Manitoba Telecom Services Inc. Reports Solid Third Quarter Results
Key overall financial metrics on track for 2008
Stock Symbol: MBT
This news release contains forward-looking statements. For a description
of the related risk factors and assumptions, please see the section
entitled "Forward-looking Statements Disclaimer" later in this news
release. This release discusses results from Manitoba Telecom Services
Inc.'s continuing operations. The results, and the definition of
continuing operations, should be read in conjunction with Manitoba
Telecom Services Inc.'s third quarter 2008 interim management's
discussion and analysis dated November 6, 2008 (available at the
Investors section of www.mtsallstream.com), which is incorporated by
reference in this release.
- Solid growth in free cash flow, revenues, EBITDA, EPS and growth from
growth services
- Consumer Markets division delivers another quarter of best-in-class
incumbent performance
- Enterprise Solutions division increases value of new contracts won
in 2008 to $247 million, exceeding year-end total for 2007
- Quarterly dividend of $0.65 per share declared, fully supported by
operating cash flows
WINNIPEG, Nov. 6 /CNW/ - Manitoba Telecom Services Inc., and its
principal operating subsidiary MTS Allstream Inc. (herein referred to as
either the "Company" or "MTS Allstream") (TSX: MBT), one of Canada's leading
national communications companies, today reported solid third quarter 2008
financial performance driven by continued strong growth in the Company's
growth services.
"MTS Allstream delivered another quarter of solid growth despite
challenging economic conditions," said Pierre Blouin, Chief Executive Officer.
"Overall we grew revenue, free cash flow(1), EBITDA(2) and EPS(3) and
continued to build our customer base, acquiring more than 19,000 new customers
during the third quarter from our growth lines of business."
"Our Enterprise Solutions division, which won a record number of
contracts for the period, has already surpassed last year's total value of new
contracts. In Manitoba, where we are benefiting from a strong provincial
economy, our Consumer Markets division delivered best-in-class performance for
an incumbent telco," continued Mr. Blouin. "Taken as a whole, our performance
for the quarter demonstrates our ability to deliver solid results and support
our dividend."
Results for the third quarter of 2008 were solid, contributing to overall
year to date growth of 2.0% in revenue, 1.0% in EBITDA and 5.3% in EPS from
continuing operations(4).
Growth in the Company's growth services portfolio, which includes
wireless, converged Internet protocol, unified communications, digital
television and high-speed Internet services, and the Company's success in
adding new customers in both divisions were the principal drivers of this
solid financial performance. In the third quarter, revenues from growth
services increased by 9.5% or $18.4 million to $213.1 million. Revenues from
growth services accounted for 44.4% of the Company's overall revenues from
continuing operations in the third quarter. "This continued growth in our
growth services products, together with solid growth in new customers,
demonstrates our long-standing ability to innovate, compete and respond to the
changing needs of customers in all the markets we serve," added Mr. Blouin.
FINANCIAL HIGHLIGHTS (*)
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in millions of three months nine months
dollars, except ended ended
per share amounts September 30 September 30
----------------- -----------------
2008 2007 change 2008 2007 change
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EPS 0.74 0.73 1.4% 2.39 2.27 5.3%
-------------------------------------------------------------------------
EBITDA 165.1 164.8 0.2% 505.1 500.3 1.0%
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Free cash flow 70.8 65.3 8.4% 221.9 248.4 (10.7%)
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Growth services
revenues 213.1 194.7 9.5% 632.9 554.8 14.1%
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Legacy services
revenues 266.8 281.2 (5.1%) 812.2 862.6 (5.8%)
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Revenues 479.9 475.9 0.8% 1,445.1 1,417.4 2.0%
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(*) From continuing operations. MTS Allstream provides financial
information on continuing operations in order to assist investors in
understanding its underlying financial performance. MTS Allstream's
definition of continuing operations excludes certain non-recurring
items such as restructuring costs and the retroactive impact of
regulatory decisions. For more information, please see MTS
Allstream's third quarter 2008 management's discussion and analysis
("MD&A") in the Investors section of www.mtsallstream.com.
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In addition to solid overall business performance, MTS Allstream
continued to achieve significant improvements in its cost structure with a
reduction in annualized costs of $22.4 million thus far in 2008.
"We continue to make significant gains in our overall cost structure and
productivity," said Wayne Demkey, Chief Financial Officer. "We expect to
achieve our guidance in 2008, but at the same time we are carefully evaluating
any impact that the current economic conditions may have in the context of our
2009 plan and will adjust our expense and investment levels accordingly. In
particular, we are in the process of completing a thorough review of certain
key internal business processes in our Enterprise Solutions division and
expect the effort to deliver additional cost savings and productivity gains in
2009."
The Company's Board of Directors declared a cash dividend of $0.65 per
share for the fourth quarter of 2008, which is payable on January 15, 2009 to
shareholders of record on December 15, 2008.
DIVISIONAL HIGHLIGHTS
Enterprise Solutions division
-----------------------------
The Company's Enterprise Solutions division provided solid performance,
delivering growth in revenues and winning a record number of new contracts,
exceeding last year's total. Growth services revenues once again delivered
strong growth with revenues from the Company's next generation services, which
include converged IP and unified communications services, increasing by 14.6%
for the third quarter.
The division's national sales team won $91 million in new contracts in
the third quarter of 2008, including contracts with TD Waterhouse, WestJet,
Prairie Rose School Division and Statistics Canada. Year to date, the
Enterprise Solutions division has won $247 million in new contracts,
surpassing the total value of new contracts won in all of 2007.
Subsequent to the end of the quarter, the Company announced that
Enterprise Solutions division president John A. MacDonald would retire from
his position effective December 1, 2008. A formal executive search for a
successor to Mr. MacDonald is ongoing and the Company expects to name a
successor prior to Mr. MacDonald's departure.
"With John's full support, we anticipate a seamless transition to his
successor," said Mr. Blouin. "I would like to once again thank John for his
passion, his wisdom, and the tremendous contributions he has made to the
success of our business. We wish him continued success and happiness upon his
retirement."
Consumer Markets division
-------------------------
MTS Allstream's success in Manitoba was supported by the continued strong
performance of its three major growth products. Wireless, television and
high-speed Internet services customers delivered significant growth in
revenues and subscribers for the third quarter. Specifically, the digital
television services subscriber base increased by 10.5% and revenue grew by
16.8%, as compared to the third quarter of 2007. High-speed Internet services
subscribers increased by 7.3% for the quarter and the associated revenue was
19.7% higher than the same period last year. The customer base for wireless
services continued to deliver strong growth in new subscribers adding 11.4%
year-over-year, while revenue from wireless services increased 7.3% over the
same period last year. In addition to powering strong results, these products
serve as the foundation to our successful bundling strategy, which reinforces
customer loyalty, drives average revenue per subscriber, and has played a
significant role in helping MTS Allstream achieve the lowest rate of
residential line losses in the country.
In addition to its success in bundling popular products and services for
customers, MTS Allstream is benefiting from a robust provincial economy in
Manitoba. As of October 20, 2008, the Manitoba Department of Finance reported
that surveys of major forecasters indicate that the province will generate
real gross domestic product ("GDP") growth of 2.4% for 2008, which is above
the national average of 0.8% GDP growth.
In September, MTS Allstream was recognized for the performance of its
consumer growth services products when it was named in an award ceremony in
London, England as a winner of the Global Telecom Business Innovation Awards
in the fixed and mobile communications category. The Company also received the
prestigious 2008 Frost and Sullivan Competitive Strategy Leadership Award in
the North American Consumer Communication and Entertainment Wallet Share
Growth category earlier this year.
2008 OUTLOOK
As announced on December 7, 2007, the Company's 2008 outlook for
continuing operations is as follows:
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2008 Financial Outlook - Continuing Operations
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Revenues $1.920 B to $1.980 B
EBITDA $660 M to $680 M
EPS $2.95 to $3.15
Free cash flow $250 M to $280 M
Capital expenditures 14% to 15% of revenues
-------------------------------------------------------------------------
-------------------------------------------------------------------------
"While general economic trends and conditions remain difficult to
predict, we expect to be within our financial outlook for 2008," said Mr.
Blouin.
For assumptions underlying the Company's 2008 outlook, refer to "Material
Assumptions" in the Company's release dated December 31, 2007 and its third
quarter 2008 interim Management's Discussion and Analysis ("MD&A"), which are
filed on SEDAR and the Company's Web site.
OTHER DEVELOPMENTS
The following are various announcements made recently by MTS Allstream.
Enterprise Solutions division announcements
- On October 8, 2008, MTS Allstream announced that it had been awarded
the Canadian Project Excellence ("CPEX") award in Best Practices in
partnership with the Ontario Association of Community Care Access
Centres at the CPEX Awards Gala. The Best Practices award recognizes
outstanding performance and achievement through the application of
recognized project management best practices. MTS Allstream was
recognized for its voice over IP implementation project to
14 Community Care Access Centres across Ontario.
- On August 19, 2008, MTS Allstream announced that it had achieved the
Master Unified Communications Specialization from Cisco(R). This
specialization recognizes MTS Allstream as having fulfilled the
training requirements and program prerequisites to sell, deploy and
support highly sophisticated applications-based Cisco unified
communications solutions.
Consumer Markets division announcements
- On October 31, 2008, MTS Allstream announced that HBO Canada was now
available for its MTS TV customers.
- On September 10, 2008, MTS Allstream was proud to announce that it
had received an award in the consumer fixed and mobile service
innovations category at the 2008 Global Telecoms Business Innovation
Awards in London, England. MTS Allstream was recognized for its
digital television service, MTS TV, the most successfully deployed
telephone line-based television service in North America based on
technology and market share growth.
- On September 9, 2008, MTS Allstream announced an enhancement of its
online protection with the launch of the award-winning ZoneAlarm(R)
ForceField(TM), which is available free to the company's Internet
customers.
- On September 3, 2008, MTS Allstream announced a special offer for
students who are 18 years or older and attending any educational
institution in Manitoba. The MTS Mobility Student Deal costs
$19.99 per month and includes 250 weekday minutes, unlimited text
messaging and Mobile Web, as well as unlimited calling on evenings
and weekends starting at 5:00 p.m. The MTS High-speed Internet
Student Deal is $24.95 per month for 12 months, and students receive
free installation when ordering MTS TV.
- On August 18, 2008, MTS Allstream announced that it had received
approval from the Canadian Radio-television and Telecommunications
Commission to offer television service in the community of
Portage la Prairie, Manitoba.
Corporate announcements
- On October 29, 2008, MTS Allstream was pleased to announce that
it was awarded the Manitoba Chambers of Commerce Lieutenant
Governor's Award for Outstanding Contribution to the Community at the
Manitoba Business Awards Gala Dinner held on October 28 in Winnipeg.
- On October 20, 2008, MTS Allstream announced that it had been awarded
The Winnipeg Chamber of Commerce's Community Contribution Award. This
award, which was received at the Chamber's annual Red Carpet Gala
held on October 17, 2008, recognizes the Company's significant
community contributions in Winnipeg.
- On October 14, 2008, MTS Allstream announced that it had been named
one of Manitoba's Top 20 Employers for 2009. This special designation
recognizes Manitoba employers that lead in their respective
industries in offering exceptional places to work with the most
progressive and forward-thinking programs.
- On October 1, 2008, MTS Allstream announced that Enterprise Solutions
division president John A. MacDonald would retire from his position
effective December 1, 2008, concluding a 30-year career as a senior
executive and highly regarded leader in the telecommunications
industry.
- On September 26, 2008, MTS Allstream announced that it had paid
tribute to a select group of employees as part of its 100th
anniversary celebrations. The MTS Allstream Luminaries, primarily
current and former employees, were praised for distinction in their
respective fields through outstanding achievements and dedication.
- On September 18, 2008, Pierre Blouin, Chief Executive Officer,
presented the Friends of The Canadian Museum for Human Rights with a
contribution plan of $1 million to equip the museum with
state-of-the-art telecommunications technology.
- On September 5, 2008, MTS Allstream employees and retirees delivered
backpacks filled with school supplies to 500 elementary school
students across Manitoba. Part of the Company's 100th anniversary
celebrations, the employee-driven Centennial Packs School Supply
Drive collected dozens of boxes of school supplies from MTS Allstream
employees over the summer.
- On September 5, 2008, 60 MTS Allstream employees helped to restore a
forested area near the community of Victoria Beach, Manitoba, by
planting 100 trees as part of the celebration of the Company's
100th anniversary.
Summary of MTS Allstream recognition in 2008
- 2008 Manitoba Chambers of Commerce Lieutenant Governor's Award for
Outstanding Contribution to the Community.
- 2008 Community Contribution Award from The Winnipeg Chamber of
Commerce.
