BCE Inc (BCE) 2012 Q3 法說會逐字稿

Good morning. My name is Tracy, and I will be your conference operator today. At this time I would like to welcome everyone to the MTS Allstream third 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.

Mr. Paul Peters, Vice President, Tax and Investor Relations. You may begin your conference.

Thank you, Tracy. Good morning, everyone, and thank you for joining us for our third quarter results conference call. Earlier this morning we issued a news release for our third quarter 2012 financial results. The news release MD&A and additional supplementary information are available on our website at mtsallstream.com under the Investor tab.

Yesterday MTS's Board of Directors approved a fourth quarter dividend, which has been set at CAD0.425 per share. On today's call our Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Kelvin Shepherd, President of MTS; Dean Prevost, President of Allstream; and Chris Peirce, Chief Corporate Officer.

Today's call will consist of remarks by Pierre and Wayne followed by a question-and-answer session. Today's comments may contain forward-looking information relating to the finances, operations and strategies of the Company, including comments on revenue, EBITDA, earnings, cash flow, capital expenditures, sales and marketing activities. These statements are based on suggestion made by the Company and run the risk that our actual results and actions may differ than 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 will now it over to Pierre.

Thank you, Paul. Good morning, everyone. First I'll make a comment on our strategic review. Our Allstream strategic review process, announced September 13, is in progress, and I think as you would expect we will not discuss on this call development related to the review process until we determine that further disclosures required or we determine we have he something to announce.

So now switching to our results. In the third quarter we delivered steady financial results for both MTS and Allstream. Our overall focus remained on improving profitability, managing legacy revenue decline -- in fact, accelerating legacy revenue decline in Allstream,disciplined cash management supporting plan investments in fiber and wireless networks in Manitoba, and expending Allstream fiber for nationally. And in Q3 this strategy continued to payoff.

EBITDA was up 3.3%, and earnings per share were up 8.9%. In addition, we launched LTE in Manitoba. MTS now has seven cities with fiber to the home is deployed, and we connected 90 more buildings with fiber for Allstream.

MTS strategic product lines -- high speed Internet, IPTV, wireless -- delivered in quarter revenue growth of 2.4%, a result negatively impacted when compared to last year by one-time items in Q3 2011. Wayne will discuss this in more detail in a few minutes. And I'm happy to report that Allstream continues it's successful stretch of year-over-year profitability improvements with now eight quarters of EBITDA growth and improved margin for IP sales.

And for eight years in a row the Company has gain again achieved it's annual cost improvement target. At the end of the Q3 we had realized over CAD26 million in annualized costs savings, thus reaching our 2012 target range of CAD25 million to CAD35 million. I think these results are proof that our strategy in both divisions is working.

So let's talk about division specific results, and let's start with MTS. MTS third quarter EBITDA increase of 1.6% was supported by growth in strategic product lines revenue, with another solid performance in ARPU, which is clearly MTS's main focus. And while MTS experienced similar level of line losses as previous quarters, it's important to note that more than the majority of the losses results from wireless substitution and not from losses to competitors. And because of MTS's strength and market share in Manitoba, we believe that most customers letting go of traditional voice service are staying as MTS customers, many of them with bundles.

MTS also delivered on its strategy to bring Manitobans leading technology, launching our on Augusts is first 4G LTE wireless network in Manitoba, deploying LTE both in Winnipeg and Brandon. As you know, this new wireless network boasts mobile data speeds of up to 75 megabytes per second and is supporting and expanding line up of MTS smartphones, including the latest version of the Samsung Galaxy S3, which will be launched this month.

MTS is seeing continued strong adoption of smartphones, creating a 29% increase in wireless data revenue in Q3 and data plan growth with 53% of MTS's post-paid subscriber having data plans. MTS also launched the iPhone 5 in the first quarter, further demonstrating it's ability to bring the most popular handset to the Manitoba marketplace. Together, these results give us confidence that MTS will continue to see strong wireless data growth in the future.

And MTS's focused strategy on reducing customers on promotional plans and increasing ARPU is bringing solid results, withIPTV ARPU up by 9%, Internet ARPU up by 8.6%, and wireless ARPU up by 2.4% year-to-date. And in the quarter we also saw 10.5% increase -- year-over-year increase in customers subscribing to bundles.

So now turning to Allstream. As I mentioned previously, with it's Q3 results Allstream has reported year-over-year EBITDA growth now for eight consecutive quarters. It was a good quarter for IP sales, up 14% over Q3 2011. Some of the customers signing IP contracts with Allstream in the quarter including -- included Scotia Bank, RBC, Loblaws and ING.

