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 fourth quarter 2008 management's discussion and
analysis dated February 5, 2009 (available at the Investors section of
www.mtsallstream.com), which is incorporated by reference in this
release.
2008 Highlights
- Achieved guidance for revenue, EBITDA, EPS, capital expenditures and
free cash flow from continuing operations
- Full-year revenue grows for the first time since 2005
- Revenues from growth services increase by 11%
- Free cash flow from continuing operations up by 1% for the full year
- 2008 annualized cost reductions of $30 million, meeting top end of
savings targetWINNIPEG, Feb. 5 /CNW/ - Manitoba Telecom Services Inc., which includes
its principal operating subsidiary, MTS Allstream Inc. (the "Company" or "MTS
Allstream") (TSX: MBT), one of Canada's leading national communications
companies, today reported fourth quarter and full-year financial performance.
"MTS Allstream delivered solid results in 2008 as we continued to execute
on our strategy," said Pierre Blouin, Chief Executive Officer. "The company
achieved its guidance on the strength of continued performance by our Consumer
Markets division in Manitoba and a record level of new contract wins by our
Enterprise Solutions division. In a challenging environment, we were able to
grow full-year revenue, free cash flow(1), EBITDA(2) and EPS(3) while
maintaining one of the strongest balance sheets in the telecommunications
sector. This performance reflects the continued strength of the Manitoba
economy and gives us confidence that we can achieve our plan for 2009."
Full-year revenue from continuing operations (4) increased by 0.8% to
$1,921.5 million, EBITDA from continuing operations increased by 1.0% to
$661.8 million, and free cash flow from continuing operations was up 1.1% to
$261.3 million. EPS from continuing operations for the year grew $0.09 or 3.1%
to $2.98, which was in line with the Company's guidance. Overall EBITDA margin
performance was stable at 34.4% for 2008.
Growth services revenues, which include wireless, high-speed Internet,
digital television, converged Internet protocol ("IP") and unified
communications services, increased by 11.3% to $845.4 million for the year.
Growth services contributed 44.6% of total revenue in the fourth quarter of
2008 and 44% for the year, which is well ahead of the 41.8% and 39.8%
contributions, respectively, for the same periods of 2007.
Demonstrating its continued ability to improve its cost structure, the
Company achieved annualized cost savings of $29.7 million in 2008, reaching
the high end of its objective for the year. Over the past three years, MTS
Allstream has achieved significant annualized cost savings and shifted its
product mix toward growth services while at the same time increasing EBITDA by
2.4%.FINANCIAL HIGHLIGHTS (*)
-------------------------------------------------------------------------
three months ended fiscal year ended
in millions of December 31 December 31
dollars, except -------------------- --------------------
per share amounts 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
EPS 0.59 0.62 (4.8%) 2.98 2.89 3.1%
-------------------------------------------------------------------------
EBITDA 156.7 154.8 1.2% 661.8 655.1 1.0%
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Free cash flow 39.4 10.1 n.m. 261.3 258.5 1.1%
-------------------------------------------------------------------------
Growth services
revenues 212.5 204.7 3.8% 845.4 759.5 11.3%
-------------------------------------------------------------------------
Legacy services
revenues 263.9 284.5 (7.2%) 1,076.1 1,147.1 (6.2%)
-------------------------------------------------------------------------
Revenues 476.4 489.2 (2.6%) 1,921.5 1,906.6 0.8%
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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 fourth quarter 2008 management's discussion and analysis
("MD&A") in the Investors section of www.mtsallstream.com.
-------------------------------------------------------------------------For the fourth quarter of 2008, EBITDA from continuing operations
increased by 1.2% to $156.7 million as compared to the same period last year.
Free cash flow from continuing operations was up significantly in the quarter,
increasing to $39.4 million, while EPS from continuing operations was $0.59
per share.
"In 2008, MTS Allstream delivered full-year revenue growth for the first
time since 2005, along with continued solid results for EBITDA and a 1.1%
increase in free cash flow," said Wayne Demkey, Chief Financial Officer. "For
2009, we are well-positioned for continued success with a growing share of
revenue from growth services, significant additional cost saving initiatives
underway and the flexibility and certainty that comes from having a strong
balance sheet."
The Company's Board of Directors declared a cash dividend of $0.65 per
share for the first quarter of 2009, which is payable on April 15, 2009 to
shareholders of record on March 16, 2009.
