Rogers Communications Inc (RCI) 2004 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Rogers Communications Inc. fourth quarter 2004 results conference call. [Operator Instructions] I will now turn the conference over to Bruce Mann, Vice President, Investor Relations. Please go ahead.

Thank you very much operator and everybody for joining us. With me here in Toronto this morning are Ted Rogers, our CEO and Alan Horn, our Chief Financial Officer. And then also with us are Nadir Mohammed, the CEO of Rogers Wireless, Edward Rogers, the CEO of Rogers Cable and Tony Viner, the CEO of Rogers Media. And in addition to held with questions we also have some of the members of dear Edward and Tony's senior teams as well as a couple of folks from our R.C.I., as well.

Our detailed fourth quarter earnings release was put on the wires this morning. If you don't have a copy you can find one on the Rogers.com website on PR Newswire or on first call and you should please review it fully. Including the cautionary safe harbor language that it contains, which applies equally to our discussion on the call this morning as it does to the forward-looking content of the press release.

So historically, we've conducted these quarterly calls in two parts. That configuration reflected our capital structure, which had separate publicly traded equities securities for each of Rogers Communications and Rogers Wireless. Along with several other transactions, you are all aware of during the fourth quarter, Rogers Wireless became a fully owned subsidiary of Rogers Communications on December 31. This simplified our capital structure and it simplifies how we will conduct our quarterly earnings conference calls as well going forward, including today's.

So we will no longer do these in two parts. This morning Ted will make a few brief introductory remarks and then Nadir will provide a quick update on the integration of the Microcell acquisition. And then we'll take questions from the participants pertaining to the Wireless Cable or Media Division of Rogers Communications, so that Ted please go ahead.

Good morning, everyone. Thank you for joining us. Let me start by saying that characterize the fourth quarter of last year was an extremely busy one for Rogers would be an understatement. It was a tremendously exciting quarter for us both operationally and from a strategic perspective. I think we did an excellent job with all that we had to do in delivering both continued operating momentum and execution our multiple value creating transactions. That's always difficult to do both. On an operating perspective we delivered a 14% pro forma consolidated top-line growth and quarterly operating profit growth of 25%, while driving very healthy subscriber acquisition numbers of both cable and wireless. Overall, a good set of quarterly results to end a solid year.

From a strategic perspective, those of you who listen closely on a couple of different occasions, during the first half of 2004, know that I said I was committed to increasingly involving Rogers from a holding company to an operating company. I think you will agree when I say that we made great strides in this regard in the second half of 2004. And then at the same time we delivered on our commitments to you for the year in general. We still have a long ways to go in that effort to increasingly make us into one operating company where that makes sense. During the quarter, a lot of people worked very hard to bring together several important transactions. In my view, these efforts and successes will pay dividends for many, many years to come.

The three main transactions in the quarter, as you know, were the purchase of AT&T of the 34% interest in Rogers Wireless. The acquisition of Microcell and the acquisition of the 11% public float of Rogers Wireless. In my view from the early indications from Nadir and others, the acquisition of Microcell is probably the finest acquisition that we've ever made. The end result of these three transactions is that Rogers Wireless is now Canada's largest wireless provider operating what is now a three-player market and Rogers communications now owns 100% of the three operating segments and has a greatly simplified capital structure. And also I had several excellent transactional opportunities, which we executed on the media side of the business. Including the agreement to acquire 20% minority interest in Rogers from fox to now own 100% of that is a very valuable asset. As well as an agreement to acquire Vancouver over the air broadcast TV station, which we are very excited about. We were also successful being awarded three new F.M. radio licenses in the three largest cities in the Maritimes, which where we operate in wireless and in cable.

As we look to our priorities for this year and beyond, in addition to delivering the financial and operating results, which we guided you in the release this morning, we're steadfastly focused on the execution and integration and we spent a great part of January, day after day after day, working on our plans for this year. We expect leverage, which is terribly important. We'll triple down from just under five times EBITDA now to the mid fore's by the end of this year and down to four times next year. In line with our financing assumptions as we crafted the transactions during the fourth quarter. We are focused now on executing on the day-to-day tactical, roll-up-the-sleeves work across the three groups, continuing the integration of activities between and across the groups. Also impressed most critically important in the short term is integration of the Microcell acquisition into our wireless operations. Anybody can buy something; it takes a lot of effort to make it worthwhile.

Nadir is on the line with us from the international T.S.M. conference he is attending. T.S.M. is the world standard, and will give you some detail as to where we are in terms of Microcell integration in a few moments. He can also help and take your questions later on in the call. I can assure you he and his team are relentlessly focused on pursuing cost efficiencies and doing so without compromising our track record of profitable growth.