Our recently launched and industry-leading Allstream service guarantee has contributed to successfully winning many second and third contracts in Allstream fiber fed buildings across Canada. And, please, go to the Allstream website if you do not know about this new service commitment. It's really unique in our industry. And with the 90 new buildings connected with fiber in the quarter, Allstream now has a total of 2,644 buildings nationwide.

Our continued focus on on-net sales is having significant impact. Over 37% of new IP circuits installed in 2012 were 100% on Allstream's fiber network, bringing the on-net proportion of Allstream's IP base to over 25% at the end of Q3. This has had an impact and resulted in gross margin increase of 3.5 points to 58.6%.

Moving to regulatory. Regarding the 700 megahertz wireless spectrum auction, over the past month MTS participated in the government's consultation and licensing framework, and we now await the federal government's framework announcement, which should establish the auction rules, including the format, bidder participation and licensing conditions, now only expected in early 2013.

And also in the regulatory front we were pleased that the CRTC recognized in the proposed Bell-Astral transaction the consumer risk associated with the concentration of ownership and the potential negative consequences for consumer choice.

So all-in-all a steady quarter with growth and improved profitability in our key product lines, which we're focused on, and we're on track to deliver on our plans. I will now turn it over to Wayne. Thank you.

Thank you, Pierre, and good morning, everyone. I'm pleased to report solid progress both in our third quarter and year-to-date against our plan for 2012. EBITDA is up 3.3%, and earnings-per-share is up 8.9% year-to-date compared to 2011.

We continue to generate growth in our strategic lines of business, including wireless data, IPTV, high speed Internet and converged IP. As a result we are on track to meet all key metrics of our financial guidance as announced in February.

Now turning to Q3. Earnings per share was CAD0.61 in the third quarter of 2012, up 8.9% compared to CAD0.56 last year. The increase in earnings per share was due to lower operations expense resulting from diligent costs management and lower finance costs due to slightly lower overall interest rates. Consolidated EBITDA was CAD151.7 million, up 3.3% in the third quarter, with year-over-year growth at both MTS and Allstream.

At Allstream this quarter marks the eight consecutive quarter of year-over-year EBITDA growth, with a 1.1% increase in EBITDA over Q3 last year. We made progress on our IP strategy, with an increase on IP revenues while at the same time increasing the percentage of on-net customers, contributing to a 3.5 point increase in overall gross margin from 55.1% in Q3 last year to 58.6% in Q3 this year. We also continue to lower our costs structure, having achieved the 16.7% decline in direct costs and a 5.2% decline in operating costs compared to last year.

At MTS EBITDA increased to CAD123.7 million in the third quarter, up 1.6% over the same period last year. Growth in revenues from MTS's strategic lines of business and continued focus on costs management led to solid EBITDA growth and consistently strong EBITDA margins at 50.2% this quarter.

Turning to revenues, consolidated revenues of CAD424.3 million in the third quarter were in line with our expectations, down 4.3% from the same period last year, anddown 2.7% year-to-date. The quarter-over-quarter revenue decrease is attributable to declines in our legacy lines of business, partly offset by growth in our strategic lines of business, including wireless data, converged IP, high speed Internet and IPTV.

At MTS revenues of CAD246.6 million were consistent with Q3 last year. We continued to achieve strong results in our MTS growth services, which were up 2.4%. The results include a 29.4% increase in wireless data revenues, a 6.9% increase in high speed Internet revenues, and a 7.7% increase in IPTV revenues. This growth offset declines in legacy revenues, which now account for less than 35% of total revenues for MTS division.

With respect to wireless results, strong year-to-date wireless revenue growth of 3.3% to CAD272.2 million was driven by continued strong demand for wireless data, with a 32.3% increase in wireless data revenues in the first nine months of 2012. Q3 growth was impacted by one time retroactive revenues received from wholesale customers in Q3 2011. Excluding this impact, wireless revenues increased 1.8% in the third quarter of 2012 and 3.9% year-to-date compared to the same periods in 2011.

At September 30, 2012, our wireless subscriber base increased to 494,000, of which 400,000 are higher ARPU post-paid customers, up 3.5% over Q3 last year. 53.5% of our post-paid subscribers now have data plans, up from 40% a year ago, which contributed to a 2.4% increase in wireless ARPU to CAD60.58 for the first nine of 2012.

