BCE Inc (BCE) 2015 Q1 法說會逐字稿

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

All lines have been placed on might to prevent any background noise. After of the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I'll now turn the call over to Paul Peters, Vice President of Tax and Investor Relations. Please go ahead, sir.

Thanks, Laurel. Hello and thank you for joining us today for discussion of our strategic review on Q1 2015 results.

The news release sent in a financial statement and supplement information package which can be found on our website at mtsallstream.com. Yesterday, our Board of Directors approved the 2015 second quarter dividend which has been set at $0.325 per share. This call consists of comments by our Chief Executive Officer, Jay Forbes; our Chief Financial Officer, Wayne Demkey, followed by a question-and- answer period. 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 presentations and remarks may contain forward-looking statements. A 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 risks and actual results may differ materially from the conclusions, forecasts or projections of 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 it's a result of new information, future events or otherwise as required by law. For additional information about such material factors and assumptions, please refer to our first quarter 2015 MD&A released this morning and our 2014 annual MD&A which is available on our website. I will now turn the call over to Jay.

Thanks, Paul, and good morning, everyone. It's a pleasure to be here this morning to discuss with you our progress over the course of the last four months. I will step you through the learnings from our strategic review and what it means for the future of the company and then turn the call over to Wayne to discuss the financial results for the quarter. I'm delighted with the insights and findings we've been able to identify over the last few months, all of which have confirmed my belief in the untapped potential of the company.

While the process was completed over a short period of time, it was both thorough and disciplined. We completed a detailed situational assessment for each of MTS and Allstream which challenged our understandings and beliefs about the business. Through this process, we've created an aligned view of the company across our senior management team and developed strategic plans that will address the challenges and opportunities uncovered by our situational assessments. These assessments also gave rise to three issues that required our immediate attention -- the pension solvency deficit, Allstream's cost structure, and the sustainability of the dividend.

Yesterday we prefunded $120 million towards a pension plan using our short- term borrowing facilities. This has eliminated the need for any further pension solvency payments in 2015 and 2016 under any reasonable economic circumstances bnd based on current bank forecasts for long-term interest rates, we will likely never have to make another solvency payment again.

We've also realigned Allstream's cost structure with a 25% reduction in the workforce and a plan 20% to 30% decrease in capital spending. With these actions, we expect Allstream to generate positive free cash flow in 2015 and beyond.

Lastly, we have preset our dividend rate to a level that we can expect to readily sustain and grow. We believe that at this new level or dividend rate provides attractive yield for our investors, at the same time enables a sustainable dividend program that is capable of long-term growth.

Shifting focus now to MTS. MTS is a great company with great potential. We have a large customer base, extensive network, and a well-admired brand, which makes us well positioned to capture our fair share of market growth. We also see significant opportunities to improve the productivity and thus the profitability of our operation.

Our new strategic focus for MTS will touch on a number of areas, from how we interact with our customers to how we operate as a business. We will develop a customer- first organization that is fully aligned around putting the customer first, constantly working to enhance the customer experience, growing revenue, and earning customer loyalty. We will grow revenue by reinvesting in our brands, tapping into our expensive customer connectivity and by leveraging our unmatched level of bundled offerings to grow core revenues in underpenetrated consumer and business solution segments. We will invest smartly by investing to increase the productivity of past investment, increasing the return on investments on new investments, and by investing for future growth.

We will make it simple. As 101 -- excuse me, 107-year-old company, we have added layer after layer of policies, processes and protocols that make it difficult for our customers and the employees who serve them to enjoy the type of experience we want them to. We will simplify our systems and processes for both customers and employees, improving the end-to-end customer experience.

We will drive efficiency. We will work to embed the knowledge and expertise of our retiring workforce into the processes and systems creating operational cost savings. In the process, we will create a performance-based culture where accountabilities are set, met, and celebrated.

And lastly, we will reinvent the MTS brand, leading a substantial [renewal] in the consumer segment while crafting a parallel brand strategy for business solutions.

Turning to Allstream. Allstream's situational assessment was instrumental in helping us understand the root causes that have prevented this organization from realizing its full potential and we've crafted a strategy that addresses each of these issues head-on.

Firstly, a lack of strategic focus. Allstream was essentially trying to be everything to everyone everywhere. We will now go to market with a laser focus on IP products and key customer segments in five major markets. As mentioned earlier, Allstream also had an unsustainable cost structure resulting from fixed cost not falling in tandem with legacy revenue decline. We've taken action to reduce staffing levels by 25%.

A low level of customer acquisition. Most of the growth was coming from existing versus new customers. Allstream will adopt a much more aggressive market stance as the disrupter in the ILEC legacy market.

[All] revenue retention.

Legacy revenues were declining at rates far faster than market. We will introduce improved marketing programs to manage churn.

And lastly investment decisions didn't deliver the expected economic benefit. In response, we've implemented a more rigorous capital allocation process that should see a 20% to 30% reduction in capital investment while providing adequate capital to grow the business.