On the cable side, I am really pleased with how we are doing in competing with the continued rationality in the competitive environment and sales growth. To me that's a critically important thing is to have the sales growth, particularly in our new businesses in that big fat pipe (ph). And I am especially pleased with how we positioned ourselves in terms of product features and functionality, and with the success we are having in bundling and cross-promoting our cable, internet and wireless services. Last August we announced Rogers cable was proceeding to digitize its entire programming lineup. As later parts of last year 2 million customers across Ontario received the all-digital lineup by simply moving on to a Rogers digital cable set-top, very, very easy. While the customers experience all of Rogers cables programming in 100% digital, at the same time they retain the ability to watch the analog channels on any cable outlet in the home without the need for extra digital boxes, the best of both worlds.

Digital simulcasting, which we have rolled is in may ways the first real step on the path to full digitalization of the cable network to which I am deeply committed. We are now working with our program suppliers to commence that transition. And it combines with our unmatched selection of on demand products and programming to deliver a combination of flexibility, features and selection that no other provider in Canada comes close to matching.

Once again, it's fitting with our history, Rogers was a North American leader in this transition, and today you are seeing many of the other large M.S.O.'s begin to adopt this approach. We are working very hard to put further downward pressure on digital box costs. As I am very committed to moving along the path towards all-digital over the next several years, and as quickly as it makes sense from an economic and operational perspective to do so. You know, the benefits of the digital channel to our customers is extremely compelling, and the ARPU upside to us is significant and growing. If you've got a digital box in your home, it's like Pandora's box.

We have so many offerings for you that you can order almost remotely and we can connect you up without a truck roll just by pressing buttons. At the same time, the incremental cost of a terminal is relatively low compared to the significant investments we made to get to a new 62-way video and network. When we layer on our own view how quickly the video world is moving to high definition, I want to make sure we're in a comfortable position to begin to recapture analog spectrum when the time comes and that's the key. You can see from our digital subscriber and CapEx guidance of this morning, that our ranges for 2005 are somewhat wide. And this is reflective of some degree of uncertainty we still have as to how quickly operational and box cost realities will enable this rollout to occur.

But my bias, very strongly, that is we do it quickly for the benefit of our customers and to be able to start to remove analog services not slowly. So thank you for your support. With that, I will turn it over to my partner, Nadir Mohammed, to give you a brief update on the success he and his team are having with the integration of Microcell and then we will answer any questions you might have. Thank you very much.

Thank you, Ted. And good morning, everyone. My remarks today will focus on the Microcell integration, and I will specifically address what's ahead for 2005 from an integration, synergy and guidance perspective. At the highest level, our strategy for integrating Microcell has two key aspects. First, to retain and grow two distinct brands Rogers and Fido both with unique and differentiated offerings in the market.

To rapidly and fully integrate the infrastructure and support functions across the business to achieve significant cost-savings in the area of network operations, information systems, back-office functions and equipment and handset purchasing. The integration teams are relentlessly focused on pursuing cost efficiency as Ted mentioned, while minimizing customer impact, insulating the rest of the organization from unnecessary distraction, and most importantly, not compromising on our focus on profitable growth. Based on what we've achieved in the first three months since we closed the purchase, I am confident that we'll succeed on all fronts. We expect the integration to be substantially completed by the end of 2005.

Once we complete the integration we will deliver an annualized OpEx savings in excess of 100 million per year by 2006. And by 2006, we expect that the profit margin of our integrated operations will have returned to the levels of Wireless that we were achieving prior to the acquisition. In addition to the OpEx savings, we are integrating the network and information systems in a way that will produce significant CapEx savings while vastly improving our network density in urban centers. Our CapEx guidance for 2005 reflects approximately $100 million of savings from the integration. On day one, we enabled roaming across the Rogers and Fido networks, and starting this weekend in eastern Quebec, we will begin to fully and seamlessly integrate the networks. This full network integration will allow us to decommission roughly 35% of the Microcell site going from approximately 1,400 down to 900.

In addition to providing a significant uplift to network coverage and quality, the retained sites and additional spectrum will enable reduced CapEx spending on cell end splitting and project we would otherwise have had to undertake. We also have well-developed plans on the I.T. side for the transition of Microcell, both post paid and prepaid subscriber basis on to the Rogers Wireless billing and customer care systems in phases over the course of this year.

