BCE Inc (BCE) 2015 Q4 法說會逐字稿

Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS fourth quarter annual conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Brenda McInnes, Vice President and Treasurer, you may begin.

Thank you, Jay. Hello, everyone, and thank you for joining us today on our 2015 Q4 and annual results call. Our news release, MD&A, financial statements, a supplemental information package and annual information form can be found on our website at mts.ca under the About Us link.

Today, our Board of Directors approved a 2016 first quarter dividend, which was set at CAD0.325 per share. Today's call will consist of comments by Jay Forbes, our President and CEO, followed by a question and answer period.

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 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 such material factors and assumptions please refer to our annual MD&A released this afternoon, which is available on our website. I will now turn the call over to Jay.

Thanks, Brenda, and good afternoon to all of our call participants. Joining me this afternoon for our call in Winnipeg are Paul Cadieux, our Chief Financial Officer; Paul Beauregard, our Chief Corporate and Strategy Officer and Corporate Secretary; Heather Tulk, our Chief Customer Officer; and Marvin Boakye, our Chief Human Resource Officer. You've had an opportunity to review our Q4 and annual results so I'll only comment briefly on them at the end of my remarks.

Let's spend a few minutes on an update on the strategic initiatives that we have progressed over the course of the past year. After completing our strategic assessments earlier last year, we crafted new strategies, reset the organizational structure, and reconstituted the leadership team which quickly developed to great rhythm as it began to methodically execute the new strategies.

We launched the transformation of MTS into a customer-first organization, developing a three-year transformation plan to evolve MTS, which will unlock approximately CAD100 million in free cash flow improvements; the vast majority by the end of 2017. We turned around Allstream and exited the business, maximizing the value created for shareholders.

We reset the dividend to a level that we believe is sustainable and capable of future growth. Our new dividend rate created a pro forma free cash flow payout ratio of 73% for 2015. We completed the pre-funding of CAD120 million into our pension plans, which eliminated the need for cash solvency payments for 2015 and 2016 even with the interest rate declines of the past year.

As we report our year-end results today, we are also announcing our plan for the use of the proceeds from the sale of Allstream; one based on the evaluation of a number of capital-allocation options we committed to consider when the sale was originally announced. We are now finalizing closing adjustments and working through transition plans. We expect to realize net proceeds of approximately CAD420 million after estimated closing costs of CAD45 million.

Based on that value, we plan to utilize CAD190 million to retire debt and then CAD200 million for share buybacks under normal-course issuer bid. This leaves us with approximately CAD30 million in cash for other business needs. The share repurchase plan will start early next week and continue until we reach our target of CAD200 million or approximately 7.1 million shares allowed to be purchased under the normal-course issuer bid; an amount that represents approximately 10% of our public vote.

Other options were considered in our evaluation of the use of proceeds including dividends, further capital investments, and additional pension solvency pre-funding. Our analysis shows that additional cash solvency funding may not be needed until 2017 if interest rates stay at this current low level. Our view is our business generates sufficient free cash flow to handle any cash solvency funding that may be required in the future. We believe that the planned use of proceeds provides a balanced approach, which will return value to shareholders, strengthen our balance sheet, and improve our strategic position.

Effective November 21, 2015, we started reporting Allstream as an asset held for sale as prescribed by IFRS. The results of operations are considered discontinued operations and, as a result, you will notice Allstream's revenues and expenses are no longer reflected in our financial results. Our consolidated financial statements for 2015 are a good resource if you are interested in additional disclosure on the accounting treatment of Allstream, post-sale.

We're very pleased with the sale process and how quickly we were able to close the transaction. This deal certainly was achieved because of our extensive pre-planning and diligence of all parties involved in the process. We can now turn our full attention to MTS and its transformation process.

Part of our three-year journey to transform MTS into a customer-first organization included streamlining the back-office support and management functions as one of our very first transformation initiatives. Late in 2015, we announced and initiated a voluntary workforce reduction program for certain employees in back-office support and management functions who were not customer-facing.

Of the over 250 positions that we're part of this program, 129 employees had exited the business by the end of 2015. Most of the remaining employees will exit the business by the end of March. This initiative is expected to deliver annualized free cash flow savings of CAD28 million through lower salaries and benefits.

We were very pleased with the uptake on this program and I was personally impressed by the understanding, the support, and the professionalism demonstrated by our employees as we undertook this restructuring to facilitate a more customer-first organization. On behalf of the executive team, I'd like to take a moment to thank these employees for their contributions to MTS and to wish them the very best in the future.