DIVISIONAL HIGHLIGHTSEnterprise Solutions division
-----------------------------The Company's Enterprise Solutions division delivered solid performance
for 2008. This division set a record for contract wins in 2008 with $331.5
million in new contracts, a 38% increase over $240.7 million in contract wins
that were achieved in 2007. The Company achieved these gains by leveraging
improvements to its market focus and leadership in IP-based products, as well
as its efforts to target the Canadian mid-market segment. Converged IP data
revenues continued their strong performance in the fourth quarter of 2008,
increasing by 10.4% over the same period in 2007, while IP-virtual private
network ("IP-VPN") customer count increased by 19.2% to 311, reflecting
continued demand for innovative next generation IP-based services offered to
business customers.
The Enterprise Solutions division continued to win important new
contracts, with recent business wins with HMV Canada ("HMV"), the Government
of Newfoundland and Labrador, the City of Kamloops and the City of New
Westminster, demonstrating the continued diversity of the customer base.Consumer Markets division
-------------------------On the strength of its well-developed bundling strategy and continued
strong performance of growth services, the Consumer Markets division continued
to deliver strong margin performance for its incumbent operations in Manitoba.
For the fourth quarter of 2008, consumer high-speed Internet services once
again delivered double-digit growth in revenues, as compared to the same
period last year, with revenues increasing by 14.7% and was also very
successful in 2008 overall, with revenue increasing by 19.2% and customers
increasing by 6.3% in the full year as compared to 2007. Wireless revenues
increased by 7.7% and customers grew by 10.2% year over year.
In the fourth quarter of 2008, digital television revenues increased by
9.6% and customers increased by 10.1% as compared to the fourth quarter of
2007. For the full year, digital television revenues increased by 17.2% and
the customer base increased by 10.1%. The Company's market share increased to
34%, with 84,500 customers in the city of Winnipeg, the largest market served
by the Consumer Markets division. The ability to grow its digital TV base
successfully in 2008 bodes well for the upcoming introduction of a new IPTV
high-definition television service in Winnipeg.
2009 OUTLOOK
In 2009, MTS Allstream expects to deliver growth of up to 2% in overall
revenue, EBITDA, EPS and free cash flow as it continues to execute on its
long-term strategy.
MTS Allstream expects to see stability in its Enterprise Solutions
division, which will continue to benefit from a well-diversified customer base
which includes a significant number of public sector customers, a strong sales
backlog of $47 million, solid sales funnel, and from new efficiency
initiatives launched in the third quarter of 2008. The Enterprise Solutions
division has achieved stronger levels of recurring revenue during 2008 which
will support its expected steady performance into 2009.
The Consumer Markets division expects to deliver growth in 2009 supported
by continued strong performance from wireless, high-speed Internet and digital
television. Backed by bundle strategies and superior customer value
proposition, this division has, to date, continued to deliver a best-in-class
in-region margin performance in Manitoba for its residential customer base.
This is expected to continue in 2009 as MTS deploys new and innovative IPTV
services to customers in Winnipeg, its major market. The division will also be
supported by a strong provincial economy in Manitoba. The most recent
forecasts available for the Manitoba economy call for growth of 1.0% for 2009.
MTS Allstream has doubled its target cost reduction range for 2009 to
between $35 million to $45 million. It expects to reduce operating costs and
enhance productivity by optimizing certain key internal business processes and
refocusing the sales team based on a process launched in the third quarter of
2008. MTS Allstream expects that these initiatives will also enable it to
improve customer service by speeding order execution times.
Benefiting from significant past investments in its network
infrastructure and a strong balance sheet, the Company expects to maintain
capital expenditures at 13% to 15% of revenues, while also achieving moderate
growth in free cash flow. Free cash flow is expected to be between $250
million and $280 million, which will support the dividend to shareholders and
all other cash requirements including pension solvency and restructuring
costs. The Company has adopted a prudent expenditure and investment strategy
that is scalable, providing flexibility to adjust the pace of investment
according to economic conditions.----------------------------------------------------
2009 Financial Outlook - Continuing Operations
----------------------------------------------------
Revenues $1.900 B to $1.980 B
EBITDA $645 M to $685 M
EPS $2.90 to $3.20
Free cash flow $250 M to $280 M
Capital expenditures 13% to 15% of revenues
----------------------------------------------------For assumptions underlying the Company's 2009 outlook, refer to "Material
Assumptions" in the Company's release dated December 17, 2008 and its fourth
quarter 2008 interim 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 February 4, 2009, MTS Allstream announced the award of several
projects, in partnership with Plato Consulting, Infotech Solutions,
and Tamarack Technologies, with the Government of Newfoundland and
Labrador - contracts that total over half a million dollars. Projects
include the construction of a secure socket layer virtual private
network that provides end-point security, access control and threat
prevention and will be used by remote workers to securely access
corporate networks.