- Recognized as one of Manitoba's Top 20 Employers for 2009.
- Canadian Project Excellence award in Best Practices, in partnership
with the Ontario Association of Community Care Access Centres,
recognizing outstanding performance and achievement through the
application of recognized project management best practices.
- Digital television service recognized in the consumer fixed and
mobile services innovations at the 2008 Global Telecoms Business
Innovation Awards.
- 2008 Frost and Sullivan Competitive Strategy Leadership Award in the
North American Consumer Communication and Entertainment Wallet Share
Growth category.
- 2008 Microsoft Partner of the Year for Information Worker Solutions,
Unified Communications.
- 2008 Special Recognition Award from Canada's Telecommunications Hall
of Fame.
- 2008 Cisco Partner Regional Market Mover Award for Canada.
- 2008 recipient of the Manitoba Historical Society Centennial Business
Award.
Quarterly Conference Call
MTS Allstream's third quarter 2008 conference call with the investment
community is scheduled for 4:30 p.m. (Eastern time) on November 6, 2008.
Investors are invited to listen to the conference call. The dial-in number is
1-800-595-8550. A live audio Webcast of the investor conference call can be
accessed by visiting the Investors section of the MTS Allstream Web site
(www.mtsallstream.com). A replay of the conference call will be available
until midnight (Eastern time) on November 16, 2008, and can be accessed by
dialing 1-877-289-8525 or 1-416-640-1917 (access code 21285684 followed by the
number sign).
Note
MTS Allstream's interim MD&A for the nine months ended September 30, 2008
and supplementary financial information are available in the Investors section
of the MTS Allstream Web site at www.mtsallstream.com.
About Manitoba Telecom Services Inc.
Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS
Allstream Inc., is one of Canada's leading national communication solutions
providers, delivering innovative products and services through its Enterprise
Solutions and Consumer Markets divisions. The Enterprise Solutions division,
which operates under the Allstream brand nationally and under the MTS
Allstream brand in Manitoba, is a leading competitor in the national business
and wholesale markets. This division offers customers a portfolio of solutions
tailored to the needs of medium and large businesses looking for success in a
world of rapidly evolving technology - Internet protocol connectivity, unified
communications, IT consulting and security services, and voice and data
connectivity services. The Consumer Markets division leads every
telecommunications market segment in Manitoba, delivering a full suite of next
generation wireless, high-speed Internet and data, digital television and
wireline voice services under the MTS brand, as well as small business
services in select markets across Canada under the Allstream brand, and
security and alarm monitoring services through the company's subsidiary AAA
Alarm Systems Ltd., which also operates in other western provinces. The
company's extensive national broadband fibre optic network spans more than
24,300 kilometres, and provides international connections through strategic
alliances and interconnection agreements with other international service
providers. Manitoba Telecom Services Inc.'s common shares are listed on The
Toronto Stock Exchange (trading symbol: MBT). For more information, please
visit: www.mtsallstream.com.
Forward-looking Statements Disclaimer
This news release includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, financial
objectives, and future financial results and performance that are subject to
risks, uncertainties and assumptions. As a consequence, actual results in the
future may differ materially from any conclusion, forecast or projection in
such forward-looking statements. Forward-looking statements reflect our
expectations as at November 6, 2008. Examples of statements that constitute
forward-looking information may be identified by words such as "believe",
"expect", "project", "anticipate", "could", "target", "forecast", "intend",
"plan", "outlook", "pending", and other similar terms. Factors that could
cause anticipated opportunities and actual results to differ materially from
those expected, and the material factors or assumptions that were applied in
drawing a conclusion or making a forecast or projection set out in such
forward-looking statements, include, but are not limited to, the items
identified in our interim MD&As for the first, second and third quarters of
2008, and our 2007 annual MD&A. Except as required by law, 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.
Factors that could cause actual results to differ materially include, but
are not limited to, the intensity of competitive activity from both
traditional and new competitors (competitive conditions); the ability to
retain major customers (customer relationships); decisions by the federal
regulator that affect our ability to compete effectively or to enter into new
business opportunities (developments in federal regulation); general economic
and market conditions and the level of consumer confidence and spending, and
the demand for, and prices of, our products and services (market conditions
and economic fluctuations); the ability to manage labour relations effectively
(collective agreements); the ability to anticipate, and respond to, changes in
technology (technology); and other risk factors listed from time to time in
our comprehensive public disclosure documents, including our 2007 Annual
Report and in other filings with the Canadian securities regulatory
authorities. Unless otherwise stated, all amounts are expressed in Canadian
dollars. For further information, refer to the "Risks and Uncertainties"
sections in our 2007 annual MD&A and our interim MD&As for the first, second
and third quarters of 2008.
Additional information relating to our Company, including our Annual
Information Form, is available on SEDAR at www.sedar.com. This news release
and the financial information contained herein have been reviewed by our Audit
Committee and approved by our Board of Directors.
Footnotes
(1) Refer to MTS Allstream's third quarter 2008 interim MD&A for the
definition of free cash flow.
(2) EBITDA is earnings before interest, taxes, amortization, other income
and discontinued operations. EBITDA should not be construed as an
alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian generally
accepted accounting principles) as a measure of liquidity.
(3) EPS is earnings per share.
(4) Refer to MTS Allstream's third quarter 2008 interim MD&A for the
definition of continuing operations.
-----------------------------
MANAGEMENT'S DISCUSSION
AND ANALYSIS
-----------------------------
Unless otherwise indicated, this Management's Discussion and Analysis
("MD&A") of our financial results for the interim period ended September 30,
2008 is as at November 6, 2008. In this MD&A, "we", "our", and "us" refer to
Manitoba Telecom Services Inc. ("MTS"). This interim MD&A should be read in
conjunction with our interim consolidated financial statements and the
discussion and analysis that accompanies our audited consolidated financial
statements for the year ended December 31, 2007. This interim MD&A for the
three and nine months ended September 30, 2008 updates the information
contained in our interim MD&A for the first and second quarters of 2008, and
our 2007 annual MD&A.
This interim MD&A includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, financial
objectives and future financial results and performance that are subject to
risks, uncertainties and assumptions. As a consequence, actual results in the
future may differ materially from any conclusion, forecast or projection in
such forward-looking information. Examples of statements that constitute
forward-looking information may be identified by words such as "believe",
"expect", "project", "anticipate", "could", "target", "forecast", "intend",
"plan", "outlook", and other similar terms. Factors that could cause
anticipated opportunities and actual results to differ materially from those
expected, and the material factors or assumptions that were applied in drawing
a conclusion or making a forecast or projection set out in such
forward-looking statements, include, but are not limited to, the items
identified in this interim MD&A under the "Risks and Uncertainties" and
"Material Assumptions" sections, our interim MD&A for the first and second
quarters of 2008, and our 2007 annual MD&A. Please note that forward-looking
statements reflect our expectations as at November 6, 2008. 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. Additional information relating to our company, including our
Annual Information Form, is available on SEDAR at www.sedar.com. Unless
otherwise stated, all amounts are expressed in Canadian dollars.
NON-GAAP MEASURES OF PERFORMANCE
--------------------------------
In this MD&A, we provide information concerning continuing operations,
EBITDA and free cash flow because we believe investors use them as measures of
our financial performance. These measures do not have a standardized meaning
as prescribed by Canadian generally accepted accounting principles ("GAAP"),
and are not necessarily comparable to similarly titled measures used by other
companies.
- Continuing Operations - We provide information that refers to our
performance from continuing operations to assist investors in
understanding the performance of our company.
In the first nine months of 2008, continuing operations excludes
restructuring costs; the impact of changes in income tax rates on our
tax asset; the costs of transitioning certain wireless service
requirements away from Bell Mobility to new suppliers and to our
wireless platform as well as costs associated with the advanced
wireless services ("AWS") spectrum auction; and solvency funding to
our pension plans.
In the first nine months of 2007, continuing operations excluded
restructuring costs, certain tax recoveries, the retroactive
adjustment related to Telecom Decision CRTC 2007-10 ("Decision
2007-10") in which the Canadian Radio-television and
Telecommunications Commission ("CRTC") determined that we had been
billed twice over the past several years for basic service extension
features charges, the impact of changes in income tax rates on our
tax asset, solvency funding to our pension plans, and a reduction to
our tax asset valuation allowance and other adjustment.
- EBITDA - We define EBITDA as earnings before interest, taxes,
amortization, other income and discontinued operations. EBITDA should
not be construed as an alternative to operating income or to cash
flows from operating activities (as determined in accordance with
Canadian GAAP) as a measure of liquidity.
- Free Cash Flow - We define free cash flow as cash flow from operating
activities, less capital expenditures, and excluding changes in
working capital. Free cash flow is the amount of discretionary cash
flow that we have for purchasing additional assets beyond our annual
capital expenditure program, paying dividends, buying back shares or
retiring debt.
OVERVIEW
--------
MTS is a leading national communications provider in Canada. The company
is organized into two reportable operating segments, the Enterprise Solutions
division and the Consumer Markets division. The company, which operates under
two principal brands, MTS Allstream and Allstream, builds upon its unique
combination of market leadership in Manitoba and agile competitive presence in
business markets across Canada to deliver innovative telecommunications
solutions that bring value to customers. MTS employs approximately 6,000
people.
MTS commenced its operations in the province of Manitoba in 1908, first
as a department of the provincial government, and then as a Crown corporation
that was incorporated in 1933. In 1997, the company was reorganized and
continued as a publicly traded company.
MTS's common shares are listed on The Toronto Stock Exchange under the
trading symbol MBT.
Enterprise Solutions division
The Enterprise Solutions division, which operates under the Allstream
brand nationally and under the MTS Allstream brand in Manitoba, is a leading
competitor in the national business and wholesale markets. This division
offers customers a portfolio of solutions tailored to the needs of medium and
large businesses looking for success in a world of rapidly evolving technology
- Internet protocol ("IP")-based communications, unified communications, voice
and data connectivity services. The Enterprise Solutions division operates an
extensive national broadband fibre optic network that spans more than
24,300 kilometres, and provides international connections through strategic
alliances and interconnection agreements with other international service
providers. The division's advanced services, combined with the impressive
reach of a state-of-the-art network and continued leadership in technological
innovation, have allowed the company to forge strong relationships with top
national business customers across the country.
Consumer Markets division
The Consumer Markets division leads every telecommunications market
segment in Manitoba, delivering a full suite of next generation wireless,
high-speed Internet and data, digital television and wireline voice services
under the MTS brand, as well as security and alarm monitoring services through
AAA Alarm Systems Ltd., a subsidiary of MTS which also operates in other
western provinces. This complete range of products is unmatched by any other
provider in Manitoba, and the digital television service offered to customers
in Winnipeg is recognized as one of the leading North American digital
television services. With this innovative combination of products and
services, the company connects people, homes and businesses everywhere in our
markets. In addition, the Consumer Markets division is a major player in the
national small business telecommunications market outside Manitoba, providing
customers in targeted major Canadian centres with a range of innovative
business Internet, data and voice services under the Allstream brand.
RESULTS OF OPERATIONS
---------------------
Earnings Per Share ("EPS")
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(in $) Q3/08 Q3/07 % change
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EPS (continuing operations) 0.74 0.73 1.4
Wireless transition and AWS spectrum auction
costs (0.08) - n.m.
Restructuring costs (0.07) (0.03) n.m.
-----------------------------
Basic EPS 0.59 0.70 (15.7)
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Note: EPS for the three months ended September 30 is based on weighted
average shares outstanding of 64.6 million for 2008, and 64.6 million
for 2007.
The strength of our growth services portfolio drove the increases in EPS
with double-digit increases in revenues from our growth services. Share
purchases made in the first six months of 2007 under our normal course issuer
bid (the "Issuer Bid") positively impacted EPS from continuing operations on a
year to date basis with lower shares outstanding for the nine months ended
September 30, 2008. While the markets in which we do business remain highly
competitive, we are confident in our management of customer migration to new
generation IP-based technology services as well as the popularity of our
bundling programs and the reinforcement of customer relationships that these
programs provide. In addition, the successful execution of our ongoing cost
control initiatives, along with targeted business strategies, contributed to
our improved performance year-over-year.
We are pleased with the continued growth in our EPS from continuing
operations in the quarter and year to date ended September 30, 2008. As we
disclosed last quarter, we are in the process of transitioning certain
wireless service requirements away from Bell Mobility. The costs associated
with this transition, in addition to the costs related to our participation in
the AWS spectrum auction and certain restructuring costs impacted our basic
EPS performance. Additionally, on a year to date basis, the decrease in basic
EPS reflects the positive impacts of Decision 2007-10, and a reduction in our
tax asset allowance, as well as negative impacts of a future tax rate
adjustment and the costs associated with the AWS spectrum auction. The
financial impact of each of these items is detailed in the following table:
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(in $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
EPS (continuing operations) 2.39 2.27 5.3
Wireless transition and AWS spectrum auction
costs (0.18) - n.m.
