BCE Inc (BCE) 2013 Q3 法說會逐字稿

Good afternoon. My name is Kyle and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Allstream third quarter 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, Tax and Investor Relations.

Thanks, Kyle, and good morning, everyone. I'm Paul Peters, Vice President of Tax and Investor Relations. Thank you for joining us for our third quarter 2013 financial results and 2014 outlook conference call and webcast.

Earlier today we issued a news release for our third quarter 2013 financial results and 2014 outlook. The news release, MD&A, and financial statements are available on our website at mtsallstream.com. We're once again reporting Allstream as part of continuing operations. For additional details pertaining to Allstream's results during the second quarter, which we previously reported as discontinued operations, we encourage you to review our supplementary information package for Q3 which can also be found on our website.

Also today our Board of Directors approved the fourth quarter dividend, which has been set at CAD 0.425 per share.

On today's call are Pierre Blouin, Chief Executive Officer; and Wayne Demkey, Chief Financial Officer; Chris Peirce, Chief Corporate Officer; Kelvin Shepherd, President of MTS; and Dean Prevost, President of Allstream. Today's call will consist of remarks by Wayne and Pierre, followed by a question-and-answer session.

This call may contain certain forward-looking information, material factors or assumptions where applied in drawing conclusions or making a forecast or projection reflected in such forward-looking information. Actual results may differ materially from a conclusion, forecast or projection in such forward-looking information. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Additional information about material factors and assumptions can be found in our filings with Canadian securities regulatory authorities and, except as required by law, we disclaim any intention or obligation to update and revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Key assumptions and forward-looking statements can be found in our third quarter 2013 results and 2014 outlook news release dated November 7, 2013.

Also today, please note that, due to the federal government rules, we will not be taking any questions on the upcoming spectrum auction.

I'll now turn the discussion over to Pierre.

Thank you, Paul. Good afternoon, everyone. Thank you for joining us today.

Well, first I'd like to make some comments on the Allstream transaction. I think you all had the opportunity to see what we said about the federal government's rejection of the transaction. This decision was not at all in line with the feedback we received throughout the long and disruptive review process and it came as a complete surprise to all of us. Unfortunately, there was no possible appeal and, according to the government, no ability to restructure the transaction.

So, our main focus is now on operating Allstream and MTS and bringing Allstream's performance back to the level that brought us 10 consecutive quarters of year-over-year EBITDA growth prior to our process.

I think you can imagine how challenging it was for Allstream to work in a sales process environment with the uncertainty that comes with it, the inabilities to make the necessary adjustments to the business while the asset is held for sale, and how your competitors use that against you. Add to that five months of Investment Canada review and you don't have a receipt for strong results.

Well, that was the negative, but there were also positive outcomes. Through discussions with a number of interested parties, we gained insights into Allstream's potential. We received strong validation from Accelero and others that Allstream is a valuable asset with growth potential and that our IP strategy focusing on on-net customers is indeed the right one.

Among other things, we restructured parts of the business, moved Allstream to a more independent footing and further improved its cost structure.

On a lighter note, we now have gained huge brand recognition for Allstream with all the media attention it's received. The result is that we go forward with a positive outlook and a plan that demonstrates that Allstream can quickly regain the momentum it had in 2012, delivering improved margin, EBITDA and free cash flow for 2014 and beyond. And with around 40% of its overall revenue coming from IP, it will have a solid foundation for a more stable performance going forward.

And I want to say thank you to our employees for their resilience and dedication throughout all the disruption in 2013. This wasn't easy, but our people stayed focus on our customers and did an exceptional job under very difficult circumstances.

And I'd like to say before we get into the results that you will hear many of our comments with the caveat excluding transaction costs. We understand that this is an unusual way to report, but we're in an exceptional position and our results, in particular Allstream's, are quite distorted because of the review process and we're trying to indicate what our business is really delivering.

As for MTS, MTS has not been really impacted, materially at least, by the review process and its third quarter results reflect stable performance with strong wireless and internet results. And more importantly, the increasing cash flows supporting our dividend.

I'm also pleased to report that recently we reached over 100,000 IPTV customers. This is an important milestone that speaks to the strength of our MTS TV business. And MTS unique bundled offerings continue to be unmatched in Manitoba, appealing to our higher-value customers and enabling MTS to protect its market share in all of its services.

