Transcript

Transcription

Transcript

FINAL TRANSCRIPT
MTS
First Quarter Results Conference Call
Event Date/Time: May 11, 2016 — 5:30 p.m. E.T.
Length: 22 minutes
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May 11, 2016 — 5:30 p.m. E.T.
MTS First Quarter Results Conference Call
CORPORATE PARTICIPANTS
Brenda McInnes
MTS — Vice President and Treasurer
Jay Forbes
MTS — President and Chief Executive Officer
Paul Cadieux
MTS — Chief Financial Officer
Heather Tulk
MTS — Chief Customer Officer
CONFERENCE CALL PARTICIPANTS
Maher Yaghi
Desjardins Capital Markets — Analyst
Sanford Lee
Canaccord Genuity — Analyst
Jeff Fan
Scotiabank — Analyst
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PRESENTATION
Operator
Good afternoon. My name is Dan (phon), and I will be your conference Operator today. At
this time, I would like to welcome everyone to the MTS First Quarter Results Conference Call. All lines
have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. If you would like
to ask a question at that time, please press *, then the number 1 on your telephone keypad. If you
would like to withdraw your question, simply press the # key. Thank you.
I would now like to turn the call over to Vice President and Treasurer, Brenda McInnes.
Please go ahead.
Brenda McInnes — Vice President and Treasurer, MTS
Thank you, Dan. Hello, everyone, and thank you for joining us today on our Q1 2016 results
call.
Our news release, MD&A, financial statements, and supplemental information package can
be found on our website at mts.ca under the About Us link.
Today, our Board of Directors approved the 2016 second quarter dividend, which has been
set at $0.325 per share. Please note, that due to the arrangement with BCE, the second quarter 2016
quarterly cash dividend is expected to be the last dividend we declare.
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Our 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 the 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 the result of new information, future events or otherwise, except as required by law.
For additional information about such material factors or assumptions, please refer to our
first quarter 2016 MD&A released this morning and our 2015 annual MD&A, which are both available
on our website.
I will now turn the call over to Jay.
Jay Forbes — President and Chief Executive Officer, MTS
Thanks, Brenda, and good afternoon, to everyone joining us on the call today.
While we're here this afternoon to discuss our Q1 2016 performance, I will briefly address
the announcement made last week of the agreement that will see BCE purchase MTS.
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As I said on May 2nd's analyst call with BCE, the transaction we have announced is historic,
both for MTS and for the telecommunications industry in Canada.
We're proud of what we have achieved as an independent company. And we believe that
the transaction with BCE positions us for an even more successful future.
It offers compelling benefits to our shareholders, our customers, and our employees, which
will contribute greatly to the long-term growth and prosperity of Manitoba.
We will see a headquarters for Bell's Western Canada operations established in Winnipeg.
Bell will invest $1 billion, over the next five years, to improve Manitoba Telecommunications
infrastructure. And our relationship with the community will grow stronger, as Bell maintains and
develops community sponsorships and relationships in this province.
The sensitivity Bell demonstrated in crafting an offer that addresses the unique needs of the
Manitoba marketplace and community shows, in our view, that Bell is the perfect long-term owner
of MTS. And under its ownership, Bell MTS will play a continued and significant role in the future of
Manitoba.
We're working jointly with BCE to obtain the appropriate regulatory approvals, with a view
to closing the transaction late this year or early 2017. As I hope you can appreciate, we will respect
the regulatory process and will not be offering further comments, other than to say, that this work
will be an important area of focus for us.
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However, I would add that this will not detract from our continued efforts to serve our
customers and to transform our business.
With that in mind, I'd like to turn now to our performance from the first quarter of 2016.
This quarter marks the one-year anniversary of the start of our journey to transform MTS into a
customer-first organization.
Work on our strategic review process started early in 2015, and gained momentum
throughout the year, as we launched our three-year transformation program, which we announced
in Q4 of 2015.
This positive momentum allowed us to enter 2016 from a position of strength. I'm pleased
with the changes we have created in our business over the last several months, the results we have
generated, and the value that we have created for our shareholders.