An integration of this magnitude is never easy. Recognizing this, we have invested heavily in preplanning, and by the way, the work actually started much before the transaction was announced. We have stick on to top-notch resources and as engaged Accenture who spent most of last year working with Cingular on the AT&T wireless integration. I think these actions combined with strong hands-on management, have brought the focus on the project that makes me confident that we will execute successfully.

In closing, on November 9, 2004, Rogers Wireless became Canada's largest wireless service provider with over 5.5 million customers and Canada's only carrier operating the world standard G.S.M. platform. We fully intend to capitalize on the significant opportunities this presents. With that, I will turn it back to Bruce for your questions.

Thank you very much Ted and Nadir. Operator, in just a moment we'll take questions from the participants.

Before we begin, we would like to ask first that everyone please respect our request that you limit the questions to one particular topic so that as many people as possible have a chance to participate. Then we will, to the extent we have time, circle back and take additional questions where we will answer them individually after the call. So with that operator if you want to explain how you want to queue for questions, we would be ready to take them.

Your first question comes from Greg MacDonald of National Bank. Please go ahead.

Thanks. Good morning. Question is on wireless to Nadir, looking at 2005 guidance from the wireless side, it looks to me or I am anticipating a lot of that, a lot of the 450,000 to 500,000 net ad has to do with your assumption on Chiron. Someone maybe you can give us an insight there. Number one, as to what your expectations are for the trends on churn for both postpaid and pre relative to what you put up in Q4. And then if you could give us an insights as to the major inputs being competition from Bell and Tellas and what their activity is? Your own marketing efforts when it comes to trying to lock up the Microcell subs and then what potential voluntary churn are you looking at within the Microcell sub based?

Greg, this is Nadir. Well, that was a four-part, I think.

One subject though.

I will try and go through all four of them and then maybe turn it over to Rob, as well. But starting with your question on churn. Obviously we don't actually give specific guidance on churn. But I can tell you that one of the things when we were planning for the acquisition going way back, we fully expected that post acquisition there would be a lot of effort on the part of the competition to go after the customer base, Fido customer base and to a certain extent ours.

Obviously, they have. I think based on what you've seen in 2004, the Q4 numbers, you can see the churn actually held pretty nicely. From that perspective, not to say there wasn't any impact from the, I'll call them the tellis-bell attack on us, you will see some of that in Q1, but generally speaking, we are quite pleased on what is happening on the churn front heading into the 2005 period. Without getting specific guidance, I think, you know, we are doing everything -- we recognize that churn is one of the key levers. And in fact right after the transactions was done implemented some retention activities with the Fido base. If you looked at personal of folks on contract, we always talked about Rogers Wireless pre Fido as being in the 2/3-plus range for contracts.

The reality is if you looked at contracts of Fido, over 70% of their loads have been coming on to your contracts as a total base of Fido customers, about 40% of them are in contracts works-year contracts. There is no question we are focused on churn and maintaining if not reducing over time, but I think it is fair to say there will be some continued attack on us post transaction and you will see a little bit of that in the first quarter. Being a little hesitant because we don't actually give a specific number on churn. So I can't be more definitive. On your question on the marketing approach, I think I'll go back to something I said earlier, which is we very much are keeping the two brands alive. We believe that they serve us well and have a distinct positioning in the market.

From a marketing approach, keeping distribution alive, keeping the offers alive and strong is going to be very important for us. I think you've already seen on the actions we've taken that we are committed to rational pricing. We've seen some of the pricing already on city Fido and it reflects our orientation of the new Rogers Wireless. What you saw from Rogers Wireless pre-transaction, you can pretty much expect going forward in terms of our approach. If I can turn to Tony on voluntary churn and specifically I think, Greg, we talked about some churn, involuntary churn issues that I would like Tony to address on the voluntary churn, hopefully we've addressed your questions.

Thanks.

Greg, on the involuntary side, the customers that are canceled for non-payment if you look at combined, the combined brands going forward, we are running involuntary churn that's about .65% in the fourth quarter that's up from historical levels a fair bit. We tend to run at around .5%. We have a challenge there. We are working hard on getting on top of that and we have, I think you may have noticed in our third quarter press release we said we've tightened our credit policies a little bit on the Rogers side and then starting to help as well. We are looking for reduction from that as we go through 2005 as we work through some of the customers we brought on earlier in 2004. As I say, things are starting to look up on that already.

It's Nadir. Going just to finalize, I think you talked about 450 to 500. The important thing to note if you looked at 2004, and if you were to look at the Fido operations, particularly pre-transaction, obviously the loads were heavily influenced with a very aggressive city Fido offer that we've changed. In our numbers for 2005, we certainly have taken that into account.

Helpful. Thanks.

