BCE Inc (BCE) 2014 Q1 法說會逐字稿

Good morning. My name is Andrea, and I will be your conference operator today. At this time I would like to welcome everyone to the MTS Allstream first quarter results conference call.

(Operator Instructions)

Thank you. I will now turn the call over to your host, Mr Paul Peters, Vice President, Tax and Investor Relations. You may begin your conference, sir.

Thanks, Andrea. Hello, and thank you for joining us today for a review of our first quarter 2014 results. The news release, MD&A and financial statements can be found on our website at www.MTSAllstream.com.

Yesterday our Board of Directors approved 2014 second quarter dividend which is been set at CAD0.425 per share. Presenting today will be Pierre Blouin, Chief Executive Officer, and Wayne Demkey, Chief Financial Officer. Also on the call today are Kelvin Shepherd, President of MTS; Mike Strople, President of Allstream; and Paul Beauregard, our Chief Corporate and Strategy Officer.

Before we start I'd like to remind all listeners that today's presentation and remarks may contain forward-looking statements. And number of assumptions were made by us in preparing these forward-looking statements which represent our expectations as of today. As such they are subject to the risk that 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.

We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. For additional information about material factors and assumptions, please refer to our first quarter 2014 MD&A released this morning and our 2013 annual MD&A which are available on our website. I'll now turn the discussion over to Pierre.

Thank you, Paul, and thank you everyone for joining our call this morning. We're delivering our first quarter results now and will also at our annual meeting with their shareholders later this morning in Winnipeg. I hope that you all have an opportunity to attend through the webcast. So on balance Q1 produced results demonstrating our progress with Allstream and good performance from MTS resulting in growth in strategic product lines, strong cost-reduction and solid free cash flow supporting our dividends.

And, as most of you know, earlier this quarter we acquired the prime -- sorry, earlier in the first quarter we acquired the prime block of 700 MHz spectrum for CAD8.8 million. And MTS's wireless network is already the best in Manitoba with an extensive of coverage at over 97% for our HSPA network and with currently over 65% LTE coverage. We also have the capability to provide customers the advanced features and download speeds that are driving the growth in wireless data across the industry.

But this new 700 MHz block provides MTS with an even stronger position to meet the opportunities for advanced wireless services Manitoba in the future. MTS' immediate plans are to use the existing [interval US] and 850 MHz spectrum to further expand its LTE networks. Our new 700 MHz spectrum will be turned up in communities across Manitoba in the next two years. And we are currently working with Rogers to plan for cost efficiently deploying LTE in the province. Let's turn to our first quarter results.

First the results of MTS were solid with revenues up slightly from last year, EBITDA basically flat and improving cash flow. We had very strong high speed Internet revenue growth at 10.1% driven in almost equal amounts by new customer adds and by higher ARPU. In the first quarter MTS high speed Internet connection grew by 7.2% and its IPTV sub-base by 8.2% from a year ago. We also had solid growth in IPTV with 6% growth in revenue.

And for wireless, excluding the impact of wholesale and the one-time 2013 FleetNet equipment sale, wireless revenue growth was 1.7% driven by strong increases in wireless data revenue of close to 18% over last year. MTS also attracted an additional 6500 new post paid customers and continues to deliver one of the highest wireless ARPU's in the country at CAD59.70. Our wireless wholesale results were dampened by a reduction in roaming revenues as competitors moved their CDMA customers, which are on the MTS network, to their own HSPA network.

And this trend should continue with CDMA wholesale revenue expected to decline in 2014 to just under CAD10 million from CAD17 million last year. A good part of this decline was already included in our outlook this year. In the quarter MTS passed the hundred thousand bundle customer mark with an increase of about 5% over Q1 last year. Our Four Service Bundle, which provides customers the flexibility to have more than one wireless device in their bundle which is unique in the country, now accounts for over 57% of our total bundle customers.

So bundling continues to provide a strong foundation for growing both our broadband and wireless businesses and supports MTS with one of the lowest wireless postpaid churn rates in the country. I am also happy to report that last week in Winnipeg we started the construction of our new data center which is expected to be completed mid-2015. This 64,000 square-foot data center this which will be run by our subsidiary EPIC Information Solutions will be the first of its kind in Manitoba and has been designed to be the Manitoba -- Manitoba's most advanced and environmentally friendly commercial data center in the province.

