BCE Inc (BCE) 2012 Q1 法說會逐字稿

Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Allstream first-quarter 2012 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Paul Peters, Vice President, Tech and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on our first-quarter results conference call. Earlier this morning, we issued a news release of our first-quarter 2012 financial results. The news release, MD&A, and additional supplementary information are available on our website at www.MTSallstream.com. Yesterday, MTS Allstream's Board of Directors approved second-quarter dividend, which has been set at CAD0.425 per share. On today's call are Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Kelvin Shepherd, President of MTS; Dean Prevost, President of Allstream; and Chris 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 related to the finances, operations, 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 or revise the statements, whether as a result of a change in circumstances, a change in events, or otherwise, except as required by law. These cautionary statements are made on behalf of each speaker for whose remarks contain forward-looking information.

I'll now turn it over to Pierre.

Good morning, everyone. Today, in addition to having our Q1 call, we will also host our annual general meeting this morning in Winnipeg, and I invite all of you to join us by Webcast or in person. Now, when we look at the quarter, I think we picked up in the first quarter where we left off in Q4 2011. MTS delivered strong growth in wireless high speed Internet and television, while Allstream continued to deliver year-over-year improvements in profitability with continued solid sales in converged IP. We also continue our success in improving our cost structure, and achieving CAD18 million in annualized cost savings in the first quarter, pursuing our effort here in trying to get those cost savings early in the year to maximize the benefits from them. So, this puts us, this CAD18 million puts us well on track to meet our target of CAD25 million to CAD35 million for 2012. In fact, when we look at our Q1 results, we think that they compare quite favorably to all of our Canadian peers in terms of operating metrics.

So first, let's talk about MTS. MTS growth in revenues and EBITDA in the first quarter prove once again that it is a solid foundation for our Company, and that it can face down stiff, and even sometimes and unfortunately, irrational competition in Manitoba. Our wireless growth continues to be strong. Wireless data revenues were up 45% in the first quarter, and we benefited from high demand from smartphones and wireless data plans driving up wireless revenues, and giving us strong ARPU growth at 5.4%. In fact, 48% of all post paid wireless customers subscribed to data plans at the end of March, up from 31% at the end of Q1 2011. And post paid subscribers were up 4% over last year. So, the overall impact of these positive trends was a solid 6.9% increase in wireless revenues.

And we continued to enhance our Manitoba leadership with the deployment of LTE in Winnipeg and branded later this year, where we think we will lead the market. In addition, MTS has recently taken multiple steps to better control and reduce its wireless COA. For example, reducing its retail commission, and increasing its upgrade fees. And MTS continues to benefit from its unique ability to offer multi-service bundles. No other competitor in Manitoba can offer a four- or five-service bundle, and no competitor can offer a bundle with wireless in it. That's quite an important fact, and quite a competitive advantage.

And customers with bundled services increased by 6.9% compared to Q1 last year, to almost 92,000 at the end of the first quarter. And we have also seen strong growth in revenue for high speed Internet at 9.1%, and growth in IPTV at 19% over the prior year, driven by an increase in our customer base and strong ARPU growth resulting from our focus on having fewer subscribers on promotional plans, and that being quite successful. We were also pleased to recently celebrate MTS 100,000 TV customer, another milestone in MTS history. So, MTS is also executing on its plan to deploy fiber to the home, and has recently launched fiber to the home in two new communities, Thompson and [De Paul], and we have more communities planned for later in 2012. And I think, as you all know, this network expansion is not only creating growth opportunities for MTS, but enabling us to retain clear market leadership in wireline networks and in wireless networks across Manitoba.

So, turning to Allstream. We continue to see progress at Allstream, confirming that the focus on unmet IP services is the right strategy for that Company. In Q1, we saw improvements in Allstream EBITDA and cash flows, while Allstream overall revenues declined as planned, as we continued to exit non-profitable lines of business like voice resale and global hubbing. Allstream delivered IP revenue growth of 4.1% compared to Q1 2011. This comes from the 21% growth of IP sales in 2011, and would have been greater if not for a change in policy by the Ontario government for the procurement of telecom services for doctors and medical clinics. And as we indicated in our Q4 call, we expect the negative impacts of the government's decision to have run their course over the next few quarters. Excluding this impact, Allstream's IP revenue growth for Q1 would have been 8.7%.

And in addition, Allstream delivered a record month of IP installations in March, demonstrating that the work done on IP processes is enabling Allstream to manage its increased sales volume, all resulting in improved EBITDA margins to 14.6%. And we're also continuing to expand Allstream fiber network with relatively modest capital outlays. In the first quarter, Allstream added 99 office buildings to its national IP fiber network, bringing the total to just under 2,500 as of March 31, an increase of about 15% year-over-year.