The workforce reduction program was part of the first phase of our transformation plan. Redesigning the capital investment program was another important component of this first phase. Our significant shift in strategic focus and vigilance in aligning our capital investments with our strategy has resulted in a reduction in our capital investments by CAD32 million. This brings our capital intensity ratio close to 18%, which is at a level we believe is appropriate for our normal business operations going forward.

Together, these two initiatives have unlocked half of the targeted CAD100 million in free cash flow improvements. The remaining phase one funding initiatives along with phases two and three of the transformation program are expected to deliver another CAD50 million in annual free cash flow improvements. These savings will allow us to strategically invest in the processes, systems, and tools necessary to transform our operations and to improve our customer experience.

We are equally excited to launch our new brand externally. Our refreshed brand was launched publicly yesterday and it represents yet another important component of our customer-first strategy. The refreshed brand has four characteristics at its foundation; open, helpful, accountable, and dedicated. Our employees have received training about our new brand and each employee is living this new brand every day.

Our refreshed brand embodies our commitment to the transformation already underway and our promise to reinvent our customer experience and become a truly customer-first organization. Our new brand tag line, "we're with you", is our promise to customers and we're looking forward to how this shift in mindset will help our employees deliver the best experience at every customer interaction.

Let me take a few minutes before we open the call to questions to provide some brief thoughts on the 2015 results. Our 2015 results are a reflection of a company in transformation. We know that MTS is a great company with even greater potential and we're making great strides in unleashing that potential.

In 2015, we made some notable progress while also facing some continuing challenges. A strategic focus on making the right capital investments played a big role in increasing our free cash flow by CAD9.2 million when compared to 2014, an increase of 7%. EBITDA before restructuring and transformation costs was down CAD2.8 million reflecting some of the challenges we faced during the past year. While revenues increased about 1%, our expenses outpaced this growth.

I'm pleased with the progress we're making on customer retention. Despite the impact of the wireless double cohort, Q4 2015 post-paid subscriber churn remained relatively unchanged from Q4 2014 demonstrating the effectiveness of the steps we took to mitigate the impact of this decision. Our increased wireless cost of acquisition can also be tied to this transition to two-year contracts. Our prepaid and post-paid wireless strategies are showing promising results and we enter 2016 with strong momentum.

With 2015 behind us and a number of our transformation initiatives taking shape, we expect MTS revenues to show flat to low growth in 2016 while our free cash flow is expected to improve by 10% to 15%.

Let me close my comments by saying our new strategy is in place. Our new future is taking shape. And we're excited about 2016. With that, I'll turn the call over to the operator for any questions you might have.

(Operator Instructions). Jeff Fan, Scotiabank.

Thanks and good afternoon. Just a couple of clarifications on the cost cutting. Jay, you mentioned CAD20 million of savings that you expect to get. Is that all going through OpEx or is there some CapEx that's associated with the CAD28 million? And, I guess, how much of that do you expect to accrue for the full year in 2016?

Good afternoon, Jeff. In terms of the CAD28 million in free cash flow improvement, it breaks down as follows; CAD21 million in operating cost improvement, CAD7 million in capital cost savings, for the full CAD28 million of savings. We will have effectively realized CAD10 million of that by virtue of the people that have exited the organization in 2015 and would expect to hit the full run rate in 2016, the vast majority of that run rate actually by March 31st of this year.

Okay, great. And the CAD7 million of CapEx savings; that's already factored into your, I guess, CapEx intensity guidance for 2016 as well?

That is correct. We had, as we went through the improvement process in 2015, we had actually some of our capital costs being backed up into our operating costs as we had the excess workforce in place. And, now, with this early retirement program taking root, CAD7 million of that CAD32 million in total savings that we see in the year-over-year decline is represented in that CAD7 million.

Okay, great. A question on the revenue guidance. You're looking for flat to 2% growth. If I look at the results in 2015 or in the fourth quarter, wireless revenue is down and wireline revenue is flat. I guess what are some of the key drivers that we should be thinking about that could get us to positive revenue for 2016? If you can just elaborate on that a little bit more. Thank you.

So, maybe I'll offer a few overview comments and then ask Heather to follow up with any additional thoughts that she might have. As we noted, this was a year of transition and, indeed, transformation, as we undertook the turnaround and exit of Allstream and, coincident to that, launched this transformation initiative within our own organization.

You saw, in the fourth quarter, some nice improvement in terms of the churn rate and the revenue profile of the organization. That is a direct consequence of some of the steps that we've taken from a sales and marketing perspective to deepen the relationships and minimize the turnover in our customer base. So, maintaining that turnaround that we saw in the Q4 in some of those results throughout 2016 will be key to hitting that guidance that we're providing on revenue.