Now turning to 2014 and our outlook, we expect our company to see material increases for EBITDA, EPS and free cash flow in 2014 when compared to 2013, and for Allstream to have a performance in line with what it delivered prior to the review process. So, let me give you some highlights.

For 2014 our strategies are to continue to strengthen MTS' position in Manitoba and further invest to make MTS leading position even stronger for the future. We plan on expanding its LTE network and Wi-Fi locations to attract a greater number of higher ARPU data subscribers and smartphone users. Note that we have the deepest and widest wireline and wireless network footprint of any carrier in Manitoba.

And recently PC Magazine did a survey of Canadian wireless networks and MTS was recognized as the fastest wireless network in Winnipeg and the best wireless network in Manitoba, and we're very proud of that recognition.

We also announced on Monday a partnership with the city of Winnipeg to equip more than 350 libraries, arenas, recreation centers and other city sites with Wi-Fi services over the next two years. This is directly in line with MTS' strategy of connecting Manitobans everywhere they go and delivering a superior customer experience than our competitors. In fact, we plan to spend more capital to enhance our customer experience in Manitoba by implementing more online and self-serve capabilities, which should improve our customer experience and enable MTS to increase operating efficiency for the coming years.

At Allstream the IP market in Canada is expected to grow at high single digits over the next few years. Allstream is well positioned to benefit from this trend. In fact, I think we're in a more solid position than we were a year ago because of the changes made to Allstream.

In 2014 we plan to continue Allstream capital investments to create additional higher margin, on-net IP revenues, increasing its network footprint by connecting with fibre over 300 new buildings, bringing the total to about 3,300.

Allstream focused-IP strategy should result in having around 40% of its total revenues from IP. This finally puts Allstream near the inflection point where IP revenue growth exceeds legacy declines. These IP revenues combine with a stronger on-net performance will contribute to Allstream's EBITDA margin growth in 2014 and bode well for our multi-year goal of reaching the 20% EBITDA margin mark.

So in summary, we've presented our 2014 guidance reflecting stable growth at MTS; Allstream performing solidly to pre-review level; solid and improving cash flows supporting our dividend; and an opportunity to improve those results as we pursue our work on Allstream to bring its IP revenues closer to 50% of its total revenues.

Wayne will give you more details on our Q3 results and 2014 outlook, as well as providing more information on our planning to address pension solvency payments. So Wayne?

Thank you, Pierre, and good afternoon, everyone.

I'm now going to review our Q3 results and our 2014 outlook, after which we'll be pleased to take your questions. You can find additional details in our Q3 MD&A. Please feel free to follow up with us after this call if you have any additional questions.

Overall revenues were down 3.7% for the quarter with solid growth in MTS revenues at 2.5%, being offset by an 11.9% decline in Allstream revenues.

For MTS, revenues from strategic lines of business, wireless, broadband and converged IP, were up 5.7% or CAD 8.3 million and now represent 61% of total revenues. Wireless revenues increased 4% in Q3 compared to the prior year. And if you exclude wholesale wireless, that growth would be 7.6%. Wireless subscribers are up 0.4% and wireless ARPU is up 2.9% year to date, all of which is being driven by an 18.7% increase in wireless data revenues.

A growing number of our post-paid subscribers have data plans, 64% by the end of Q3, so we expect the strong growth in wireless data revenues to continue. MTS also achieved a 9.4% growth in internet revenues in Q3 driven by a 7.3% growth in our high-speed internet subscribers and a 2.7% year-to-date increase in ARPU.

IPTV revenues were up 3.1% in Q3 as a result of the 7.1% growth in subscribers. As at September 30, 2013 83% of our growing IPTV customer base subscribed to our premium IPTV service, Ultimate TV. Partly offsetting this strong growth in strategic services were declines in local access revenues of 4.3% in Q3, as well as a 6.3% decline in LD and legacy data.

At Allstream revenues declined 11.9% in Q3, with the majority of the decrease coming from the planned exit of low-margin legacy revenues. IP revenues were down 0.7% in the quarter. The disruption resulting from the announced transaction at Allstream and the subsequent regulatory delays had a negative impact on IP revenues which we now expect to be about flat for the full year.