So, before I turn it over to Wayne, I'd like to leave you with a few comments on the recent announcements concerning foreign investment and the 700 megahertz spectrum auction. As you all know, we have long argued that the existing foreign investment restrictions in telecom limit competition, and hinder access to risk capital and strategic partnerships for companies of our size. The recent Federal Government's announcement to relax restrictions on foreign investment in the telecom sector is good news for our Company. The removal of these restrictions will expand the range of strategic alternatives available that can strengthen our business and increase value, in particular for Allstream. We expect the new rules to come into effect as the federal budget is approved, potentially at the beginning of the summer.

So, as for the spectrum auction rules for the 700 megahertz auction, we believe the policy framework strikes a reasonable balance. The rules provide flexibility for arrangements like the one we have with Rogers for the Manitoba HSPA network. Overall, these seem positive for MTS. And we will be participating in the consultations relating to the auction rules in the coming months.

So, thank you. And I will now turn it over to Wayne.

Thank you, Pierre. And good morning, everyone. MTS Allstream reported a solid first quarter, keeping us on track to meet all key metrics of our 2012 guidance announced in February. We are pleased to report that we achieved year-over-year improvements in EBITDA, free cash flow, and earnings per share in the first quarter of 2012. These results come from the successful execution of our strategy with a focus on our high margin growth lines of business, a continuing improvement in the proportion of our Allstream business served on-net, and diligent cost management.

Turning to the specifics of our quarterly financial results, consolidated EBITDA was up 2.8% to CAD154 million in the first quarter, with notable year-over-year growth at both MTS and Allstream. We have been successfully improving profitability at Allstream, and in the first quarter, achieved an increase of 1.7% in EBITDA year-over-year. This marks our sixth consecutive quarter of year-over-year EBITDA growth.

While total revenues at Allstream declined by 5% in the first quarter, we saw direct costs decrease much faster, at 10.4%. Allstream's overall gross margin increased from 54.1% in Q1 2011, to 56.7% in Q1 of 2012. Growth in high margin converged IP revenue, coupled with our on-net focus and diligent cost reduction efforts, contributed to Allstream's EBITDA margin improvement, up from 13.7% in the first quarter last year, to 14.6% this year. MTS's EBITDA increased to CAD125.3 million in the first quarter, up 2.9% over the same period last year. MTS's revenue growth and continued focus on cost management led to solid EBITDA growth and strong EBITDA margins at 51% this quarter.

Now, turning to revenues. Consolidated revenues of CAD435.1 million in the first quarter of 2012 were in line with our expectations, down 1% from the same period in 2011. The anticipated decrease in legacy revenues as we deliberately exit low margin lines of business at Allstream has been partly offset by the strong growth in our strategic services, including wireless, high speed Internet, IPTV and converged IP. MTS's revenue of CAD243.7 million grew 2.7% over Q1 last year. By leveraging our product leadership and unique bundling capabilities to face a competitive market, we achieved strong growth in wireless, IPTV, and high speed Internet, which more than offset declines in legacy revenues.

Allstream revenues of CAD200.2 million in the first quarter were in line with expectations, down 5% from last year. Decreases in Allstream's legacy services, primarily driven by our plan to exit certain low margin services, were partly offset by 4.1% growth in converged IP in the first quarter. In our view, long-term profitability and growth at Allstream involves a focus on growing demand for IP services, along with a disciplined approach to selling on-net services, while at the same time taking out low margin revenues and related costs.

Before we leave the revenue section, I just want to make a note on revenue reporting. Related to the realignment of our legal entities on January 1, 2012, we took the opportunity to realign certain customer accountabilities between divisions, and to move closer to market-based pricing for our inter-divisional services. While there's no change to total consolidated revenues, this results in small adjustments to certain line items compared to the prior year. These changes to our 2011 reported revenues are detailed in our supplementary information package.

Now, turning to earnings per share. Earnings per share was up CAD0.80 in the first quarter of 2012, up 19.4% compared to CAD0.67 last year. The increase in earnings per share over the prior year is attributable to growth in EBITDA and non-cash tax adjustments, partly offset by higher depreciation and amortization expense. Income tax expense was reduced by CAD10.2 million or CAD0.15 a share in the first quarter of 2012, due to a change in the expected future tax rate applicable to deferred taxes.

Capital expenditures were CAD76.9 million in the first three months of the year. This increase is mainly due to the timing of various capital projects compared to last year. As announced at our outlook for the full year in 2012, we expect capital spending to be up slightly over last year, as we intend to reinvest the majority of our EBITDA growth into important strategic initiatives.

For the first quarter of 2012, free cash flow was CAD36.1 million, compared to CAD24.4 million in 2011. This leaves us well positioned to meet our guidance range of CAD110 million to CAD150 million for the year. The CAD11.7 million increase is due to higher EBITDA and lower pension solvency cash funding due to the use of letters of credit, partly offset by higher CapEx and higher wireless cost of acquisition compared to the same period of the prior year.

Wireless COA in the first quarter was CAD16.3 million, compared to CAD9.1 million in the first quarter last year. When looking at the year-over-year increase in COA, remember that Q1 2011 was unusually low, as customers were anticipating the second-quarter launch of our 4G network and the iPhone. COA in the first quarter this year is in line with our expectation for 2012 to be slightly higher than 2011.