Future tax rate adjustment (0.12) (0.09) 33.3
Reduction in tax asset allowance and other
adjustment - 0.15 n.m.
Decision 2007-10 - 0.15 n.m.
Restructuring costs (0.07) (0.10) (30.0)
-----------------------------
Basic EPS 2.02 2.38 (15.1)
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-------------------------------------------------------------------------
Note: EPS for the nine months ended September 30 is based on weighted
average shares outstanding of 64.6 million for 2008, and 65.2 million
for 2007.
EBITDA
-------------------------------------------------------------------------
(in millions $) Q3/08 Q3/07 % change
-------------------------------------------------------------------------
EBITDA (continuing operations) 165.1 164.8 0.2
Wireless transition and AWS spectrum auction
costs (7.5) - n.m.
Restructuring costs (7.1) (2.3) n.m.
-----------------------------
EBITDA 150.5 162.5 (7.4)
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(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
EBITDA (continuing operations) 505.1 500.3 1.0
Wireless transition and AWS spectrum auction
costs (17.8) - n.m.
Decision 2007-10 - 13.5 n.m.
Restructuring costs (7.1) (8.9) (20.2)
-----------------------------
EBITDA 480.2 504.9 (4.9)
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Our growth services portfolio continued the strong performance we have
seen throughout the year with revenues from our converged IP, unified
communications, wireless, consumer Internet and digital television services
contributing significant increases to our overall financial performance. In
addition to the increases in revenues from our growth services offerings, our
solid progression with ongoing cost control initiatives provided further
support to solid year-over-year growth in EBITDA from continuing operations.
Costs of transitioning certain wireless service requirements away from
Bell Mobility to new suppliers and our wireless platform, the costs associated
with our participation in the AWS spectrum auction, higher year-over-year
restructuring costs as well as the positive one-time impact in 2007 of
Decision 2007-10 are the primary drivers of these decreases in consolidated
EBITDA on a year to date basis. We are disputing certain costs being charged
by Bell Mobility associated with transitioning away from Bell Mobility and are
of the opinion that such costs are recoverable from them. We have commenced
formal proceedings in accordance with the dispute resolution mechanism in our
agreement to recover such costs, however there is no certainty that such costs
will be recovered. These wireless transition costs are a one-time charge and
do not impact our continuing operations.
REVENUES
Operating Revenues
-------------------------------------------------------------------------
(in millions $) Q3/08 Q3/07 % change
-------------------------------------------------------------------------
Revenue (continuing operations) 479.9 475.9 0.8
-----------------------------
Revenue 479.9 475.9 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Revenue (continuing operations) 1,445.1 1,417.4 2.0
Decision 2007-10 - (0.8) n.m.
-----------------------------
Revenue 1,445.1 1,416.6 2.0
-------------------------------------------------------------------------
------------------------------------------------------------------------
Significant year-over-year increases in revenues from our converged IP,
unified communications, wireless, consumer Internet and digital television
services, which are included in our growth services portfolio, drove the
increases in our revenues from continuing operations. In addition, the strong
revenues from our growth services more than offset the decline in revenues
from our legacy services.
Both of our operating divisions achieved overall growth in revenues from
continuing operations in the quarter and year to date ended September 30,
2008. Our Consumer Markets division continued to provide "best in class"
results against our competitors in all lines of business, and for the fourth
consecutive quarter, we have continued to achieve overall revenue growth
year-over-year in our Enterprise Solutions division with a slight increase
this quarter and a 2.0% increase year to date. While Rogers Communications
Inc. ("Rogers") and AT&T Corp. ("AT&T") have continued to transition their
business to their own networks, the impact of their reduced traffic on our
network has been lessening due to the gains we are achieving in our growth
services revenues. In the third quarter of 2008, revenues from Rogers and AT&T
declined by $6.0 million as compared to the same period last year, and on a
year to date basis, declined by $20.8 million. If these impacts were excluded,
the revenues of our Enterprise Solutions division would have grown by 2.4% in
the third quarter and by 4.6% in the first nine months of the year, as
compared to last year. Solid demand for converged IP and unified
communications services provided by our Enterprise Solutions division is
demonstrated by this division's improved performance. We continue to assess
the current economic climate for signals of challenges to our solid financial
performance and business environment.
Segmented Revenues (Continuing Operations)
-------------------------------------------------------------------------
(in millions $) Q3/08 Q3/07 % change
-------------------------------------------------------------------------
Growth services 213.1 194.7 9.5
Legacy services 266.8 281.2 (5.1)
-----------------------------
Total 479.9 475.9 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Growth services 632.9 554.8 14.1
Legacy services 812.2 862.6 (5.8)
-----------------------------
Total 1,445.1 1,417.4 2.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Growth Services Revenues
The proportion of our total revenues from growth services has continued
to increase, in keeping with our business strategy. Contributing 44.4% and
43.8% to our total revenues from continuing operations in the third quarter
and year to date, respectively, these levels continue to grow above the 40.9%
and 39.1% contributions from the same periods last year.
The strength of the product offerings within our growth services
portfolio continued to drive the gains in our growth services revenues with
significant year-over-year increases in revenues from our converged IP,
unified communications, wireless, consumer Internet and digital television
services.
Legacy Services Revenues
Through our targeted marketing initiatives and popular service bundle
packaging, we are successfully managing the influences of re-pricing and
customer churn on our legacy services products. These strategies are intended
to profitably manage our customer transition to growth services and products,
as well as contributing to new and growing revenue streams. As expected,
Rogers and AT&T have continued with the migration of communications traffic to
their own networks, which contributed $6.0 million and $20.8 million to the
decline in the three and nine months ending September 30, 2008, respectively.
If these impacts were excluded, the decreases in our legacy services revenues
would be 3.0% and 3.4%, respectively.
Operating Revenues (Continuing Operations)
-------------------------------------------------------------------------
(in millions $) Q3/08 Q3/07 % change
-------------------------------------------------------------------------
Wireless 75.1 71.3 5.3
Data 171.3 166.9 2.6
Local 132.6 133.7 (0.8)
Long distance 80.2 84.9 (5.5)
Other 20.7 19.1 8.4
-----------------------------
Total 479.9 475.9 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Wireless 215.1 200.4 7.3
Data 523.8 491.0 6.7
Local 396.3 399.9 (0.9)
Long distance 248.0 268.1 (7.5)
Other 61.9 58.0 6.7
-----------------------------
Total 1,445.1 1,417.4 2.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our operating revenues include those earned from the provision of
wireless, data, local voice, long distance voice, and other services,
which include our digital television service.
Wireless Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 75.1 71.3 5.3
YTD 215.1 200.4 7.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our wireless portfolio consists of cellular, wireless data, paging and
group communications services that we offer in the Manitoba market.
Our wireless subscriber base has continued to grow significantly year-
over-year and is a primary driver to the increases in our wireless services
revenues. As at September 30, 2008, our wireless subscriber base had grown by
11.4% to reach 420,612 subscribers, and we outperformed our peer group. We
believe that part of our success is attributable to our strategy of offering
high-value product bundles that cannot be duplicated by our principal
competitors and also, that we provide the largest wireless coverage in
Manitoba.
We continue to see strong potential for growth in our wireless services
revenues in Manitoba. At the end of the third quarter for 2008, wireless
penetration in Manitoba was approximately 59.5% as compared to our estimate of
the Canadian penetration rate of approximately 66%. These penetration rates
provide the right conditions for continued growth in the province as consumer
adoption of wireless products continues to expand.
Year-over-year, our revenues from wireless data services have increased
significantly by $2.9 million or 48.3% and $9.5 million or 63.3%,
respectively, in the third quarter and year to date as subscribers continue to
increasingly utilize next generation wireless data services and service
features, such as text messaging and Web browsing services. Although our
average revenue per user ("ARPU") decreased by 2.9% to $57.51 for the nine
months ended September 30, 2008, we have one of the leading ARPUs among our
principal competitors. Time limited promotional offers have increased our
subscriber base substantially, however the resulting lower airtime usage and
flat network access fees related to these plans, along with lower wholesale
revenues, impacted wireless ARPU this quarter and year to date.
Data Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 171.3 166.9 2.6
YTD 523.8 491.0 6.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our data line of business includes revenues earned from providing data,
Internet and professional services. Data services connect data, video and
voice networks to establish private connections across office locations
and to integrate traffic over highly secure networks. We provide a wide
range of Internet connectivity services to meet the needs of residential
customers in Manitoba and business customers across the country. We also
offer numerous hosting and security services to business customers across
Canada.
The increases in our data services revenues were driven by strong
performance in our data growth services, which was offset partly by customers
transitioning from legacy services to growth services, and by reduced traffic
on our network from Rogers and AT&T. If the data services revenues of Rogers
and AT&T were excluded from our performance, our data services revenues for
the quarter would have shown an increase of 8.6% and an increase of 13.5% year
to date, which reflect the growing attractiveness of our next generation
products and services. We are achieving our desired results as customers are
continuing to migrate to IP solutions that utilize our state-of-the-art IP
multiprotocol label switching ("MPLS") network and customer service
capabilities.
Strong growth in our next generation data services, which include
converged IP and unified communications services, was demonstrated with
increases of 14.6% this quarter and by 20.5% year to date, as compared to the
same periods in 2007. New customer growth along with higher year-over-year
volume usage from business IP domestic MPLS, network resident IP telephony,
switched Ethernet, wavelength, IP trunking and consumer high-speed Internet
services and higher unified communications sales drove these significant
increases.
The capabilities of the suite of products offered by our Enterprise
Solutions division continued to be demonstrated by strong growth in our
IP-virtual private network ("IP-VPN") customer base. As at September 30, 2008,
we were supporting 292 IP-VPN customers, which is 22.2% more than last year.
In the three and nine months ended September 30, 2008, our consumer
Internet services revenue continued its strong growth, increasing
year-over-year by 19.7% and 20.8%, respectively. Our consumer high-speed
Internet customer base grew by 7.3% and reached 174,580 customers as at
September 30, 2008. In addition, higher average revenue per customer also
contributed to the increases in consumer Internet services with a 12.1%
year-over-year increase.
Local Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 132.6 133.7 (0.8)
YTD 396.3 399.9 (0.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Local services revenues include basic voice connections for residential
customers, including enhanced calling features (such as Call Answer, Call
Display, Call Waiting and 3-Way Calling), payphone revenue, wholesale
revenues from services provided to third parties, as well as a full range
of local services to business customers. These services allow customers
to complete calls in their local calling areas and to access long
distance, cellular networks and the Internet.
We have positioned ourselves for long-term success by packaging our
residential service offerings such as wireless, Internet, digital television
and alarm services into bundles to create a unique value proposition for our
customers. In the third quarter of 2008, customers utilizing our bundled
service packages increased by 7.9% as compared to the same period last year.
With these popular programs well in place, we continued to deliver best in
class performance against cable company competitors, minimizing the reduction
in our local services revenues. In the third quarter of 2008, our residential
line loss was less than 5,000, after adjusting for cottage-country seasonality
and customers in transit. The level of line loss we are experiencing
demonstrates the success of our service bundle and consumer marketing
strategies in this market. We are confident in our ability to compete across
Manitoba and win in this highly competitive local services environment. Our
customer connections, which include network access services, high-speed
Internet, wireless and digital television subscribers, increased by 3.6% as
compared to the third quarter of 2007.
Long Distance Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 80.2 84.9 (5.5)
YTD 248.0 268.1 (7.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long distance services enable residential customers in Manitoba and
business customers across Canada to communicate with destinations outside
the local exchange. Our long distance voice service portfolio includes
basic, domestic, cross-border and international outbound long distance,
basic and enhanced toll-free services, calling cards and audio
conferencing, as well as a variety of enhanced long distance services and
features.
More customers are choosing the long distance services that our Consumer
Markets division provides over dial-around competitor services and this impact
is partly offsetting the effects of competitive pricing and customer losses.
In addition, higher cross-border volumes and international rates in our
Enterprise Solutions division partially offset the lower rates in domestic and
cross-border markets and lower domestic volumes, contributed to the decreases
in our revenues from long distance services.
Other Revenues
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 20.7 19.1 8.4
YTD 61.9 58.0 6.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other revenues consist of revenues earned from our digital television and
home security services, and miscellaneous items. Our digital television
service is offered across our broadband network platform and is targeted
at residential customers in Winnipeg. Miscellaneous revenues primarily
consist of the sale and maintenance of terminal equipment.
Strong revenues and subscriber growth from our digital television
services continued to drive increases in our other revenues.