For Allstream, consistent with our plan to exit certain low margin services and to focus on the growing converged IP segment, Allstream revenues were CAD186.2 million in the third quarter, a decline of 9.5% over the previous year. Approximately half the reductions are from planned exit of certain low margin legacy lines of business such as global hubbing and local resale.

IP revenues were up 0.3% in Q3 and 2.2% year-to-date. Adjusting for the impact of the previously-announced Ontario government contract reduction, IP revenues would have grown 5.5% in Q3 and 7.1% year-to-date. We now expect that IP revenues from this customer will be down about CAD12 million in 2012, representing approximately half the revenues reported for this customer in 2011. We expect IP revenues will continue to see some impact from this contract reduction in the first half of 2013.

Demand for IP services continues to drive IP sales winds at the same pace as 2011, where we achieved significant IP revenue growth. We therefore expect to return to strong IP -- strong growth in IP revenues once we are through this unusual churn. In addition, gains in on-net customers and average revenue per IP customer improved IP gross margin from 71% in Q3 2011 to 73.5% in Q3 2012. We continue to make progress on our IP strategy, with IP revenues increasing to 33% of total Allstream revenues, thereby reducing legacy to only 57% of total revenue.

Capital expenditures were CAD94.5 million in the quarter, up from the same quarter of the previous year. This increase is mainly due to the timing of various capital projects compared to last year, including the upgrade of MTS's wireless billing system and the LTE network launch. Where Q4 is traditionally the quarter with the greatest CapEx, this will not be the case this year. with approximately 80% of our 2012 CapEx spending now complete, we are well-positioned to fall within our financial guidance range for capital expenditures as announced at our 2012 outlook.

Now it turning to free cash flow. For the third quarter of 2012 free cash flow was CAD17.3 million compared to CAD29.3 million in 2011. On a year-to-date basis free cash flow was CAD80.5 million, down CAD31 million from the prior year. This is mainly due to the timing of certain capital projects and a CAD20.7 million SRED recovery recorded in 2012, partly offset by lower required pension solvency funding and EBITDA growth.

Our year-to-date free cash flow result leaves us well-positioned to meet our guidance range of CAD110 million to CAD150 million for the year.

Wireless costs of acquisition in the third quarter were lower at CAD14.8 million compared to CAD16 million in Q3 last year. For the first nine months of 2012 wireless COA was CAD45.5 million, up slightly from CAD44.3 million in 2011 andis in line with our expectations for 2012. These results demonstrate our disciplined approach to managing the growth of our smartphone base.

Strong participation in our dividend reinvestment plan continues, with a 29% of the outstanding shares participating in the program in October. This reduced the cash costs of our dividend by approximately CAD8.2 million.

Now turning to pension. We continue to use letters of credit to fund our solvency requirements through 2012 and are on track to meet our 2012 funding plan. Beyond that, we have a number of funding options such as raising capital as some of our peers have done. But there's into need to make a decision on funding options at this time, and in fact it would be premature to do so since our strategic review process may inform our thinking about how best to address our pension solvency requirements. We will have another opportunity to discuss pension solvency funding plans on our 2013 outlook call in February.

In conclusion I would like to here you with a few thoughts. Our strategy and execution continue to produce solid results, keeping us on track with our 2012 plan. MTS has performed well, with growth in EBITDA and revenue from strategic services supported by steady subscriber and strong ARPU growth in wireless high speed Internet and IPTV.

Allstream has continued to improve it's profitability by growing high margin IP services, resulting in eight consecutive quarters of year-over-year EBITDA growth. We continue to make timely and focused investments in our growth lines of business, which generate solid results and further validate our strategy. We remain committed to producing strong free cash flow in line with our 2012 guidance range, which fully supports our dividend.

We would now be pleased to take your questions.

(Operator Instructions). Your first question comes from the line of Drew McReynolds with RBC. Your line is now open.

Yes. Thanks very much, and good morning. Just two questions for me. First, on Allstream, just when you strip out the government of Ontario contract and you look at the underlying revenue growth trajectory, we've decelerated from about 7% to 9% in the first half of the year to 6% this quarter. Just wondering if you could add a little bit more color on the pipeline and whether on and underlying basis you see a reacceleration, and then maybe just talk about the overall business market?

And my second question just on corporate costs, for you, Wayne. You have obviously reached your target range for the year. Just wondering if we should see further costs savings in Q4, just given that you typically have been front end loaded with corporate costs savings relative to guidance. Thanks.

Thank you, Drew. You want to take the Allstream question?