Staying with wireless for a moment, post paid subscribers, our higher ARPU customers, were up 4% over the prior year to about 392,000. This increase of just under 15,000 post paid customers was partly offset by a decrease in lower ARPU prepaid and other wholesale subscribers, which occurred primarily in the first quarter this year. At March 31, 2012, our wireless subscriber base is up 1% at 488,571.

Strong participation in our dividend reinvestment plan continues with 29.6% of the outstanding shares participating in the program in April. This reduced the cash cost of our dividend by approximately CAD8.3 million. The actuarial valuations of our defined benefit pension plans have been completed, and the results are largely in line with what we expected. Our pension deficit, as disclosed in our financial statements, is now at CAD365.1 million. As expected, our 2012 pension solvency funding requirements of approximately CAD80 million for the year will be made using letters of credit. Going beyond 2011, funding will be primarily influenced by changes to the long-term government of Canada interest rates, along with returns on our pension assets. An increase of approximately 300 basis points in long-term interest rates would eliminate our solvency deficit.

In conclusion, I'd like to leave you with a few thoughts. Our results are in line with our guidance ranges for 2012. MTS has performed well, with growth in both revenue and EBITDA, supported by strong growth in wireless, high speed Internet, and IPTV. Allstream has continued to improve its profitability by growing high margin IP services, increasing the proportion of services provisioned on our own network, and diligently managing costs. We continue to generate strong free cash flow, in line with our 2012 guidance range, which fully supports our dividend. Thank you.

We would be now pleased to take questions.

(Operator Instructions)

Vince Valentini, TD Securities.

Yes, thanks very much. Couple things. Maybe just start with the last point you made, there, on the pension, Wayne. Just clarify -- the CAD365 million -- that's the solvency deficit according to the regulators; is that correct?

That's the deficit that's according to our audited financial statements.

So the CAD80 million of funding doesn't relate to that, it relates to the solvency deficit?

That's right; the solvency calculation is what drives funding.

Do you have that number -- what the solvency deficit is, approximately?

No.

The CAD80 million is funded over five years, so that gives us a ballpark? Is that wrong?

Well, the CAD80 million's going to change each year depending on what our asset returns are and what the long-term interest rates are. The actuarial valuation gets done each year. So, in general, funding rules are that you would fund 20% of your solvency in year one and then you recalculate your deficit the next year and fund 20% of that.

Okay. And last one on the pension -- can you give us any breakdown of that CAD365 million between Allstream employees and MTS segment employees?

The majority would be in the MTS plan, which is our largest plan, but I don't know the number specifically.

Okay. And separately, on Allstream -- can you tell us, have there been any discussions with anybody yet about the strategic alternatives that you see being opened up by foreign ownership rules? Specifically, if you can talk about it, have you guys started to put together any sort of data room on the Allstream business to help those potential strategic partners analyze what's there?

Vince, it's Pierre. Good morning.

I think on that question, as we've answered before, we talk to a lot of providers all the time because they are the customers of Allstream and partners of Allstream. So we have discussion at all levels, whether it's a working level, or myself with their CEOs, through the year, every year, so indeed there's been lots of discussions. I think you've also seen in the government process that some of them have intervened and made their opinion known in terms of foreign investment in Canada.

I would answer that there is no doubt that there is a lot of interest outside of the country in what's happening in Canada in terms of relaxing foreign investment restriction for some our -- the telecom providers; but again, this is still not something that's approved. It's in the budget legislation and I don't think anybody would consider this seriously right now until that legislation is approved, which potentially is before -- just before the summer or if not, in the fall.

Okay. Thanks.

Greg MacDonald, Macquarie Capital Markets.

Good morning, guys. Questions for Pierre.

Pierre, are there any trend changes in the last few years that would improve the prospect of a US carrier, particularly, forming a more significant or formal relationship with Allstream? I'm thinking of things like higher on-net focus for yourselves, cross-border traffic trends, anything like that. Essentially what I'm looking for is, what's the most likely driver of these strategic options that you're talking about?

I don't know if it's a most likely driver, but just to talk to you overall about the market, about what we've seen in our relationships, in particular with US providers; foreign providers in Europe and Asia, a lot less -- I would say we deal a whole lot less with them. We deal with about all the large providers and IP providers in the US as well, and maybe Dean can also add to it if I'm missing something.

I think what you've seen in terms of alignment of strategies in the past few years has changed. Allstream used to be more of a long distance and -- I'll call it legacy -- data providers. The change of strategies at Allstream to focus on IP and focus in an area that has lots of growth in the market is no doubt an element that makes it easier for Allstream to deal and to serve US providers that have customers in Canada. So the alignment in product line -- and if you just look at some of the providers in the US; I think Global Crossing was a good example that got picked up by Level 3 at one point. I see Global Crossing as a sister company of Allstream, basically providing about the same services in the US as Allstream is in Canada.