Q1 has been built off a very successful 2015. We closed the Allstream sale in January. And
following the final post-closing adjustments, we'll realize net proceeds of $425 million.
We bought back shares using the proceeds from the Allstream sale. As of May 4th, we have
returned over $164 million to our shareholders, buying back just over 5 million shares. This represents
82 percent of the 200 million we committed to our share buyback program earlier this year.
With the announcement that BCE will be acquiring all of our issued and outstanding shares,
we have suspended our normal course issuer bid.
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In 2015, we identified $100 million in free cash flow improvements expected to be captured
by our transformation program initiatives. Our progress over the last two quarters has been
significant, with programs to deliver over 50 percent of the free cash flow improvement already
implemented.
We have streamlined our management and back-office processes, have implemented our
new capital investment redesign initiative, and launched a refreshed MTS brand completing these
three transformation program initiatives.
We're getting ready to implement two more of our transformation programs and have five
more programs that are now in the design stage. You can find more details on these initiatives in our
news release, and we look forward to providing progress updates on these initiatives as we continue
to work towards the successful transformation of MTS.
Looking more closely at our results of the quarter, I want to highlight some notable progress,
as well as some continuing challenges.
In Q1 2016, we posted a strong improvement in free cash flow with Q1 free cash flow up by
$12 million when compared to Q4 2015. Our free cash flow per share increased $0.16 or 38 percent
to $0.58.
Free cash flow of 45.6 million for the quarter was down 2.6 million compared to Q1 2015,
mainly due to increased deferred wireless costs, partly offset by our lower capital investments. We
continue to work through the impact of the wireless double cohort that started in Q2 2015.
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While we saw a $5.2 million decrease in revenue from 2015, Q1 revenues were largely in
line with our plan. And our lower post-paid wireless churn and increased subscriber adds over Q1
2015, as well as our increased wireless ARPU, are all signs of a positive momentum that we are
building in the business.
Capital investments were $12.1 million lower than Q1 2015, mainly as a result of our capital
investment program process redesign, which began in the second half of 2015, and the timing of our
capital investment program.
We expect to ramp up our capital investment spends, in the following quarters, as we
continue to follow our redesigned and more disciplined capital investment process.
Finally, I would like to highlight the positive results from our January 1, 2016 pension funding
valuations, which show our pension plans' combined solvency funded ratio has significantly improved
to 95 percent.
So we're off to a good start in the first quarter of 2016. We delivered a solid first quarter,
building further on the momentum that we established throughout last year. And we've already done
a lot of work in a short term as we progress towards transforming MTS to a customer-first business.
Even as we move ahead with the BCE acquisition proposal, we will continue this work and
invest across our business to further enhance our capabilities, all the while focusing on becoming an
organization that is fully aligned around putting our customers first.
With that, let's open up to whatever questions you might have.
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Q&A
Operator
At this time, I'd like to remind participants that in order to ask a question by phone, you
must dial *, then the number 1 on your telephone keypad. We'll pause for a moment to compile the
Q&A roster.
Your first question comes from the line of Maher Yaghi with Desjardins Capital Markets.
Your line is now open.
Maher Yaghi — Desjardins Capital Markets
Yes. Thank you, for taking my question. Jay, I wanted to ask you, you mentioned the
improvement in ARPU, which was about 2 percent on wireless. But could you provide what the
organic ARPU would have been, if you were to exclude the OnStar wholesale subs? Because I think
most of the subs come with no data plans and lower ARPU than your average ARPU?
Jay Forbes
Maher, good afternoon. You are correct in your assumption. Those OnStar clients come with
a much lower ARPU than what has traditionally been the case in terms of our post-paid ARPU. I don't
think we have broken out the ARPU numbers on a normalized basis. We have provided—we have
some analytics that we are prepared to provide as it relates to the churn, with and without this
classification, but don't have the ARPU numbers to share with you.
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Maher Yaghi
Okay. Would the number be negative if you were to exclude those because you did lose
quite a bit of those subs in the quarter, right?