While the strategic review process has identified a clear path to profitable growth for Allstream, it is also reaffirmed that Allstream is not integral or strategic to MTS's future. With the expectation of being free cash flow positive here after, we will evaluate our options from a position of strength, executing our new strategy to create value for our shareholders.

As we progress through the year, we will continue to provide you with updates on how we are tracking to these strategic objectives. These are indeed exciting times, a start of a new direction. We know that these are the right actions to take, although we also know that sustainable improvement will take time. Our employees are making a difference every day. They're driving the efficiencies, generating ideas, and executing on the objectives necessary for improvement for years to come.

I would like to end by thanking them for the trust and support that they have be so quick to offer this newcomer.

I will now turn the call over to Wayne to review our Q1 2015 results.

Thanks, Jay, and good morning, everyone. Today I'll focus on the key points from our first quarter results. A more complete analysis can be found in our Q1 MDA news release and supplemental. For the quarter, consolidated revenues increased 1.6% from Q1 2014, reflecting revenue growth at MTS of 2.9%, offset by a decline at Allstream of 1.2%. At MTS, revenue growth was driven by increases in our wireless and broadband revenues and increased revenues from our information solutions line of business. Overall, wireless revenues at MTS are up 2% over Q1 last year, driven by 2% postpaid subscriber growth and a 1% increase in ARPU.

Wireless data revenue growth was very strong, up more than 15% over Q1 2014. Postpaid subscriber growth combined with the growing number of customers with data plans is expected to continue to drive strong growth in this area. Broadband revenues were also very strong, thanks to revenue growth in both Internet and IPTV. Internet revenue growth was 9.8%, driven by 4% Internet subscriber growth, along with an 8% increase in ARPU. IPTV revenues were up 4.7%, resulting from subscriber growth of 1% and a 3% increase in ARPU.

The increase in information solutions was mostly driven by higher equipment sales at EPIC. While these sales contribute positively towards EBITDA, they also drag along an increased cost of goods sold.

At Allstream, we saw strong growth in revenues from converged IP, up 9.4% over Q1 2014, as well as an increase in unified communication revenues of 17%. This growth was offset by declines in our local, long distance, and legacy data revenues.

I also wanted to mention that we are most of the way through the transition of three-year contracts in our wireless customer base to two-year contracts. We have 25% of our customers remaining on three-year plans at the end of March.

We are expecting a 10% to 20% increase in wireless COA in 2015. This increase is driven by contract renewal timing as the first of the mandatory two-year contracts begin their renewal, along with the last of the three-year contracts. Also contributing to the increase in COA is the increasing penetration of smartphones, now at 75% of our customer base, which in turn is contributing to the 15% growth in wireless data revenues.

Consolidated EBITDA was down 4.9% as the 1% growth in our Manitoba operations was offset by a decline at Allstream. Allstream EBITDA decline primarily result from the decrease in legacy revenues as well as increased restructuring costs as we work through Allstream's workforce reduction program.

This was partly offset by the positive contributions from converged IP and Unified communications revenue growth. In toilet, over 500 people have been given notice, of which approximately 100 have exited the business, while the remainder will be leaving over the next 18 months.

Restructuring costs are expected to be approximately $16 million and are expected to be partly offset by the in-year cost savings from associated salary reductions. For the quarter, approximately $13 million of Allstream's salaries and benefits costs relates to employees who are included in this workforce reduction program.

Of this amount, $11 million impact OpEx and $2 million impacts CapEx. On an annualized basis, these reductions should result in a $50 million impact to free cash flow by the end of 2016.

Free cash flow of $46.7 million for the quarter was down $2.3 million, compared to Q1 2014. MTS pre-cash flow was up 7% in Q1, resulting from a 1% EBITDA increase in our Manitoba operation and a planned decrease in capital spending, partly offset by the increase in wireless COA.

Allstream is on track with our plan to deliver positive free cash flow in 2015, with $1.5 million in positive free cash flow for the quarter. This is down from last year, primarily due to timing differences that made Q1 the best quarter for free cash flow at Allstream in 2014.

We have now completed our actuarial evaluation of our pension plan and the solvency deficit as of January 1, 2015, with $340 million, which was better than we had previously estimated.

Additionally, as Jay has noted, we have now prefunded $120 million into the plan. This will result in no further solvency funding requirements in 2015 and 2016 under any reasonable economic scenario. Based on where interest rates are today, we would not have any funding requirements in 2017, either. And if interest rates rise according to the charter bank consensus forecast of approximately 60 basis points by the end of 2016, we could see an indefinite end to solvency funding.

In response to all of the interest in our pension plans from our last call, we have provided an extensive supplemental disclosure package regarding our pension plan. I hope that you'll find this information helpful.

Our balance sheet remains strong, with conservative leverage and more than adequate liquidity. We have met with both S&P and DBRS regarding our strategic review as well as the $120 million pension prefunding from short-term debt, and we are anticipating both to confirm our credit ratings at the triple B level.

For Q1, earnings per share was down $0.20, with $0.12 due to the SRED amortization credits recorded in Q1 2014. And the remainder due to the restructuring costs and the decline in Allstream EBITDA.