Your next question comes from John Grandy from Orion Securities. Please go ahead.

Thank you. Little confused about the CapEx guidance on the wireless side. It seems to be a couple of puts and takes. First of all you say there will be some one-time PP&E expenditures. Am I right thinking those will be about $70 million to $75 million, is that the sort of order?

That's right, John.

Then you also say there's $100 million of savings due to the acquisition in 2005, so the guidance includes the savings but does not include the one-time items, is that correct?

Right.

Perfect. Thank you.

Your next question comes from Rob Goff from Haywood Securities. Please go ahead.

Thank you very much. My question will be on the cable side. Would your EBITDA guidance for 2005 include a significant increase in sales and marketing expense, i.e. would you be looking for a double-digit increase net line item next year?

Rob. It's Edward. There are increases on the sales and marketing side. I would say the drivers of that include the launch of the telephony product later in 2005, and they would include some expenses for the continued strong run rate of Internet loads and the acceleration of our digital net ad expectations in 2005. But say those would be more consistent with the incremental R.G.'s we are loading on compared to other sorts of investments we put in 2004.

Thank you.

Your next question comes from Jeffrey Fan from UBS Securities. Please go ahead.

Thank you very much. My question is on the cable CapEx side. Talked about the wide range a little bit on the cable CapEx for 2005. Can I get a little bit more color on what or some of the factors that would take you to the low end of the range and what are some of the factors that would maybe end up on the high end of the range? And also, on that topic regarding telephony CapEx, it looks like if we look at total CapEx spend for 2004 to date, and then also the $110million to $130 million for 2005, looks like that total number ends up to be higher than what you anticipated earlier, so maybe can you give us a sense as to what of that component is fixed and what is variable for telephony going forward? And whether the fix is likely to drop off as we head into 2006 after the launch? Thanks.

I'll start, then I may have to add some color as well. Some of the contributions to higher capital spending are obviously the continued rollout of the digital phone service and I'll come back to that. The stronger net ad assumptions of R.G. especially on the digital cable side, and there would be quite a bit of swing depending on how many customers we do achieve in 2005. We are also doing some, I'd say, more one-time product improvements, which are hitting our capital numbers in 2005, including an upgrade on our Doxis platform and returns on the Internet side. Some increases in spending on internet reliability and stability, and the expansion of our V.O.D. and SVOD product, which we are seeing very good results and we would expand the number basically give ourselves the ability to have more customers use the product at one time.

I'll jump in just to elaborate it. I think Edward covered most of the main points. The swing factors in our guidance are largely due to the digital growth, which along with the subscriber equipment, brings with it capacity requirements, the uptake in the V.O.D. and free on-demand services, and keep ahead of the curve in terms of having enough capacity to meet those demands. We will continue, as Edward said, on changing into a Doxis platform. On the D.B.S. side, we're still within our guidance range that we initially set out. We're actually going to be doing more with the money than what we originally intend. I will let Mike Adams elaborate on that. I think the last part of your question; will a fix drop off in 2006? Yes, it will. Maybe Mike can elaborate.

Just briefly, the only one thing I want to add is that we are creating Rogers Lab which was add to the recently announced plan, which add as little bit to the amount of efforts we have to invest upfront which will impact slightly the CapEx but we will be substantially in the guidance, both on front and going forward on the variable CapEx we provided.

It's Ted here. The numbers for the boxes are between, I think, $175,000 adds to $275,000 ads, a big, big range. Single most critical factor in that is when did the new lower price boxes become available? Yes they become available in July 1, it's one number. They became available on May 1 its another number. Available October 1st, it's another number. The earlier the boxes become available, the closer to the $275,000 we'll be. The whole objective is to try to get a percentage of homes with digital before we have to start moving analog specialties of analog. Obviously, if you have a sufficient number of people who already have the box, that's not going to be a problem. If you had to put out hundreds of thousands of boxes on such an event that, would be a problem.

Can you just elaborate on the telephony CapEx, can you give some number as to what is fixed that has been spent so far? I guess $106 million in 2004? That is all fixed?

Yes.

Okay. Thank you.

I think there is a carryover from 2004 to 2005, isn't that right?

Yes.

Your next question comes from Tim Casey from BMO Nesbitt Burns. Please go ahead.

Good morning. Question only digital phone. We've seen two launches in Canada that are, I guess, a bit different. Obviously Shaw is a more simplified phase done-size-fits-all and videotron was a more flexible that is a little more aggressive on price. I am wondering, Mr. Rogers, if you could comment on those and I guess discuss which one strategically aligns more with your thinking and perhaps an update on where you are in terms of testing and things like that? Thank you.

