these programs work perfectly on a month by month basis, right? So we've got a bunch of things that we will be doing in this quarter and in the first quarter of next year that will see that coming down, and Jeff. So don't -- the quarter-over-quarter or the one sequential quarter gets a little more difficult when you are taking bigger steps in OpEx. They show up and then they are steady for a while and then they show up again. So when I look at the pattern over a year, I can see it continuing to decline.

Okay. So it's really driven by the timing of when these contracts come in, installations, etc?

Yes, and, and --

And moving off of legacy?

That's right. And it's also driven by our own actions to change the way in which we deliver a kind of service. It takes a little bit of time to get that organized at least to a lower OpEx, and then the results, you will see them in the financial -- in the financial statement.

Yes, I wouldn't get too focused on what happens in each individual quarter. Year to date, our expenses, even excluding restructuring costs, are down 2.4% in operations expenses. So I think we're making a lot of progress there year over year.

Great. And just a quick follow-up on the pension comment about 2012. What are your assumptions behind that that you continue to use the letters of credit? So can you just update us on how much you've used within your capacity on the letters of credit to be able to post towards the solvency funding?

Well, the amounts will always depend on what the actuarial valuation is at January 1, 2012. And the discount rate and the asset returns will get measured then. But if -- what we are saying is that if we use today's numbers for discount rates and asset returns, that we wouldn't be required to make any funding in 2012. We would be able to fund the entire requirements with letters of credit.

Can you remind us of how much room you have in your letters of credit today?

I'm not sure I know what you mean by room.

Well how much capacity do you have?

You mean what is our banking facility?

Yes.

I don't think that's a limitation in any way.

Okay. All right. Thanks.

Dvai Ghose, Canaccord Genuity.

If I could follow-up from Jeff's questions on the letters of credit and the pension deficit, so I just want to make sure I'm reading your statements correctly. You have CAD140 million of your CAD171 million of letters of credit at the end of Q3 associated with pension solvency payments. Would that be correct?

Sounds right.

Okay. And, I think to Jeff's question was, there is a finite limit as to how much you can use based I think on plan assets. What is that finite limit?

Well, it would be 15% of your deficit.

Okay, and your deficit on the solvency side or --?

I'm sorry, 15% of your liability -- or your assets. Sorry.

Of your assets. So how much is that? (multiple speakers)

I think we have somewhere in the neighborhood of CAD2 billion in assets.

CAD2 billion of assets, so you can use about CAD300 million, and you've used CAD140 million already?

Yes, somewhere in that neighborhood.

Okay. And how is the CAD140 million or indeed the CAD170 million of total letters of credit treated on your balance sheet? Is it included in your net debt assumption?

No, letters of credit aren't debt.

Okay. Is that what the rating agencies defined it as, as well?

Well, the rating agencies would -- they have their own means to look at things and so they would look at your pension deficit as part of their evaluation of your credit rating. So I don't know that they would look at the letters of credit per say. It might be better to ask them exactly what their methodology is. But they would certainly -- they do measure our pension deficit as part of their ratings and they look at what the impact is going to be.

The deficit, when you look at it from a debt raters' perspective, the amount that is evident at any point in time is not necessarily their -- the entirety of the way they look at things. They are looking at and evaluating the rater's ability to pay over the long-term, so they would look at not only where is the deficit today, but where is it going to be in the future.

Right.

Let's remember that, Dvai, that if interest rates change and go up, it wipes out a big chunk of this deficit.

Yes, but to be fair, issuers have been saying that for the last three years and interest rates have probably gone down, right? So -- and then my last --

(multiple speakers) over time it may change, but [yearly].

Yes, that's a fair point.

My last question is for you, Pierre, if I may. Nothing to do with pensions. On the foreign ownership issue, you've talked about in the past as something that you are lobbying for and potentially increases Allstream's strategic alternatives. I don't see much appetite in Ottawa at the moment for changing the rules. Have you seen any shift there from last year when it seemed to be a forefront issue for the government?