Earnings per share is impacted by a number of one-time events, both this year and last year. For the full year in 2014, earnings per share was $1.70, which included a one-time SRED tax credit of $0.23. In 2015, we are expecting one-time adjustments of $0.15 for Allstream restructuring charge and $0.15 for wireless COA amortization, as well as a $0.10 non-cash increase in pension expense. As a result, our guidance is in between $0.90 and $1.20 for

earnings per share in 2015.

Guidance for other metrics has also been provided in our news release and MD&A. We are expecting growth in both EBITDA and free cash flow for our MTS business. Allstream EBITDA is expected to be lower than last year, primarily due to restructuring costs and Allstream free cash flow is expected to be positive in 2015, compared to a negative $1.5 million last year.

Thank you, we would now be pleased to answer your questions.

Thank you. (Operator Instructions) Your first question comes from the line of Glen Campbell with Bank of America. Your line is open.

Thanks very much. So my question is on the expense reduction program at Allstream. This is a surprising element in the plan. It's certainly very encouraging.

Jay, could you talk us through where the cost cuts are coming from and perhaps why, with the efforts in the past, including the near sale of the business, management would not have arrived at the conclusion about taking those costs out, and what the implications are for the legacy products, which we understand had always been in past the constraint on removing costs?

Good morning, Glen, happy to address those three questions. In terms of where the costs are coming out, it's basically across the board with the special emphasis in terms of our customer facing, our sales and marketing aspects of the business. So, again, broad-based but with a slight bias in terms of increasing the productivity of our sales force and rightsizing the market and resources.

In terms of why, we've been able to take this step and reduce the workforce by some 25%, it's really kind of a function of two factors.

One, as you well know and have pointed out, there has been a significant decline in legacy revenues in that business over the last year. We're looking at about 7% compounded annual growth rate in terms of rate of decline in that business in the legacy piece of it over the last five years, and as a consequence, we ended up with a cost structure that just wasn't a proper fit for the lesser-sized revenue streams.

Over and above that, the focus that we brought with the new strategy that would bring us a laser-like focus to key segments in key markets and largely focused on IP, has allowed us to see additional opportunities to bring the total reduction down to that 25% amount that we have made.

In terms of the implications go forward for the business, indeed, this is an organization that is moving from its heels to its toes in terms of taking a much more aggressive stance as a disrupter in the ILEC legacy market. It will be focusing on IP, it will be focusing in on key markets, five key markets in Canada and has a very targeted approach, go-to-market strategy in terms of the customer statement and the nature and extent of customers that it will be looking to grow its business with in the years to come.

Just a quick follow-up on that -- thanks. When I hear disruptive I think lower pricing. So is there a calculation being made that you can take pricing down and essentially offset that on volume? Is that the thinking there?

We don't go to price easily or quickly, Glen. We think that the market itself is quite still, underdeveloped. It was a decade ago and it continues to be well underdeveloped then an organization like Allstream with the national presence that it enjoys with the historic offerings that it's been able to offer the market in terms of IP, coupled with a significant investment that we're going to making in 2015 in terms of next-generation network, we believe that we'll have a product offering in the marketplace that will have great appeal and again we'll not see it necessarily competing on price as a means of garnering additional new customer revenues.

Okay. It's a very encouraging plan. Thank you.

The next question comes from the line of Jeff Fan with Scotiabank. Please go ahead.

Good morning, and a question on Allstream as well. In the follow-up to the last one perhaps on CapEx cuts. The 20% to 30% cut to CapEx is also very optimistic and then certainly encouraging from a cash flow perspective.

So a question for Jay is, where are these cuts coming from? Because I guess the plan before was to expand the network coverage and therefore expand the addressable market. How do you cut that much capital and still grow the IP business? Can you just talk maybe a little bit about that?

Absolutely, Jeff. Good morning. So in terms of the CapEx reductions, if you go back over the last five years, you'll see that the spending envelope on CapEx for Allstream has been relatively consistent around that $100 million range, and despite the fact that we've seen again declines in revenue throughout that piece. And as we looked past the capital, how it's been directed in terms of both the strategic objectives that it was seeking to deliver as well as the economic returns that we've been able to generate, we saw opportunities to reel that back without having a significant impact in terms of our revenue growth profile in IP as we go forward.

One of the reasons for that, Jeff, has been a dynamic in the marketplace that has developed -- being the competitive access providers, we were once held hostage in terms of a very high rates for access to local marketplaces. There's been an abundance of new entrants to the market that have allowed us to see a significant rationalization of prices, much more competitive pricing structure, and thus a lower need for us to deploy our own capital and instead utilize the capital of these alternative access providers.

So am I interpreting that by saying that you're not actually reducing the addressable market, you're just finding other methods of getting the access?

We are actually addressing -- excuse me, reducing the addressable market and so we're going to be geographically more centered on five geographies, as opposed to the entire country. And by customer segments, we have defined a particular market niche that we believe is -- offers considerable addressable opportunities for our offerings.