Thank you, Ted. When you go through the pricing, we do look at videotron and Shaw. You learn from experiences with cablevision and Cox and others. I think, all I can mainly comment is on what we've talked to in the past, which is to keep the pricing on a telephony-only customer at a price point that is not materially less than what bell charges today. Then hopefully these customers will be multi product customers, and if they sign up to a two-year term would flow through a better choice bundle additional percent off. I think when you look at customers that come on telephony originally it is customers who do buy one or two more products. On the cablevision side they've actually restricted it to customers for cable and Internet customers, so I think we are in -- we are going to continue to try to generate as much market demand for the product as possible, but not be as aggressive on just using price as they leave it.

I might just add one of the things is not readily apparent is the difference in long distance pricing between the east and the west. In the case of the west, tellis basically kept the long distance pricing where it's been and gradually lowering the rates, but doing nothing huge. Here in the east, bell, for some reason, took a package that sold for about $20 for, I believe, 800 minutes or thereabouts, and it reduced that in one fell swoop to $5 for 1,000 minutes of long distance in Canada or the United States. A huge, huge decline in the price of long distance.

The retail price of long distance. It almost was lower than many companies were paying, when you think about 1,000 minutes for $5, so the pricing level of an offer that includes 1,000 minutes for unlimited long distance will tend to be higher in the west than it is in the east because of bell Canada's action. That sort of huge, huge reduction in price, to me, is something that didn't harm us because we weren't in the business, but I would think it harmed Bell tremendously and we simply matched it. So they gain no advantage and nobody gains a great advantage by having huge price declines like that when the competitor just instantly matches it.

Could we also get an update on testing of the system?

Yes. The trial system has been deployed and is currently in testing.

Can you give us anymore than that?

It's going very well.

Yeah, there's no surprises. We are, as I mentioned earlier, trading Rogers that added to additional activity. We absorbed that in our schedule, we're proceeding through that and completing connectivity. With bell we anticipate getting approval on our license within the next couple of months. We are in the midst of technical trials and we'll be entering our R.T. stage going forward.

You are not testing the system with friendly homes or anything like that now?

We have some limited employees on some campus environments currently.

Thank you.

Your next question comes from Dvai Ghose CIBC World Markets. Please go ahead.

Thank you very much. Questions for Nadir on the wireless side if I may, may be your implied guidance is subscriber growth of some 8 to 9% in2005, obviously will be somewhat muted by the positive price changes on city Fido. But your service revenue growth guidance is 13% to 15%, implying very robust ARPU growth of 5% to 7%. I am wondering if you could just give us an idea as to where that comes from? To what extent is that relied on data forecast, to what extent is that bringing up the ARPU of Microcell base the prepaid ARPU which is traditionally being lowered at Rogers and so on?

Dvai Thanks. I think you probably answered to a certain extent of the question. But let me try and fill in. I think in terms of the growth in ARPU that can infer based on sub growth that is implicit in the guidance for revenue, data really is the biggest driver. If you looked at Q4 and we've been growing steadily, I think Q4, the data revenue as a percentage total is about 6.5%, which is really very to my mind, very impressive. We see no reason for data not continuing to grow. In fact, one of the things that we know is that the Fido brand data offerings have been somewhat muted given their lack of investment. So they can leverage platforms that we have and take advantage of some of the service offerings on data for their brand, as well. I think data is the primary driver.

Clearly rational pricing is something we are committed to. You've seen some actions already. I think you see an approach that says consistent with the past what you had seen on the Rogers Wireless front. The other thing you hadn't mentioned in your quick summary there was roaming revenues. Roaming revenues have continued to be strong and we are expecting them to contribute going forward in the trends in ARPU. And the last point is, quite frankly, as part of our pricing review we see opportunities on the Microcell side or the Fido side going forward for some gains in 2005. Those are the drivers. Offsetting that, obviously, tends to be going deeper into the penetration just as an industry trend, if you will. You are absolutely right. When you look at the revenue guidance, depending on where you are in the range, you can infer some strong ARPU.

Maybe a followup. Maybe as you are doing your consolidation plans for Microcell with another partner and internally, you have a lot of spectrum that you've required from them 30 Mega hertz across their country. Is there any plans to monetize any value of that part of the spectrum? Have you been in negotiations with your competitors and maybe interested?