Well, I'm not sure why or on what you are basing your comments, but I can tell you I met with the Minister of Industry recently, met with lots of people in Ottawa. The government seemed still to be in the same page in terms of their direction. Now what are they going to do exactly, as you know well, it's politics; it's government, so it's hard to read exactly. But the answer is that they are telling us -- what they are telling us in terms of direction seems to be the same as in the past.

I think Minister Paradis understands the issue and understands what the previous changes for the last spectrum auction have done. And they're going to move in that direction.

Now what are they going to do exactly? We're still awaiting for the spectrum auction rule for the 700 megahertz auction, which hopefully we're going to learn about before Christmas or before year end. At the same time would probably be an opportune to tell us who is allowed to bid for that auction and at least give us a view on foreign ownership or investment restriction in telecom at the same time.

So I think that's about where we are. But on our side, at least would tell you from the meetings I have had, I haven't seen a change in direction. It's basically more a new minister coming in after an election and picking up the files and looking at all of that. So I think they're looking at all of this and hopefully shortly will come up with a position.

Thanks very much. I appreciate it.

Vince Valentini, TD Securities.

Thanks very much. A couple things just to clarify first -- you cite in the MD&A certain project costs that got expensed in the third quarter. Is that what you talked about with the write off of some past project expenses as part of that other EBITDA, Wayne?

Yes.

Okay, good. And in terms of the lumpiness in equipment revenue, Dean, is that in this other category that was down 30% year over year? Is that mostly equipment sales?

No, I don't think it's in that category.

No, the equipment sales are in the UC and security line, Vince.

So can you talk about the other line? I know the numbers aren't huge, but on a percentage basis is a pretty big swing year over year. Is there something lumpy in that other revenue category for Allstream?

Yes, the biggest item in other is what we call global hubbing, and it's a low-margin line of business that we are largely looking away from or looking to exit.

Okay. Thank you.

And last one is just on free cash flow, so you alluded to the fact that you will have positive free cash flow in the fourth quarter. And you've already exceeded the low end of your guidance range after three quarters at CAD112 million versus the CAD110 million low mark. So, is it not clear that the low end of the guidance is no longer relevant and you're targeting at least the midpoint and maybe the higher end of your guidance range for free cash flow for the year?

Yes, I don't want to get too specific on where we are going to end up for the year, but clearly we are going to be higher than we are today with the positive free cash flow that we expect in the fourth quarter. Q4 is typically a high quarter for capital spending due to the cyclical nature of that, but I guess what we were trying to make clear is that last year, we had negative free cash flow in the fourth quarter due to a couple of things that aren't going to be happening this year. And that is, we had a lot of capital spending for HSPA that isn't going to happen this year.

We had a large pension solvency payment, which isn't going to happen this year. And some restructuring costs that aren't going to happen this year.

So when you add those back, we have a substantial increase in cash flow in the fourth quarter. And just to further clarify that, we thought we should say that it's going to be positive in the fourth quarter.

Okay. And also on free cash flow, Allstream is still negative for the year, about CAD9 million negative free cash flow. So you alluded in the past that if you really had a good year, you might be able to get that close to breakeven, but it doesn't look like you're going to quite get to breakeven this year on free cash flow from the Allstream segment. Is that fair?

Yes, I think what we said is that it would be slightly negative and we defined that as under 10, and so I think we're still on that track.

Okay. And the last one, maybe more for Pierre, but I know talking dividends is the board and it's difficult, but as that Allstream number continues to improve and you see the margin expansion you want and the CapEx intensity starts to come down as you start to -- against second and third contract wins and buildings as opposed to having to build fiber to new ones constantly, if theoretically you do positive free cash flow in Allstream in 2012, would you immediately transfer that into 70%, 80% of that going into a dividend? Or do you think there's going to be a lag effect where it's going to take some time to sort of prove it to the board that it's there for a full-year basis before you could start talking about actually raising the dividend based on that?

Well, Vince, let me see. Well, I think as I said before, our focus right now is to make both divisions stronger. We're making investments in both in there, network, whatever it's wireless or fiber, to try to strengthen them for the future. That's our main focus and ensuring that these investments do provide results and are enabling better performance over time in those divisions. So that's our main focus.