- On January 23, 2009, MTS Allstream announced the signing of a 40-
month contract extension with HMV. The contract
extends a previous agreement between the two companies, providing HMV
with managed multi protocol label switching, Internet, and voice
communications; including toll-free and long-distance services.
- On December 16, 2008, MTS Allstream announced that it had been
selected as the winner in the Solutions Awards category at the 2008
Microsoft Partner Program IMPACT Awards. The sixth annual IMPACT
awards recognize excellence across the large and diverse community of
Microsoft's Canadian technology partners.
- On December 16, 2008, MTS Allstream announced the signing of a three-
year, $13.5 million contract extension with Selectcom Telecom. The
contract services include a full suite of enterprise
telecommunications services such as domestic long distance,
international long distance, calling cards, toll-free, multiprotocol
label switching, Internet services, local lines and private lines.
- On December 16, 2008, MTS Allstream announced that it had completed a
$1.2 million contract for Prairie Rose School Division for the
provision and installation of a wireless wide area network to 28
locations within the school division, which covers an area spanning
1,400 square miles in southwest Manitoba.
- On December 15, 2008, MTS Allstream announced that the Royal College
of Physicians and Surgeons of Canada (the "College"), the national
organization that oversees postgraduate medical education in Canada,
selected MTS Allstream to implement the first phase of a business
transformation project that will improve its efficiency with
information and administrative processes to better serve the over
42,000 members of the College.
- On November 27, 2008, MTS Allstream announced that it had been
certified as an approved scanning vendor. This service will help
customers adhere to the payment card industry ("PCI") data security
standard ("DSS"). PCI DSS is an industry-wide standard developed by
the major credit card companies. It requires merchants and service
providers who store, process or transmit cardholder data to adopt
information security controls and processes to ensure data
confidentiality. This comprehensive standard helps protect cardholder
data from fraud and identity theft.
- On November 6, 2008, MTS Allstream announced it had been named
Mitel(R) premierPARTNER of the year in Canada in recognition of its
strong revenue performance and exceptional growth in the field of
unified communications. As Mitel premierPARTNER of the year, MTS
Allstream has demonstrated outstanding performance in a number of
areas including its strong focus on the Mitel portfolio of unified
communications platforms and applications and true engagement as a
Mitel partner.
Consumer Markets division announcements
- On January 27, 2009, MTS Allstream announced that it has been asked
to support LG Electronics Canada ("LG"), the manufacturer of the
LG 150 mobile handset, in LG's voluntary recall of approximately
13,000 LG 150 handsets sold by MTS. The recall follows a decision by
Industry Canada, which regulates mobile handsets, to remove the
LG 150 model from its list of certified mobile phones for sale in
Canada.
- On December 23, 2008, MTS Allstream announced new roaming coverage
for MTS Mobility customers throughout most areas of Mexico, including
many tourist destinations coast to coast.
- On December 22, 2008, MTS Allstream announced the availability of
four new products from Kyocera Wireless Corp. ("Kyocera"), a leading
global manufacturer of wireless phones and devices, for customers in
Manitoba. The new portfolio includes the Neo E1100 phone, the Mako
S4000 phone, Kyocera's KPC680 ExpressCardTM featuring CDMA2000@ 1x
Evolution-Data Optimized ("EV-DO") Revision A technology, and the
Kyocera KR2 Mobile Router.
- On December 15, 2008, MTS Allstream became the first service provider
in Canada to offer customers the ability to download binary runtime
environment for wireless ("BREW") applications to their BREW-enabled
devices, which will allow MTS Mobility customers in Manitoba to shop
for a wide variety of value-added services. MTS Mobility subscribers
with CDMA2000 EV-DO or CDMA2000 1X capable devices will be able to
download a variety of BREW content, including games and applications.
- On November 10, 2008, MTS Allstream announced the launch of a new
hosted phone system that will provide a significant opportunity for
small businesses in the Greater Toronto Area to improve their
operations by helping them to control costs and boost efficiency.
Hosted phone system utilizes MTS Allstream's privately managed,
secure data network, providing customers business-grade performance
and the same high-quality voice service they are accustomed to,
without the need to buy, lease, or maintain an on-site phone system.