Sure. Hey, Drew, it's Dean here. So I will talk about that in a couple of ways. So you're right, and I will give you a couple of metrics that we use as leading indicators as to what's going to happen upcoming in that revenue space.

So first, from a market point ever view nothing has changed. So there's nothing in the market that is substantially different. And while we were he selling in the first two quarters the year at a pace that was very similar to last year, which was a big step up from year priors, we were at a similar pace.

What I have notice and what we have seen from the results in Q3 and expect to see in Q4 is that our pace of wins in the IPC space is moving up substantially. We were up about 13% in terms of in the third quarter, and that will take a few more months to translate into revenue, but what we see is an acceleration in terms of our performance there. And so I would expect that we're going to see that represented in better revenue growth next year.

From a funnel point of view, our funnel has expanded. We had actually some very good results where that's up 25%, 30% from the first half of the year. And what it really translates into is a better ability to manage the pace of installs, as in increase it, which is really a key driver for additional revenue growth as well, and again in the third quarter we saw that exact same positive result. So I'm optimistic that we're going to see these things move in the right direction early next year, driven by the operating results I am seeing now.

Dean, you want to make some comments on the economy and the impact?

Yes, soI would say no change. There's the cautiousness that is always underlying this year as people seem a bit uncertain as to how -- when we return as an economy to growth. It's not different this month than it was in prior, so really I don't -- I'm not too concerned on that front at this point.

Yes, I think, Drew, an advantage that maybe the IP products over many other industries in terms of the impact of the economy is that the IP products are in huge demand. I think more and more companies are switching to -- or converting to IPO tools and fully integrated workstation including mobile, so there is a huge demand for IP, and I think we have only -- we have half of the Canadian market converted to IP. Maybe that -- I haven't a stat recently, but it's probably around that number. There's quite a bit of [runway] to go in Canada to -- in terms of demand. And, Wayne, you want to talk about costs?

Sure. With respect to costs reductions, we are within -- I guess we have reached our guidance range for the year at CAD26 million versus our guidance of CAD25 million to CAD35 million. We -- you're right that we do typically front-end load those programs so that we get in-year savings. This year, though, we do have some programs that are still ongoing, and in fact, have a staffing initiative going on -- or that has just been completed in the fourth quarter and expect to see some albeit relatively small cost savings in Q4 as well. So I would expect that number to go up in the fourth quarter. Not necessarily as high as we have seen in the first three quarters, but some savings are left to go.

That's great. Thanks very much.

Next question comes from the line of Glen Campbell with Merrill Lynch. Your line is now open.

Yes, thanksvery much. I wanted to start with a question on the Allstream revenue and gross profit, kind of in the last couple of quarters. If we think of the grooming that you are doing in your product line, it's understandable that the revenues are decline. But we also are seeing -- we have seen now two sequential declines in the absolute gross profit dollars. So I'm wondering if you can back out how much the government of Ontario contract reduction has impacted that, and what the kind of organic change would have been in the last couple of quarters on gross profit?

Well, the -- you're right that the gross profit total dollars has come down, and that's largely due to the revenue decline. So the -- I mentioned in the third quarter about half of that revenue decline was from our planned exit. The balance would be from just the erosion in the legacy base. So our percentage of gross profit has increased.

The government contract is contributing to that, as it tends to be a -- or had some -- probably a higher percentage than our basin terms of off-net usage. I don't have the gross profit number excluding that contract. We've talked about the revenue base, but you could probably say that the contract we're speaking of would be in that 50% to 60% gross margin versus our overall IP gross margin of 73.5% in the third quarter.

Okay. Maybe just between Q2 and Q3, can you give us a sense of how much of a step down there was in the government of Ontario contract revenues?

It would have been between Q2 and Q3 about CAD3 million. I think we -- I talked about it earlier. We expect about a CAD12 million decrease for the full year, and that's spread out relatively evenly between the quarters.

Okay. Thanks. And I had a follow-up on wireless. We have seen Bell launch in your market very aggressive price points. Telus has been there for a little while. Can you remind us what you are obligations are to offer them roaming on your LTE network and to what degree they might have taken advantage of that to be able to get on your network at say low roaming rates for outside their coverage?

Yes, Glen, it's Kelvin here. Well, today they don't offer and LTE service in Manitoba, Glen, so there's really no obligation on LTE at all. But under the current rules we really don't have an obligation to offer them in-territory roaming. We only really have and obligation to offer for out of territory, so it doesn't really -- I don't think their change is really linked at all to any changes in roaming at this point.