Revenues from our digital television services increased by 16.8% or $1.8
million to $12.5 million in the third quarter, and by 20.0% or $6.2 million to
$37.2 million year to date. In addition to strong subscriber growth driving
this year-over-year increase in revenues, we also experienced a 6.9% increase
in average revenue per subscriber ("ARPS") to $50.35. This strong increase in
ARPS was driven by increased usage of video-on-demand, pay-per-view and
high-definition services, as well as price increases and a decrease in the
number of subscribers on promotional pricing plans.
As at September 30, 2008, our digital television subscriber base
increased by 10.5% to reach 82,278, representing a 3% increase in market share
over last year. Our current share of the market is approximately 33%.
OPERATING EXPENSES
Operations Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 322.3 311.1 3.6
YTD 957.8 902.8 6.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We continue to focus on our cost reduction initiatives. Our 2008
efficiency program achieved $22.4 million in annualized savings as at
September 30, 2008, which is in line with our 2008 objective for annualized
expense savings of $20 million to $30 million with this program. Partly
offsetting these savings were higher expenses from our growth operations. In
addition, the year to date increase on our operations expense was impacted by
a one-time net positive adjustment in 2007 of $14.3 million related to
Decision 2007-10, which reflects the retroactive impact of a competitor
service for which we had been double-billed by incumbent carriers and resulted
in a positive one-time impact of $13.5 million to consolidated operating
expenses and a $0.8 million negative impact to consolidated revenues. If this
amount and the costs associated with the wireless transition and our
participation in the AWS spectrum auction are excluded, expenses from
continuing operations were up by 2.5%, due to increases in revenue and timing
differences between quarters.
We have been very effective at achieving cost efficiencies over the last
two years and expect to continue to find cost savings going forward. To assist
with our ongoing cost reduction initiatives, we have begun further review of
certain major processes with a focus on the rebuilding of processes in our
Enterprise Solutions division. Through this analysis, a number of process
improvement opportunities have been identified, which could significantly
enhance the way products and solutions are delivered to customers and
contribute to our cost reduction initiatives. Our Enterprise Solutions
division is on track for solid revenue growth and stable profitability for the
first time in several years, and we plan to maintain and build on this
momentum throughout the remainder of 2008 and 2009 by making our internal
processes more efficient and cost effective, assuming that the current
projected economic conditions are sustained.
In the three and nine months ended September 30, 2008, we incurred
one-time costs in the amounts of $7.5 million and $17.8 million,
respectively,relating to the costs of transitioning certain wireless service
requirements away from Bell Mobility to new suppliers and to our wireless
platform as well as costs associated with the AWS spectrum auction. We expect
these one-time costs to be $40 million to $50 million in aggregate over the
next two years, including the amount we have incurred year to date this year.
These costs are non-recurring, will be recorded as a one-time cost and will
not impact our continuing operations. We are disputing certain costs being
charged by Bell Mobility associated with transitioning away from Bell Mobility
and are of the opinion that such costs are recoverable from them. We have
commenced formal proceedings in accordance with the dispute resolution
mechanism in such agreements to recover the disputed costs.
This transition away from Bell Mobility to other suppliers and/or to our
own wireless platform is not expected to impact our wireless operating cost
structure and will give us additional flexibility to succeed in a rapidly
changing telecommunications landscape.
Restructuring Expenses
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 7.1 2.3 n.m.
YTD 7.1 8.9 (20.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We have incurred costs of $7.1 million under our 2008 efficiency program.
These costs primarily relate to the process improvement assessment and
implementation initiative that we commenced in the second quarter, and
one-time costs that were incurred for facilities consolidation of select real
estate. In addition, we applied payments to prior years' workforce reduction
program liabilities in the amounts of $0.6 million and $6.5 million for the
three and nine months ended September 30, 2008, respectively. This is outlined
in Note 2 to our interim consolidated financial statements.
Amortization Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 83.9 80.0 4.9
YTD 246.6 239.0 3.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The year-over-year increases in our amortization expenses are due to
increases in property, plant and equipment, as well as the intangible asset
additions from our acquisitions of Multinet Communications Services Inc. and
ICU Technologies Inc. ("ICU Technologies").
Other Income
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 2.5 1.1 n.m.
YTD 7.6 7.2 5.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-over-year, other income was higher primarily due to foreign exchange
gains which were offset partly by a decrease in interest income.
Debt Charges
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 12.1 12.8 (5.5)
YTD 36.7 39.4 (6.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The decreases in debt charges resulted from lower year-over-year long-
term debt levels that were refinanced with short-term debt at a lower interest
rate and temporary cash on hand, which were offset partially by higher costs
related to our accounts receivable securitization program.
Our debt to total capitalization ratio as at September 30, 2008 was
39.0%, and continues to provide us with financial strength and flexibility
going forward.
Income Tax Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q3 18.9 25.3 (25.3)
YTD 74.2 78.3 (5.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We are able to reduce our taxable income to zero without utilizing our
substantial and growing capital cost allowance ("CCA") pools as a result of
our acquisition of Allstream Inc. in 2004 along with its income tax loss
carryforwards. Through the utilization of these loss carryforwards, followed
by the utilization of our deferred CCA deduction, we project that we will not
pay cash taxes before 2014.
The decreases in our income tax expense were primarily driven by lower
income before tax and lower statutory tax rates this year. Further impacting
income tax expense on a year to date basis is a favourable adjustment in our
tax asset valuation allowance by $12.8 million which occurred in the second
quarter of 2007 resulting from higher forecasted taxable income. In addition,
a $7.5 million charge related to changes in provincial tax rates was required
in the second quarter of 2008, as compared to a similar $6.0 million
adjustment in 2007.
CONSOLIDATED QUARTERLY DATA
Unaudited quarterly financial data for our eight most recently completed
quarters is presented below:
-------------------------------------------------------------------------
(in millions $, except earnings Q3 Q2 Q1 Q4
per share) 2008 2008 2008 2007
-------------------------------------------------------------------------
Operating revenues 479.9 486.4 478.8 489.2
Operating income 66.6 78.8 88.2 72.1
Net income before discontinued
operations 38.1 38.0 54.2 14.3
Net income and comprehensive income 38.1 38.0 54.2 14.3
Earnings per share before
discontinued operations 0.59 0.59 0.84 0.22
Diluted earnings per share before
discontinued operations 0.59 0.58 0.83 0.22
Earnings per share 0.59 0.59 0.84 0.22
Diluted earnings per share 0.59 0.58 0.83 0.22
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $, except earnings Q3 Q2 Q1 Q4
per share) 2007 2007 2007 2006
-------------------------------------------------------------------------
Operating revenues 475.9 474.1 466.6 479.1
Operating income 82.5 92.2 91.2 34.2
Net income before discontinued
operations 45.5 57.0 52.9 26.8
Net income and comprehensive income 45.5 57.0 52.9 216.1
Earnings per share before
discontinued operations 0.70 0.88 0.80 0.39
Diluted earnings per share before
discontinued operations 0.70 0.88 0.80 0.39
Earnings per share 0.70 0.88 0.80 3.18
Diluted earnings per share 0.70 0.88 0.80 3.17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our consolidated financial results for the eight most recently completed
quarters reflect the ongoing performance of our business in the marketplace,
as well as the following:
- The recording of amounts in relation to the transitioning of certain
wireless service requirements away from Bell Mobility to new
suppliers and to our wireless platform, as well as costs associated
with the AWS spectrum auction, consisting of $10.3 million and
$7.5 million in the second and third quarters of 2008, respectively.
- The recognition of restructuring expenses for our 2008 efficiency
program in the amount of $7.1 million in the third quarter of 2008;
restructuring expenses for our 2007 efficiency program in each of the
four quarters of 2007 in the amounts of $3.9 million, $2.7 million,
$2.3 million and $3.0 million, listed chronologically; and the
related workforce reduction initiative that we undertook in the
fourth quarter of 2006 in the amount of $8.5 million.
- The recording of amounts respecting a number of regulatory decisions:
a $5.0 million positive impact in the second quarter of 2007 and a
$9.9 million positive impact in the first quarter of 2007, which are
related to Decision 2007-10.
- Adjustments in the amounts of $12.8 million and $25.7 million for
reductions to our tax asset valuation allowance in the second and
fourth quarters of 2007, respectively, and $11.8 million for
reductions to our tax asset valuation allowance in the fourth quarter
of 2006.
- Effective October 2, 2006, we sold our directories business and
recorded a net gain on the sale of discontinued operations of
$189.3 million in the fourth quarter of 2006.
- The recording of charges to reflect decreases in the value of our
income tax asset as a result of reductions in future income tax
rates, consisting of $7.5 million in the second quarter of 2008, and
$6.0 million and $49.6 million in the second and fourth quarters of
2007, respectively.
- The recognition of restructuring costs for our Transition Phase II
cost reduction program in the amount of $28.3 million in the fourth
quarter of 2006. Included in this amount are costs associated with a
workforce reduction initiative that was announced on October 2, 2006,
which resulted in restructuring charges of $19.0 million.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q3 124.9 195.0 (70.1)
YTD 359.7 415.9 (56.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from operating activities refer to cash we generate from our
normal business activities.
The decrease in cash flows from operating activities in the third quarter
resulted primarily from a decrease in cash from working capital related to a
decrease in funds from our accounts receivable securitization program,
decreased consolidated EBITDA, and increased pension funding. Year to date,
the decrease in our cash flows from operating activities is mainly due to
increased pension funding and lower consolidated EBITDA, which were offset
partially by increased cash from working capital due to utilization of our
accounts receivable securitization program and decreased debt charges.
Cash Flows used in Investing Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q3 120.1 79.5 40.6
YTD 249.3 187.4 61.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing activities represent cash used for acquiring, and cash received
from disposing of, long-term assets and other long-term investments.
The increases in cash flows used in investing activities are due to our
purchase of 35 MHz of wireless spectrum during the AWS spectrum auction
earlier this year. In the third quarter, we incurred $48.6 million in license
costs for this spectrum, which will cover 1.2 million people in Manitoba and
strengthens our already leading position in this market. Our capital
expenditures from continuing operations in the third quarter of 2008 were
$69.1 million as compared to $73.2 million in the same period in 2007. In
addition, an amount of $4.0 million for the purchase of ICU Technologies
earlier this year is included in the year to date change.
Free Cash Flow
-------------------------------------------------------------------------
(in millions $) Q3/08 Q3/07 % change
-------------------------------------------------------------------------
Free cash flow (continuing operations) 70.8 65.3 8.4
Spectrum licence costs (48.6) - n.m.
Pension solvency funding (10.7) (1.3) n.m.
Wireless transition and AWS spectrum auction
costs (7.5) - n.m.
Restructuring expense (7.1) (2.3) n.m.
Wireless transition capital expenditures (2.4) - n.m.
Restructuring capital expenditures - (6.4) n.m.
Tax recoveries - 4.1 n.m.
-----------------------------
Consolidated free cash flow (5.5) 59.4 n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Free cash flow (continuing operations) 221.9 248.4 (10.7)
Spectrum licence costs (48.6) - n.m.
Pension solvency funding (22.1) (2.3) n.m.
Wireless transition and AWS spectrum auction
costs (17.8) - n.m.
Restructuring expense (7.1) (8.9) (20.2)
Wireless transition capital expenditures (2.4) - n.m.
Restructuring capital expenditures - (12.8) n.m.
Decision 2007-10 - 14.9 n.m.
Tax recoveries - 13.4 n.m.
-----------------------------
Consolidated free cash flow 123.9 252.7 (51.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow refers to cash flow from operating activities, less
capital expenditures, and excluding changes in working capital.
The in quarter increase year-over-year in our free cash flow from
continuing operations is primarily due to the timing of capital expenditures.
The year to date decrease year-over-year is primarily due to the timing of
capital expenditures and increased normal pension funding, which were offset
by higher EBITDA from continuing operations. We are confident in our prudent
approach toward the disciplined use of free cash flow and the support it
provides to our high-yield dividend.
The in quarter and year to date decreases year-over-year in our
consolidated free cash flow are primarily due to decreases in cash from
one-time items as listed above, the timing of capital expenditures, decreased
consolidated EBITDA, increased pension funding and decreased current tax
recoveries in 2008.
Cash Flows (used in) from Financing Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q3 3.3 (133.2) 136.5
YTD (103.8) (340.7) 236.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing activities refer to actions we undertake to fund our operations
through equity capital and borrowings.
The increase in the third quarter is primarily due to the repayment of
long-term debt and the issuance of notes payable. The year to date increase in
our cash flows from financing activities is primarily due to the issuance of
notes payable and to our purchase for cancellation of 2,377,500 common shares
for $111.0 million in the first half of 2007.