However, we do expect to see growth in IP revenues in Q4 at Allstream compared to Q4 last year as other events that have negatively impacted revenue year to date are now coming to a close. Specifically, churn related to Ontario Health is almost at the end and the delay in provisioning of the Shared Service Canada contract that we won last December seems to be over. We've installed approximately 15% of this contract so far with the remainder now in the queue, which bodes well for strong growth in 2014. Converged IP revenues now account for 37% of Allstream's total operating revenues, up from 33% in Q3 2012.

Consolidated EBITDA was down CAD 3 million, or 2.1%, to CAD 142.7 million in Q3 due to transaction and restructuring costs. Excluding these costs, consolidated EBITDA would have been up 4% in the quarter.

At MTS EBITDA again showed steady growth, up 1.4% from Q3 last year. This increase is a reflection of MTS' leading bundling capabilities that continue to drive growth in strategic services, along with diligent cost management.

Allstream EBITDA was CAD 25.5 million for the quarter, down 3% from Q3 last year. If you exclude transaction and restructuring costs, EBITDA would have been up CAD 4.6 million, primarily due to ongoing cost reductions, as well as improving gross margins.

Allstream's gross margin percentage increased to 53.2%, up from 58.6% in Q3 2012 as a result of our focus on selling on-net IP services and expanding our connected building footprint, while exiting the lower-margin legacy lines of business.

Earnings per share, down CAD 0.12 in Q3, was negatively affected by a CAD 0.24 Allstream impairment loss and a CAD 0.10 impact resulting from the transaction and restructuring costs, partly offset by a lower depreciation and amortization expense when compared to Q3 2012. Adjusting for these factors, earnings per share would have been down CAD 0.02, in line with our expectations.

As a result, for this quarter capital expenditures decreased by CAD 25.9 million due to the 2012 completion of such projects as our wireless billing system upgrades and our 4G LTE network build in Winnipeg and Brandon. 2013 capital expenditures are expected to be within our guidance range of 17% to 19% of revenues.

Free cash flow was CAD 45.4 million in Q3, up CAD 28.1 million compared to 2012. Free cash flow increased primarily due to lower planned capital expenditures. Allstream was CAD 2.5 million cash flow positive in the quarter. This is a CAD 10 million improvement over the same period in 2012 due to lower capital expenditures and lower operations expenses, partly offset by restructuring and transaction costs.

Disciplined cost management is an integral part of our financial plans. By the third quarter we had achieved CAD 59 million in year-to-date annualized cost savings. This exceeds our annual cost reduction targets of CAD 30 million to CAD 40 million.

And now turning to our 2014 outlook. Before we get to the specific guidance, I'd like to make a few comments about why we believe 2014 will be a much better year for Allstream than 2013.

Allstream will continue to focus on growing on-net IP revenues while reducing our operating expenses and expanding our fibre network to more buildings. This is the same plan that we had before the Accelero deal was announced and, indeed, was the same plan that we were working on with Accelero while awaiting regulatory approval.

The plan hasn't changed, but in 2014 Allstream will benefit from the cost reductions initiated in 2013, as well as IP revenue growth driven by the provisioning of the Shared Services Canada orders and the completion of the churn associated with Ontario Health as previously mentioned, and will also benefit from removing the distraction that negatively impacted results in 2013.

Our 2014 revenue guidance is between CAD 1.6 billion and CAD 1.7 billion, representing a slight increase over 2013 revenues, which are expected to be at the low end of the 2013 guidance.

MTS revenues will continue to deliver moderate growth as strong growth in strategic services, which now represents 61% of total revenues, offsets expected declines in legacy revenues. At Allstream we expect strong growth in IP revenues, as I just explained, which should nearly offset expected declines in legacy revenues. Allstream IP revenues are expected to move from 37% of total Allstream revenues to over 40% of total revenues in 2014.

On a consolidated basis, EBITDA will be in the CAD 580 million to CAD 620 million range, higher than 2013, due to lower transaction and restructuring costs and EBITDA growth at both MTS and Allstream. MTS EBITDA is expected to continue its steady, low-single-digit growth resulting from strategic revenue increases and continued diligent cost management.

Allstream EBITDA growth will be more pronounced. Excluding the 2013 restructuring charges, we expect solid EBITDA growth to a level that exceeds 2012 EBITDA based on an annualized cost savings from the 2013 restructuring efforts, growth in higher-margin on-net IP revenues and the reduction in inter-carrier costs from an expanded network footprint.