With the acquisition of EPIC, MTS will leverage its unique position in the Manitoba business market delivering an unmatched set of solutions and services to its customers. IP services are expected to enable solid growth for MTS and become one of its major product lines going forward. At Allstream results show that we are making good progress in getting back to past performance levels. IP is improving with revenue growth up over 4% compared to last year.

March was a strong month in sales, and Allstream closed Q1 with IP sales win 7.4% higher than Q1 last year. This strong sales performance was supported by new IP contracts with nationally recognize brands such as Shoppers Drug Mart, Mark's Wearhouse and Toy Star along with many others. We also continued the expansion of its network and added in the first quarter 66 buildings to Allstream's national IP fiber network.

That IP network now feeds close to 3100 buildings across Canada. And importantly we are winning more contracts in buildings that are already connected to our network. In the first quarter we connected almost 50% more customers due to subsequent sales in connected buildings over what we did last year with good results. So while there is more work to be done at Allstream we are pleased with its progress. And Wayne will give you more details. Wayne?

Thanks, Pierre. Good morning, everyone. In Q1 we made some good progress on our plans for 2014. For the quarter consolidated revenues were CAD401.5 million down 1.3% from Q1 2013 as growth in revenues from strategic services was offset by declines in our legacy line of the business. At MTS revenues were up to 2.1%, and strong growth in revenues from strategic services more than offset legacy declines.

Revenues from strategic services which include wireless, Internet, IPTV converged IP and information solutions increased by 6.2% and now account for 62% of total MTS revenues. Wireless revenues increased 1.7% if you exclude wireless wholesale revenues and a large equipment sale from Q1 2013 in our FleetNet business. Wireless subscribers are up 1.2%, and wireless data revenue are up 17.9%. A growing number of our postpaid subscribers have data plans, now 69.2% at the end of March 2014 up from 58.9% in Q1 last year.

With continued smartphone adoption we expect this strong growth in wireless data revenues to continue. MTS also achieved a 10.1% growth in Internet revenues in Q1 driven by a 7.3% growth in our residential high-speed Internet subscribers and a 5% increase in ARPU. IPTV revenues were up 6% in Q1 as a result of an 8.2% increase in IPTV subscribers. Over 106,000 Manitobans are now enjoying our IPTV service. By the end of March 87% of our increasing IPTV customer base subscribed to our premium service Ultimate TV up from 80% at the end of March 2013.

Our information solutions line of business which began with the acquisition of EPIC in Q4 last year is performing as we expected providing a new source of revenue for the Company and a trusted source for IP services for our customers. Partly offsetting this strong growth in strategic services were expected declines in revenue from local access, long-distance and legacy data. At Allstream we start growth in revenues from our converged IP and unified communication lines of business as expected.

Each were offset by decreases in legacy services. Converged IP revenues grew by CAD2.6 million or 4.3% in Q1 as the impact of solid sales in the latter part of last year are now contributing to revenue growth while the negative impact of the government of Ontario disconnects is finally behind us. Sales in Q1 were up 7% over sales in Q1 last year, and we've seen this momentum continue into April. Allstream sales staff continues to implement a more focused unmet approach which includes targeting additional customers in already connected buildings where we achieved a significant increase in installations, up nearly 50% over Q1 2013.

I also want to mention that our shared services Canada contract which accounted for only CAD400,000 of revenue in Q1 has been ramping up circuit insulations that are expected to be substantially complete by the end of 2014. Once fully installed this contract will account for revenue of approximately CAD4 million per quarter as previously disclosed. Converged IP revenues continue to account for a larger proportion of Allstream's total operating revenues from 35% in Q1 2013 to 39% in Q1 2014 and are expected to exceed 40% later this year.

Overall our EBITDA results were 0.7% down compared to Q1 last year as the decline in legacy services for mostly offset by cost reductions and revenue growth from broadband and converged IP services. At Allstream Q1 EBITDA was CAD27.9 million down 1.4% reflecting the decline in legacy revenues partly offset by the ongoing improvement in our operating cost structure and by improving on net volumes which enhance our gross margin. Allstream's EBITDA margin percentage increase from 16.5% in Q1 2013 to 17.2% in Q1 2014.