Dvai, in terms of the last part of your question obviously, whether I had or hadn't, I wouldn't say anything on a fall. But on spectrum, I think if you look at what's happening in the U.S. and in a sense what had happened in Europe and Asia, clearly there is a move of a foot to go to 3G. We're keenly aware bell has announced the EBDO deployment with looking at sprint and Verizon, and there is no doubt is watching what's happening with a view to deploying EBDO. From our side we've also locked at what AT&T wireless, Cingular now has been doing with respect to rolling out UMTS or HSDPA. We haven't put anything specific in, but I can tell that you one of the big, big advantages of having the spectrum we have is that we save a lot of CapEx that we would otherwise have to incur to deploy HSDPA. What I am referring is to the cell-type clearing we would have had to do otherwise. It is a significant number. We'll get into more specific when we are ready to announce our HSDPA deployment plan, which we are not today. But I can assure you that even our early work would suggest a lot of savings from spectrum. In that sense, our current view is that we are going to leverage it for what we have for what we foresee as trends in the industry. As far as monetizing, that's not something that we've got a plan for specifically today.

Thanks Nadir. Congratulations on the results.

Thank you.

Next question comes from Richard Talbot from RBC Capital Markets. Please go ahead.

Thank you, good morning. My question is for Ted Rogers. Big-picture question. Ted if you go back and look at the evolution of the business, I think one could summarize it us a spend a lot of time building the overall operation going into 2004 through various organic growth and transactions. In 2004, I think it's fair to say you consolidated the business in terms of the three big pillars of wireless cable and media, to use your balance sheet and cash flow to do that.

Now as you look the business going forward, I wonder if you could comment what your priorities are in terms of using the cash flow and balance sheet you have today? How would you break it down in terms of continuing to invest in upgrading the business? Paying down debt, and perhaps returning some capital to shareholders?

Well, as a large shareholder, I am delighted to return money to shareholders in the way of increased dividends. So I hope we'll be able to do that over the years. Look, I think that the danger of entrepreneurs and founders is that they just want to keep buying things and expand, and they expand beyond their competents and they suffer from that. And all of us never know when somebody will call in with some proposal or something like that which somebody else initiates, but certainly what we're initiating right now is total execution and integration. I won't bore you with the details in January, but if you knew some of my colleagues here they would be complaining about a 9:00 to 6:00 day after day, week after week in January just reviewing absolutely everything we do because I am not satisfied with much of what we do.

And we are upending things and reviewing things and seeing how we can do better. I think that is critically important, particularly now that we have got these companies wholly owned. What makes sense to integrate as a group, integration is not a religion. It only makes sense where you increase the benefits, which means that our customers get better service at the same cost or if you're fortunate they get better service at lesser cost, which actually is possible by stopping doing unnecessary things. We are entirely focused in that activity. I don't know what more to say.

That's why the debt-to-EBITDA I think, you will notice it's just under five and is coming down to 4.5% again in the year. That's really important to me, that's important to our management team. If we just keep doing that for another year after this year, we will push it down another notch to below 4%, I guess now. Round about 4% so that's what's important. There's two key ingredients here. One is free cash flow, which you use to pay down debt and your debt-to-EBITDA is reduced because of that. The other method is to increase your EBITDA. You don't have much free cash flow, but you increase your EBITDA, and likewise, the debt-to-EBITDA comes down. You can go either route. When you get going both routes, then it really comes down and you really do well. That's what we are trying to do. We admire and respect very much our competitors. Bell is probably the best-run phone company in North America. That is a good thing for us because it makes us have to work harder.

Thanks very much.

Your next question comes from Madhav Hari from Westwind Partners. Please go ahead.

Thank you very much. I have a question for Edward. It's to do with the cable operating leverage, it's basically not working in 2004 we saw a healthy top-line growth, 9%, 7% EBITDA growth. Based on your guidance it seems you should begin to grow your revenues strong about 8%, EBITDA growth to the telephony guidance that you provided the cable EBITDA is going to grow about 6%. This is like in strong contrast what you see south of the border with the cable operators there consistently being able to grow their EBITDA faster than the revenues. That is probably the way cable should be working at this point in the game. Maybe you can provide more color to what is happening there and future trends as you look out in 2006 and 2007?

Okay. I will start and maybe ask Tom to put in some color what I have missed. I would say we continue to be focused on improving the health of the cable company. We are focused on continuing strong growth. I believe that is important to future and the long-term health of the cable company. I think you see that in our results in 2004 and our guidance as we go into 2005. As you say you back out telephony, that does obviously impact our EBITDA in 2005, but we believe that will, that's going to be great growth driver for us as we go into outer years. The higher sales expectations, the overall expectations in 2005, over 2004, drive some incremental costs, short-term both in CapEx and operating costs into the business. But again, we believe it's very healthy for the company in the immediate and to long term.