Over and above that, we also had a slower start to our TTC acquisition in 2015. And so, as we look to 2016, we would expect the contracts that are being negotiated and finalized to take hold and that revenue to flow through to the financial statements as well.

So, again, fundamentally in the core business it is about retaining that which we have at a better rate than what was necessarily the case throughout 2015 as well as additional revenue from some of the subsidiaries as they gain traction for the full year in 2016.

Yes. I think that covered it well, Jay. The only thing I'd add is I think there is inside the core business, as you mentioned, the opportunity across some of our business areas to continue the churn improvements that we've seen as well as some upside opportunity in monetization of higher tiers and a higher package mix to drive some ARPU improvement in certain of lines of business.

Okay, great. And in terms of how it flows through for the full year, do you expect this to sort of see a gradual improvement through the year and maybe a bit more back-end loaded considering how you're exiting Q4? Or is this going to start see it in Q1 or first half?

Yes. I think that is a good way to describe it in terms of its profile, Jeff. One, as you see, there has been an easing of the downward trends and, in fact, some reversals in Q4. And so, we will build on that momentum as we enter 2016.

And the overlay here is the transformation and the ability to identify those aspects of the business that we can readily grab ahold of and begin to alter that customer experience. And with a more constructive, more additive customer experience, again, work on that churn, reduce that churn, and, as a consequence, retain that revenue and participate in the marketplace that is continuing to be robust and growing.

Okay. Thanks very much.

Drew McReynolds, RBC.

Thanks very much. Good evening, again. Jay, just, I guess two questions. Just, first, in terms of considerations for use of proceeds, you did allude to a CapEx program that, obviously, at 18% you're comfortable with. I'm just wondering if you can update us on how fiber to the home factors into that.

And then, secondly, we didn't, obviously, get EBITDA growth or EBITDA margin guidance. With all the moving parts coming through MTS under the transformation program, I'm just wondering when you look at it on the other side is there any kind of blue sky margin target or level that you're trying to achieve that you could share with us. Thank you.

Good afternoon, Drew. In terms of fiber to the home, as we've discussed in the past, we maintain a very strong series of networks that underpin our go-to-market strategies here in Manitoba. We currently pass around 70% of homes in Manitoba with either fiber to the home or fiber to the node networks. And, as we look at the current and the forecasted needs within our marketplace, we believe the current array of technologies deployed within our networks is appropriate.

As we look at EBITDA and cost of acquisition and its profile through the coming year, as you say, there's a lot of factors at play, not the least of which is this transformation. As we introduce this new, more disciplined capital investment program, we do expect us to climb, as an organization, a learning curve. And that labor that might have found a home in capital in the past may not so readily find a home in capital in the future. And that, as we look at it from a cash flow point of view, will be managed successfully by the organization. But that mix between capital and operating, we could see some to and fro in that certainly in the first quarter, first half of this year as, again, we ramp up that program and change the culture and the processes within the organization for investing capital.

The other piece of this that remains quite the wildcard is cost of acquisition. As you've seen from others in the Canadian marketplace, this has been arguably one of the most competitive periods in the Canadian wireless marketplace; certainly in the decade, if not ever. And, as the market heats up, as we go toe to toe to maintain industry-leading market shares in this market, cost of acquisition is going to be a variable in that equation.

So, for all those reasons, we think that focusing on free cash flow remains our absolute focal point in terms of a driver of economic value for this organization. We were additive in terms of the revenue guidance and signaled our belief and our ability to deliver this organization to a capital intensity of around 18%, believing that that will fund all the necessary investment, but do so in a manner that, again, is quite additive to the creation of value for our shareholders.

Okay. Jay, thanks for that. And maybe just a derivative of that. Just wondering if -- better than what we were expecting on the subscriber growth this quarter. Can you just comment on the competitive environment? And you spoke, obviously, to a pretty intense wireless environment, which I'm sure we're all aware of. Maybe just on the wireline side, if there are any incremental changes in the quarter. Thank you.

Yes. It continues to be a very competitive marketplace. And, as a consequence, we're required to roll out our very best game in order to maintain share and to enjoy the rates of churn and the ARPU that we do.

I think a very interesting fact point is that most of the competitors nationally have introduced this CAD5 increase per month to subscribers. And, lo and behold, the single market that hasn't been altered is Manitoba. So, I think it speaks volumes to the market leadership that MTS has been able to demonstrate here; that these other competitors in the marketplace don't feel that they have the equity, that they don't feel that they have the offerings to effectively compete at a higher price point.

So, again, we will go where we need to go to preserve the profitability of those segments, both wireline and wireless, and that has certainly been the stance and the signal that we've sent to all comers in the marketplace.