At MTS Q1 EBITDA was CAD120.1 million down 0.3% as declines from legacy lines of business and wholesale wireless revenues were mostly offset by the impact of revenue growth from the broadband, converged IP and information solutions segments. Earnings-per-share was positively impacted by decreased depreciation and amortization expense resulting from a large scientific research and experimental development investment tax credit recorded in Q1 2014.

Earnings-per-share was CAD0.54 up 17.4% from CAD0.46 in Q1 2013. Capital expenditures were down CAD23.1 million from Q1 2013 mostly due to a CAD21.7 million SRED tax credit recorded in Q1 2014 resulting from an audit of the last four years by Revenue Canada which allowed an SRED claim that was higher than what had been recorded for accounting purposes. Free cash flow was CAD72.8 million up CAD25.2 million over Q1 2013 mostly due to lower capital expenditures and the SRED claim that I just mentioned.

In the first quarter we achieved CAD13.6 million in annualized cost savings resulting from our ongoing effort to streamline our cost structure. We announced last quarter that strong asset returns in 2013 and an increase in long-term interest rates have significantly improved the MTS pension plan solvency deficit. Based on our preliminary actuarial valuation, the solvency funded ratio of the MTS pension plan as at January 1, 2014 is 90%., while the solvency funded ratio for the Allstream pension plan are estimated at 98%.

In total our solvency deficit for all plans combined is approximately CAD230 million which is better than we had previously expected. And this includes the CAD135 million of liabilities associated with the Supreme Court decision that we announced last quarter. With interest rates expected to rise over the next few years, we're in a better position on the solvency deficit than we have been for quite some time. Thank you. We would now be pleased to answer your questions.

(Operator Instructions)

Our first question comes from Vince Valentini with TD Securities.

Couple questions maybe first this pretty large SRED credit you got in the first quarter, did that impact your guidance for the year. Should EPS and free cash flow be at the high-end of the guidance range now?

No, the SRED credit is included in our guidance, so I wouldn't say we are going to be at the high-end of the range.

So you knew about it when you gave us guidance of February?

Well, I wouldn't say we knew that -- what we would get, but it is included in guidance at this point in time.

Okay. A couple things on margins on the MTS side. The wholesale revenues that you are losing, I assume those are very high margin revenues. There is not a lot of incremental cost associated with that unfortunately?

Yes, Vincent. It's Kelvin here. That's the case as you would expect.

Okay. And what about EPIC, a margin question on that? Is it adding or diluting your EBITDA margins? And also on that there's a pretty big increase in the revenue CAD5.7 million this quarter versus CAD4.5 million in Q4. Is that just seasonal, or is there ramp-up in that business going on?

Well let me take that into parts, Vince. It is dilutive as you might expect with the business which has quite a high percentage of resale components in it. The margins on that part of the business are lower. So it will be dilutive, but it is positive in absolute terms, and so we are happy to have that additional EBITDA in our results.

The revenue there is some seasonality as you might expect, and there is a component of equipment resale in the business. So you will see that vary from time to time. But I would say the revenue in the quarter is on track, and we do expect to see it grow. We also expect to see, as we mentioned in the release, with the turn up of our data center next year that EPIC will be operating that, and so we do expect to see this data center revenues, which will be largely more of the recurring revenue nature added into that revenue stream.

Great, thanks.

Our next question comes from Glen Campbell with Bank of America.

Thanks very much. A couple. Some encouraging news I guess on the sales funnel at Allstream. Can you give us a sense that how much sales you're generating and when you expect those revenues to come on stream?

Sure, thanks, Glenn. Certainly encouraged with IP sales up 7% quarter-over-quarter from Q1 last year. An IP sale generally takes anywhere from three to six months to work its way into the installation, some a little shorter, some a little faster. But we expect that strong growth in Q1 flows into Q2 and Q3.

Okay, and can you give us some sense of the magnitude?

The magnitude is mostly multi-year contracts, so I think it's included in the numbers that we've submitted and the outlook really when we have a performance in March was stronger, the quarter is good. I think Mike, you feel we're kind of in line with the outlook?

We're in line with the outlook we've got. We were expecting the strength in sales, and we've actually seen it, and it carries -- the strength in Q1 is carried into April, and we certainly expect to see that into Q2 also.