In the third quarter of 2008, we paid cash dividends of $42.0 million and
issued net notes payable in the amount of $45.0 million. In the third quarter
of 2007, we paid cash dividends of $42.0 million, and repaid long-term debt in
the amount of $91.9 million.
Year to date in 2008, we paid cash dividends of $126.0 million, issued
net notes payable in the amount of $115.0 million and repaid long-term debt in
the amount of $89.7 million. Year to date in 2007, we paid cash dividends of
$128.6 million, and repaid long-term debt in the amount of $106.5 million.
Credit Facilities
-------------------------------------------------------------------------
(in millions $) utilized at
September
capacity 30/08
-------------------------------------------------------------------------
Medium term note program 350.0 -
Commercial paper 150.0 20.0
Accounts receivable securitization 150.0 115.5
Revolving credit facility 200.0 169.5
---------------------
Total 850.0 305.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We have arrangements in place that allow us to access the debt and
commercial paper markets for funding when required. Borrowings under these
facilities typically are used to fund new initiatives, refinance maturing
debt, and manage cash flow fluctuations.
We established our $350 million medium term note program on January 18,
2008. In addition to this program, we have credit facilities available in the
amount of $500.0 million, which consist of a fully back-stopped commercial
paper program of $150.0 million, an accounts receivable securitization program
of $150.0 million, and a $200.0 million revolving credit facility. As at
September 30, 2008, we utilized $20.0 million of our commercial paper program
via the back-stop facility, $115.5 million of our accounts receivable
securitization program, and $169.5 million of our revolving credit facility,
which includes $74.5 million in undrawn letters of credit. Of this amount,
$52.5 million represents letters of credit issued under the new Solvency
Funding Relief Regulations enacted under the Pension Benefits Standards Act,
1985 (Canada), which permit the extension of pension solvency payments from a
five-year amortization period to a 10-year amortization period for our defined
benefit pension plans.
Capital Structure
-------------------------------------------------------------------------
(in millions $) September December
30/08 31/07
-------------------------------------------------------------------------
Bank indebtedness 3.5 10.1
Proceeds from accounts receivable securitization 115.5 43.0
Notes payable 115.0 -
Capital lease obligations, including current
portion 19.0 22.5
Long-term debt, including current portion 650.1 739.5
---------------------
Total debt 903.1 815.1
Shareholders' equity 1,409.8 1,404.0
---------------------
Total capitalization 2,312.9 2,219.1
---------------------
---------------------
Debt to capitalization 39.0% 36.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our capital structure illustrates the amount of our assets that are
financed by debt versus equity. In the first nine months of 2008, our debt
level increased approximately $85 million. The increase is due primarily to
the costs that we incurred related to our purchase of 35 MHz of spectrum in
the AWS spectrum auction and a seasonally high working capital level, which is
expected to decrease in the fourth quarter of 2008 causing a corresponding
reduction in debt levels by year-end. Our debt to total capitalization ratio
of 39.0% as at September 30, 2008 continues to represent excellent financial
strength and flexibility.
Credit Ratings
-------------------------------------------------------------------------
S&P - Senior debentures BBB+
-------------------------------------------------------------------------
S&P - Commercial paper A-2
-------------------------------------------------------------------------
DBRS - Senior debentures BBB
-------------------------------------------------------------------------
DBRS - Commercial paper R-2 (high)
-------------------------------------------------------------------------
Two leading rating agencies, Standard & Poor's ("S&P") and DBRS Limited
("DBRS"), analyze us and assign ratings based on their assessments. We
consistently have been assigned solid investment grade credit ratings. DBRS
confirmed our credit ratings on December 20, 2007 at "BBB" on our senior
debentures and "R-2 (high)" on our commercial paper, and maintained its stable
outlook. On December 17, 2007, S&P confirmed our credit ratings on our
long-term corporate credit and senior unsecured debt of "BBB+", and our
commercial paper of "A-2". The outlook remained unchanged at negative.
Outstanding Share Data as at October 28, 2008
Authorized:
- Unlimited number of Preference Shares of two classes issuable in one
or more series
- Unlimited number of Common Shares of a single class
-------------------------------------------------------------------------
Issued:
-------------------------------------------------------------------------
Book Value
Shares Number (in millions $)
-------------------------------------------------------------------------
Common 64,635,967 1,265.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options:
-------------------------------------------------------------------------
Weighted Average
Exercise Price
Options Number Per Share
-------------------------------------------------------------------------
Outstanding 2,287,890 $42.07
Exercisable 949,410 $40.49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contractual Obligations, Financial Instruments, Off-Balance Sheet
Arrangements, and Other Financial Arrangements
Our contractual obligations, financial instruments, off-balance sheet
arrangements, and other financial arrangements remain substantially unchanged
from those that were disclosed in our interim MD&As for the first and second
quarters of 2008, and our 2007 annual MD&A. For additional details, please
consult our interim MD&As for the first and second quarters of 2008, and our
2007 annual MD&A, which are available on our Web site at www.mtsallstream.com.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
---------------------------------------------
Our critical accounting estimates and assumptions remain substantially
unchanged from those that were disclosed in our interim MD&As for the first
and second quarters of 2008, and our 2007 annual MD&A. For additional details,
please consult our interim MD&As for the first and second quarters of 2008,
and our 2007 annual MD&A, which are available on our Web site at
www.mtsallstream.com.
CHANGES IN ACCOUNTING POLICIES, INCLUDING INITIAL ADOPTION
----------------------------------------------------------
Our accounting policies, including initial adoption, remain substantially
unchanged from those that were disclosed in our interim MD&As for the first
and second quarters of 2008, and our 2007 annual MD&A. For additional details,
please consult our interim MD&As for the first and second quarters of 2008,
and our 2007 annual MD&A, which are available on our Web site at
www.mtsallstream.com.
RISKS AND UNCERTAINTIES
-----------------------
Our risks and uncertainties remain substantially unchanged from those
that were disclosed in our interim MD&As for the first and second quarters of
2008, and our 2007 annual MD&A, except as noted below. For additional details,
please consult our interim MD&As for the first and second quarters of 2008,
and our 2007 annual MD&A, which are available on our Web site at
www.mtsallstream.com.
Bell Mobility Agreement
We and Bell Mobility have been parties to a wireless alliance that
addresses competition and reciprocal services in our respective territories
and provides us with access to various wireless-related platforms and
products. On March 5, 2008, we provided notice of termination to Bell Mobility
of certain of these wireless agreements relating to the framework underpinning
this wireless alliance. These agreements provide for the continuation of
services following such notice during a notice period and, thereafter, during
a transition period. Bell Mobility disputes that it has any remaining
obligations under these agreements. We have commenced formal proceedings to
resolve this disagreement. Notwithstanding this dispute, we have entered into
a transition agreement with Bell Mobility which will ensure continuity of
services to our customers, while reserving all rights to our respective
entitlements under these agreements. Although we still have to finalize our
transition plan, we have begun implementation, and effective September 29,
2008, we started activating new wireless customer additions and handset
upgrades on new service platforms independent of Bell Mobility.
We anticipate that the one-time costs of transitioning certain wireless
services requirements away from Bell Mobility to new suppliers and to our
wireless platform, as well as the costs associated with the AWS spectrum
auction, to be an aggregate of $40 million to $50 million over the next two
years, which includes the amount we have incurred year to date this year. As
noted above, we are disputing certain costs being charged by Bell Mobility in
relation to the transition away from Bell Mobility, and we are of the opinion
that such costs are recoverable from Bell Mobility, however, there is no
certainty that such costs will be recovered.
While there is always a risk associated with any transition, we have
plans to execute our transition of wireless services in a manner that will be
seamless to our customers.
Changes in Telecommunications Policy and CRTC Regulation
The telecommunications and broadcast industries in which we operate are
federally regulated. We operate as both an incumbent local exchange carrier in
Manitoba and as a competitive local exchange carrier nationally. In addition,
pursuant to Broadcasting Decision CRTC 2002-235, the CRTC granted us a Class 1
regional broadcasting distribution licence to operate as a broadcasting
distribution undertaking serving Winnipeg and the surrounding areas. Current
regulatory proceedings and policy issues, which present significant risk and
uncertainty on our business, are described below.
Essential Facilities
On March 3, 2008, the CRTC issued Revised regulatory framework for
wholesale services and definition of essential service, Telecom Decision CRTC
2008-17, in which it adopted a new broadened definition of an essential
service or facility as one that (i) is required by competitors to provide a
retail telecommunications service; (ii) is controlled by a company that could
use its market power to lessen or prevent competition; and (iii) provides a
functionality that would not be practical or feasible for competitors to
duplicate. In addition, the CRTC adopted six categories of mandated competitor
services, with differing approaches as to when and how mandated access could
or, in the case of one category of services will, be phased out. This decision
ensures that pricing for competitor services will remain, for the most part,
unchanged for a period of five years. On April 2, 2008, Bell Canada and other
carriers applied for leave to appeal the decision to the Federal Court of
Appeal. We successfully opposed this application, which was dismissed by the
Federal Court of Appeal on June 20, 2008. On May 15, 2008, Bell Canada filed
four separate applications asking the CRTC to review and vary elements of its
decision. We have opposed those applications, and have applied separately to
have the decision reviewed and varied with respect to the treatment of
Ethernet and asymmetric digital subscriber line. We expect the CRTC to rule on
these review and vary applications by the end of 2008 or early in 2009.
Deferral Account
On February 16, 2006, the CRTC issued Disposition of funds in the
deferral accounts, Telecom Decision CRTC 2006-9 ("Decision 2006-9"). In this
decision, the CRTC determined that the funds accumulated in our deferral
account should be used for certain reductions in rates for basic local
residential services and for certain optional features; for the expansion of
broadband services; and for initiatives to improve accessibility to
telecommunications services for persons with disabilities. After using
approximately $5 million to fund the required rate reductions which came into
effect on June 1, 2006, the estimate of the balance to be cleared from our
deferral account for the remaining initiatives is approximately $24 million.
The final calculation of the balance to be cleared is dependent upon certain
other CRTC proceedings.
In two subsequent decisions relating to the use of deferral account
funds, Telecom Decision CRTC 2007-50 dated July 6, 2007 and Telecom Decision
CRTC 2008-1 dated January 17, 2008 ("Decision 2008-1"), the CRTC approved
various proposals submitted for the expansion of broadband services in certain
rural and remote communities, and for improved access to telecommunications
services for persons with disabilities. In Decision 2008-1, the CRTC directed
that the remaining balance of the deferral accounts of the incumbent local
exchange carriers be rebated to residential customers in non-high-cost serving
areas.
Bell Canada and certain consumer groups have been granted leave to appeal
Decision 2006-9 to the Supreme Court of Canada. Bell Canada also has sought
leave from the Federal Court of Appeal to appeal Decision 2008-1. TELUS
Communications Inc. has appealed Decision 2008-1 by way of a petition to
Cabinet, and has filed an application with the CRTC to review and vary this
decision. On October 17, 2008 the CRTC dismissed this review and vary
application.
The final disposition of deferral account balances will be dependent upon
the outcome of these appeals. In the interim, Decision 2006-9 and Decision
2008-1 have been stayed by order of the Supreme Court of Canada.
AWS Spectrum Consultation and Auction
In February 2007, the federal government initiated a consultation on a
framework to auction spectrum in the 2 GHz range, including AWS spectrum. We
submitted comments in that consultation on May 25, 2007, and on June 27, 2007,
we submitted reply comments. Our submissions identified the need for the
federal government to adopt rules for the AWS spectrum auction that will allow
the competitive entry of new national and regional wireless providers in
Canada. In particular, we asked the federal government to designate two blocks
of spectrum for new entrant bidding only, and to mandate commercially
reasonable roaming and tower sharing on a non-discriminatory basis. In
November 2007, the federal government issued its Policy Framework for the
Auction for Spectrum Licenses for Advanced Wireless Services and other
Spectrum in the 2 GHz Range (the "Policy Framework") which was followed by the
release of the Licensing Framework for the Auction for Spectrum Licenses for
Advanced Wireless Services and other Spectrum in the 2 GHz Range (the
"Licensing Framework") in late December 2007. In both the Policy Framework and
the Licensing Framework, the federal government clearly expressed the
importance that it places on encouraging new wireless entry, and specifically
decided to set aside 40 MHz of spectrum for new entrant bidding only, and to
mandate both in-region and out-of-region roaming as well as tower sharing, all
on commercially reasonable terms.
The AWS spectrum auction commenced on May 27, 2008, and we participated
as a qualified new entrant through our wholly owned subsidiary 6934242 Canada
Limited. The auction concluded on July 21, 2008. We successfully bid for, and
are the provisional licensees with respect to, licenses representing 35 MHz of
spectrum in the province of Manitoba, at an auction price of approximately $41
million. We now have tendered payment and filed documentation demonstrating
compliance with the foreign investment restrictions applicable to prospective
licensees as required by the federal government, and we are waiting for the
response and issuance of the relevant licenses.