Thanks. Thanks very much.

Maher Yaghi, Desjardins Management.

Yes. Thank you for taking my question. I just wanted to have some clarification on a chart you have on the estimated discount rate. I know, I mean, granted, you guys have not updated your pension funding liabilities and you're expecting to do that in Q1. But if I read the chart correctly, am I right in saying if current rates stay where they are, you're estimation when you come out with your new solvency deficit is that for 2016 you won't have to do any payments? And if they were to stay at these levels until 2017 you'd only have to pay CAD12 million in additional solvency deficit?

Hi, Maher. It's Brenda McInnes here. Yes. The chart is interesting because it does show that the discount rate is sort of in between a zero to a possible minus 25 basis point change. We don't have the final discount rates yet. The CIA sets those rates and they have yet to clearly indicate what those are.

But if they do come at that level, we're expecting that our solvency deficit will remain close to where it was last year to possibly partially improve and, indeed, we wouldn't have any cash solvency funding in 2016. It's a little early to say what 2017 will entail. It will really matter where the year plays out and where interest rates are at the end of 2016.

Okay. Thanks for that clarification. And what I'm trying to get to is; you have a CAD50 million play here between your expected free cash flow for 2016 and your dividends and I was trying to see what you guys are planning to do with that extra free cash flow.

And my second question would be on the deferred wireless cost, which continued to be high with the transition to two years, how many quarters you expect this to continue in 2016?

In terms of the first question and the free cash flow generation of the business, there will really be, effectively, two uses of that extra cash flow being generated by the business, Maher.

The first is the transformation initiative. As we've mentioned before, phase one was really about funding the journey and, hence, the opportunity to implement a new capital investment process and generate some CAD32 million of free cash flow lift. And secondly, our streamlining of our head-office management functions to produce another CAD28 million of lift; duly noted, CAD7 million of which is included in the CAD32 million. So, that free cash flow is, in large measure, going to be directed to the transformation of our underlying process and systems as we begin the revamping of our customer experience here in the organization.

The second piece of this the Allstream disentanglement. We have a vast number of arrangements between the two organizations that had been inventoried coincident with the sale process. And we have these inter-company interdependencies, if you will, that will need to be addressed and severed over the course of the next two years. We estimate the cost of addressing that to be somewhere in the neighborhood of CAD10 million to CAD20 million. And so, those two will be kind of the larger two uses of that surplus cash in 2016.

And on the deferred wireless cost?

I'm sorry. If you could repeat that question.

Yes. I'm trying -- the wireless, the subsidy cost on the handsets, which have been high given the transition to two years. I'm trying to get a sense from you maybe just how long do you think that transition will continue before we see a drop in those subsidy costs. Thank you.

Yes. There's a couple of factors that are at play here. One is, obviously, the double cohort. The second is a rise in the cost of the handsets themselves. So, perhaps, I'll ask Heather to speak to those matters.

Yes. Yes, I guess, really, you can break the rise in the cost of acquisition into three buckets. So, one is an increase in the number of our customers who are taking the higher subsidies on more iconic sets. And, quite honestly, the intense competitiveness of the pricing that's been introduced into the market on those sets is driving the subsidies high. The second bucket is what I would call, if you will, the permanent change in the rate of the cycle of upgrades from kind of a 36-month upgrade cycle for a subscriber in a three-year contract to a 24-month upgrade cycle on a two-year contract. And then, the third is the one-time impact of all those three-year contracts that were ended in the June timeframe based on the Supreme Court ruling.

So, if you kind of break that down, looking forward, the actual impact actually is somewhat equal, surprisingly, across those three drivers of increased competitiveness and per-unit subsidy, the one-time impact, and the more permanent change. So, as we go forward, obviously the one-time impact will fade away, probably in the next two quarters. After that, we'll be left with the permanent change and the competitiveness issue. So, obviously predicting competitiveness is very difficult, but we're very hopeful that we won't see, going into next year, as aggressive pricing and subsidy in the market as we did in the fourth quarter of last year.

Thanks for the clarity on that.

Vince Valentini, TD Securities.

Yes. Thanks very much. First, just maybe clarify a couple things from earlier questions. One, on that pension table you were referring to in the last question, could you just confirm; those numbers, though, are all based on the footnote on the 6% rate of return on your assets where you actually did 9.5% last year. So, is it safe to say those numbers are somewhat out of date no matter what happens in the future?