So lots of relationships there. Allstream being reinforced -- you know, it was, I would say, a weaker asset in the past. It is now a stronger asset. People understand, and partners that we have in the US understand, its strength and the extension of its network that got built by AT&T. You're talking about a CAD3 billion, CAD4 billion network, coast to coast. That's a pretty unique asset for a telecom company in Canada. So very hard to replicate.

So the fact that we are aligned, the fact that Allstream is doing better, is enabling it in fact to do more business with US providers. I think Dean could talk to you that our relationships with AT&T, with Verizon, with Level 3, and others have increased over the past year, just because we are stronger and they trust now much more that we can provide a much better service to them.

Just as a quick follow-on to that -- you mentioned AT&T. This was a revenue stream that in the past had been declining. Can you comment on whether the revenue or volume of that business has stabilized now? And is AT&T still your largest foreign carrier customer?

So it's Dean here.

The AT&T's revenue has stabilized, is in fact growing, and I'll tell you they still are a large customer, but we have others that are of similar size now in our base.

Just maybe adding a bit to what Pierre said is, don't forget I think a core change in the marketplace over the last couple of years -- it's not unique to Allstream or Canada -- but the need or requirement for fiber in local access in particular and for transport, whether it's to support wireless strategies or whether it's to support cloud service strategies or just generally overall the need for a lot more bandwidth -- is driving a lot more attention to the assets of companies like Allstream. So by being more on-net and using those very significant fiber counts that we have in every city and between them -- that's a value creator for us.

And I've heard recently that there is a bit of a fiber glut on the local side within cities. Would you say that, that's the case -- local fiber's difficult to get, or dark fiber's difficult to get?

So when you say fiber glut, you mean you think you've heard there's too much fiber in the local space?

Sorry. Misspoke. Not enough or even if there is too much, the access to it, it's consolidated too much in too few hands.

That's a good observation. By the way, it's not just fiber. You've got to look at the whole ability to deploy new, which has to do with local access, being able to get conduit, being able to get permits.

What I would say is, building local metro fiber is difficult. It takes a lot more money and time than it had historically. So having high fiber count, local fiber, like Allstream does -- we typically are in the 200 fiber count in all the cities where we are -- that's a very valuable asset.

In fact, Greg, I think we've talked about it on this call. The fact that we have the network and the urban loops that we have, that have been built mostly by AT&T and Metronet many years ago -- the fact that we have that already built is a huge advantage for us. If we had to dig every single street and redo that in downtown core, it would be too expensive, probably not economical. But now that we're on the street or at the corner of the street -- so much easier and economical and we're still connecting buildings at a cost of just over CAD30,000 I think, or even lower on average, which if you look at other telcos, how they're doing it, it's much more expensive. So for us, quite an advantage there that we're trying to benefit from.

Can I ask one final question, and then I'll let you go. Is your business with any of the Canadian carriers anywhere near the business that you have with foreign carriers?

We do serve Canadian carriers of size. There's a few that would be getting close, yes.

Okay.

But you've got to think broadly about who's a carrier in Canada. There's a lot of players now who are in need of transport and access as their businesses change; so yes, there are some that would be of similar size.

You serve the cable cos also -- all of them, in fact, to quite a degree.

Thanks very much, guys.

Jeff Fan, Scotiabank.

Thanks very much. Good morning, guys.

A few questions. One on the on-net percentages -- wondering if you can give us for Allstream what your on-net percentage of either revenue or traffic that you're carrying right now?

That's a good question. I can -- off the top of my head, I can tell you, I'll give you a statistic that is -- give you a bit of an indication of the change that has occurred. Our base -- and I've said this one before -- our base, up until the end of 2010 -- the true on-net, so forgetting even the use of co-locates -- was just about 20%. Today, when we sell in the marketplace, we are very steady at around 50%. Some months, we actually see it go above that. That is true on-net.

When you add the co-locate component, which is very healthy for doing speeds in up to the E-100 space using Ethernet footprint that we have there, you're getting into on-net or on-colo in the mid-70s. That gives you, I think, a good idea.

The base is changing less fast than that. So we tend to add 4 or 5 full percentage points of on-nettedness to the base every year, based on the new sales that we bring in that are predominantly on-net or near net. So the base is moving up. But it will be number of years before the base reflects the level of on-net sales that exist in our new revenue.

But you see that effect if you're watching what's happening on gross margin, and it's not the only effect on gross margin. There's service changes and there's some movement to more MRR as opposed to equipment sales; but predominantly in that gross margin, you see that effect of the on-net level that's moving, which is driving gross margins up every quarter.

And are those percentages pretty consistent across different lines -- i.e., the IP and also LD legacy?

Yes. So the idea of on-net only applies to any of the connectivity portfolios; so you don't -- LD would not be a part of that because it's effectively a logical service and it exists effectively 100% on-net. What it applies to is your local access services, your legacy data, and your IP. The biggest change where this is happening is in the IP portfolio, because that's where all the net new sales are really coming from.

Okay.

But it does benefit -- I should just conclude -- it does also benefit other portfolios. It may not be driven -- on-net is not being driven necessarily by, say, a private line deployment, but it sure helps some of those other services if we've moved a building on-net or an area on-net, we can go back and migrate lease lines to on-net and see a margin increase as well.