As a result of the AWS spectrum auction, two new entrants became the
provisional licensees for sufficient spectrum in Manitoba to enable them to
offer wireless services in competition with us. These new entrants have
indicated publicly that they will initially focus their efforts on more
densely populated areas of Canada where they also acquired spectrum, and one
announced they would delay entry into our market in Manitoba. We are
well-positioned to face these new competitors and there is no certainty that
these new entrants will create a more competitive environment in Manitoba at
some point in the future.
Competition Policy Review
On October 30, 2007, the Competition Policy Review Panel (the "Panel")
appointed by the federal government to review competition and investment
policy in Canada released a consultation paper entitled Sharpening Canada's
Competitive Edge. This consultation paper asks for submissions dealing with a
range of issues concerning competition and investment policy, including the
continued utility of foreign investment restrictions in the telecommunications
industry and the state of competition policy in Canada. On January 11, 2008,
we filed our submission and argued in favour of the removal of the
sector-specific foreign investment restrictions applicable to the
telecommunications industry, as well as for updates to competition policy to
deal with an increasingly deregulated telecommunications industry. In response
to our submission, the Panel requested that we appear before them to comment
further, which we did on January 24, 2008.
On June 26, 2008, the Panel submitted its report, entitled Compete to
Win, to the Minister of Industry. In its report, the Panel recommended the
immediate removal of foreign investment restrictions applicable to new entrant
telecommunications companies, including existing companies having less than a
10% market share in Canada, and broader liberalization for all broadcasting
and telecommunications companies subsequent to further review of broadcasting
and cultural policies. The Panel noted that its recommendations are consistent
with those of the Telecommunications Policy Review Panel that had been
established by the federal government in 2005. We support the Panel's
recommendations.
The Minister of Industry has indicated that the federal government will
review the Panel's recommendations.
Pension Solvency Funding
We have defined benefit pension plans which provide retirement benefits
to our employees. These plans are funded as determined through periodic
actuarial valuations.
We have filed January 1, 2008 actuarial valuations for our defined
benefit pension plans in accordance with federal pension legislation under the
Pension Benefits Standards Act, 1985 (Canada). As one of our defined benefit
pension plans is in a surplus position, solvency funding is not required for
this plan. We have two defined benefit pension plans with solvency
deficiencies for which a total of $30.8 million in solvency and special
funding payments are required in 2008.
In 2006, we elected to extend the amortization period of our solvency
funding payments from five years to 10 years based on the Solvency Funding
Relief Regulations. In accordance with the requirements of these regulations,
we have obtained letters of credit, which are amended annually, to guarantee
future funding of our registered pension plans.
Future solvency funding requirements will depend on the results of annual
actuarial funding valuations which are affected by various factors, such as
return on plan assets, changes in solvency liability discount rates, and
government regulations regarding the requirements associated with solvency
valuations.
In the third quarter, worldwide equity markets began to experience
unprecedented volatility and losses in value. Our pension plans are invested
in a well-diversified portfolio of assets, which has demonstrated over the
long-term to provide a return on plan assets that meets or exceeds the
long-term assumptions used by our actuaries to value these plans. However, if
these market conditions persist to the end of 2008, depending on the severity,
it could result in an increased solvency funding requirement for us.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
----------------------------------------------------------------------
REPORTING
---------
Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during our most recent interim period that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
2008 OUTLOOK
------------
Forward-looking statements disclaimer
This outlook includes forward-looking statements and information
(collectively, the "statements") about our corporate direction, business
opportunities, operating and dispute resolution activities, financial
objectives, and future financial results and performance that are subject to
risks, uncertainties and assumptions. As a consequence, actual results in the
future may differ materially from any conclusion, forecast or projection in
such forward-looking information. Forward-looking statements reflect our
expectations as at November 6, 2008. Examples of statements that constitute
forward-looking information may be identified by words such as "believe",
"expect", "project", "anticipate", "could", "target", "forecast", "intend",
"plan", "outlook", "pending", and other similar terms. Factors that could
cause actual results to differ materially from those expected, and the
material factors or assumptions that were applied in drawing a conclusion or
making a forecast or projection set out in such forward-looking statements,
include, but are not limited to, the items identified in this interim MD&A,
our interim MD&As for the first and second quarters of 2008, and our 2007
annual MD&A. Please note that forward-looking statements reflect our
expectations as at November 6, 2008. 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. Additional information relating to
our company, including our Annual Information Form, is available on SEDAR at
www.sedar.com. This outlook and the financial information contained herein
have been reviewed by our Audit Committee.
Factors that could cause anticipated opportunities and actual results to
differ materially include, but are not limited to, the intensity of
competitive activity from both traditional and new competitors (competitive
conditions); the ability to retain major customers (customer relationships);
decisions by the federal regulator that affect our ability to compete
effectively or to enter into new business opportunities (developments in
federal regulation); general economic and market conditions and the level of
consumer confidence and spending, and the demand for, and prices of, our
products and services (market conditions and economic fluctuations); the
ability to manage labour relations effectively (collective agreements); the
ability to anticipate, and respond to, changes in technology (technology); and
other risk factors listed from time to time in our comprehensive public
disclosure documents, including our 2007 Annual Report and in other filings
with the Canadian securities regulatory authorities.
For further information, refer to the "Risks and Uncertainties" sections
in this interim MD&A, our interim MD&As for the first and second quarters of
2008, and our 2007 annual MD&A.
-------------------------------------------------------------------------
2008 Financial Outlook - Continuing Operations
-------------------------------------------------------------------------
Revenues $1.920 billion to $1.980 billion
EBITDA $660 million to $680 million
EPS $2.95 to $3.15
Free cash flow $250 million to $280 million
Capital expenditures 14% to 15% of revenues
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Looking beyond 2008, we expect consolidated revenues and EBITDA growth in
the range of 1% to 3% for 2009 and into the near future.
A Sharpened Strategic Focus
We have a unique position in the Canadian communications services
industry. We are the leading full-service communications provider in Manitoba,
and have a leading presence in national enterprise markets.
We are building on our unique combination of market leadership in
Manitoba and agile competitive presence in business markets across Canada to
deliver innovative telecommunications solutions that bring value to our
customers. Following a thorough strategic business review in 2006, we have
been pursuing opportunities to increase our focus on serving the national
mid-market and small business segments. Our mid-market strategy is centred on
the availability of our market-leading IP network in major urban centres in
specific markets in the country. Together, our new initiatives are forecasted
to achieve $200 million of incremental revenues by 2010.
In our Consumer Markets division, where local competition has
intensified, our emphasis will be on growth products and bundles in areas such
as high-speed Internet, wireless and digital television services. Our goal is
to maintain our position as the one-stop provider of clear choice to Manitoba
households and consumers by delivering double digit growth in our Internet,
digital television and wireless services in 2008 in a more competitive and
deregulated market. We have been forborne in a few markets, including the
local market in Winnipeg, which has enhanced our ability to compete against
new market entrants.
In our Enterprise Solutions division, we will build on our established
leadership in advanced IP, MPLS solutions and unified communications services.
As part of this new strategy, we will strive to reduce our direct costs
through the migration of customers to our network, and we will continue to
improve our productivity and cost structure. From a growth perspective,
revenues from our IP connectivity and unified communications product lines are
forecasted to grow at double-digit rates.
Material Assumptions
We have made a number of assumptions in preparing our outlook and making
certain other forward-looking statements, which include, but are not limited
to, the following assumptions:
Economic Assumptions
The general economic activity in the national and regional markets in
which we operate influences our performance. Consistent with the Manitoba
Finance Survey of forecasts, which includes the Conference Board of Canada, as
of November 2007, we assumed a growth rate of approximately 3% for gross
domestic product for the Manitoba and national markets. The economic
assumptions, as well as other factors that have an impact on our business, may
be challenged by current economic and market conditions which could have an
adverse effect upon our financial outlook.
Market Assumptions
As competition in the overall marketplace escalates, the broad market
segment trends that have taken shape in recent years also will persist in
2008. Growth in service areas such as wireless, Internet, digital television,
converged IP and unified communications for business customers is expected to
continue at similar levels in 2008. The competitive pressure experienced in
traditional legacy services, which include data connectivity, and local and
long distance services, will continue in similar trends as it did in 2007.
Likewise, we anticipate that customer demand will continue to migrate to next
generation services. To face continued strong competition in business markets,
we are refining our market focus, creating innovative IP solutions, reducing
our cost structure, and investing selectively in high-margin opportunities.
Although competition from an incumbent cable operator is expected to continue
in the Manitoba residential market, we are confident that we have prepared our
operations and strategies prudently to counter these threats. Through our
broadband network initiative and our residential service offerings, which
include local and long distance, wireless, Internet, digital television and
alarm services, we believe that we are well-positioned to compete
successfully.
Financial and Operational Assumptions
We have made the following financial and operating assumptions with
respect to the forward-looking information in this outlook:
- double-digit growth for growth services, to represent approximately
45% of total revenue in 2008 as compared to 40% in 2007; and
- overall revenue growth of 1% to 3%.
We have future tax assets resulting from net operating loss
carryforwards, which, to the extent utilized, will reduce future taxable
income. As such, we do not expect to pay any cash taxes on earnings from
operations in 2008.
Cost Reduction Assumptions
Key to our operating and financial progress will be our restructuring
activities. We expect to achieve further cost reductions in 2008 of between
$20 million and $30 million in 2008. To capture these additional savings, we
expect to incur further restructuring costs of approximately $10 million in
2008. These costs are not included in our 2008 outlook from continuing
operations.
Liquidity and Capital Resources Assumptions
Our operations historically have delivered strong cash flows, and we
expect this positive trend to continue in 2008. We will continue to invest in
our core operations with a focus on our growth products and services to ensure
success in the markets in which we operate. Significant investments have been
made in modernizing our network infrastructure, both in Manitoba and
nationally. In 2005, we saw the completion of a five-year, $300 million
broadband expansion program in Manitoba, which has positioned our network
capabilities second to none in Canada. These investments, in addition to the
investment choices we are making nationally, are placing us in a favourable
position in terms of capital requirements going forward. In 2008, our capital
program is expected to comprise 14% to 15% of our revenues.
Our cash requirements for 2008 include a non-recurring obligation of
approximately $10 million for restructuring programs and, based on January 1,
2007 actuarial valuations, approximately $30 million for pension solvency
funding.
FOURTH QUARTER DIVIDEND
The Board of Directors of MTS today declared a quarterly cash dividend of
$0.65 per share. The fourth quarter dividend is payable on January 15, 2009 to
shareholders of record at the close of business on December 15, 2008.
The fourth quarter dividend is designated as an "eligible" dividend under
the Income Tax Act (Canada) and any corresponding provincial legislation.
Under this legislation, individuals resident in Canada may be entitled to
enhanced dividend tax credits which reduce income tax otherwise payable.
Notes:
1. Supplementary financial information is available in the Investors
section of the MTS Web site at www.mtsallstream.com.
2. MTS's third quarter 2008 conference call with the investment
community is scheduled for 4:30 p.m. Eastern time on
November 6, 2008. The dial-in number is 1-800-595-8550. A live
audio Webcast of the investor conference call can be accessed by
visiting the Investors section of the MTS Web site
(www.mtsallstream.com). A replay of the conference call will be
available until midnight November 16, 2008 and can be accessed by
dialing 1-877-289-8525 or 1-416-640-1917 (access code 21285684
followed by the number sign). The audio Webcast will be archived on
MTS's Web site.
This interim MD&A contains forward-looking statements and there are risks
that actual results may differ materially from those contemplated by these
forward-looking statements. Forward-looking statements reflect our
expectations as at November 6, 2008. Additional information on these risks can
be found in our filings with the Canadian securities regulatory authorities.
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. This interim MD&A, and the
financial information contained herein have been reviewed by our Audit
Committee and approved by our Board of Directors.
In addition, investors should read the forward-looking statements
disclaimer in the "2008 Outlook" section for the various factors, including
economic, competitive, regulatory and company-specific, that could cause
actual future financial and operating results to differ materially from the
forward-looking information in this interim MD&A.
About Manitoba Telecom Services Inc.
Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS
Allstream Inc., is one of Canada's leading national communication solutions
providers, delivering innovative products and services through its Enterprise
Solutions and Consumer Markets divisions. The Enterprise Solutions division,
which operates under the Allstream brand nationally and under the MTS
Allstream brand in Manitoba, is a leading competitor in the national business
and wholesale markets. This division offers customers a portfolio of solutions
tailored to the needs of medium and large businesses looking for success in a
world of rapidly evolving technology - Internet protocol connectivity, unified
communications, IT consulting and security services, and voice and data
connectivity services. The Consumer Markets division leads every
telecommunications market segment in Manitoba, delivering a full suite of next
generation wireless, high-speed Internet and data, digital television and
wireline voice services under the MTS brand, as well as small business
services in select markets across Canada under the Allstream brand, and
security and alarm monitoring services through the company's subsidiary AAA
Alarm Systems Ltd., which also operates in other western provinces. The
company's extensive national broadband fibre optic network spans more than
24,300 kilometres, and provides international connections through strategic
alliances and interconnection agreements with other international service
providers. Manitoba Telecom Services Inc.'s common shares are listed on The
Toronto Stock Exchange (trading symbol: MBT). For more information, please
visit: www.mtsallstream.com.
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND
COMPREHENSIVE INCOME
(unaudited)
For the periods ended
September 30
(in millions, except Three months ended Nine months ended
earnings per share) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues $ 479.9 $ 475.9 $ 1,445.1 $ 1,416.6
-------------------------------------------------------------------------
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Operating expenses
Operations 322.3 311.1 957.8 902.8
Restructuring (Note 2) 7.1 2.3 7.1 8.9
Amortization 83.9 80.0 246.6 239.0
-------------------------------------------------------------------------
413.3 393.4 1,211.5 1,150.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 66.6 82.5 233.6 265.9
-------------------------------------------------------------------------
Other income 2.5 1.1 7.6 7.2
-------------------------------------------------------------------------
Debt charges (12.1) (12.8) (36.7) (39.4)
-------------------------------------------------------------------------
Income before income taxes 57.0 70.8 204.5 233.7
-------------------------------------------------------------------------
Income tax expense (recovery)
(Note 4)
Current 0.2 (4.1) 0.3 (13.2)
-------------------------------------------------------------------------
Future 18.7 29.4 73.9 91.5
-------------------------------------------------------------------------
18.9 25.3 74.2 78.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income and
comprehensive income
for the period $ 38.1 $ 45.5 $ 130.3 $ 155.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share
(Note 8) $ 0.59 $ 0.70 $ 2.02 $ 2.38
-------------------------------------------------------------------------
Diluted earnings per share
(Note 8) $ 0.59 $ 0.70 $ 2.02 $ 2.38
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
For the periods ended
September 30 Three months ended Nine months ended
(in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 129.0 $ 145.0 $ 120.8 $ 183.9
-------------------------------------------------------------------------
Net income 38.1 45.5 130.3 155.4
-------------------------------------------------------------------------
Dividends declared (42.0) (42.0) (126.0) (126.3)
-------------------------------------------------------------------------
Purchase of outstanding
shares - - - (64.5)
-------------------------------------------------------------------------
Retained earnings, end of
period $ 125.1 $ 148.5 $ 125.1 $ 148.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
(in millions) 2008 2007
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable (Notes 3 and 5) $ 72.5 $ 176.1
-------------------------------------------------------------------------
Future income taxes (Note 4) 103.9 109.1
-------------------------------------------------------------------------
Other current assets (Note 6) 71.6 55.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
248.0 341.0
Property, plant and equipment 3,824.0 3,751.5
-------------------------------------------------------------------------
Accumulated amortization 2,304.1 2,264.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,519.9 1,487.1
Other assets 380.7 334.8
-------------------------------------------------------------------------
Future income taxes (Note 4) 447.3 517.9
-------------------------------------------------------------------------
Goodwill and other intangible assets 59.5 58.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,655.4 $ 2,739.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness (Note 5) $ 3.5 $ 10.1
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
(Note 5) 303.8 404.2
-------------------------------------------------------------------------
Advance billings and payments 48.8 49.2
-------------------------------------------------------------------------
Current portion of long-term debt (Note 5) 220.0 89.7
-------------------------------------------------------------------------
Notes payable (Notes 5 and 7) 115.0 -
-------------------------------------------------------------------------
Current portion of capital lease obligations 3.3 6.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
694.4 559.3
Long-term debt (Note 5) 430.1 649.8
-------------------------------------------------------------------------
Long-term portion of capital lease obligations 15.7 16.4
-------------------------------------------------------------------------
Deferred employee benefits 43.6 45.0
-------------------------------------------------------------------------
Other long-term liabilities (Note 5) 60.1 62.1
-------------------------------------------------------------------------
Future income taxes (Note 4) 1.7 2.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,245.6 1,335.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 9) 1,265.7 1,265.5
-------------------------------------------------------------------------
Contributed surplus 19.0 17.7
-------------------------------------------------------------------------
Retained earnings 125.1 120.8
-------------------------------------------------------------------------
1,409.8 1,404.0
-------------------------------------------------------------------------
$ 2,655.4 $ 2,739.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the periods ended
September 30 Three months ended Nine months ended
(in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 38.1 $ 45.5 $ 130.3 $ 155.4
-------------------------------------------------------------------------
Add items not affecting
cash
Amortization 83.9 80.0 246.6 239.0
-------------------------------------------------------------------------
Future income taxes
(Note 4) 18.7 29.4 73.9 91.5
-------------------------------------------------------------------------
Deferred wireless costs (9.3) (8.9) (28.8) (26.3)
-------------------------------------------------------------------------
Pension funding and net
pension credit (17.5) (7.4) (42.4) (16.2)
-------------------------------------------------------------------------
Other, net 0.7 0.4 (10.7) (3.3)
-------------------------------------------------------------------------
Changes in non-cash
working capital 10.3 56.0 (9.2) (24.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from
operating activities 124.9 195.0 359.7 415.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from investing
activities
Capital expenditures, net (120.1) (79.6) (245.0) (187.4)
-------------------------------------------------------------------------
Acquisition (Note 13) - - (4.0) -
-------------------------------------------------------------------------
Other, net - 0.1 (0.3) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
investing activities (120.1) (79.5) (249.3) (187.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from financing
activities
Dividends paid (42.0) (42.0) (126.0) (128.6)
-------------------------------------------------------------------------
Repayment of long-term
debt - (91.9) (89.7) (106.5)
-------------------------------------------------------------------------
Issuance of notes payable,
net 45.0 - 115.0 -
-------------------------------------------------------------------------
Issuance of share
capital (Note 9) - 0.5 0.2 5.9
-------------------------------------------------------------------------
Purchase of outstanding
shares - - - (111.0)
-------------------------------------------------------------------------
Other, net 0.3 0.2 (3.3) (0.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows (used in) from
financing activities 3.3 (133.2) (103.8) (340.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in bank indebtedness 8.1 (17.7) 6.6 (112.2)
-------------------------------------------------------------------------
(Bank indebtedness) cash
and cash equivalents,
beginning of period (11.6) 12.2 (10.1) 106.7
-------------------------------------------------------------------------
Bank indebtedness, end of
period $ (3.5) $ (5.5) $ (3.5) $ (5.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the nine months ended September 30, 2008 and 2007 (All financial
amounts are in $ millions, except where noted.)
-------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of Manitoba Telecom
Services Inc. (the "Company") have been prepared in accordance with
Canadian generally accepted accounting principles. These interim
consolidated financial statements have been prepared using the same
accounting policies and methods of their application as the Company's
audited consolidated financial statements for the year ended
December 31, 2007.
These interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 2007.
Accounting policy developments
Commencing with the Company's 2009 fiscal year, the recommendations
of the Canadian Institute of Chartered Accountants ("CICA") for
"goodwill and intangible assets" (CICA Handbook section 3064) will
apply to the Company. This guidance establishes updated standards for
the recognition, measurement, presentation and disclosure of
intangible assets. The Company does not expect to be materially
affected by the new recommendations.
2. RESTRUCTURING
The efficiency program in 2008 is aimed at achieving process
improvements and implementing further cost reduction initiatives.
During the three and nine months ended September 30, 2008, the
Company recorded restructuring expenses of $7.1 million related to
this efficiency program.
The restructuring activity in 2007 was a continuation of a
restructuring program which commenced in the fourth quarter of 2006
and was aimed at improving efficiencies and reducing operating costs.
During the three and nine months ended September 30, 2007, the
Company recorded restructuring expenses of $2.3 million and
$8.9 million, respectively.
The Company has outstanding liabilities related to workforce
reduction programs that were initiated in prior years. The total of
these outstanding liabilities as at December 31, 2007 was $7.9
million. During the three and nine months ended September 30, 2008
payments of $0.6 million and $6.5 million, respectively, were applied
against these liabilities, leaving a total outstanding liability of
$1.4 million as at September 30, 2008.
3. ACCOUNTS RECEIVABLE SECURITIZATION
Under the terms of the Company's accounts receivable securitization
program, the Company has the ability to sell, on a revolving basis,
an undivided ownership interest in its accounts receivable to a
securitization trust, up to a maximum of $150.0 million. As a result
of selling the interest in certain of the trade receivables on a
fully serviced basis, a service liability of $0.2 million has been
recognized by the Company as at September 30, 2008.
The terms of the Company's accounts receivable securitization program
also require the Company to maintain reserve accounts, the fair value
of which approximates carrying value. As at September 30, 2008, the
Company had received $115.5 million on the sale of its accounts
receivable to the trust, which is comprised of the outstanding
undivided ownership interest held by the trust of $149.2 million and
the reserve accounts of $33.7 million.
As at September 30, 2008, the Company recognized a pre-tax loss of
$0.2 million on the sale of accounts receivable, which is recorded in
other income.
During the three and nine months ended September 30, 2008, cash flows
received and paid to the trust in revolving period securitizations
were $608.0 million and $2,106.5 million, respectively.
The key assumptions used to determine the loss on sale of receivables
and the fair values attributed to the retained interest as at
September 30, 2008 are as follows:
---------------------------------------------------------------------
Annual discount rate 3.39%
---------------------------------------------------------------------
Weighted average life of receivables sold (days) 39
---------------------------------------------------------------------
Credit loss ratio 0.51%
---------------------------------------------------------------------
Servicing fee liability 1.0%
---------------------------------------------------------------------
---------------------------------------------------------------------
4. INCOME TAXES
A reconciliation of the statutory income tax rate to the effective
income tax rate is as follows:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Combined basic federal and provincial
statutory income tax rate 32.9% 35.7%
---------------------------------------------------------------------
Change in substantively enacted tax rates 3.7 2.6
---------------------------------------------------------------------
Reduction of valuation allowance - (5.5)
---------------------------------------------------------------------
Other items (0.3) 0.7
---------------------------------------------------------------------
Effective tax rate 36.3% 33.5%
---------------------------------------------------------------------
---------------------------------------------------------------------
The balances of future income taxes as at September 30, 2008 and
December 31, 2007 represent the future benefit of unused tax losses,
and temporary differences between the tax and accounting bases of
assets and liabilities. The major items giving rise to future income
tax assets and liabilities are presented below:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Non-capital loss carryforwards 241.2 360.6
---------------------------------------------------------------------
Property, plant and equipment 436.5 374.6
---------------------------------------------------------------------
Other (64.2) (46.5)
---------------------------------------------------------------------
Total future income tax asset 613.5 688.7
---------------------------------------------------------------------
Valuation allowance (64.0) (64.4)
---------------------------------------------------------------------
Net future income tax asset 549.5 624.3
---------------------------------------------------------------------
---------------------------------------------------------------------
Future income taxes are comprised of:
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Current future income tax asset 103.9 109.1
---------------------------------------------------------------------
Long-term future income tax asset 447.3 517.9
---------------------------------------------------------------------
Long-term future income tax liability (1.7) (2.7)
---------------------------------------------------------------------
Net future income tax asset 549.5 624.3
---------------------------------------------------------------------
---------------------------------------------------------------------
During the nine months ended September 30, 2008, the Company paid
$0.1 million in cash income taxes (2007 - recovered $3.8 million).
As at September 30, 2008, the Company had non-capital loss
carryforwards available to reduce future years' taxable income, which
expire as follows:
---------------------------------------------------------------------
2009 686.9
---------------------------------------------------------------------
2014 and beyond 73.3
---------------------------------------------------------------------
760.2
---------------------------------------------------------------------
---------------------------------------------------------------------
5. FINANCIAL INSTRUMENTS
Effective January 1, 2008, the Company adopted CICA Handbook sections
3862 "financial instruments - disclosures" and 3863 "financial
instruments - presentation". These standards outline the presentation
requirements for financial instruments and require the Company to
disclose information that enable users to evaluate the significance
of financial instruments for the Company's financial position and
performance, the nature and extent of risks arising from those
financial instruments to which the Company is exposed and how the
Company manages those risks.