Okay, great. I had a follow-up as well on your network sharing arrangement with Rogers [carry]. You mentioned that you're going to be sharing I guess spectrum and AWS and 850. I don't think, unless I miss heard, you specifically mentioned the 700 as something you're going to share with Rogers. Could you talk a little bit about how that might roll out whether it's covered by the agreement and how the sharing agreement is working so far.

It's Kelvin here, Glen. Yes, the sharing agreement has actually been working very well for us, and we are quite pleased with the arrangements we have in place with Rogers. And certainly the agreements we have in place do contemplate the ability for us to add 700 spectrum to the shared network. So it's really just a question of timing and what makes the most sense.

Okay, maybe just a quick follow-up on that one. You've obviously done a very extensive rural network more than they had, so what it be fair to us to assume that the shared network mostly uses your cell sites and relies on them to say a much lesser extent, or is it all on yours, or is it a pretty even mix between the two?

It's actually pretty even mix. I really would make any assumptions in particular about us having more rural or Rogers being more urban. It varies across the two technologies, HSPA and LTE. But overall we have a pretty balanced mix of who owns the cell sites and equipment, and it is pretty equal sharing.

Okay, thanks very much.

Our next question comes from Dvai Ghose with Canaccord Genuity.

Thanks for taking my questions. As Pierre, you pointed out, you had some very solid broadband TV subscriber growth and reduced residential line loss in the incumbent business. But, despite that, if you exclude the acquisition, your revenues are down 0.3%, and your EBITDA if you include the wireless equipment subsidies like your peers, were down nearly 2%.

I understand that's a problem because of the high-margin wireless roaming that's being lost, but you were alluding to the fact that that's going to be for several quarters going forward. Do you think you can return to the old days of modest but nonetheless positive organic and revenue growth at the incumbent division or the margin' just too high to get any higher.

I think so, Dvai. In fact that's one of the reasons we gave you the numbers on the wholesale loss or the expected low sale loss -- wholesale losses because while it's impacting our bottom line this quarter, it is not that large of an amount at the end of the day through the year. And some of it was in the outlook because it was expected as you saw it that well last year.

So I think you can expect with a strong performance that we are having in all of our product lines other than wireless wholesale and the market share that we still own, and by the way we haven't lost market share. We've been very solid in our market share, in fact, and the high ARPU that we're having with our customers and adding more bundles and more four product bundles throughout. And now EPIC kicking in and at the data center also kicking in next year, starting to see in fact more contributions from their side better margin as we move to managed services. All of this really I think bodes well for bringing MTS back to what you've seen in the past.

Okay, that makes sense. On the spectrum question, Pierre, I assume the reason why you're not deploying your 700 MHz is because you will be able to see one Verizon equivalent block, so I assume it will take two to three years before you get backwards device compatibility issues resolved. In the interim of course both Rogers as well as Bell and Telus with their spectrum agreement have AT&T equivalent spectrum to build on 700 MHz in the near-term. Is that a competitive disadvantage?

I don't think so, and I think Kelvin can answer it, but you're right about the 700. You know that that band we won't see devices on them probably before two to three years. However, with the seven -- with the 850 and the AWS all things that we have and that Rogers has, we think we're in great position in fact to deploy LTE. We have one of the largest footprints in this province. We have about right now 65%, 70% deployed already.

And that's the largest network that you're going -- LTE network you're going to find in this province. And as we expanded this year, I think this year we want to add about 50 communities to that footprint that's already strong. So we are going to be in great shape we believe to deliver LTE in a very competitive way before our competitors can be here with their new spectrum.

Just a comment a little bit on the -- we don't really see that as any disadvantage at all, and in fact in the near-term people deploying on 700 are going to be deploying in a pretty limited way. They only have enough bandwidth on the one prime block for about a 37 megabit carrier with 850 aggregations available. And we have enough spectrum to easily exceed that. So in some ways it may be a competitive advantage for us in the near-term.

That's a good point Bell and Telus won't have 850 in Manitoba. Last one so for Wayne just some financial questions. You had a CAD1.1 million restructuring expense in the quarter. Was that attributed to either division, or is that corporate restructuring?

Yes, there is a little bit in each division. I'm not sure about the breakdown. It's relatively light this quarter at CAD1.1 million in total.

Okay. So the reported EBITDA includes a small amount of restructuring in each division.