The Company plans to continue its efforts to generate annualized cost reductions in 2014 in the range of CAD 20 million to CAD 30 million. Any costs required to complete these initiatives have been included in our 2014 EBITDA guidance.

Free cash flow on a consolidated basis is forecasted to be in the range of CAD 130 million to CAD 170 million, excluding pension solvency and spectrum, up substantially from 2013's revised range. The increase is a result of EBITDA increases at both MTS and Allstream and the elimination of transaction-related costs, partly offset by an expected increase in capital expenditures. At this level, 2014's free cash flow is expected to fully support our dividend in addition to a healthy capital program to grow our business.

Capital expenditures will be between 18% to 20% of revenues, an increase over 2013 in support of certain revenue growth and cost reduction initiatives, primarily at MTS.

MTS capital initiatives for 2014 are focused on delivering key strategic initiatives such as investment in LTE, IP telephony, Wi-Fi, customer self-serve capabilities and the expansion of our fibre network to additional homes and businesses.

At Allstream, we'll be investing capital at a similar level to 2012 to expand our network footprint, to increase the proportion of our higher-margin on-net revenues and to gain further efficiencies. Allstream capital spending is expected to be fully funded from our improving cash flow profile at Allstream.

Our pension deficit has improved substantially since the beginning of the year. Very strong year-to-date asset returns and a 70 basis point interest rate increase since the beginning of the year helped reduce our pension solvency deficit by one-half since the beginning of 2013. Much of these improvements were known when we had previously announced that we would use approximately CAD 170 million of proceeds from the Allstream sale to prefund our pension solvency obligations and eliminate future solvency payments until at least 2016, or longer if interest rates were to rise.

In light of these further improvements in the market, we are now reassessing the appropriate level of pension plan prefunding and contemplating a range of alternative financing strategies, with a preference to issuing equity to prepay our solvency funding requirements for the coming years. In the absence of prefunding, our solvency requirement for 2014 would be approximately CAD 55 million.

Lastly, with respect to taxes, we do not expect to pay cash taxes until at least 2020.

Thank you. We would now be pleased to answer your questions.

(Operator Instructions). Jeff Fan, Scotiabank.

A few questions here. First, regarding the pension funding of CAD 55 million, is that after you would apply the letters of credit? Wondering if you can just update us on how much LOC room you may have and clarify the CAD 55 million, whether it's before or after the LOC.

Yes. Thanks, Jeff. The CAD 55 million would be after LOCs. As you know, we're -- we've been maximizing our deferral of solvency funding using LOCs so there's a small amount in 2014 that would be available, always depending upon what your asset levels are at the end of the year. But the CAD 55 million is after whatever amount would be applicable to LOCs.

Any clues as to how much that might be on the LOC room?

I don't have it with me. It's not a significant number.

Okay. And then just a clarification. In your segmented results, I guess we've seen Allstream EBITDA for the first time for the second quarter. The second quarter EBITDA for Allstream was only CAD 13 million. I'm just wondering whether there were some charges related to the restructuring that you put through there in Q2. Just trying to reconcile.

Yes. There would have been some restructuring charges in Q2. We had a workforce reduction initiative that we undertook in April that was part of our plan and that was completed in Q2. So, that would have been part of the difference. In total I think we were somewhere in the neighborhood of CAD 10 million between that initiative and the transaction-related costs that would have been incurred in that quarter.

Okay. And so can you just review for us how much more restructuring costs you still have to put through in the fourth quarter? I realize you put through about CAD 9 million in the third quarter. So how much is left just from all-in purposes?

It's somewhere in the CAD 10 million to CAD 15 million range.

Okay. CAD 15 million.

And I guess the biggest portion of that, the majority of that is a workforce reduction initiative that we initiated at the beginning of November.

Okay.

So earlier this week.

And that would all be inclusive in the CAD 35 million that you talked about, I guess, when you made the announcement in October?

That's right. So the transaction and related costs year to date were about, I guess, CAD 14 million on the OpEx side and there was maybe CAD 3 million to CAD 5 million on the capital side, and we've got roughly CAD 10 million to CAD 15 left to go. So, it's all in that -- in Q4 and that's all a part of that CAD 35 million that we talked about.