Okay. And then once they've constructed LTE, and once the government passed the detailed rules, would you expect under those things to change?

Well, we haven't seen the final rules yet, so it's a little early to comment. So we will have to see what those rules are and then what the process is that they would have to go through.

Okay. Thanks very much.

Your next question comes from the line of Jeff Fan with Scotia Capital. Your line is now open.

Thanks very much. Just to clarify on the IP revenue, you're saying about half the impact is already occurred this year. Should we read into that, going to 2013, I mean essentially the other half is going to come off in the first half? SoI just want to clarify that.

The other thing I wanted to ask is regarding your options related to the pension funding. I understand, Wayne, your comments that you're going through a strategic review and it's probably premature, but I'm just wondering why not deal with this earlier rather than later to perhaps help you guys negotiate on the Allstream situation from a position of strength? I just wanted to get your thoughts there. Thanks.

Well, so first off with respect to the decline, I don't think we know for sure exactly when and how we might see further declines on that contract. We do expect that we will see that continue to come down, and so we are indicating that we're going to see that impact. I think we expect the impact to be smaller next year than it is this year, but beyond that it's difficult to predict exactly what they're going to do.

The -- with respect to pension funding, I recognize that we are, I guess, out of line with what some of our peers have done. I guess what we've -- in terms of funding earlier, and I think there are good reasons for that. We still believe that the way or the approach that we have taken to funding is the right approach for our Company, and that at the appropriate time we will fund.

And in the -- in terms of the manner in which we will fund it, we think we have lots of options on that, and we're continuing to gather information. And what we can say is that for 2012 we're going to fund that completely with letters of credit, and in 2013 we're going to talk further about that when we get to our outlook call, and including any information we might gather from our process. But beyond that, we really can't speculate on what we would do or what advantages or whatever any other ties to the strategic process.

Okay. And just one final question. On your CapEx for the year I just want to clarify, you said about 80% of your capital has been spent for this year?I guess that would imply roughly CAD330 million for the year. Is that kind of about right?

Yes. That's in the range. Yes.

Okay. Thank you.

Your next question comes from the line of Vince Valentini with TD Securities. Your line is now open.

Questions. First for Dean. Are there any contract renewals coming up that you would be worried about that could create another type of churn issue similar to the doctors office thing.

Second question is, I guess there's some talk that the new entrant wireless players are struggling and [win] may or may not be for sale. Just want to revisit, given that you guys had this strategy back in 2008 to go national in wireless. Is that still you would potentially contemplate if there was an opportunity to buy one of the new entrants?

And the third question is you've made linkage a couple of times to the pension issue and the strategic review, so I'm just wondering if you can clarify. You've said the process could take up to a year, but you're saying in February you will give us some update on the pension, which could be linked to whatever happens with the strategic review. So does that imply you're hoping to have something more concrete that you will be aware of or that maybe you can share with us by February at the latest on the process?

So thank you, Vince. I will ask Dean to answer the first question.

Sure. Hey, Vince. With -- unequivocally there's nothing else in the Allstream base that loos like eHealth. I can say that for a few reasons. There's nothing of that size. There's nothing that is a government contract that has no commitments associated with it. And there's also no other customer we have that can choose to turn down an enormous IP network without consequence in the sense that it doesn't need it. So there as real -- it just doesn't exist else where in the base.

In fact, the pattern for us, 47 of the top 50 customers that we have been with us ten years. So this is an unusual situation for us, so it's not represented whatsoever. And I would remind everybody one of the reasons we started a couple of years ago emphasizing and improvement in our mid-market was to remix our base of customers, as we have to be much more reliant on a more distributed set of customers than single large. So there's nothing like this that exists at all any more in the Allstream base.

So, Vince, let me take your last two questions. First on the pension funding and potential outlook announcement or more information provided the outlook. I wouldn't warrant to speculate on the strategic reviewer, but there's clearly a timing issue in pension funding like we -- so while there is some impact, I'm not sure they're totally linked, but we have to consider how the strategic review is going, if we have something to -- that can impact the pension funding or not. But clearly because there's timing linked with pension funding for 2013, we do have to come out with various ways of funding it, whatever, we're in 2013. So I think Wayne's comment is more linked to that, and on the strategic review we wouldn't want to speculate on timing or anything like that or results. So when we have something to say there or announce, we will.