Just to carry on to a previous comment about the relationship with US carriers in general -- I'm just curious, when you look at the amount of business that you get from them, what percentage of their traffic, if you were having a conversation with a Global Crossing or Level 3 -- what percentage of their traffic do you think you can carry on-net on their behalf? I know it varies from customer to customer, carrier to carrier, but I'm just wondering if there's a rough percentage that you think that's in your head?

It would be -- in general, across the country, we think we can serve between 50% to 65% of the businesses in Canada cost effectively, meaning on-net or on our co-locate footprint sufficiently close that we can get the margins that we like.

In terms of serving the carriers from outside of Canada, in the US in particular, that actually tends to be a little higher with them. The reason is, the kind of customers that they serve who buy from afar and need traffic landing in Canada -- they tend not to skew as much toward the rural areas of Canada. So our ability to serve them is higher than that average that I've given for the country.

So as high as 70%, 75%.

I think it would be fair to say 65% to 75% would be a better average for those, for the requirements that they have.

I would tell you, Jeff, same thing as what we do for normal customers. I would say that the feedback we are getting from these carriers is that they really prefer if they can to deal with Allstream, because of the customer experience and because of our responsiveness. I think you're going to find that also in Canada with our own customers. I still believe in all the data that we see on customer experience and comparative data with others, still show that Allstream provides by far the best customer experience in Canada to business customers, and that applies also to wholesale customers, particularly from the US.

Okay. And with just one last quick one for Wayne.

You couldn't split the pension deficit between MTS and Allstream. Wondering if you have a split of just the pension members between the two segments.

I don't, Jeff. I mean, I would say, just in general, that probably two-thirds of the pension is MTS and one-third Allstream.

Okay. Thanks very much.

Dvai Ghose, Canaccord Genuity.

Good morning. Question for Pierre and one for Wayne, if I may.

Pierre, you've been kind enough to talk about your peers and you see yourself as a Global Crossing of Canada, Level 3 perhaps; but you have a lot of off-net business. Your margins are low. Your revenues are still dominated by legacy. I'm wondering whether you see yourself as a comparison to cable and wireless, and what you think of their recent multiple vis-a-vis the Vodafone bid.

Well, first, maybe I wasn't clear. I don't see Allstream as the Global Crossing of Canada. I think we're starting from a different place. But in terms of product line, it's very similar; and in fact there's been a lot of joint work between Global Crossing and Level 3 over the years on products and on customer service and on processes internally and things like that. That's more what I said -- or what I meant at least. So sorry if I wasn't clear about that.

I would tell you that you know well Allstream and I think we're not shy of saying really where we are and how we're doing. We're happy with what we're doing on IP on Allstream. It's working well. I think it's the right strategy. The expansion of the network and connecting the local loop to more and more buildings I think is the right strategy. It's economical, makes sense. We're there also.

Legacy is the piece that we're trying to take down and take costs out of there, and I think we're doing the best we can and improving every quarter. So we're getting there. But it's still a work in progress, I'm with you there, and we still have work to do and we'll continue to do that work. So I'm okay there.

Now, going to cable and wireless -- you know, I don't think we can compare ourself to cable and wireless. Different asset and different geography and different environment. What's interesting, though, is really the interest by a company like Vodafone and wireless providers in terms of looking at landline asset companies, wireline companies; and I think the recognition that for their wireless base that they can or they need to have joint products with the landline side of the business, because customers are often asking for joint or same features across wireless and wireline, and we've seen that also in Canada.

Allstream has partnered with some of the other providers on the wireless side to deliver solutions that were required by business customers. So that's an interesting point I think.

Okay. That's great. And so Wayne, if I can go back to the [pension deficit] solvency and letter of credit funding -- by your own math, I think you've got CAD43 million left to fund pension solvency deficits by letters of credit next year. Correct me if I'm wrong. Interest rates are now finally declining again, so that's not really helping you. I don't think there's any proposed change to the 15% limit on plan assets that you can use for letters of credit. I'm wondering if you can give us an idea if you thought about how to fund the deficit next year if you want to avoid cash payments, or whether you want to raise capital to do that.

Well, I guess just with respect to letters of credit first -- we know that we can fund the 2012 requirements using LCs, because that's determined based on the asset balance and the actuarial valuation at the end of 2011. And so, as announced, we'll be funding that CAD80 million this year.

For 2013, the calculation of funding requirements and LC room will be based on the asset balance and the actuarial valuation done at the end of this year; so it will depend on asset returns and interest rate movements this year, which so far have been either neutral or positive, and it's a bit complicated to calculate. So I'm not sure how you got to the CAD40 million number. But if you use the numbers on assets in our annual report, I think you can calculate the 15% limit fairly well, and you have to make a few assumptions on what the returns are and so on.