I see. Okay. And one last question. You're talking about EBITDA in 2014 for Allstream being higher than 2012. Are you referring to pre-restructuring 2012 EBITDA number for Allstream?

Yes. The 2012 number that I'm referring to, I believe, was around CAD 108 million or CAD 109 million.

CAD 108 million, CAD 109 million. So that's the base that we should be comparing against.

Yes.

Vince Valentini, TD Securities.

First on the pension. So the deficit cut in half. Wayne, can you just put some numbers around that? Does that mean it's sort of CAD 300 million to CAD 350 million range right now?

Yes, that's right, about at the top of the range you just mentioned.

Okay. And can you update us on how much rate increase you'd need to see from the end of September levels to take that to zero?

Well, if you exclude any prefunding -- and remember, when we talked earlier or announced that we were going to put CAD 170 million in, that was about 100 basis points on top of that would have got us to that fully-funded stage. So, I don't know the exact number, but you'd probably be looking at maybe CAD 150 million to CAD 200 million.

Okay. And these financing alternatives you're looking at, can we assume you mean you'd be looking at preferred equity as opposed to common equity to bridge the funding requirement?

Well in our case, given that we're not taxable, preferred equity is not as attractive. In fact, there's a punitive tax implication to preferred shares, that there's a 40% tax on the dividends and so -- which you, if you're taxable you get back through the tax system. But given that we're not taxable until 2020, that makes it relatively unattractive for us from that perspective.

Okay. And the range of -- or the amount of funding you'd be talking about, is that -- the CAD 170 million you were going to contribute from Allstream proceeds, is that a reasonable proxy for the magnitude or are you suggesting -- you're sort of reviewing that now given what's happened with the returns and the interest rates?

Yes, we're reviewing that now. I mean when we estimate -- when we wanted to do the CAD 170 million, of course, the market had already improved in terms of the interest rates in some of the asset returns. So the number that, in terms of prefunding, we're still looking at to see kind of where -- what would make sense.

So I mean, I don't think I have an answer specifically on what we're going to do there, but we're still looking at what's best in terms of pension solvency funding. What we did, I guess, is tell you what the minimum amount is in terms of 2014, but we'd like to do something that would take care of more than just 2014.

Okay. And two more quick ones. The Shared Services Canada, you indicate there's been a delay there but you still expect about 15% of that contract to show up in 2013 and the rest going into next year. Is that run rate from that 15% already in your Q3 IP revenue at Allstream or was most of that deferred into Q4?

Well, Dean may want to add something here, but I guess just to clarify what I had said is that we've installed as of today about 15% of that contract and we are actively working with the folks over there on basically the balance of that contract. So exactly what the installation timeline is I don't know. I don't exactly where we're going to be by the end of the year, but we're working on all of the different departments that are involved in that contract as we speak.

But it's not in any of the Q3 numbers. Very small--.

That's right.

In the Q3 numbers.

Okay. That's what I was looking at. That's great. Thanks, Pierre. And one last one, Pierre, maybe for you. You may not want to answer this but, I mean, given you've spent so much time thinking about selling Allstream and how positive your company seemed to be on what you'd look like without Allstream in the mix, is it possible that you'll review either a sales or just a spin-off of Allstream next year when the dust settles, perhaps after the spectrum auction?

Well, I -- and you're right; I don't really want to answer this question. But I would tell you that that would be pure speculation right now. We're really focused on getting Allstream back into its past performance level and even better. In fact, as you can see from the guidance, we're confident on that. And we're focused on operating the business in two divisions of Allstream and MTS.

Glen Campbell, Bank of America.

So a question, Pierre. When you sort of look at what Allstream might be worth, together I guess with potential buyers, I mean it must have been frustrating to see a price tag on this asset that would attach to say a pure CLEC with a fraction of the revenues. Have you given thought to how long it might take to completely migrate off your legacy revenues and your legacy cost base so that it would look more like a pure alternative carrier with those kind of margins?

Yes. Well, it's good and bad on both sides. And you've seen more of the bad over the past few years, because the legacy had so much weight in it and it was declining fast as the market was repricing and where the products or the legacy services were replaced quickly by IP.