Yes, we include the restructuring costs in our EBITDA numbers.

Great.

And then, Dvai, as you may have seen in our annual report and proxy, and I know you just got the MD&A. But you may have seen in there or you will see in there that we have down sized our management team both in Allstream and MTS and are putting forward the new structure with a much more nimble senior team, much more efficient, much more flexible. And we believe that that's the structure is going to take us with success in the future year. So there's been some of that. You've seen the senior executive change, but as well there's some of that at vice president and at director level also.

Very good. Last one for Wayne is on the pension deficit, thank you for the update. You are referring to the CAD230 million number. I just wanted to confirm that that's a pro forma number at the end of last year, because obviously benchmark treasury yields have fallen 30 or 40 bips or so this year. Is that a current estimate CAD230 million, or is it a year end last year pro forma estimate?

CAD230 million would be the January 1, 2014 number. So the -- we don't tend to track that quarterly, but you're right. If we were looking in the short term, interest rates have fallen about 30 basis points, and I think we've said in the past that that would equate to probably CAD100 million change. We don't tend to look at that quarterly. We look at that in terms of -- in longer-terms, and we value it once a year as required on January 1 each year.

Makes sense. Thank you very much for your very comprehensive answers.

Next question comes from Greg MacDonald with Macquarie.

Thanks, good morning, guys. Bell Canada on its conference call was talking about the weaker Ontario and Quebec economies having an impact on their business access lines. Your access line seem fine in the quarter, but revenue a little bit light on the growth and the legacy segments for Allstream. I wonder if you just might comment. How much headwind are you seeing in the economies of those two provinces impacting your business? And is that headwind changing from 2013 to the Q1 and maybe thoughts on 2014?

Yes, I think, Greg, I will ask Mike to add to what I'm going to say, but since the recession, the market -- the business market in Canada has been soft or at least never came back to the strength that it has before. Allstream is in a bit of a different position where it's not an incumbent and doesn't have a huge base of customers.

And it proposes new products and different products that attracts customers and with a very different service proposal as well as a much more flexible proposal. So we are potentially in a different place even if the market is soft, and I think some of our results in sales are demonstrating that. So maybe, Mike, you want to add to it.

We've seen a very competitive business market for quite some time and quarter-over-quarter the last two quarters I haven't seen that change. We continue in that competitive market and as Pierre mentioned the strong results in Q1 very pleased with the improvement in sales there. So we haven't really seen the change of that underlying market.

So as a competitor to Bell, you haven't really seen them get more aggressive post the Q -- the end of the Q1 or during the end of Q1 as a result of their weakness.

We haven't seen that change happen.

Okay. Just a quick clarification question on the pension deficit side of things. If -- how do you judge when you will start making solvency payments again? If CAD230 million ends up being CAD330 million deficit at the end of 2014, is that going to trigger pension solvency payments in 2015? How do we think about that?

First off, when you look at the outlook for long-term interest rates, the forecasts that we are seeing by the major Canadian banks for example are that the interest rates are going up this year and in the longer-term continuing to go up. So while we are 30 basis points down, I'm not sure that that should be seen as an indicator of anything specific or significant for the future.

What we've said about solvency payments is at last quarter is that with respect to the pension lawsuits the amount that we would have to and the timing of the cash flow involved in that is going to be dependent upon the negotiations with the plaintiffs. And as a result we can't at this time tell you exactly what that's going to be. So we will announce as soon as we know more.

I think what I'm hearing, Wayne, is CAD135 million is treated separately. The CAD230 million is really a lot less than that, probably closer to 95% plus solvency ratio. Is that correct, and therefore that gives you a lot more flexibility?

That's right. The CAD230 million includes the CAD135 million in liability, so that map is relatively simple. And if you took that out, you are right, we be in that let's say 95%, 96% ratio. So beyond that the lawsuit, you're right, funding is a relatively small issue.

Greg, it's basically all one number.

But that's what gives you the comfort to say that, despite what happened to rates from the beginning of this year, you still feel pretty comfortable on not having to pay solvency.

Yes.

Okay. Thanks, guys.

Our next question comes from Drew McReynolds with RBC.

Yes, thanks very much. Just two follow ups for me. Just first on Allstream, you clearly took a lot of costs out of the structure exiting last quarter.