Jay Forbes
Yeah. As you will note in the quarter-over-quarter analysis, we have begun to shed those in
early 2015 and have effectively shed the last of them here early in the second quarter of 2016. And
so that—those will now no longer cost to part of the post-paid or wireless subscriber mix, as we go
forward. And again, I'll refrain from offering any commentary in terms of the ARPU impact of those,
but we'll look at doing so as part of our Q2 disclosures, Maher, assuming that we don't run into any
issues around that type of disclosure.
Maher Yaghi
Right. That would be helpful. I wanted to ask you a question on your solvency liability. I was
surprised to see the number improve for MTS, but increase on the Allstream side. Could you talk
about the difference here, why one solvency liability would go down and the other would go up? I
guess some old—I mean some employees might have left or bought out their plans or something.
Have you—can you talk a little bit about that difference.
Brenda McInnes
Hi, Maher. This is Brenda McInnes. I can answer that for you. It really boils down to how the
discount rate is calculated and how the mortality tables are applied to those two plans. The CIA,
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Canadian Institute of Actuaries, was delayed in their recommendations for applying the mortality
tables. So we applied them early for MTS because we use a different basis for calculating the discount
rate. So that was done in 2015's evaluation. Where for Allstream, we weren't allowed to adopt them
until 2016's evaluation. So you're seeing an impact because of that. And there is a slight different
basis, again, on how the discount rate is calculated for a retiree. It was slightly less favourable for the
Allstream pension plans. And it was fairly neutral to slightly positive for the MTS plans.
Maher Yaghi
Okay. Great. That's helpful. And would the metrics that you're using and your assumptions
be now, on a going on run rate? Or would there be any additional changes that you expect to incur?
Brenda McInnes
Sorry, Maher. Could you repeat that question?
Maher Yaghi
The assumptions that are basing your solvency liability numbers, are those as to the most
updated recommendations to evaluate those liabilities? Or there are still some assumptions that you
have not factored in yet?
Brenda McInnes
No. That is everything. There are no further changes that we're expecting at all from either
the regulator or from the CIA.
Maher Yaghi
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May 11, 2016 — 5:30 p.m. E.T.
Okay. Okay. Great. Thank you very much.
Jay Forbes
Thank you.
Operator
Your next question comes from the line of Sanford Lee with Canaccord Genuity. Your line is
now open.
Sanford Lee — Canaccord Genuity
Hi. Thanks, for taking the question. Can you just tell us what the wireless EBITDA was for the
quarter? I didn't see it in the release or the supplemental?
Jay Forbes
I'm sorry, Sanford. We must have a poor connection. Could you please repeat your
question?
Sanford Lee
Sorry. I'm asking about the wireless EBITDA. Can you provide that number?
Jay Forbes
Nope. That’s a number that we didn’t break out.
Sanford Lee
It used to be, at least in the supplementals.
Paul Cadieux — Chief Financial Officer, MTS
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Yeah. We—it's Paul here, Paul Cadieux. We used to provide it. And then we made a decision
in 2016, just as a result of all the restructuring activities that we're doing and all the allocations we
are going to have to make that it wasn't going be that beneficial. And arguably, we would have some
concerns with the ability to provide it on a consistent. So at this point, we felt it—we’ll just to provide
the revenues. And then for—with the disclosure on the COA that one could make their own
assessment on where the EBITDA would ...
Sanford Lee
I see. Okay. And then another question. And you're seeing I guess a nice uptick in the highspeed Internet subs over the past two quarters, which you know, I kind of assume that you're
benefitting from the Total Internet bundles. However, you're also reporting four consecutive quarters
of year-over-year TV subscriber declines. Can you maybe explain what you're seeing in the
marketplace? Is it a function of cord cutting? And do you expect this trajectory to change in the
coming quarters?
Heather Tulk — Chief Customer Officer, MTS
Yeah. It's Heather Tulk. So yes. Thank you very much. We're quite pleased with how we're
seeing the Internet business performing recently. And we certainly—Total Internet's a piece of that,
but so too is, I'd say some of the renewed focus that we've had in terms of our marketplace and sales
activity. And specifically to IPTV, we do continue to see some cord cutting and cord shaving related to
over-the-top. But I think you'd also see that, similar to our Internet performance, we've been
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refocusing ourselves on some of the work in our TV business. And actually, in Q1, we were quite happy
to see Internet net gain come back to positive. And so we certainly, although it was down below last
year, it's trending in the right direction when you look at quarter—a sequential quarter basis. And we
expect to see that continuing.