As for the wireless -- the new wireless [entrant] in Canada, I think I have said it a few times,wireless is still a great business, very interesting business. Clearly from the last time we have looked at this to today, the market has changed substantially. There's no doubt that for us to be interested or even able to move into that type of market or even idea, it would have to be something that made a lot of sense for our Company and was, I would say, a great deal. Because we are further in the penetration in Canada. The larger incumbents have react today phased the new entrants.

The world is all data now, so there's a lot of other factors that would have to be taken into consideration, and there's a reason why some of these providers are facing more challenges than they expected. So probably not a clear answer for you, but something that's always interesting. But looking at it at this time would be quite challenging because of how the market has changed in Canada.

That's good. Thanks.

Your next question comes from the line of Dvai Ghose with Canaccord Genuity. Your line is now open.

If I may -- sorry to hop back to the government of Ontario eHealth contract, but it's obviously important to investors. Can you give us the size of the total contract? Is it in the CAD30 million range? And given the comments you have given us -- it's quite good guidance, I just want to put it all together -- does this suggest that you could actually go declining IP revenue in the fourth quarter and early 2013 before it starts growing as year-over-year comps get easier without the government of Ontario contract? Because your growth with that contract loss is only 0.5% in this quarter year-over-year.

Yes,I guess the -- what I mentioned earlier in terms of the size of the contract, that we've lost about half of the revenue that we recognized last year. So that would put that contract in the CAD25 million range in terms of 2011 revenue. We're a little -- around how of that now on a run rate basis so -- and we do expect to continue to see some declines.

I think Dean mentioned earlier that we have seen sales picking up, and what I mentioned in my speaking notes was basically that we expect to see with the sales that we're seeing at the level we produced last year to continue to drive growth in IP. We're not expecting a decline in IP revenues. In fact, we would expect growth to pick up as we start to work our way through this over the next quarter or two.

Okay,that's --

Yes, if I may, the one factor is we're not fully in control.

Yes.

The customer disconnects at the pace that they choose, but if we follow the pattern that they follow, and there's no other indication that they will change that, it should be progressive over time. So looking at our sales, looking at our current performance, which we're happy about -- and it's really unfortunate we have this one to carry for so long in fact -- the IP business in Allstream is doing pretty well.

One thing I would mention that Pierre talked about it earlier about it earlier, but we had -- Q3 was a very strong month for IP sales, and October looks very good as well. So we're expecting some pretty good results in the fourth quarter.

And I guess the other thing that we have talked about in past quarters is that we've made significant improvements on our ability to provision IP contracts efficiently, and in fact we have grown our capacity while at the same time reducing our costs. I think we talked a fair amount about that in Q2. But we continue to see a ramp-up in the amount of installs that we've been doing on a consistent month over month basis, and we think that's going to contribute to a strengthening of the IP revenues as we go forward.

Okay. So the 0.5% should be a low point . It shouldn't get worse from here. Understood. On the free cash flow, if I may just very quickly, you talked -- and I appreciate the 80% of CapEx and going against normal seasonality with Q4 being heavy, so that's very useful in trying to assess full year cash flow. But to what extent do you this I that will be at least partially compromised by wireless subsidies. They were down I think 7.5% year-over-year in the third quarter because of the very late iPhone 5 launch. I assume iPhone 35 had no impact, positive or negative, in the quarter. So to what extent do you think there will be significant subsidy pressure in Q4, and does this mean you're trending towards the lower end of your free cash flow guidance?

Well, maybe I can talk about free cash flow, and Kelvin may want to talk about COE in general. But we do expect to be below the midpoint of our guidance, but we do expect to be well within our guidance range in terms of free cash flow. We talked about CapEx, and that's the one that has been higher this year versus last year, and that will reverse in the fourth quarter, although the full year we do expect CapEx to be higher year-over-year. Just lower in Q4.

With respect to the impact of COA, I mean I think we've got that -- fair amount of visibility into that number, and we expect -- we're right -- I guess we're right in line with our expectations, and we believe that for the full year we're going to be up slightly year-over-year. You notice that we were actually down in Q3, so those factors that you mentioned are included in that number. So our Q3 was a little lower. So Q4 is always a higher month in terms of COA -- or quarter I should say -- and will be likely higher than Q3, but still in line with that overall expectation of seeing COA relatively in line with where we were last year.

Thanks very much.

Your next question comes from the line of Rob Goff with Byron. Your line is now open.

Thank you very much. My questions will be on the wireless side. Could you address wireless substitution to start? In terms of the numbers there, would your figure for wireless substitution be in around the 16% level? What is your view of the US levels north of 30%? And are you maintaining your wireless share in those subscribers who are going to wireless substitution? Thank you.