So when you think about funding, this is an issue for all defined benefit sponsors. We are as a group talking to the government to see if there's an opportunity to adjust funding rules, so we'll see where that goes. But in the meantime, we're funding using letters of credit because we think that's the right way to go for our Company. Immediate funding has no tax advantage for us, so generally we prefer to defer the funding to the extent allowed, and over time we expect interest rates to rise so that deferral reduces the risk of trapped capital for us as well.

And so at some point, we'll have to fund the plan and we believe we have the capacity to manage that. We've seen some of our peers raise capital to pre-fund their plans and that's probably what we would do.

That makes sense. Thank you very much.

Glen Campbell, Merrill Lynch.

Yes, thanks very much. Couple questions on the results, and then a regulatory question.

On the results -- you talked about prepaid losses being mostly this quarter. I wonder if you could give us a breakout of prepaid and post paid net adds for the quarter.

Our post paid adds in the quarter were just over 1000, and then the balance would be prepaid and other.

Okay.

That would be down, whatever that net is.

Okay. Great. And then you described earlier revenue restatements. Could you give us a little more detail on what happened there and what the changes are, exactly?

Well, as I mentioned, there's a page at the back of our supplementary information package. The number -- the changes are relatively small, other than we are -- let's say, if you look at by quarter, there's an additional CAD4 million or CAD5 million in inter-company revenues. That's the biggest part of the change. So, as part of realigning our legal structure to match the way we operate the business, we took the opportunity to align our customer accountabilities -- relatively small changes but in some cases, one division was recording the revenue and the other division was actually providing service to the customers, so -- and in some cases, we have shared customers. So we realigned the revenues there to match our customer accountabilities, and so there was some small changes there.

We're talking in terms of each line of business, less than CAD1 million in most cases, moving from one to the other. And the net amount being less than CAD1 million overall. So they're relatively small changes on the external revenues.

And at the same time, we also tidied up the intercompany services to move closer to market-based pricing for the services that are provided from one division to the other. So that is a slightly bigger change. In total, it doesn't change the consolidated revenues and it doesn't change our EBITDA by division. So we're just making some changes to more accurately report and hold our divisions accountable for the revenues that they manage.

Okay. Thanks. And then on the subscriber results in wireline -- strong results in business access lines turning positive and then soft numbers in TV. Could you give us a bit of color on that? What would be a good run rate post-Q1 for those line items?

It's Kelvin here, Glen.

Yes, in terms of the TV and the Internet results, to some extent what we've seen is -- Shaw has been in the market. They've been attracting the most price-sensitive customers in the market, and in fact, we've been really been disciplined and have -- I think as we talked before -- have had processes in place to make sure that we're not providing discounts to repeat switchers and to that low-end segment. So that's probably the biggest thing you're seeing in those results.

I think our bundle is performing well. We are still adding good high ARPU TV, Internet, and bundle customers. So I don't know, looking ahead, exactly what we'll see. I think we're going to continue with our program and I think our results will continue to be positive, but I wouldn't expect to see a big change in subscriber growth rates. We're going to continue to market and to focus on value.

And the strength in business lines?

I guess the business lines, in Manitoba certainly, we continue to see fairly low losses in business lines; so certainly, again, Shaw has probably been the most active competitor in the business market but loss rates are actually quite low and I guess on the Allstream side -- Dean?

The interesting thing is, we don't talk about the local services very much, which is part of our legacy portfolio. Our local access lines are also pretty stable and the revenue decline is actually quite modest; and because of the movement on-net, the actual margins generated from our local portfolio are very stable. They're very consistent.

In fact, Dean, on your business losses, the part that has been the losses are the part that we're doing on purpose, which is exiting voice resale basically, which is basically the wholesale basis that we don't necessarily want to supply anymore. So that's taking the number down. But if you exclude that, you're doing very well.

That's exactly right. One metric we watch, of course, is average revenue per line and average cost per line. The former is going up, and the latter is going down. So it's been a nice change.

It's a very stable line of revenue inside of Allstream that we don't talk much about. There's several hundred million dollars which is pretty stable year-over-year. Although it's part of the legacy portfolio, it's actually not a decliner.

That's great. If I could squeeze in one last one -- under the new Industry Canada policy, you're classified as a regional incumbent, which obliges you to offer roaming to your competitors. Do you expect your competitors to take advantage of that, and what would be the likely timing?

Just to preface what Kelvin would comment on that, Glen -- it's Chris.

There's still consultation going on, so the rules aren't set yet by Industry Canada. We expect that regional roaming looks like it's going to be a part of the final package. It's not a done deal yet.

And again, maybe just to remind you again -- because of our shared network arrangement with Rogers, in effect our biggest competitor in the market, really doesn't have an impact on us. We really already have an arrangement in place that basically is equivalent to that.

Okay. That's great. Thanks very much.

Peter Rhamey, BMO Capital Markets.

I've got a question on enterprise, and then one on tax.

Dean, perhaps you could comment -- your building connections are up about 15%. Your IP revenue was sub-10%. You did have the Ontario initiative. I'm just wondering -- when should we expect or should we expect that your revenue begins to start tracking your building connectivity over time? And perhaps you could talk a little about what you're doing on the sales force side in terms of adding to resources there.