And, further, as we look at the nature of the offerings in the marketplace, we're only at one point -- we were only too happy to provide copper and IP solutions. We would be dedicating new customer acquisitions to strictly IP acquisitions.

So reeled in the focus considerably and thus have brought the addressable market down in size and at the same time to an addressable market that I think is much more appropriate for the organization and still very, very lucrative and with us possessing a very small market share, so plenty of upside opportunity.

And just one very quick follow- up, I guess the $70 million to $80 million of ongoing CapEx, what would you consider that as the growth versus maintenance CapEx?

The vast majority will be growth. Vast majority.

Okay. Great. Thanks very much.

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

Yes. Thanks very much and congrats on the bold plan, Jay. Sorry to stay at Allstream but I just want to make sure we're all level set in expectations.

So if you exit copper, exit at all markets except for five, and some legacy products, mostly just focused on IP, what does that mean to the revenue stream? Would you see a further accelerated erosion of some of those legacy revenues till you get down to, say, a base of $550 million of revenue but it's a much more profitable and especially free cash flow general raft base of revenue?

Yes. And for clarification, Vince, we don't plan to exit copper in the short to mid term, but we are not going to be aggressively adding copper, which had been part of the activities of the organization in the past.

So the copper base that we currently have, we'll continue to serve those customers, and in fact have actually undertaken some moves internally that allow us to serve those legacy customers in a much more efficient manner than what has been the case in the past.

So we will preserve that. We'll continue to manage that and deliver the services that our customers would expect us to with that legacy business. But our pursuit of new customers will be dedicated to IP in those five major markets in a very targeted customer segment.

So am I right to assume, though, that the revenue base would shrink with better profitability on that lower revenue or do you think you can stay at the current sort of run rate?

No, it is -- it is a legacy business and probably we'll have more effective term management with that legacy business. It is our expectation that we'll continue to decline over time. Again, but what we would like to do is to see a rate of decline (inaudible) at something that's more in line with the overall market.

Okay, great. Just follow up, would you mind clarifying what the five markets are? They're probably obvious, but just so nobody's uncertain? And you also mentioned that there's still a nonstrategic asset and you'll evaluate options over time. Do you have any sense of what that timeframe is? Is it six-year or three years to evaluate options?

I'll let Mike speak to the markets momentarily, but let me address your second question.

In terms of time, for us, Vince, the important thing was to get the Allstream business financially stable. And the steps that we have taken by virtue of the 25% headcount reduction, the 20% to 30% of reduction in our planned CapEx should allow this business to be free cash flow positive in 2015 and beyond.

So that gives us options, gives us time to explore those options, and we don't feel the least [defense] in in terms of the realm of options that can be considered or the timeframe for addressing those. Again, with this business now expected to be free cash flow, it relieves some of that pressure that might have otherwise been there.

So, maybe Mike, you can just speak a little bit to those geographies, and thanks -- and for five major metros are Vancouver, Calgary, Edmonton, Montreal and including the [GTA] in Southwestern Ontario.

Thanks.

Your next question comes from the line of Greg McDonald with Macquarie. Your line is open.

Thanks. Good morning, guys, and good morning, Jay. I don't want to labor the issue of the big cut to Allstream work force but 25% of the workforce and 20% to 30% of CapEx are very big numbers, and what I suspect will result in a pretty material change to the profile of that business two or three years out.

The Company hasn't really given any guidance on what the EBITDA for 2015 will look like other than it's going to be lower due to restructuring costs.

But presumably taking that much investment out of the business equates to some risk. Can you give us any sense of what the profile of EBITDA might look like two or three years out or even a year out? Presumably I'm drawing a conclusion it has to be less than $100 million. I wonder if you would [refute] that.

I won't comment and offer any more specificity in terms of EBITDA number other than the guidance that we have provided, Greg, but, you know, again, I will come back to the fact that the revenue at Allstream has been in decline. It's been quite obvious to all of you Certainly obvious to us. And this amounted on a compounded annual growth rate, about a 7% decline over the last five years, and the cost structure has not been stepped down to reflect that revenue decline.

So we entered 2015 with excess capacity in terms of our operating cost structure. We also, by virtue, of the strategy that we've articulated, by virtue of the geographic focus that Mike has spoken to, by virtue of our go-to market strategy focusing on a very tight product set, to a very tightly defined market, we have a much lower threshold in terms of the operating resources that we need to deploy in support of that strategy, and steps like we've taken to manage those legacy business accounts that we have to manage them in a far more efficient manner that what has been the case in the past.

And as Wayne has indicated in his commentary, lowering the planned CapEx by 20% to 30%, recognizing capitalized labor's component of that also gives us an opportunity to reduce headcount.

So when you factor in those three different elements, you start to see why and where we're able to take the steps that we can in terms of the 25% headcount reduction, 20% to 30% CapEx reduction, and not see any significant degradation in terms of the day-to-day operation of the business or constraints around the -- for this business to continue to grow its IP revenues in the high-single digits that it has been.

Okay, Greg, there's maybe I would add when you're thinking about EBITDA in the future, the cost reductions that we've taken in 2015 will contribute to the equivalent or annual equivalent of $50 million in cost savings, and about 80% of that goes to OpEx. So that will play a factor in the EBITDA in the future for Allstream.