I'll take a crack at that, Rob. I mean it's always a little bit hard to get the exact number on where you're at, but the latest actually figures from -- I think it was 2011 that were published -- would have showed Manitoba in the 16% or 17% range, which would have been I think number two in the country, which is maybe a little surprising. So I would anticipate that we're probably in the 20% range at this point. Certainly that's consistent with what I'm seeing.

The US numbers are higher, and there's some reasons for that, but I think generally the trend is going in that direction, as part of it's demographics and obviously part of it also is the capabilities now of these wireless devices and how people are using them. So certainly our projection is that number is going to continue to increase. Now, how quickly, whether we catch up to the US at some point or continue to lag, I mean that's hard to forecast, but certainly we do see it continuing.

And in that market I would think it varies a bit, depending on whether you're talking urban or rural. We have a different kind of share distribution obviously in Winnipeg, where we have many more competitors, than outside of the major markets, where it's more Rogers and ourselves. But I think based on the data we would see in that segment that from a wireless point ever view we're getting our share, our reasonable share on the wireless side.

I think, Rob, what's also interesting is that not only the telecos now are facing wireless substitution, but also the cable cos with their voice customers who are starting to switch to wireless only. So that's really impacting the whole market now. Now the comment I made to this, just want to make sure we all -- that we're clear that this is not something new for us. It's been many quarters I think that we're seeing a lot of wireless substitution and probably less losses to our competitors.

Okay. Thank you. And if I may on a follow-up, sticking with wireless. And it's not necessarily a new question. At Allstream are you seeing your competitors using more linked sales, where wireless is put in together with the voice?

Rob, it's Dean. It's not been on usual for us. We do see RFPs that include wireless within them, but we have relationships with providers like Rogers where we can introduce that element of the offer into the RFP,supplied separately and independently, but definitely satisfying what they need.

I will tell you, as an interesting piece, what we have seen is a pickup in, call it, the wireline related element of wireless. What do I mean by that? We've got now a dozen customers who have come to us that are looking for wireless backup. So they're looking for wireless as a second line into a business, typically deployed as part of a wireline network managed by us, but simply a kind of elemental choice that's separate from the wireline access to a traditional business. And that's been very interesting. Something that we actually built a product for a couple of years and have seen a fair amount of demand on.

We also continue to see things like fixed mobile convergence, so kind of and IP PBX deployment inside of an office where you can hang anybody's handset -- it doesn't matter who the provider is -- off of it as a natural extension to the in-buildingdialing that you would do or in-company dialing that you would do.

And Lastly, we still continue to be the material supplier to the wireless new entrants for all of their back haul needs. So we're kind of participating in the wireless market in wireline relevant way, if you want.

Great. Thank you very much, Dean. Thank you, guys.

Okay.

Your next question comes from the line of Phillip Huang with UBS. Your line is now open.

Hi. Good morning. Thanks guys. Two quick questions. One, on the Allstream side I was wondering if the strategic review has had any potential disruptions to the operations through this process? And the second question, on the pension side I was wondering based on your conversations with the rating agencies how do they look at the potential scenario of rates remaining low for an extended period of time? Thanks.

I'll ask Dean to answer your first question, but I would say in Allstream as well as throughout the Company we have been very open with our employees. We've communicated and answered their questions, and we have been talking about that very openly in the Company. So I don't think we've seen any issue there. The -- but, Dean, you want to.

Absolutely, [Chad], there is no concern whatsoever. In fact, it as seen as a positive, and it's been not disruptive whatsoever insides the division.

And I would say same for our customer base and our ability to win contracts, as you can see in some of the contracts wins that we have. Like we've had some pretty solid sales over the past few months since the strategic review process has been announced and some large customers that have given us their business, which I think shows you that there's really no impact out there. Wayne?

Yes, onthe pension side versus the rating agencies, I can tell you that we have definitely had conversations with our rating agencies in detail about our pension numbers, and so they're fully aware of it, and I believe that they take that into account in terms of their ratings. Exactly how that factors into their ratings, I'm not sure I can tell you exactly, but they certainly know what our status is.

My guess would be that, like all other things, they take a relatively long-term view given the long-term nature of long-term debt. So they are going to factor in what they see over a longer period than something like the solvency test would. So if you look at our -- for example, our going concern we're, 98% funded. Solvency takes a much shorter view, looking at -- in spot market government of Canada bond rates, which are artificially low, they'reprobably looking at that as somewhere in between the two. Likely closer to the going concern assumptions, since that tends to be the longer-term assumption type that they would use.