Sanford Lee
Great. And then one last one if I could, I think Jay addressed it a little bit on the BCE call. Can
you say if there's anything in relation to the termination cost with your network sharing deal with
Rogers? Just wondering if there's anything material there?
Jay Forbes
Sanford, in terms of the network sharing agreement, a function we refer to as Netco. That
agreement was structured to envision a number of different occurrences over its lifespan, one of
which was a change of control type of event. So we would expect that agreement to continue as we
go forward and would have many years left on it in terms of this transaction as it's currently
envisioned.
Sanford Lee
Great. Okay. I'll jump back in the queue. Thanks.
Operator
Again, if you would like to ask a question by phone, please dial *, 1 on your telephone
keypad.
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Your next question comes from the line of Jeff Fan with Scotiabank. Your line is now open.
Jeff Fan — Scotiabank
Hi. Good afternoon. I wonder if you can just talk about the overall margins this quarter when
we compare it from last year to this year and what's causing that? I think it went from 48 percent to
46 percent. I know you don't breakdown the wireline and wireless, but maybe can you give us a little
bit of colour there?
Jay Forbes
Well, I think there's a number of factors that come into play on that, Jeff. As Heather's
indicated, we have done well in the marketplace in terms of adds, especially around the Internet
business. There's been a pronounced impact in terms of the back-office streamlining that we had
done in Q4 of last year, and the fact that the vast majority of the 250-plus employees that had taken
part in that staff reduction program had left the organization by the end of the first quarter. And so
we began seeing that benefit flow through in terms of reduced operating costs.
We would say that, counter to that, the capital reduction that we saw in the first quarter, as
we forewarned you, we anticipated that there was going to be a degree of softness in terms of the
capital investment program for the first quarter as we implemented new processes, implemented a
new regime, if you will, for the organization to follow as we looked at a much more disciplined
approach to capital investment. That decline in capital investment backed up some labour cost into
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operating results. And so we see a bit of that flowing through as well. So a variety of factors that
contributed to the EBITDA profile for the quarter.
Jeff Fan
Would you say the wireline margins were relatively stable?
Jay Forbes
As Paul has mentioned, we do not break out the wireline/wireless margins. Again, as we
looked at it, there was a far too much discretion around allocations to produce anything that was
really meaningful to our investors. And so, as a consequence, we've decreased the disclosure around
that aspect of the business.
Jeff Fan
Okay. And maybe just one quick one on ARPU, following on an earlier question. Your
blended ARPU did go up. And I guess the question was around OnStar. But also, can you just give us
some colour on your post-paid ARPU, whether that was positive, flat, or down, considering that given
the change in your subscriber base, and I guess the change in your blended ARPU. seems to imply that
a lot of the change was due to the mix?
Heather Tulk
Yeah. Certainly, as you mentioned, a lot of the change was due to the mix, although we did
have some changes in post-paid, as well. You'll see that our percentage of subscribers on data plans
has increased nicely. It continues to increase nicely so that's given us some good upside in our post-
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paid ARPU, as well as some plan price increases that we put into place over the last year are flowing
through nicely. That's somewhat offset by the increase in customers taking plans with features
wrapped in or their long distance calling wrapped in, which has depressed some of those lines. So
there's some puts and takes in there. But generally, we're feeling good about the direction of ARPU,
both on a post-paid standalone, as well as the blended that you see in the disclosure.
Jeff Fan
So overall it was positive.
Heather Tulk
So generally on—so overall, yeah. As we said, the ARPU we disclosed is positive. And
generally, we're seeing good trending in the standalone, without the OnStar.
Jeff Fan
Okay. Thanks.
Operator
That concludes the question-and-answer session. Ms. McInnes, please continue.
Brenda McInnes
Ladies and gentlemen, we have reached the end of our Q1 2016 results conference call.
Once, again, thank you for joining us today.
Operator
Thank you. The conference call is now over.
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*****
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