Good question. That is a very hard question, though. I don't know if I can give you a good answer, Peter, in terms of how to record those two.

You've got a bunch of stuff going on. Revenue growth is a function not just of units, which is really what building connections are, but it's also a function of price changes and a variety of other things that are going on. And in our instance, also churn, so loss of customers which Pierre mentioned, the one that's most material and most impacting the near term results, which is the EL event. I don't think I can give you a good answer on how to record those.

What I can tell you, though, is the pace -- last year we ran about 75 new buildings a quarter. We're running about 100. I don't see that changing. So in fact, quarter-over-quarter looks like it's up about 15%. But in fact, the pace of additions, it's about 25% more this year than we did last year. By the end of this year, we'll have added about 50% in terms of new buildings to the network from when we began this program in early 2010. So that gives you a sense of the expansion that has happened with respect to the network. The opportunity we're still just starting to scratch, because the expansion is permanent. The addition of buildings is permanent.

What we're now doing is selling into that expanded marketplace, and that's what will take time; and now back into the sales side, we've done quite a few things to see their performance move up dramatically. So we typically are seeing productivity up about 20% in the sales force. It kind of reflects in some of the revenue streams we get off of the individual market segments we serve, but it's a whole variety of things.

There's new tools in their hands that help us pick the right accesses more quickly. We prepriced a lot of the environment we serve to make quoting easier. We've removed some of the complexity in bringing on co-locate offers quickly. And we're just doing a hell of a lot more in terms of demand creation in the marketplace, very targeted to the buildings that we want to serve and the areas that we want to serve. So it's hard to put a finger on one thing. Across the whole sales and marketing environment, we've added a lot of capability and not always a lot of extra people. What we've done is enable them to be a lot more productive in terms of what they choose to go after and how quickly they can action it.

The last thing I would say, which is also a big help towards our sales is, our ability to install and turn up a customer continues to get better every month. So we're seeing our ability to move a customer from a win to a build revenue is shrinking every single month that goes on, and that's a big helper from a sales perspective because those delays lead to cancel before starts and things like that, which can slow the revenue process.

Hypothetically, if you had additional capital to put at work and didn't have to worry about margins, what would you be investing in?

So I would be very much staying the course. We talked a little bit about this at the February outlook call, is that we have good and productive use of additional capital by going after additional markets that are similarly situated to the ones we serve today. We would do some work on our IT environment, probably at a faster pace than maybe we're doing today, and we would do some connections into data centers across Canada that are -- we're doing, but we would do it at a faster pace. Almost every idea we have would be something we're doing today that we would do quicker. We would do it on a faster pace than we would otherwise meet or to data manage our cash flow.

The follow-up question I had is on your tax yield. I guess it would be for Wayne.

Looking at the CAD325 million net present value of that tax yield -- I think it's associated with your gross assets that underpin your Company, because you've exhausted your NOLs from what I understand. Does that mean that, that CCA pool is associated with your gross assets, and to the extent that you were to monetize Allstream, the CCA would be -- certain amount of the CCA would be parked with the sold item? Or do those pools rest somewhere else?

Well, just to clarify a couple things. The tax assets you're talking about have evolved over time from the beginning, where they were all in losses; and then over time through utilizing those losses and not taking our CCA claims, we utilized about half and converted about half or CAD1.5 billion into CCA. But then what happens after that is that you would use your CCA tax yields faster -- as fast as you could -- basically returning those amounts into losses. So the form of the tax assets changes, and we would do that according to the tax rules that are allowed.

And then back to where does that lie; and so as you know, previous to January 1, 2012, we had one corporation, MTS Allstream, and so all of the assets, the tax assets, would have been in that one corporation. And then, when on January 1, '12 when we realigned our legal structure to match closer to our operating structure, part of that is because we didn't need that single company structure for tax anymore, so the tax assets then would have been aligned into the two corporations. So largely, the asset base that Allstream has would follow the tax base as well. Or I should say the tax base would follow the assets that Allstream is controlling. So they would have the full CCA of that, and most of the losses that were previously existed or were created would lie in the MTS corporation.

Is there a way to put a quantum on the CAD325 million? Is it reasonable to try to allocate that between the two corporations -- or subsidiaries, excuse me?

I don't know. I would say -- I don't have that offhand, Peter.

Is there a ballpark figure one could use?

I would say the majority or more than the majority would be in the MTS company, but I can't really give you a breakdown off the top of my head.

Thank you very much.

Drew McReynolds, RBC.

Thanks very much for squeezing me in here. First question for Dean or Wayne.

When you look at the CAD18 million in cost savings in the quarter, is there any way you can proportion that to Allstream versus MTS? And I guess my understanding on Allstream is there's a back office kind of revamp going on in order for Allstream to take on a little bit more volume. Is that whole process that's under way part of the CAD25 million to CAD35 million in savings?

Well, first off, the cost reductions would be in the majority would be in Allstream this last quarter. And I'm not sure I understand your second question.