As IP for Allstream gets close to 50%, that's going to change the equation for Allstream and we think that that's going to happen over the next two or three years, really. We're already looking at getting above 40% or around 40% in 2014 and then finish this year around 37%, let's say.

So, we're getting there. And let's remember that IP is growing, that certainly is the forecast in Canada, at high single digit. So, that makes it interesting when you have half the business or more growing with very high margins. So, these margins have not gone down on IP. So, that's what's enabling us with all the restructuring we've done, with the realignment of its cost base closer to a pure fibre provider or a pure IP provider that you see in the US. That's enabling us to have much better result.

Now, for the balance of the legacy -- and by the way, it's not 50% because we have other products in there like unified communication and others, so it's less than that. There's still a big chunk of it that, even if it's declining, is still highly profitable. And if we were a private company that would be great. As a public company. it's creating pressure on the top line, let's say, for now at least, but it's still contributing very positively to the Allstream performance.

And let's remember that the customers on legacy, the very large majority of them are the customers that are also coming to IP or are already partially on IP. So, we have both product lines with them. And our work is to get them to move completely from legacy to IP, but on their schedule, unfortunately.

So all in all, don't have an answer. It's still going to take many years. But as IP gets closer to 50%, which is in 2014, you can see -- and you can see that in the guidance improving results in all our metrics, n fact; whatever its revenue, whatever its EBITDA or cash flow.

You've said Allstream's going to be cash flow neutral to positive next year, but if you decided to go down the equity-raising route and you had a stronger balance sheet, would there be any merit to accelerating the construction -- say the on-net connections or new business or cost cutting or other initiatives, to more quickly transfer Allstream? Is that part of the equation if you do decide to raise equity?

Yes. I think we're satisfied with the plan that we have right now. We have to remember that while we could accelerate that, we have to be able to sell into those buildings. We will have to be able to install all of this at that speed.

So some people suggested that in the past, but at the point we're at, we're happy with our plan, I would say. And in terms of cost, I think as we've put in the guidance also, and then Wayne mentioned, we're always looking at ways to improve our cost and ensure that we bring it at line with the type of business that we have.

Now, in Allstream that has been a long journey; like it's been many years that we're at this. And the recession a few years ago in the US did not help. But, as you can see with the work that we've done, and partially related to the transaction that we contemplated, we're we believe in a much better place with Allstream.

Okay. One quick final one, if I might. You're getting close to having all of your TV base on the new Ultimate TV platform. Is there a migration planned there for the balance of the customers and, if so, would that be a 2014 or 2015 item?

Glen, we are getting closer. And I think basically, like most of these things, it'll be a phased plan. In fact, we've still been selling classic TV because there's still a demand by some customers for that product. But we likely, I think, are planning to essentially stop selling the product as a first step and then we'll eventually get to a point where we do migrate the last few customers.

But right now, we're not really having to spend really anything on the platform and so there really isn't a real urgent driver to force -- migrate customers off of it. So, the natural migration approach seems to be working well and there will come a time when we get down to the last few customers and we'll move, but we're not quite there yet.

Dvai Ghose, Canaccord Genuity.

Wayne, I guess I can go back to the pension solvency deficit. Listen, over the last three years when interest rates were declining and your deficit was exploding and when people like us kindly suggested that you either prefund it or cut your dividend, you resisted saying that interest rates will finally rise. Now that they're finally rising the interest rates you're saying you're going to prefund it. Can you explain why?

Well, I guess, Dvai, I mean, we've benefited for the last three years, as you're pointing out, from deferring the cash solvency requirements. And I guess the offset to that is that you don't necessarily get the -- or you don't get the returns that the plan may have earned. But given that the rise in interest rates has basically cut our deficit in half, the decision to defer funding for three years seems like a relatively wise one to me at this point in time.

So, we've never said that we didn't need to fund in the fullness of time, that we probably would and funding would be a significant part of the solution to the solvency deficit. I guess our -- given the time value of money, our position on this has always been relatively consistent, that paying -- deferring as long as you can probably makes some sense.

So, we are looking at it in a balanced way. Others have funded or prefunded earlier and more than we have and, as a result, are probably in a better funded position that we are right now. But we've always said that we had options on what we could do and when we would choose to do it and so that's what we're looking at now.