Corporate announcements
- On December 1, 2008, MTS Allstream announced that it had joined the
"One Million Acts of Green", a new online initiative recently
launched by the Canadian Broadcasting Corporation in partnership
with Cisco Canada. MTS Allstream's 6,000 employees will participate
in the program as a community group. The objective of the "One
Million Acts of Green" is to mobilize Canadians to collectively
register one million acts of green by June 2009 and be a force for
change around the world.
- On November 28, 2008, MTS Allstream announced that it was proud to
once again sponsor Operation Red Nose, a unique designated driver
program that operates free of charge for individuals who are unfit to
drive home during the holiday season.
- On November 27, 2008, MTS Allstream announced the appointment of Dean
Prevost as President of its Enterprise Solutions division, reporting
to Chief Executive Officer, Pierre Blouin, and effective December 1,
2008. In addition, the Company announced Chris Peirce, formerly Chief
Regulatory Officer, was appointed Chief Corporate Officer, effective
January 1, 2009. With these changes, the Company has reduced the size
of its executive leadership team from 10 to 8 members.
Summary of MTS Allstream recognition
- 2009 Future Leaders of Manitoba Council award for Tori Sweezy,
Manager, Customer Care, Consumer Markets division.
- 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's fourth quarter 2008 conference call with the investment community
is scheduled for 4:00 p.m. (Eastern time) on February 5, 2009. Investors are
invited to listen to the conference call. The dial-in number is
1-800-733-7571. 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 February 15, 2009, and can be accessed by
dialing 1-877-289-8525 or 1-416-640-1917 (access code 21294041 followed by the
number sign).
MTS Allstream's interim MD&A for the three months ended December 31, 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 February 5, 2009. 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", "see", "set", "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, third and fourth
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 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);
fluctuations in pension plan funding requirements (pension solvency funding);
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, third and fourth 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 fourth 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 fourth 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 December 31,
2008 is as at February 5, 2009. 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 twelve months ended December 31, 2008 updates the information
contained in our interim MD&As for the first, second and third 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 statements. 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", "see", "set", "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 this interim MD&A under the "Risks and Uncertainties" and
"Material Assumptions" sections, our interim MD&As for the first, second and
third quarters of 2008, and our 2007 annual MD&A. Please note that
forward-looking statements reflect our expectations as at February 5, 2009. 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.
Continuing operations in 2008 excludes restructuring costs; the
impact of changes in statutory income tax rates and other rate
adjustments 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; the
refund of a directors' and officers' trust (the "directors' and
officers' trust") that was established in 2002 by Allstream Inc.
("Allstream"); and solvency funding to our pension plans.
Continuing operations in 2007 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 statutory income tax rates and other adjustments 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 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 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 an important service provider 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")
-------------------------------------------------------------------------
(in $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
EPS (continuing operations) 0.59 0.62 (4.8)
Wireless transition and AWS spectrum
auction costs (0.10) - n.m.
Restructuring costs (0.14) (0.03) n.m.
Future statutory tax rate adjustment
and other rate adjustments (0.14) (0.77) (81.8)
Reduction in tax asset allowance
and other adjustment - 0.40 n.m.
-----------------------------
Basic EPS 0.21 0.22 (4.5)
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Note: EPS for the three months ended December 31 is based on weighted
average shares outstanding of 64.6 million for 2008, and 64.6 million for
2007.Strong performance in our growth services portfolio continues to underpin
our financial performance. In the fourth quarter of 2008, we achieved strong
growth in our wireless, high-speed Internet, digital television, and converged
IP services revenues, which were offset by decreased revenues from our data,
and long distance services. On a year to date basis, double-digit growth in
our growth services revenues, which include revenues from converged IP,
unified communications, wireless, consumer Internet and digital television
services, higher EBITDA from continuing operations and lower debt charges
resulted in an increase of 3.1% in our EPS from continuing operations in 2008.
In addition, 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 twelve months ended December 31, 2008. The strategies that we have in
place to manage customer migration to new generation IP-based technology
services and our residential bundling programs continue to add value and
reinforce our relationships with customers in the highly competitive markets
in which we do business. In addition, the successful execution of our ongoing
cost control initiatives, along with targeted business strategies, contributed
to our performance. We expect to achieve solid EPS from continuing operations
in 2009 through the continued success of our growth services and our internal
cost reduction programs.