Yes. No, absolutely, Vince. Those are numbers that are based on 2015's valuations; so, at the very beginning of 2015. And, indeed, we obviously had a better return at approximately 9.5% over the 6% assumption in there. But, also, you need to factor in all the other elements of an actuarial valuation before we can completely nail down those numbers going into the future. That being said, we are fairly comfortable that 2016 is properly reflected there. No additional cash funding will be required.

Great. In terms of the CAD100 million free cash flow improvement, just make sure I'm clear on this, you gave us some pretty good color on the CAD21 million of OpEx related to the early retirement, how much of that is going to be flowing through in 2016. And it looks like all of the CapEx you're targeting is in 2016 because you're going right down to 18% intensity for the year. So, if I put those two things together is roughly 45% of the CAD100 million in targeted savings being reflected in your 2016 free cash flow guidance and then the remainder would be 2017 and beyond?

Yes, you wouldn't be materially wrong with that assumption, Vince. And, as Heather has indicated, the bit of a wildcard here is COA and where that might take us. But, in terms of those two items in isolation, yes, we would expect the free cash flow improvement associated with the operating cost savings to flow through very rapidly, as more than half of the 250 individuals have already left the organization and most of the remaining will leave by March 31st. And, as you have rightly noted, we are targeting a capital intensity for 2016 at or below 18%.

Okay. And, last one, not a clarification, but a new question for you, maybe for Jay. Based on the mid-point of your free cash flow guidance and assuming that you do the full share buyback program, it looks like your payout ratio on the dividend is in the range of 60% for 2016. Can you give us any commentary on how low do you think the payout ratio on free cash flow needs to get before you consider dividend increases, given you have to gradually plan for cash taxes in 2023?

Yes. And, Vince, you raise a very good point. We chose an NCIB as for a means of returning capital to our shareholders as it does advance our plans to create a sustainable EPS dividend ratio when we become cash taxable, which we are currently predicting sometime in 2023.

When we reset the dividend in the first half of 2015, we chose a level that we believe is capable of being readily sustained and capable of future growth. And we also, obviously, provided guidance based on a ratio of free cash flow. Given that less than a year has passed since the reset and with the transformation program only recently launched, we think it would be premature to contemplate any type of dividend increase at this particular time.

Okay, thanks.

Tim Casey, BMO.

Thanks. I just, Jay, wanted, I guess, to go at it from another angle in terms of your growth outlook in your core broadband businesses on wireless and wireline. I understand how improving the customer service experience will improve churn. But are you hoping to achieve other gains more through price or more through subscriber gains or is it a combination of the two?

Good afternoon, Tim. I think it actually is absolutely a combination of the two. When we think about the customer experience, it is very much from a retention point of view, but it's also from a growth point of view in terms of additional service offerings that a customer would contemplate acquiring from us based on the positive experience that they've enjoyed as a wireline or a wireless or a broadband customer.

So, that opportunity to expand our bundled offerings and have multiple offerings per household remains a key tenet of our strategy. And whether that takes the form of our Total Internet offering or any other bundled offering, our belief is that deepening that relationship to lower that churn and to expand our offerings and, in doing so, increase the revenue per household is a definite catalyst for us as we look at the revenue growth opportunities in this marketplace.

The overarching point that I would make, as well, is that unlike a lot of other provinces, Manitoba doesn't see booms, but they don't see busts either. So, when we look at GDP, it travels in a fairly narrow band. So, the economy is well diversified. It remains very stable. And, while we haven't had the lifts that other geographies have in terms of experiencing the good times, nor do we expect to see any harsh fallout from the economic malaise that continues to linger in other provinces. So, that's the other piece; is that we have a degree of stability in the broader environment that's very conducive to, as I say, maintaining and, indeed, offering the prospect of growing revenue for 2016.

When you look at the subscriber trends now, do you think when you lose subscribers or are unable to retain them, is it mainly on price or are you losing on customer experience, when you do your research?

Customer experience is a key determinant. In the end, Tim, kind of I would boil it down to value. And so, price will be a factor. But it's amazing; if you can offer a truly differentiated, a truly unique customer-first experience there's an opportunity to certainly negate or minimize the impact of pricing in that type of situation.

And, again, quite frankly, as we look at the organization and where it is in terms of its net promoter scores, it's not where it needs to be and the opportunities that are in front of us are readily in our grasp. The organization is more than predisposed to embrace those. They're quite eager to take the experience to an entirely different level. And, again, our belief that the demonstration of that commitment, demonstration of that change in experience will continue to develop and rebuild the trust that we have in this marketplace and, as a consequence, offer such a compelling value proposition so as to differentiate ourselves from the competitors.

Thank you.

That concludes the question and answer session. Ms. McInnes, please continue.

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

Thank you. The conference call is now over.