But having said that, when we were making those suggestions your stock was in the high 30s on Allstream hype and you could have issued equity a lot more cheaply. Now, you're coming potentially to the market after a very disappointing Allstream announcement and arguably issuing equity at fire sale prices.

Yes. I think, Dvai, though, to be fair, we were contemplating at that point the Allstream transaction. So, we would not have issued equity with an upcoming Allstream transaction. I think that was the plan. I think you're aware of that.

Yes, that's fair.

I think we're in a different situation now. But as Wayne said, our ratio in terms of solvency prefunding is not at the same level as our peers. And if they were, well, maybe we would look at the different strategy.

Okay, that's fair. Now if I look at your funding strategy -- I appreciate the comment about press. I didn't realize the tax inefficiencies, though I'm sure a lot of my peers didn't as well, but obviously you could raise debt as well. I assume that you're concerned about an investment grade rating down grade if you issue debt?

Well, I mean, the -- from a balance sheet strength point of view, you're trading one kind of debt, which is your solvency deficit, for another kind of debt so you're not really improving your situation or your future flexibility from that standpoint. So from that perspective we would prefer to use equity, or that's part of the reason why we're in that -- or that is our preference.

And are you -- is there an urgency in terms of this equity issuance? Do you have to do it by end of year or is there -- do you have some liberty on your side?

No. When you look at our cash flows range of CAD 130 million to CAD 170 million, that's in excess of our dividend. It doesn't fully fund our solvency funding requirement, but I don't think we're in any way -- have to do anything immediately.

Okay, good.

There's one thing, Dvai, which is according to at least our forecast, our cash flows with a very moderate performance at Allstream are sufficient to fund our operating needs. So, the solvency payment and the solvency deficit that we have right now is probably -- and I'll put aside the spectrum auction, but that deficit is the issue that we are trying to address right now.

That's fair. Now, two last ones then I'll let you go. Sorry. So, if you do equity and pay down a big chunk of the CAD 350 million or so deficit, would it be wise to get rid of your DRIP? Because your share count has more -- it's consistently but quite materially gone up. And each share obviously carries a [CAD 1.70] dividend in itself. I'm not sure if that's been the best way so far to avoid cash payments. Would you consider changing the terms of the DRIP at least?

Yes, I think that's something that we will look at in the future for sure.

Okay. And this is my last one, I promise. So, this has to do with operations. Incumbent, nice increase in revenue, 2.5%, 0.7% increase in EBITDA, therefore an 85 bps decrease in margin. Why was that?

Could you say that again slower? (Laughter)

I'm sorry. Your revenues in the incumbent -- I'm repeating what you said. Your revenues in the incumbent division were up 2.5%, right? Your EBITDA was only up 0.7%, so that's about an 85 basis points decrease in margin year over year. Why was that?

It's principally due to the mix of revenues, Dvai. And as you can see, we've actually had strong growth in a few areas but, in particular, obviously TV is one of the things that's helping us on the top line, but it clearly doesn't contribute the same margin that, say, internet or wireless does.

Yes that makes sense. Alright, thank you. I was just thinking if there was any one-time thing. I appreciate it.

Rob Goff, Euro Pacific.

Thank you very much for taking my question. It would be on Allstream. Could you go into the nature of the labor reductions that you've taken thus far? And to what extent would those employees be customer facing? I'm worried there about the revenue traction impact of reducing the labor force.

Hey, Rob, it's Dean here.

Good evening.

For the most part, no is the short answer and now let me give you some greater detail.

We did a bunch of things with Allstream as we were heading towards a more independent state, let's say is the best way to describe it. That included bringing in things like our network services group directly into the division and a variety of other changes associated with corporate environments that led us to basically start to consolidate functions and simplify the way we operated. And it didn't end up having any material impact on the customer service we provided. In fact, it's been going up. And also, did not impact -- in fact we tried to protect both the folks that we had in terms of feet on the street from a sales point of view and those that we have rolling in trucks from a service installation and repair.

So really, it was just one other kind of relatively substantial set of simplification in the structure of Allstream, protecting the face to the customer, as it were, whether it was in the selling process or the repair and install process.

Okay. Thank you, Dean. And can I ask, to the extent that your competitors use the sale process against you as you were going after new business, how long will it take you to counter that now?