There is a slight, we continue to invest where our competitors are. There would be a slight increase in some purchasing of modems and set-top box over time, but I think when you look at the business, the model is going to allow to us have strong top-line growth and EBITDA growth in the three years as we go out and achieve EBITDA growth accelerating over the three-year time frame. On a comparison the south of the border, it's obviously hard to do apples-to-apples comparison over time. They are seeing a catching up on the penetration of high-speed Internet. Where the Canadian source came on early. I think you are going to see some of the same trends in their business that you see North of the border, which is an investment for growth, which is an increased acceleration of digital penetration. You hear Comcast and others start to talk about that. I don't think it will be too uncommon as you go out in the next few years.

Well I could just elaborate a little bit on what Edwards said and recap in 2004. It's clear that when you look at our sales and marketing growth, that's what pulls down our EBITDA growth. It was an investment that we made to get significant marketing dollars spent on awareness for our customers. We introduced a lot of advance products over the last couple of years. The P.D.R., H.D., these ties into the network launching of our relationship with Yahoo!, it's very important to get the message out there and get customer awareness out. We think the message is resonating and working and our subscriber numbers are bearing that out. As we go into 2005 and accelerate the R.G.U. growth, again, it takes many to support that growth. In the long run as we get more customers in particularly in contracted bundles, we're going in the long run continue our revenue growth and bring EBITDA with it.

Let me just add one thing. If an investor had to choose between buying a cable company that was just a cable company or a cable company that also was a big wireless company, guess what? They would pick the one that was in cable and wireless every time.

That's fair, Ted, but the cable business on a stand-alone basis is a great business in itself. I think there is margin improvements to be had there. At least over the last four quarters and into 2005, it doesn't appear that we are going to see that leverage kick back in. It's reassuring to know from Edward that as you look into 2006 and 2007, we should start to see some significant margin improvement.

Thank you.

Thanks.

Next question comes from Vince Valentini from TD Newcrest. Please go ahead.

Thank you very much. Maybe give Alan a chance to talk here. Just a few things you can answer for us.

Yeah.

One is on the options -- it says in the text Rogers Wireless options were converted into R.G.I. at $1.75. can you give and you do have the total number of options at R.C.I.?

It is set out in the financials. I'll get it here, Vince.

Yeah, I've got a couple more here while you are looking that up. It says there's $51 million for Microcell warrants to be paid in 2005. Can you confirm there will be a cash outflow for that amount in 2005 some time?

That's correct. Those were some warrants that were held by McCall group. The options at R.C.I. are just over $80 million options.

Okay. Is there any cost associated with the wireless privatization, whether it will be legal costs or anything else like that where cash will have to flow out in the first quarter? Because that transaction closed at the end of 2004 so I am to the sure if you paid those bills yet?

We generally try to pay our bills on time so there will be some, but it's minimal and it isn't going time impact anything in terms of results.

Okay. And last one is that Microsoft preferred securities, can you update everyone on what the rights are for them to convert and for you to call those securities?

Yes. There are a couple of things before we get on to that, again there will be a balance sheet reclassification next year when those preferred securities will be treated as debt under Canadian GAAP. Currently they are in equities. That will occur effective January 1. Just getting back to the questions, they have a right to convert it at any time. It's now at $35 per share. We have a call that started last -- I guess some time last year, but it is a soft call, so to be able to call the securities, the stock has to be above $45 for 25 trading days. In terms of, we also have the securities last year, which give us the right, I guess, in a couple of years to extend the life of the securities by up to three years.

Okay, very helpful. Thanks.

Your next question comes from Peter Rhamey from BMO Nesbitt Burns. Please go ahead.

Yes. Thanks very much. This is on the wireless side. Mr. Rogers commented on use of cash flow. I would like to ask in the three-T strategy Nadir you talked about you haven't made any final decision one what you are going to do there. Can you just talk about what the potential options are for you? How hit compared to EBDO and what the impact on CapEx spending perhaps beyond the '05 timeframe, are we looking for another cycle in CapEx spending? And as well I am wondering how the 2.50G spectrum fits into whatever plans that you might have in potential size and investment you might have to make there to make that project come to fruition? Thanks.

Sure Peter. I'll start, but I'll ask Bob cover off the specifics. I will just like to brush up, by context, to me there is a few drivers for going to 3-G and they would be you what's happened in the competitive arena? And I made reference to where I think Bell and Telus and it sure sounds like '05 or late '05-'06, and that's just me reading into what they said. If you look south of the border, it looks like mid to late '05, and on the GFM side very much like the smart move would be for to us go HSDPA. So, that would be a our current thinking as the third generation network that we would launch going forward.