Got it, Wayne. Thanks for that. And as a quick follow up. Should I draw any conclusion from the -- I'm sorry, as analysts have had a number of companies come out today so I haven't seen the details yet, but should I draw a conclusion from the $20 million in Allstream EBITDA? Was there anything special in that quarter? I assume it's too simplistic to multiply that by four for a current run rate, but anything you can add would be helpful.

So with respect to Allstream EBITDA, you're right, we were at $20 million, just under $2 million of that was restructuring. That compares to around $27 million last year, which was our best quarter in Q1, so we are lower.

Primarily the decrease is from legacy revenue declines, partly offset by growth in IP and UC, and with costs being relatively flat from one-quarter to the other, up about $2 million, actually. Mostly an assortment of timing differences and pension expense increases and foreign exchange and things like that. But we expect our costs over the course of the year or for the year in total to be down year-over-year. So I wouldn't, as a result, suggest that you would multiply it by four, no.

Got it. Thanks, guys.

Your next question comes from the line of Philip Wong with Barclays. Please go ahead.

Hi, thanks, good morning. First a clarification question on the restructuring charge. Does the restructuring charge this quarter include the remaining [quarter head] that will leave by the end of 2016 and would you say that most of the restructuring charges have already been reported or do we expect a bit more to come?

Yes. We only had $2 million of restructuring in Q1, and as I mentioned in my remarks, we expect the restructuring charges for the full year to be about $16 million.

Okay. And then after the $16 million, fair to assume that it's largely done?

Yes.

Okay. And then a question for Jay. I just wanted to get your thoughts on the competitive landscape and positioning for your wireless business in Manitoba based on your strategic review. Do you see any additional tools to better attain customers and maybe defend your market share against the national competitors, particularly through this year, given the double cohort? And then finally, on the dividend I understand you'll be using the excess free cash flow to grow the business but also I was wondering if you could elaborate a bit on what you would like to see before you would consider going to you have dividend again. Thanks.

Good morning, Philip. In terms of a competitive response in the marketplace, I think we have a number of tools and mechanisms that we can deploy to not only hold but indeed gain share in wireless both in the consumer and the business segment. You know, when I think about some of the hidden gems that we've uncovered by virtue of the situational assessments that have been conducted, you think about the customer connectivity that we enjoy, the basic connectivity to every customer, the deep brand equity, the channels to market that we enjoy. When you think about our access to data and utilization of our data to better understand the customers, their preferences, and the likelihood of them to adopt or switch into actively preempt those activities by virtue of relying on this intelligence.

Our unassailable positions in the marketplace in terms of the combinations we offer, when you look at consumer in the bundles, there's no one in market that can offer both wireless and an Internet solution. We're recently in market with MyPlan my plan which has gotten very good traction, and before the end of this quarter we'll be in with another significant marketing program that we think will again do wonders in terms of not only sustaining our market shares but indeed helping us grow those in market. And then as we look at the unassailable business position in our business Solutions Group, again, the ability to bundle the EPIC offerings and the MTS data set are offerings with the traditional offerings of MTS, again puts us in a position that no one else in the marketplace can offer.

So it's customer connectivity, our deep data repositories and ability to [mine] same for customer insights, or the unsaleable market positions, I think there's a number of mechanisms that are available to us to, again, not only maintain but to grow share in our wireless business.

In terms of excess free cash flow and some of the considerations that we would be looking at before moving to a dividend increase, again, for us, we do believe the steps that we've taken around prefunding the pension plans with the $120 million contribution yesterday go a long way to alleviating that as a potential issue. Certainly near term, and under any reasonable economic circumstance, long- term as well so that gives us peace of mind there and at the same time has given the economic environment that we're dealing with, having a little bit of free cash flow surplus to handle contingencies like that or anything else that might arise, again, provides a nice security blanket for the organization.

We do have a number of investment alternatives that both organically as well as adjacency that will warrant exploration as we forward, and so that may also be a call on some of this excess free cash that we're developing and over and above that, as we look at our overall stability of our balance sheet and maintaining the positive and solid balance sheet position that we have today, that will also be a consideration as we look at a dividend strategy go forward.

So, no surprises in terms of investments and maintenance of the balance sheet's stability. It would be key considerations as we thought about it [even in] policy change as we go forward. Suffice it to say that with the reduction that has been put in place by the Board of Directors of the organization, we think that we have a sustainable dividend that is indeed readily capable of growth in the future.

Got it. Thank you so much.

Next we have a question from the line of Maher Yaghi with Desjardins. Please go ahead.

Yes, thank you for taking my question. Guys, I just want to cite and say I think your dividend decision has been long overdue but going forward, it looks like it's much more sustainable.

I wanted to ask you, in terms of your cost cutting initiative in Allstream, and if you -- just trying to look longer term here. Is the plan to operate the business at that rate or is your current strategic review has noted that because of Allstream's historical depressed margins, it was a problem that got into the way of potentially selling it, and hence my question is, is the work being done right now aimed at improving the potential value of the business for potential buyers or is it to continue to hold it longer term?