And just wondering as we look into Q1 here, are we -- the margins that you have in the year-over-year increase is that baking in all of the run rate cost efficiencies that you've taken out? And then just on TV I think if my math is correct, there is a little bit of ARPU pressure in the quarter just wondering if you could speak to the dynamics behind that. Thank you.

Mike, do you want to answer Allstream?

Thanks for the question on Allstream as it relates to cost reductions. We are continually doing cost reductions so some of the restructuring we did in 2013 you're seeing reflected in Q1. There's still a little more that you will see coming in Q2 and Q3 as we go through the course of the year. But on top of that we've got regular costs structure change programs in place that will also influence the rest of the year.

And as you -- as I think you know, Drew, the -- what we tried to both in MTS in fact and in Allstream is to put forward our cost reduction program at the beginning of the year, so we can benefit as quickly as possible from the savings that it will bring. So that's what we try to do every single year and that's why you see our cost reduction number mostly always being so high in the first quarter as we put these programs in late, late in the year before or early in the new year. And that's the case again this year. You want to talk about TV?

Probably just a couple of things there, Drew. There was some ARPU pressure in the quarter as you noticed. Probably two factors there. First as we continue to add new customers and obviously as we bring them on board generally speaking for the first two or three months there is some promotional pricing impact. So in a quarter really with some pretty good adds that contributed to it.

We are also seeing I think some customer self optimization going on. As you know we have one of the most flexible packaging arrangements and the most choice out there. And so we are continuing to see some customers optimize their channel lineups. Generally speaking we think that's good for us and gives customers what they want. But we do see a little bit of that going on.

Thank you.

Next question comes from Glen Campbell with Bank of America.

Thanks for fitting me and again. So question on the subscriber trends and wireline. You had a strong quarter. Shaw had a strong quarter. Their's ends in February, yours a month later. Do you think this reflects timing, in other words, you made win back in the month of March, or do you think it reflects something else, maybe secular change? And then I was wondering if you can clarify guess the impact of these SRED credits. You mentioned briefly that depreciation was impacted. Was that by the same amount that your CapEx was affected or a different amount?

Yes, maybe before Kelvin jumps in on your question about wireline and Shaw. One thing that you may see or that you are going to see on our MD&A is that the losses now on the wireline side, the majority of them, the large majority of them in fact, are coming from wireless substitution and not necessarily from competitive actions in our market. And more and more that trend is continuing.

And in fact if I recall and I think it's in the first quarter, we have won more customers coming back then we've losses to the cable competitors. And that shows you the trend that is now has changed I think in the markets and where wireless substitution with a lot of these customers though staying with us as wireless only customers is now the bigger ticket item. I don't know if you want to add to that, Kelvin?

I think that's the case. Certainly I wouldn't attribute any kind of unusual short-term activity. We've had pretty steady results in our wireline and broadband business really for the last six or nine months pretty much month-over-month.

And so I don't attribute anything with respect to our results versus Shaw's. I think the competition is there in the marketplace, but we've had a pretty disciplined approach to the market, and we are seeing good results.

In fact broadband has been very, very well -- I think it proved bundling strategy is working very well for MTS. Wayne do you want to answer the question?

Yes, the impact of the SRED claim on amortization expense was about CAD11 million.

Great. Thank you very much.

Our next question comes from Philip Wong with Barclays.

Hi, thanks. Good morning. Great to see your postpaid churn continuing to perform well. But my question is Rogers now no longer has a coverage disadvantage in Manitoba versus you guys because of the network sharing and also Bell and Telus expanding their coverage in Manitoba albeit slowly as you mentioned. But they all have greater resources and less market share the you.

Are you concerned that wireless sharing could become a source of pressure for MTS going forward especially as we head into 2015 when you have double the number of people potentially looking for with expiring contracts because of the implementations of the wireless code?

Well let me make a couple of comments on that. The Rogers arrangement has been very positive I think for both us and Rogers, and while they gained some coverage that's been in place for quite some time now. Whatever real adjustment there is related to that I think is already gone by us.

We've had very solid results over the last six or eight months in wireless and are holding our wireless share at over 50%. I think we are doing quite well competitively in the market. We have some advantages.