Yes. It was just my understanding, at Allstream that there was some systems integration work that was being revamped, so I was just wondering if that program has a cost savings component; if it's part of the total cost savings guidance for the year.

It does, so Drew, it is, it absolutely does. In fact, really on our first phase of that one, we've got some other ideas ahead of us on what we would do. The general idea, as you see in our OpEx, is for it to continuously decline, and that may sound somewhat easy given what's happening at the revenue line, but also we need to do that and find enablers for that because there also is a fair amount of volume moving through the business now because, again, revenues and units do not accord.

So we'll do about 30% more work this year, given the IPC installs that we're doing, so we've got to find ways to do that a lot more efficiently. The use of IT is definitely one of the ways that's we're doing it. We're also just being a lot more selective in terms of the work we take on and make sure that it's margin-rich. Which is another way to make costs get defrayed much easier.

We continue to find opportunities to revamp our business processes and create efficiencies; and so there's a couple of variations in the way that we provide services and provisioning that we think hold a great deal of opportunity for continuing creation of efficiencies.

And I would tell you that -- just to complete that, while Allstream doesn't enjoy the benefit of a large scale provider like some of our competitors or other providers are in the market -- we don't have the same scale at all -- we have to be very innovative in finding ways to reduce our cost; and both Dean and Kelvin have been very successful in finding those ways over the years.

Okay. Thanks very much for that.

And then just two quick MTS follow-ups. Just wondering if you could give us a sense when you look at your IPTV penetration, you had 67% on the Ultimate plan versus the remainder on the Classic. Is there kind of a migration pace that is viable or that you expect to continue to actually see a nice TV ARPU increases going forward?

At your Investor Day, you talked a little about the quad play penetration of your bundles, and it think it was about one half or 50% in 2011. Just by the graphic that you showed at your Investor Day, you had that going to about two-thirds in 2012. Just wondering if that remains on track.

On the first question, on the IPTV versus classic TV, we continue to see pretty steady migration there. But we still are going to take some time for the Classic base to move, but certainly that is one of our focus. We have a program that we do market to our Classic customers and sell them on the benefits of more high-def TV and our PVR and those sorts of things, to convince them to move up to the higher ARPU service. That's going to continue I think at a pretty steady rate.

On our four-service bundle, we continue to see steady progress on that, and certainly well over half of our bundle customers now are on that four-service bundle. And if you look inside there, the biggest chunk of it's still, interestingly enough, our traditional TV/Internet/wireless/voice combination, but there is increasing take-up of our multiple wireless combination in the four-service bundle. So we see that as quite positive, and we see ourselves on track along the line of what we had talked about. Whether we get there exactly with the same proportion in the same timing, I don't know, but we're continuing to see the type of progress we'd like to see.

Thank you very much.

Rob Goff, Byron Capital Markets.

My question would be for Dean.

Dean, you talked on the network side about transport and access, but perhaps could you look behind the network and address what you're doing in terms of capacity, your capabilities with data centers and web hosting or managed services?

Sure. So we've got a bunch of things under way. Let's start right at the network level. So while we have a lot of capacity in terms of fiber across the country, we are investing heavily this year in adding equipment to add to our wavelength capabilities, particularly in some routes in the Southwestern part of the country. We've seen a lot of demand for wavelength services, high bandwidth, point-to-point services as part of our IP portfolio, so we've got some major investments going on and under way there.

Our Ethernet roll-out is completed. We've got Ethernet services into all the co-locates that we serve across the country. So that's going well. From a managed services point of view, we have added to our managed services capability. It's in a couple of ways.

We just got an award a couple nights ago for our managed security offer, which is embedded as part of a DDOS protection in terms of the underlying network. That's now available for any Internet access that people use us for. That seems to be very topical for a lot of people going forward. We have zip trunking, which is basically a voice application across the data network, which is now becoming incredibly popular as a replacement for traditional PRIs, another great demand coming that drives our IP footprint.

Finally I would say, for more traditional network managed services, it's attached now to probably 90% of what we sell. It's very unusual for a customer to buy a kind of a -- if you want a naked IP circuit instead of typically buying it, almost always managed. So we've got a pretty good managed capability that we've developed over the last 10 years that goes part and parcel with all of our offers.

From a data center point of view, we connect just about 70 across the country, and it's one of our core strategies. Data center is nothing more than a very concentrated market for us of customers with high bandwidth demand. It tends to be proximate to the network where we have today. Typically it is on the outskirts of major cities, driving into the center of the major cities, so we're after that business in a very aggressive way and have seen a lot of wins in that space very recently.

Maybe one last thing I'll add -- we've just launched a variety of cloud services this year which are really meant to again drive this IP portfolio, so we allow for replication and storage in the cloud as an application layer that rides on top of the underlying network.

Very good. Thank you, Dean.

Thank you. That is the end of the question-and-answer session. Mr. Paul Peters, I turn the call back over to you.

Ladies and gentlemen, we've reached the end of our first quarter 2012 conference call. Once again, thank you for joining us today.

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