Good morning Maher. You know I would answer your question by saying that I think this is a win/win. Not only are we creating immediate value but we are also creating long-term value for our shareholders. When we looked at Allstream there were a number of symptoms that proved to be underlying causes for the inability of this organization to realize its full potential. Some of that was around focus. Some of that was an unsustainable cost structure. Some of that was around customers and our inability to attract as many new customers or our inability to effectively manage the churn rate of the existing customer base. In a CapEx program that just didn't have the economic rigor, wasn't delivering the economic return that we had anticipated.

So the steps that we have taken immediately, as well as the strategic undertakings that Mike and his team are launching into, again, are positioning this business for immediate financial stability, immediate value to the shareholders, and at the same time creating something that will be very valuable go forward.

Okay. And when I look at the margins that you guys are hoping to achieve in Allstream by 2016, you're looking for a potential EBITDA margins in the tune of about 24%, 25%, but I still don't see potential for higher margins when you look at the margins for other businesses such as yourself here and on the enterprise side. It's not unheard of seeing potential margins in the 30%, 35%. Is there a structural issue at this point in time that prevents Allstream from reaching those levels or at this point this is your initial cut in terms of what you could potentially get shorter term but there is potential upside longer term still?

I wouldn't be able to comment on the EBITDA margins for that business, but I would say that, again, Allstream is in a very interesting and unique position where, again, with these competitive access providers coming into the market and providing us a new channel to market, an alternative for our own CapEx, Mike and team have a constant kind of tension within their organization. Do we utilize networks of others and have increased OpEx or do we deploy capital and put in our own network facilities?

And so you will see, over time, some shifts in terms of our gross margins and as well as our EBITDA margins as the team makes those calls and either deploys capital or rides on the capital of others.

So I think that's just a good point that you bring up, that we should highlight to all.

Again, the dynamics of the market are changing. There are more alternatives available to Mike and team, and they're making the very smart decision as to whether to invest their own capital and return -- and earn a return on that capital or indeed to ride on the capital investment of others and accept a lower margin as a consequence.

Okay. And just one last question. In terms of the cuts that you announced today, is there any direct impact of the cuts on contracts that you have signed previously at Allstream that you'll have a hard time renewing because you won't have the same amount of people supporting those businesses or contracts?

Maher, thank you for highlighting this. This is a very important point to us. You know, our customers were our primary consideration as we went through the situational assessment and as we developed the strategic plan, and as we made the difficult decisions to resize the cost structure to be more appropriate for the size of the business go-forward, again, beyond obviously our customer or employees and making sure that their issues were properly addressed through that reduction process, we were absolutely focused on our customers and making sure that we were able to sustain the outstanding level of service that they have traditionally come to expect from Allstream. And we have reassured ourselves that that indeed will be the case, i.e., that they will be able to continue to enjoy a standard of -- a level of customer experience that far surpasses that of the competitors in the marketplace.

Okay. Thank you very much.

Your next question comes from the line of Drew McReynolds with RBC Capital Markets. Your line is open.

Thanks very much. A couple of, I guess, clarifications and then a couple for you, Wayne, after that if I may.

Just on Allstream, of course, just wondering, Jay, if you can talk to what's the key one or two metric or metrics that you're going to be looking at in terms of measuring Allstream's improvement here? And when we look at the timing of that improvement you've outlined some timing of the cost savings following through and is that essentially a straight line ramp up of improvement over the next couple years? And then just a third one on Allstream, just wondering broadly, could you give us the revenue contribution of those five markets as a percentage of what you see today in the business?

So I'll defer to Wayne on questions two and three. I'll maybe speak to the metrics that we will be looking at in the business. Again, very, very tight focused in terms of our strategic planning go forward and it will come as no surprise that we have an equally tight focus in terms of what we call the strategic objectives or measures of success.

First and foremost, quite bluntly, is free cash flow. We see this as an absolute requirement for this business to be financially self-sustainable. And given the dynamics that have taken place in the marketplace as it relates to the need for the organization to deploy capital versus the need for it to utilize the capital of others, we want to impress upon the entirety of the organization the need to make those operating investing decisions coincident with the view to maximizing free cash flow productivity of the business. So free cash flow will be an overarching theme. Mike and team have also come up with a series of measures that again will have the business focused on IP, will have the business focused on key geographies, and have the business focused on key customer segments.

So these measures that we will be assessing on a monthly, if not weekly basis, throughout the remainder of 2015 and beyond, again, are designed to signal to the organization the change in strategy and to provide the degree of alignment, focus and resourcing necessary for us to achieve those metrics and achieving those metrics, realize the full potential of the strategy that we put in place.

So perhaps, Wayne, if you wouldn't mind speaking to the other two points.

And maybe Mike can help me, too, but you asked about the revenue split geographically. I don't have the numbers offhand. The majority is in the eastern part of those markets. I don't know, Mike, if you have the specifics?