Fair value
The Company's financial assets and liabilities are recorded initially
at the related transaction amount, which is normally the historical
cost. When the carrying value of a financial asset exceeds its fair
value on a basis that is other than temporary, the carrying value is
reduced to the fair value. With the exception of long-term debt, the
carrying value of the Company's financial assets and liabilities,
which are subject to normal trade terms, approximates the fair value.
The fair value of long-term debt, including the current portion, is
$640.2 million as at September 30, 2008. The fair value of long-term
debt, which has fixed interest rates, is estimated by discounting the
expected future cash flows using the relevant risk-free interest rate
adjusted for an appropriate risk premium for the Company's credit
profile.
Credit Risk
The Company is exposed to credit risk from its customers. This risk
is minimized by the Company's large and diverse customer base. The
following table provides an aging analysis of the Company's accounts
receivables as at September 30, 2008:
---------------------------------------------------------------------
0-30 days 125.5
---------------------------------------------------------------------
31-60 days 42.3
---------------------------------------------------------------------
61-90 days 8.4
---------------------------------------------------------------------
Past 90 days 12.2
---------------------------------------------------------------------
Total 188.4
---------------------------------------------------------------------
Less: accounts receivable securitization (115.9)
---------------------------------------------------------------------
Accounts receivable outstanding 72.5
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company maintains an allowance for doubtful accounts for
potential credit losses. This allowance is based on management's
estimates and assumptions regarding current market conditions,
customer analysis and historical payment trends. These factors are
considered when determining whether past due accounts are allowed for
or written-off.
The Company's allowance for doubtful accounts for non-large business
accounts receivable represents all non-large business accounts over
90 days past due. For large business accounts receivable, the
allowance is calculated as a specific percentage of total large
business accounts outstanding plus an additional provision for
certain high risk large business accounts.
The following table provides a continuity of the Company's accounts
receivable allowance for doubtful accounts:
---------------------------------------------------------------------
Twelve
Nine months months
ended ended
September 30, December 31,
2008 2007
---------------------------------------------------------------------
Balance, beginning of the period 13.3 10.8
---------------------------------------------------------------------
(Decrease) increase in allowance (net of
recoveries and accounts written-off) (0.9) 2.5
---------------------------------------------------------------------
Balance, end of the period 12.4 13.3
---------------------------------------------------------------------
---------------------------------------------------------------------
Liquidity Risk
The Company is exposed to liquidity risk from its debt. This risk is
minimized by the Company's capital structure management policies, and
by maintaining bank credit facilities. The following table provides a
summary of the maturity dates for various financial liabilities:
---------------------------------------------------------------------
Less than
1 year 1-2 years 2-3 years 3+ years
---------------------------------------------------------------------
Bank indebtedness 3.5 - - -
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 303.8 - - -
---------------------------------------------------------------------
Notes payable 115.0 - - -
---------------------------------------------------------------------
Long-term debt,
including current
portion 220.0 11.0 219.6 199.5
---------------------------------------------------------------------
Other long-term
liabilities - 10.2 8.4 41.5
---------------------------------------------------------------------
642.3 21.2 228.0 241.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Market Risk
The Company is exposed to market risk from interest rates related to
its debt, and from foreign exchange rates related to normal business
operations in foreign currencies.
Interest rate risk is minimized by the Company's capital structure
management policies outlined in Note 12.
The Company enters into foreign currency forward contracts to manage
foreign currency exposure which arises in the normal course of
business operations. As at September 30, 2008, the Company has
outstanding foreign currency forward contracts to purchase
$14.2 million U.S. As part of the Company's accounting policy to
adjust outstanding foreign currency forward contracts from book value
to fair value, the Company has recorded a gain in other income of
$0.5 million and $1.9 million for the three and nine months ended
September 30, 2008, respectively. These contracts mature periodically
beginning in October 2008 and ending in December 2008.
Reasonable fluctuations in market interest rates and foreign currency
exchange rates would not have a material impact on the Company's net
income and comprehensive income.
6. OTHER CURRENT ASSETS
The Company's inventory balance consists of wireless handsets, parts
and accessories, and communications equipment held for resale. The
Company performs periodic reviews of inventory for obsolescence and,
during the three and nine months ended September 30, 2008, expensed
$0.1 million and $0.3 million, respectively, in obsolete inventory
(2007 - $0.1 million and $0.3 million). During the three and nine
months ended September 30, 2008, the Company expensed $12.0 million
and $38.3 million, respectively, of inventory relating to cost of
goods sold (2007 - $11.6 million and $28.7 million).
7. NOTES PAYABLE
The Company has a $350 million bank credit facility with a syndicate
of financial institutions which consists of $150 million to support
the Company's commercial paper program, and a $200 million revolving
credit facility for cash management purposes and the issuance of
letters of credit. As at September 30, 2008, the Company had utilized
$20 million in notes payable under the commercial paper backstop
facility and $95.0 million in notes payable under its revolving
credit facility. As at September 30, 2008, the Company had $74.5
million in undrawn letters of credit outstanding. The Company paid
short-term interest costs of $1.3 million and $1.4 million for the
three and nine months ended September 30, 2008, respectively.
8. EARNINGS PER SHARE RECONCILIATION
The following table provides a reconciliation of the information used
to calculate basic and diluted earnings per share:
---------------------------------------------------------------------
Nine months ended
September 30
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Net income and comprehensive income
Basic and diluted 130.3 155.4
---------------------------------------------------------------------
Weighted average shares outstanding (in
millions)
Weighted average number of shares
outstanding - basic 64.6 65.2
---------------------------------------------------------------------
Dilutive effect of outstanding stock options - 0.2
---------------------------------------------------------------------
Weighted average number of shares
outstanding - diluted 64.6 65.4
---------------------------------------------------------------------
Earnings per share ($)
Basic earnings per share 2.02 2.38
---------------------------------------------------------------------
Diluted earnings per share 2.02 2.38
---------------------------------------------------------------------
---------------------------------------------------------------------
9. SHARE CAPITAL
As at September 30, 2008, share capital consists of 64,635,967 issued
and outstanding Common Shares (December 31, 2007 - 64,631,667).
During the nine months ended September 30, 2008, 4,300 stock options
to purchase Common Shares were exercised for cash consideration of
$0.2 million, of which $0.2 million was credited to share capital.
10. EMPLOYEE FUTURE BENEFITS
The Company's total net benefit credit for all of its defined benefit
and defined contribution pension plans, supplemental pension
arrangements, and other non-pension employee future benefits for the
three and nine months ended September 30, 2008 is $0.2 million and
$0.5 million, respectively.
11. SEGMENTED INFORMATION
As at September 30, 2008, the Company had two reportable operating
segments: the Consumer Markets division and the Enterprise Solutions
division. The Consumer Markets division provides a full range of
wireless, high-speed Internet and data, digital television, and
wireline voice services to residential and small business customers
in Manitoba. The Consumer Markets division also provides alarm
monitoring services to residential and small business customers in
the western provinces, and Internet, data and voice services to small
business customers in Canada. The Enterprise Solutions division
provides Internet protocol-based communications, unified
communications, voice, and data connectivity services to medium and
large business customers in Canada. In 2008, the Company changed the
basis for its allocation of certain expenses across divisions.
Accordingly, segmented information for 2007 has been restated to
conform with these changes.
The Company evaluates performance based on EBITDA (earnings before
interest, taxes, amortization, other income, and discontinued
operations). EBITDA, as reported below, includes intersegment
revenues and expenses. The Company accounts for intersegment revenues
and expenses at either prices that approximate current market prices
or cost, depending on the type of service.
The following table provides further segmented information:
---------------------------------------------------------------------
Three months ended September 30
---------------------------------------------------------------------
Consumer Enterprise
Markets Solutions
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External 208.2 204.8 271.7 271.1
---------------------------------------------------------------------
Internal 0.1 0.1 - 0.1
---------------------------------------------------------------------
EBITDA 97.3 104.2 53.3 60.1
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended September 30
---------------------------------------------------------------------
Other Total
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External - - 479.9 475.9
---------------------------------------------------------------------
Internal 10.4 9.1 10.5 9.3
---------------------------------------------------------------------
EBITDA (0.1) (1.8) 150.5 162.5
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended September 30
---------------------------------------------------------------------
Consumer Enterprise
Markets Solutions
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External 612.8 600.7 832.3 815.9
---------------------------------------------------------------------
Internal 0.3 0.3 0.1 0.1
---------------------------------------------------------------------
EBITDA 296.3 306.6 183.9 200.6
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended September 30
---------------------------------------------------------------------
Other Total
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External - - 1,445.1 1,416.6
---------------------------------------------------------------------
Internal 29.0 28.2 29.4 28.6
---------------------------------------------------------------------
EBITDA - (2.3) 480.2 504.9
---------------------------------------------------------------------
---------------------------------------------------------------------
Reconciliation of net income and comprehensive income is as follows:
---------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
---------------------------------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Total EBITDA 150.5 162.5 480.2 504.9
---------------------------------------------------------------------
Amortization (83.9) (80.0) (246.6) (239.0)
---------------------------------------------------------------------
Other income 2.5 1.1 7.6 7.2
---------------------------------------------------------------------
Debt charges (12.1) (12.8) (36.7) (39.4)
---------------------------------------------------------------------
Income tax expense (18.9) (25.3) (74.2) (78.3)
---------------------------------------------------------------------
Consolidated net income and
comprehensive income 38.1 45.5 130.3 155.4
---------------------------------------------------------------------
---------------------------------------------------------------------
12. CAPITAL STRUCTURE FINANCIAL POLICIES
Effective January 1, 2008, the Company adopted CICA Handbook section
1535 "capital disclosures". These disclosure standards require the
Company to provide disclosure of how the Company manages its capital.
The Company's objectives when managing capital are (i) to maintain an
acceptable level of liquidity risk so that the Company can continue
to cover its financial obligations and investment requirements under
the current business model; and (ii) to enhance shareholder value by
maintaining an efficient cost of capital.
The Company manages capital through the monitoring of a number of
measures, with the primary one being debt to capitalization. This
metric illustrates the amount of assets that are financed by debt
versus equity. As part of managing the capital structure, the Company
will make adjustments to it based on changes in economic conditions
and the risk characteristics of the underlying assets. In order to
maintain an optimal capital structure, the Company may buy back
shares to reduce shareholders' equity or sell assets to reduce debt.
The following table provides information on the Company's debt to
capitalization ratio:
---------------------------------------------------------------------
September 30 December 31
2008 2007
---------------------------------------------------------------------
Bank indebtedness 3.5 10.1
---------------------------------------------------------------------
Proceeds from accounts receivable
securitization 115.5 43.0
---------------------------------------------------------------------
Notes payable 115.0 -
---------------------------------------------------------------------
Capital lease obligations, including current
portion 19.0 22.5
---------------------------------------------------------------------
Long-term debt, including current portion 650.1 739.5
---------------------------------------------------------------------
Total debt 903.1 815.1
---------------------------------------------------------------------
Shareholders' equity 1,409.8 1,404.0
---------------------------------------------------------------------
Total capitalization 2,312.9 2,219.1
---------------------------------------------------------------------
Debt to capitalization 39.0% 36.7%
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company must comply with two types of covenants regarding capital
structure. The first is an earnings coverage covenant on the
Company's medium term notes that requires the Company to maintain a
minimum ratio of earnings before interest and taxes over debt
charges. The second is a level of debt covenant on the Company's
medium term notes and bank credit facility that requires the Company
not to exceed a specified debt to total capitalization level. The
Company continually monitors these covenants and is in full
compliance.
13. ACQUISITION
Effective January 1, 2008, the Company acquired all of the
outstanding shares of ICU Technologies Inc., a provider of video
conferencing solutions in Ontario, for a preliminary purchase price
of $4.0 million. The purchase price is subject to adjustments, which
are expected to be resolved within one year from the date of
acquisition. This acquisition was accounted for using the purchase
method, and the purchase price has been allocated on a preliminary
basis to assets of $4.5 million, liabilities of $1.4 million, and
goodwill of $0.9 million. The acquired assets included intangible
assets of $3.6 million. These intangible assets represent customer
contracts and relationships of $1.9 million, brand name of
$0.5 million and a non-competition agreement of $1.2 million. The
intangible assets are being amortized over estimated periods of
benefit of three to five years. The goodwill amount has been
allocated to the Enterprise Solutions division operating segment. The
operating results of this business are included in the Company's
consolidated operating results from the effective date of
acquisition.
14. COMPARATIVE FIGURES
The prior period figures have been reclassified when necessary to
conform to the current period's presentation.
%SEDAR: 00003357E
For further information: Investors: Ian Chadsey, Vice-President,
Investor Relations, (204) 941-8283, investor.relations@mtsallstream.com;
Media: Greg Burch, Manager, Corporate Communications, (416) 345-3576 or (204)
941-8576, media.relations@mtsallstream.com
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