Once we have achieved that and seem to be on a good runway of doing that for a while and have more certainty around the strength of those investments and how they are bringing good results to the business, at that point I think we could work with the board and discuss with the board what happened to the dividend policy. But right now our main focus is investing in the business.

Thanks.

Rob Goff, NCP.

Thank you very much. As you could get further and further into the smartphone market, are you finding that the historic spread in the ARPU and the net present value on a smartphone versus non-smartphone subscriber is narrowing? Or is that still being maintained?

I don't think we've seen that narrowing. You're probably seeing that our cost of acquisition is going up and that is partly to did with there's a higher percentage of smartphones that we're selling versus voice only phones.

But you're also seeing a significant increase in the revenue on that side and the ARPU from those customers is substantially higher, so I don't think we have seen that narrowing in any material way.

Okay. Thank you.

Peter Rhamey, BMO Capital Markets.

A couple of follow-ups to previous calls. Just on the negative EBITDA question -- or negative free cash flow question on Allstream, the way I would look at that business, isn't it your capital constraint at the current time? And to the extent that you can grow that EBITDA, that frees up additional capacity to reinvest in that business because ultimately the end game here is to get all your buildings for most of your customers, as many customers as you can, on net, because that's the fastest payback versus the option of taking some of that cash and notionally paying it out in the form of dividends.

And second question is, just on the smartphone upgrade program, I think you had given some guidance if I can call it that on EBITDA drag you thought from the smartphone initiative. I haven't read the MD&A. Maybe it's there, but I think that previous number was CAD10 million. I'm wondering how you are tracking towards that. Thank you.

Okay. Maybe I will just go off the second question first. Yes, we had indicated that our COA was expected to be up about CAD10 million for the year and that is still our estimate. We're up about -- I think it's CAD11 million right now. And we expect more or less the same COA in the fourth quarter as we have last year, so about I think it's CAD17 million.

And to the extent that if it is higher than that, that will be great because we will be -- that will mean that we have sold a lot more smartphones in the fourth quarter, so I think that would be a positive if we missed that estimate slightly. But that's still our estimate and I think is pretty much in line with what we expect to see in the fourth quarter.

Yes, and on the capital side at Allstream and being cash flow negative, you know, we are on the strategy of improving Allstream performance. We're trying to do it in a disciplined way, recognizing the work that has to be done there and that was done up to now. Remember that last year, Allstream was at an important negative cash flow, so a huge improvement in one year.

And we have decided that it wouldn't be appropriate to do basically the shotgun approach of -- in terms of investment for fiber for Allstream. So we are proceeding on a success-based basis. That seems to be working.

Our main issue in Allstream is not that side, I would tell you. It's much more dealing with the legacy decline and how can we manage that and extract as much cash as possible from it. That's our main challenge because the IP side, as you can see, is going pretty well. Sales are very strong. The capital investments are very efficient. And there's a demand from customers. And let's remember that we are just gearing up Allstream to face that volume. So Dean talked about the installation. It's an important execution challenge to grow 10% in that area, and I have sales that are substantially stronger than what they were just a year ago.

So we have to gear up that company to make it a strong IP player able to take on a large volume. I don't think right now or in 2011, we could have done more investment and still succeed in installing all of it. So I think we're at the right level right now and going step-by-step in the improvement of Allstream.

Pierre, you bring up an interesting point. The correlation of the relationship between growth in IP and your legacy decline. Is there someway numerically one can think about that to the extent that you push on IP growth? How much is that growth coming from the cannibalization aspect versus new growth?

I don't think that's a significant amount is cannibalization. Remember we have a fairly small market share, so where we are getting the majority of our IP growth is from customers that are new to us from the other players.

I think the other point in terms of the ratio and how things turn for us is that right now our IP revenues are about 30% of our total and growing. And -- but still, legacy being the other -- the lion's share of the rest of the 70%. If you exclude the equipment you see in security area, then it's a little bit less than the 70%. But still the majority of our revenue base is in that area that's declining. So that's -- as those start to turn and get closer to being the majority of our revenues in IP, you will see a much stronger revenue profile.