That's a great question. They certainly did. They're good at using that kind of event to their benefit. And we faced that issue and it showed in some of the results. We're coming out of it, though. What we saw in the third quarter, particularly at the -- most recently is that we've been able to gain some more traction. It's taken a lot more conversation direct into the customer than we might have had prior, but it's -- certainly the message is getting across.

Maher Yaghi, Desjardins.

I just wanted to ask you about what you think would be the minimum pension deficit payment that you need to do for 2014, because you mentioned you have a range of amounts that you could be looking at. But could you give us the minimum amount you think will be required?

Sure. In 2014, in the absence of any prefunding, we would need to fund somewhere in the neighborhood of CAD 55 million in 2014.

Okay. And what is the current solvency ratio for the pension right now?

Our funded ratio is let's say somewhere in the 80% range.

And that's using the most recent calculation for the discount rate?

Yes. Yes, that would be more or less up to date. I mean we only do a full actuarial valuation once a year, so there's a lot of estimates involved, but we can give you that in round terms. And so part of the strategy in terms of prefunding is that we feel that, if you take the pension solvency issue off the table, that we're generating strong cash flows that are in excess of all of our needs, including the dividend and all of the capital programs we're running long into the future. And so there's -- it also gets us back on the same footing as our peers once we -- if we were to do some kind of a prefunding.

Right. That's fair. And the idea here is to bring that solvency ratio probably to 105 to eliminate completely any kind of pension deficit solvency payments?

I don't think there's a specific target there. I mean I think that probably a better way to put it is that you want to get yourself into a spot where there's not this huge volatility in the annual funding. And so that that probably does get us there. We previously leveled off that volatility using letters of credit, as we discussed earlier, in terms of maximizing our deferral. And so one of the things that you probably want to do is, through something like this prefunding that we're looking at, is to basically take that volatility away. But, I don't think there's a specific targeted funded ratio.

Okay. And just one last question about the Allstream plan that Accelero was putting in place and now you're pursing and it reminds a little bit of what BCE did through that takeover. And can you talk a little bit about what terms of cost structure changes you've implemented so far as a percentage of the whole plan that was looked at through that Accelero takeover? And maybe talk a little bit about the upside potential in cost savings that we could be looking at.

That is a great question. Let me maybe say it just a little more generically. The basic idea, and this is frankly true of every telecom, that we could be substantially simpler in the way that we organize ourselves, go to market and provision an install. That remains as true today as it was three years ago.

What I would say, though, as part of the Accelero process we really got into that in a far deeper way. And also realized that we could be using tools and workflow far better to make that simplification occur, both in the terms of the way we worked with customers, but also in the way we presented services into the environment.

The second piece of it is this transition that we've been going through to IP, we also now at this point, having had such a substantial amount of legacy leave us, have the ability to start to remove the underlying legacy cost infrastructure, which occupies space, takes power, has dedicated software and operating systems and people to support it. And really, we now again realize that we are reaching a tipping point that we can start to invest to remove that cost structure.

So, I won't say exactly how far along we are, but certainly there were some substantial actions taken this year; more than we've done, frankly, in any other year to kind of march towards that. So, we've -- and you could see that in the results and particularly in terms of the one-time charges we took.

What I would also say is it also was a year where we got very, very disciplined in terms of reducing our run rate capital expenditures to manage the day-to-day business, providing more room than we've ever had before to invest in these long-term changes. And that's what we intend to do as we roll into 2014.

And if I can also maybe ask it differently, like when you're looking at the margin of this business right now, if we look at all the changes that you're looking to implement and the strategy behind it, where you could see the margins two or three years down the line?

Well, it's the same -- I've said this before and, again, it doesn't look that way when you look at the post-restructuring results, but you'll see in the MD&A and it's been mentioned what the pre-restructuring results are, we think this business can handily produce 20% EBITDA margins. When we started this journey three years ago it was at 9% and we think it can get to 20%, and reasonably soon here. And that is a lot of what we undertook this year, is to get that kind of cost structure and create the kind of investment room in CapEx self-funded that can actually get us to that level.

Yes. And when you look at Allstream, we're basically removing the issues one by one. And this has taken a few years, but we're getting there and really getting to a point where this is getting to be a much better performing asset.

Okay. Ladies and gentlemen, thank you. We've reached the end of our third quarter 2013 results and outlook Call. Once again, thanks for joining us today.

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