There's a few ways you can look at geography. You can look at it as where decisions are made (inaudible) important ways (inaudible) business perspective but you can also look at it where network drops are deployed. On the networks drops one you should follow population for the most part (inaudible).

And I'm sorry, Drew, was the third question?

Just in terms of the timing of improvement. Do we see step-up improvements here or is it kind of a gradual improvement in the cost structure of Allstream through end of 2016?

Yes, so as I mentioned in my remarks, the 500 people have been given notice and would have exit dates that are kind of throughout or over the next 18 months, and it's according to period of service primarily. And so you would see the majority gone by the end of the year. But, yes, it will be gradual kind of throughout that with an emphasis from our perspective on trying to move that or accelerate that as much as we can.

Okay. And, Wayne, just two others for me. I haven't obviously gone through all the details. The EPS guidance presumably includes the restructuring charges?

Yes.

And just wondering on the balance sheet, can you just speak to your available liquidity, not within the context of just a net debt to EBITDA but more within the context of the room you have under your current investment grade ratings?

Well, in terms of liquidity, even after the $120 million, we'll still have over $300 million in available facilities, which would probably be more than we would want to borrow under our current credit rating, but I guess, to that, I would say that our plan is to have positive free cash flow this year, so we would in fact see that coming down over the course of the year such that the $120 million that we're taking in short-term borrowings yesterday will actually be probably quite a bit less than that by year end.

Thanks very much.

Your next question comes from the line of Tim Casey with BMO. Your line is open.

Thanks. A couple for me. One, Jay, just to come back to how we should think about the new Allstream, if I'm hearing you right, you're going to spend $20 million on restructuring that will save you something in the order of $40 million on an OpEx basis, and that's a fantastic return, and it implies a much more efficient organization. Can you speak to what you think the financial profile of the new Allstream would be in terms of topline growth rate, sustainable margin, and capital intensity? Is there some way you can help us think about what the financial profile of the new entity will be?

Good morning, Tim, and regrettably, no, so the guidance that we provided you as far as we're able to go at this particular point in time. You know, I would say that we're very pleased with the efficiency in terms of the investment that we're making. We expect about $16 million in total restructuring charges associated with this headcount reduction in generating $50 million of free cash flow on same.

And so again that is a step change and moving Allstream to a position of being free cash flow positive but as importantly long-term being financially independent and stable.

You'd understand why we're all asking kind of the same question. I mean, that's just a fantastic return on $16 million.

Yes. And so just coming back to kind of the components, as we think about the 25% reduction, that's 500 individuals; 100 of those individuals have been severed and have left the organization under a more traditional approach. The rest are leaving the organization on working notice. And so you don't get the one time impact associated with that in terms of the immediate EBITDA and CapEx relief. At the same time, it gives the organization an opportunity to adjust, to the reduction of staffing levels and gives the individuals an opportunity to plan for their departure and the continuity of their career. So we thought again it struck a good balance in terms of both our employee needs and our organization needs, all the while offering the organization a very attractive return on this investment.

And so you're not willing to share any KPIs in terms of targets that you hope to strive for.

I'm not ready to do so, no.

Okay. All right. Fair enough. Another question, I guess, would be, as you refocus the sales force, presumably there are contracts outside of those five key geographies that exist that are going to run off. Should we expect a kind of accelerated decline in the numbers you report as the legacy or the old business runs off over the next couple of years before we get to a kind of right size sustainable financial profile?

I'll give you an A plus for creativity of asking the same question twice. Sorry, Tim, we really can't provide any additional guidance on that.

For us, again, it comes back to, Allstream is non-core, nonstrategic. and allowing the opportunity to become pre-cash flow positive means that gives us, as a leadership team, the time we need to explore the full range of options that are available to us to create long-term value for our shareholders all the while getting the benefit of the immediate value creation from the actions that have been taken.

I think fair enough. Just one for Wayne. Wayne, how should we think about your comfort level on debt? You know, you're going to put in the [120], you've put in another [120], that's not a huge bump up in leverage. But is there any target or leverage range that you would direct us to?

Well, I think that with the [120], that is right within the range that we see for our current credit ratings. We still have capacity there, as I mentioned, but in fact we expect that to come down over the course of the year based on surplus free cash flow this year.

About 18 now pro forma, is that right?

Yes.

Thank you.

Your next question comes from the line of Sanford Lee with Canaccord Genuity. Your line is open.

Hi, thanks. Mixed bag of questions left here. Just a little bit still unclear on the Allstream sales strategy. So you're reducing the CapEx, but to me it almost seems like it's just window dressing to prop up the free cash flow in the short-term so it doesn't really sound like you're expecting the actual EBITDA growth beyond, say, $100 million or so that you were last year. And if you are expecting EBITDA growth and the free cash flow growth as well, then why sell it?

So I'll come back to -- I think the question you're asking is, why sell it? Aand for us, the reason to contemplate a sale as part of our exit options is, again, as we look at this organization, its business model, it's risk/reward profile, it's inconsistent with the needs and expectations of our shareholders, and so the situational assessment and the strategic review that we've undertaken, again, has recofirmed the decision, the view that we have that this is indeed non-core, nonstrategic, and hence the examination of our exit options.