The -- Pierre talked about our bundling strategy which continues to work. I think you can see that both in terms of our growth on broadband and wireless subscribers but also in the low churn. So I think we are going to continue to see good strength as we go forward, and certainly we think we can hold our position of the market.

That churn is certainly are impressive. Second question on the pension. Could you maybe give us an update on how much of that CAD135 million do you expect can be funded over time versus upon completion of the negotiations?

We really can't say at this point. It's going to involve discussions with the plaintiffs, and, as a result, we will have to let you know as soon as we do.

Got it. And final one also on the pension. CAD230 million versus the CAD300 million that you gave us as an estimate in Q4, I was wondering what the key difference was in assumptions that drove the change in estimate based on the preliminary actuarial report.

Just better actuarial experience all around. So different assumptions have moved in our favor, asset returns a little bit better and interest rates a little better than what we had been estimating, so nothing specific.

Got it. Thanks very much.

Our next question comes from [Shea Noman] with Scotia Bank.

Hi, it's Jeff Fan with Scotia. A few questions first on the Allstream on the business, specifically on the gross margin percentages. In the past I think we've always seen the nice improvement in the gross margin as you move from off net two on net, and we see the growth of your fiber fed buildings. But for the last couple of quarters now we're starting to see the gross margin come down. Wondering if there is anything specific there that is causing that and whether you should -- would expect the percentages start to improve again.

And then the second question also on Allstream. Probably for Pierre. We are now more than six months after the surprise government decision on the Accelero transaction. Wondering if there is any appetite to pursue another strategic review on Allstream, and if not now wondering if you can just give us a little bit of color on what factors you would be looking for to get you interested down that file again.

Let me answer that question first. As we said or as I said a few times since the rejection of the transaction, we are going to concentrate in operating Allstream and bringing it back to past performance level, and you are seeing our progress again this quarter. We are getting there, and that's really our focus right now to try to bring Allstream as quickly as possible back to past performance.

And we work very hard to get there. And when I think on that side from what Mike has reported we are making good progress. At the end of the day it's a Board decision in terms of strategic review but we have had two strategic reviews in this Company over the past few years. I don't think right now that something that we are contemplating.

We are moving forward in trying to get better results out of MTS and Allstream and deliver for our shareholders and investing in growth areas like the data center business or the IP business in Manitoba. And that is how we are focused right now. Mike, do you want to talk about margins?

On gross margins we are actually stable quarter-over-quarter and continuing. We have moved the margin up over the past couple of years and had stability in that 62.5% range.

We are continuing with our on-net strategy which supports those stronger margins, in fact our IP base moving up over three percentage points quarter-over-quarter from Q1 last year. So we should expect to see that same strong performance on margins.

Your final question comes from Vince Valentini with TD Securities.

Just on that margin question if I could follow-up two different angles. One the 49% increase in sales to buildings that were already on net. It seems like a very impressive number.

I don't know if it was off a small base, but does that not have a pretty significant positive implications for margins of the next couple of quarters? Is there -- I assume the gross margin is extremely high when you sign up a new customer in an existing building.

And maybe on the flip side of that the shared services can of the contract, do you expect that to be same margin as your existing business, or is there a little bit a price concession given how big that customer was.

So just to give you the beginning of the answer on repeat sales in the same building. First you're right in assuming that the margin is better when we have second, third, fourth sale in buildings. And we are making good progress there, and the numbers I quoted, we quoted are good and a good indication of that, however, we need much more.

The -- that's going to be one of Mike's focus in terms of doing more in the buildings that we have connected, and we have over 3000 buildings. There is an opportunity to increase the growth and improve the margin, you are right, over time. And I think his team is very focused on that, and you are seeing the results. It's still the smaller base, but still that is something that over time will bring even more success to Allstream.

You're right in the subsequent circuits it's a very important part of our growth strategy going forward and really very pleased to see that strong growth. It's something that we put in place last year to realize that, and we are seeing that come forward.

On the shared services Canada contract because of its breadth and it does have a different margin profile. It also comes with some cost synergies because of the large size of that account so that one does have a different margin view.

Thanks.

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

Ladies and gentlemen, we've reached the end of our Q1 2014 results conference call. You are invited to join us over on the HEM webcast later this morning. Once again, thank you for joining us today.

Ladies and Gentlemen, thank you for your participation in today's conference call. You may now disconnect.