As far as timing, that's you know currently something that we are working on that we'll talk to at some future date. It's obviously not included in the guidance for '05. There's some minimal, not significant dollars that we'll have even in '05. But really, it's to just look at what's happening and do some preliminary work. But as far as speeds are concerned, maybe I'll turn to Bob on both what we expect out of HSDPA versus our current technology of edge and then a comparison with HEBDO.

Nadir great. But it's the full year (indiscernible). How about CapEx spending, is that incremental CapEx would you have to invest you think?

If you -- when we deploy 3G as an HSDPA, you will see some bump up in CapEx. It's hard to think incremental. It will definitely be an increase but understand that when we invest in 3G, we will also get capacity from it. So, you are always looking at a number that reflects both the growth as well as the functionality that comes. And you given that we haven't gone out and done kind of final pricing, I think it's premature for me to talk about the dollar amounts. I will tell you though that the positives come from having the spectrum already in place available to us, and generally when we talk about 3G HSDPA or HEBDO for that matter, part of the costs are always on clearing existing spectrum given, I am sure you know that the deployments today in the US have been at the existing frequency.

So maybe a few years ago we talked about 3G as being deployed on new frequency fact is, I don't believe Canada will be an island. We'll follow exactly what the US is doing. And that's where the significance of having spectrum becomes key but you know you are unfortunate to wait for specifics on dollar amounts and CapEx.

The CapEx spending would come in three categories. One is for the actual equipment. But understand also that all the investment we made to date on GPRS and edge shares the network infrastructure, including the switching capability and all the IP backbone that's already invested in. So, the technology that Nadir was referring to HSGPA is a leap-frog technology beyond what's out there by any other carrier. It's able to deliver first data rates when it reaches its full potential of about 14 megabits per second. Now that is, as you can imagine, getting into the range of broadband services over the year. And that contrasts significantly with what's available today in the narrow band technologies employed by the CDMA groups.

So, it's very specially efficient. It's the latest technology it's being trailed now by various operators around the world, in small installations and expects to start seeing some commercial rollout during 2005 in various sections of some operators in the world. So we expect this technology to be the big next step forward and we expect to launch using that platform.

That would be at one dot nine?

Exactly. When you are referring the 2.5 or 3G spectrum I am not sure you have any definition in mind of those, but our expectation that is we would launch with existing spectrum, whether it be at 1.9 or at 850.

So, how does the 2.50 fit into your business plan now Nadir?

Rhamey, if you are referring to the 2.50G technology --

No, 2.5 gigahertz.

Obviously the 2.5 gigs. Sorry. The 2.5 and 3.5 gig technologies are not perceived at this point to be used as high mobility types of applications. They are going to be used for fixed wireless applications. And we think that there is going to be in the very near future, a hybrid approach to providing high-speed access that the hybrid ability requirements will be taken care off by the UMPS, HSPDA technology that Nadir was referring to and that the fixed or pedestrian speed capabilities will be taken care of by a variety of technologies such as WiMAX that will be deployed on the 3.25 gigahertz frequencies or even possibly the 2.5 gigahertz frequencies along with the capabilities for fixed wireless which have been deployed and are continuing to be deployed in the nutshell (ph) business. So, we expect to see convergence occurring at handsets using a variety of technologies depending on the circumstance that will give the customers the highest bandwidth that they need.

Great. Thank you very much for that comprehensive answer.

We have time for one more question. The question comes from Peter MacDonald from Griffiths McBurney. Please go ahead.

Thank you. Just a follow up on the previous question on digital phone, are you planning to launch digital phone as a reseller in the beginning and then migrate to full CLEC overtime or will you wait until you get CLEC approval and then provide all the services yourself right from the beginning?

It's Mike Adams. I will try to answer that. We are proceeding with full CLEC certification up front. However, we don't anticipate to provide all services ourselves from the get-go. So, we are proceeding on that and have the expectation we will get license prior to launch as the CLEC was in Rogers.

So, can I take from that that you are going to do the termination yourself and then have someone else do 911 and those things for you in the beginning?

Yes.

Okay. Thank you.

Operator, first of all thank you very much for conducting today's call. First I guess more importantly for the participants, thank you for joining us this morning. We appreciate your ownership and your coverage. There will be a rebroadcast on the Rogers.com website if anyone joined the call late. And if you have questions that weren't answered, just always feel free to give myself or Eric Wright a call. Our contact info is on the release for this morning. So, thank you very much. This concludes our call. Enjoy the rest of your day.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.