Okay. Sure. And obviously a pretty big reduction in the workforce, total of 500, do you expect any backlash? I'm assuming you're one of the largest employers in the province of Manitoba. Any public, government backlash expected from this?

Actually, Sanford, where this was within the Allstream organization, the Allstream organization across Canada, we would see a lot of the employees affected by this decision situated in the GTA, the Montreal and some of the western provinces, so actually, few if any here in Manitoba.

Okay. Sorry, I'm going to keep going on. Information solutions, you mentioned one time equipment sales. Can you say the approximate amount of that?

Yes. I don't know if I called them one-time sales. Equipment sales are by their nature one-time sales, so we had a pretty good quarter, and you would find this in our numbers, but we were around $12 million in sales this quarter versus about $6 million in Q1 last year.

Yes. And on the (inaudible) and prefunding, obviously reduces your annual cash outlay for the deficit payments, but ultimately is it not just really swapping debt for debt? It sounds like you are expecting to retire this debt over time, and will this be replaced with long-term debt then?

So first, Sanford, thanks for asking the first pension question but I was worried that no one was going to talk about pension. But, yes, I think you could characterize this as kind of swapping debt for debt, but, as I mentioned, we've done this short-term for a number of reasons, but one of which is that we expect to have cash on hand this year produced through operations to retire some of that in the short-term. So we will look to term out our debt probably in conjunction with our next debt maturity, which is actually in the second quarter of 2016.

When we look at the pension strategy in specific, primarily what we're doing here is to provide really or take the perceived risk off the table of funding. What this does is fund for at least two years and probably three, based on current interest rates, and if we get even a slight increase in interest rates, this could take funding away for an indefinite period. So in our view this takes away the uncertainty that pension funding was being -- or lending towards our free cash flow.

Okay. Also I didn't go through the full release yet but all your peers have reported impacts in the 30-day CRTC, I guess notice of cancellation, because I think this is the first time we've seen an IPTV net decline yet your broadband was strong. So does that impact with a 30-day or is that a factor of possibly your bundles not working as well or OTT court cutting?

I'll take that Sanford. It's Kelvin here. No, there were some 30-day impacts, and similar to others it's primarily a revenue impact through the year, so it's not that material for us, but we did see some of that.

And it is a little bit kind of interesting because both of our Internet and our multiservice bundle performance in the quarter was quite strong. We did see some slight dropoff in IPTV, though. And I think it's really some short-term stuff. We did some pricing increases on both our Internet and TV products in the quarter. Some of the pricing increases there probably resulted in a bit of short-term increase in churn on TV. And it was a pretty competitive quarter. But I think, overall, we saw a really good broadband and multiservice growth so I'm not seeing that small decline in TV as anything too significant in the quarter.

Okay. Great. Very last one, I promise. Your cash to cash guidance has been pushed out further to 2023, I believe, and I'm assuming that it's [ultimately saw] that the MTS division would lose the [tax world] over the MTS division. Is it fully cash taxable?

There's Two things on that. One is the pension contributions are tax deductible when paid. So that contracts to the extension of the tax-free period.

And secondly, with respect to the tax losses the majority of those are actually in our MTS division or company now, of you go back in time through the history when we acquired Allstream, we amalgamated with Allstream and MTS to bring the losses to where the most all -- to combine the losses with our profitable operations, and then as the losses were converted to excess undepreciated capital costs, that remained in the MTS division. And when we then resplit out Allstream as a separate corporation once the losses were utilized, they basically were left behind in MTS.

So the vast majority of that value that you see in terms of $460 million in book value of tax losses would be in MTS, not Allstream.

Oh, okay. So the $260 million NPV, I think it says, that the majority -- can we get the percentage of [what] -- MTS? Because I think a lot of our [peers] have always described the losses to Allstream and Allstream valuation.

Both 90%.

Wow. Okay. Thank you. That's it for now.

Your last question comes from the line of Jeff Fan with Scotiabank. Your line is open.

Thanks for [filling] in for a follow-up. This is a question for Jay.

I think -- this is kind of a big picture related to Allstream. When you sit back and look at the moves that you've made with Allstream, do you think this ultimately increases the value of Allstream or do you think this essentially just gives yourselves a little bit of flexibility in terms of where it fits within the organization, i.e., a potential sale down the road? How do you think about those two when you weigh those two things?

Great question, Jeff. Again, for us, it comes back to making sure that this organization is strategically well positioned in its target markets, and I've been a big fan of Allstream strategy to the disrupter in the ILEC market and that at the same time, we all know it just hasn't enjoyed the full traction that we all thought was possible. We think the steps that we've taken position it well to achieve that and how that manifests itself in terms of value creation is very much to be determined. But certainly every step that we have taken in terms of immediate action is accretive in terms of the value of the organization, and successful execution of that strategy should be [additive] as well.

Okay. Thank you.

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

Ladies and gentlemen, we've reached the end of our strategic review on Q1 2015 results conference call. Once again, thank you for joining us today.

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