Very helpful. Thanks very much.

(Operator Instructions). Your next question comes from Tim Casey with BMO. Your line is now open.

Good morning. A couple of questions. One on the IPTV side. Could you talk a little bit about Shaw and what you're seeing in terms of promotional activity from them? And have you noticed anything beyond IPTV? Have you noticed any increased behavior by them on the [sme] side? Are you feeling any impact there?

And on the wireless side, the incumbents revised some pricing plans yesterday, which really focus on looking in data ARPU. I'm curious what you think of those with respect to your offerings, and I realize you're not going to talk about consumer plans before you do them, but just notionally what you think of that trend in pricing plans?Thanks.

Tim, on the IPTV side and just the market in general, I don't think we see have seen a whole lot of different competitive behavior in the market in Q3. So I don't certainly it hasn't been more aggressive. I think it's been fairly stable in terms of the offers in the market. And generally speaking we have seen some, I think, a little better results in terms of sales and net adds on the TV side in the last month or so. So I think the trend there, at least in the short-term, seems reasonably stable.

In terms of the small business kind of activity by Shaw, they have been in the market for some time now, and again, I think if you look at our losses in business now, it's relatively low . So they're out there, it's a competitive market, but I would say that it's -- it hasn't been accelerating or anything. It's continuing kind of in the same mode it has been for the last year or year and a half.

On wireless I guess the changes that some of the larger competitors announced yesterday really probably reflect a move more towards south some of the plans that MTS has had in the market. Some of the elements that were in there, like unlimited text messaging and picture and video messaging in the plans have been in our plans now for some time. So I think we will have to look at them.

I would say our existing plans -- I had a review of them after the announcements yesterday, and I would say they're quite competitive. In some areas we may have to make some adjustments after we review them, but I think the changes they've made there are fairly consistent some stuff we've been doing in the Manitoba market for the last year or so. So I wouldn't see a huge change in our strategy or anything as a result of that.

Thank you.

We will now take the last question from Glen Campbell with Merrill Lynch. Your line is now open.

Thanks very much for fitting me in. My first question was on the billing systems. You mentioned that the work on I guess your wireless billing system upgrade is now I guess essentially complete. I was wondering if you can talk about what might follow that and what benefits you're expecting?

And then again turning to wireless, you have a got a really -- I think quite a clever and effective bundling strategy with the big discount on the fourth product. We've known about these very aggressive price from Bell and [Telus], so is it your view going to tend to get the less' say fifth or sixth subscription that a household might have? And is there anything that you're able it do to try to keep customers in the bundle beyond that fourth product?

Glen, it's Kelvin here. Let me take a crack at that. Yes, on the billing system we're certainly anticipating over the next couple of years -- as you can imagine, billing systems are really long-term types of initiatives, but we do expect to see some benefits. It does give us better online capability in our retail stores, so we're expecting to see some more efficiency in savings in the order processing side in particular.

And I think we'll be better positioned going forward with data capabilities and able to implement some things there that we haven't really had the capability previously. So those are two areas of focus there to drive some efficiencies out through our sales and order chain as well as being able to do some things in the data services portfolio that we think will be interesting for customers.

In terms of the bundling, well, we could get five or six services in a home, that would be great. I think with our four service bundle -- and you can three wireless devices in the bundle -- I think that satisfies a big portion of the demand today, so to the extent that we needed to change that or come up with other ways to gets the fifth or sixth or seventh wireless device, that's a challenge I would be happy to take on.

I don't really see that being a near-term issue for us. We're seeing good results in the bundle, and certainly we're seeing more wireless in our bundle base, so that tells us that wireless customers see value in having wireless in that package and being able to put it together with the Internet or TV, as the case may be.

Yes. I think what's important and probably different is that you can put, Glen, up to three wireless accounts in a bundle already today. So that covers probably the majority of the demand that we have right now. But you are right that over time that's probably going to grow and these bundles will have been adjust, but over time. But with three today I think we cover most of our needs right now.

Terrific. Thanks very much.

Thank you.

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

Before we go, I just wanted to mention two things. On a personal note I encourage everyone to take a moment on November 11 to remember and honor those who have served or are currently serving our country. And also just reminder that the replay for this conference call will be available until November 22, replay details can be found on the MTS website and the Investors tab. Once again, thank you for joining us today.

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