Yes, and in fact, instead of cannibalization, one thing that Dean mentioned last December in the outlook meeting was that an opportunity for Allstream, in fact, is to go to all its current customers and try to sell them IP. Because we still have a large majority of customers that are buying just one product from us and it's not IP. So and it could be all kinds of other products from equipment to long-distance to security to all kinds of other stuff. So that base is an important base of customers in terms of potential IP buyers, which is one of the things Dean is working on.

Great. Thank you very much.

Peter MacDonald, GMP Securities.

Thanks. I apologize in advance but I've got a number of small questions.

So first, if I can go back to your capital facilities on page 12, you talk about CAD170 million drawn. You have a letter of credit of CAD150 million. Can I assume that the rest of it is drawn against the revolving CAD400 million?

Yes.

Okay. And that CAD170 million, is that broken down into CAD140 million that's in lieu of special payments from 1985? And then CAD30 million is drawn on the solvency funding since April?

No, the CAD40 million is I think the -- I don't have that in front of me -- but the rest of the amount would be just letters of credit that we have for our general business purposes.

Okay. But you're approximately CAD5 million per month. Is that correct on the -- that you are using your letters of credit against the solvency funding?

That's probably close, yes.

Okay. And then on the letters of credit then you would have about CAD380 million available if the asset calculation allowed you to do that?

Yes, I don't know the exact amount of the assets at this point in time at the end of -- or in our last actuarial valuation, we were just under CAD2 billion. I think it was CAD1.8 billion-something.

Great. And are you certain that the 15% of the asset value is against the entire letters of credit that you've drawn on the solvency deficit, or is it just on the CAD30 million or so that you have drawn so far?

No, the 15% rule is part of the new federal regulations, and so that's over your entire asset, that base for your pension plan.

No, I'm just trying to figure out is it against the CAD140 million or is it against -- that whole CAD140 million or is against the CAD30 million? Because some of it's related to a different --

Well, the amount of letters of credit that we have outstanding would be what you measure against the 15% limit. That's what you mean. I don't know the exact amount or have that number in front of me as to what we've got drawn up against the pension facility.

Yes, maybe we can organize a call and just answer those detailed questions. I don't think we have all the numbers here.

Okay. You'd like to take it off-line. The -- are there any restrictions to the access to those letters of credit from the banks? Is there a credit rating or anything that they're requiring you to keep?

No.

No? Can you then tell me your asset return on your pension year to date and what 25 basis points means to your liability?

I don't have those numbers in front of me. I think our asset returns are slightly negative the last time I looked, somewhere close to -- that was before October. The -- I think we had just gone below the break-even point for the year. I don't have the number in front of me as to what 25 basis points means in terms of the liabilities.

Okay. Then the last question is you had CAD100 million pension lawsuit that's under appeal. We were supposed to get a ruling on that midyear this year. Is there an update on that?

No, we haven't heard back. It's still -- the appeal was closed at the end of December -- the proceeding. We haven't heard back from the Court of Appeal since that time. We continue to expect it to happen this year, but we haven't heard from them yet.

And if that goes against you, do you have to make an actual cash contribution? Or can you use letters of credit for that as well?

Well, the -- I don't think it is very clear in terms of the original decision as to exactly what would happen. I think what we announced at that time was that it could be a cash contribution required up to CAD100 million because we wanted everybody to understand kind of the magnitude of it, but exactly what would happen and when or whether we would appeal that decision further, all of that would have to be determined after we see the decision from the Court of Appeal.

Okay. Thank you.

Glen Campbell, Merrill Lynch.

Sorry to finish on the pensions issue again, but can you confirm the pension deficit on the balance sheet? That is non-smooth with the accounting discount rates. Is that right?

Yes.

And if you were to use solvency discount rates, can you tell us roughly what that would -- the deficit would be?

The deficit at our last valuation was somewhere around CAD300 million.

On a solvency basis? And that's at year end 2010, right?

Yes, it's January 1, 2011, so yes, effectively the end of 2010.

Thanks very much.

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

Ladies and gentlemen, we've reached the end of our third-quarter 2011 conference call. Once again, thank you for joining us today.

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