As we disclosed in the second quarter of 2008, 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. In addition, on a year to date basis, the
decrease in basic EPS reflects the impacts of Decision 2007-10, adjustments to
our tax asset allowance, future tax rate adjustments, restructuring costs, and
the costs associated with the AWS spectrum auction. The financial impact of
each of these items is detailed in the following table:-------------------------------------------------------------------------
(in $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
EPS (continuing operations) 2.98 2.89 3.1
Wireless transition and AWS spectrum
auction costs (0.28) - n.m.
Restructuring costs (0.21) (0.12) 75.0
Future statutory tax rate adjustment
and other rate adjustments (0.26) (0.86) (69.8)
Reduction in tax asset allowance
and other adjustment - 0.55 n.m.
Decision 2007-10 - 0.15 n.m.
-----------------------------
Basic EPS 2.23 2.61 (14.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: EPS for the twelve months ended December 31 is based on weighted
average shares outstanding of 64.6 million for 2008, and 65.0 million for
2007.
EBITDA
-------------------------------------------------------------------------
(in millions $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
EBITDA (continuing operations) 156.7 154.8 1.2
Wireless transition and AWS spectrum
auction costs (9.3) - n.m.
Restructuring costs (13.7) (3.0) n.m.
-----------------------------
EBITDA 133.7 151.8 (11.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
EBITDA (continuing operations) 661.8 655.1 1.0
Wireless transition and AWS spectrum
auction costs (27.1) - n.m.
Decision 2007-10 - 13.5 n.m.
Restructuring costs (20.8) (11.9) 74.8
-----------------------------
EBITDA 613.9 656.7 (6.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------Key to our overall financial performance in the fourth quarter and the
year are the revenues from our growth services portfolio. We experienced
strong growth in consumer Internet, converged IP, digital television and
wireless services revenues throughout 2008. Also providing solid support to
our EBITDA from continuing operations is our ongoing ability and initiative
towards controlling our costs.
The 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 the decrease 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 we are of the opinion that these costs are recoverable from
them. We have commenced formal proceedings to recover such costs, however,
there is no certainty that these 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 $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
Revenue (continuing operations) 476.4 489.2 (2.6)
-----------------------------
Revenue 476.4 489.2 (2.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Revenue (continuing operations) 1,921.5 1,906.6 0.8
Decision 2007-10 - (0.8) n.m.
-----------------------------
Revenue 1,921.5 1,905.8 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------Significant year to date 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
increase in our revenues from continuing operations as compared to 2007. In
addition, the strong performance of our growth services more than offset the
decline in revenues from our legacy services. We achieved growth in our
overall revenues this year for the first time since 2005. The success of our
growth services portfolio underpins this significant achievement.
Both of our operating divisions achieved solid revenues from continuing
operations during the year. Our Consumer Markets division continued to provide
"best in class" results against our competitors in all lines of business,
achieving double-digit growth in its growth services revenues. Contributing to
this strong performance is the continued growth in popularity of the product
offers we provide. Year-over-year in the fourth quarter of 2008, the number of
customers choosing our product bundles increased by 10.4%. We are pleased with
the success of our bundled product strategy, and we are confident in its
ability to continue to drive growth within our Consumer Markets division.
Our Enterprise Solutions division is also achieving success through its
offering of growth services products. Double-digit growth in growth services
revenues offset decreases to legacy services revenues for the division to
attain flat revenues for the year. This achievement is significant after
experiencing several years of declines in revenues. 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. Solid demand in 2008 for the converged IP and
unified communications services that our Enterprise Solutions division
provides is demonstrated by this division's performance during the year.Segmented Revenues (Continuing Operations)
-------------------------------------------------------------------------
(in millions $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
Growth services 212.5 204.7 3.8
Legacy services 263.9 284.5 (7.2)
-----------------------------
Total 476.4 489.2 (2.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Growth services 845.4 759.5 11.3
Legacy services 1,076.1 1,147.1 (6.2)
-----------------------------
Total 1,921.5 1,906.6 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------Growth Services Revenues
We are continuing to be successful with our business strategy to increase
the proportion of our revenues from growth services while maintaining solid
operating margins. For the fourth quarter and year, revenues from our growth
services contributed 44.6% and 44.0%, respectively, to our total revenues as
compared to 41.8% and 39.8% in the same periods last year.
Contributing significantly to our success is the strong demand for the
products that we offer within our growth services portfolio. During 2008, we
saw strong increases in revenues from unified communications, consumer
Internet, digital television, converged IP, and wireless services.
Legacy Services Revenues
We have effective strategies in place to manage the impacts of re-pricing
and customer churn on our legacy services products. Strategies such as
targeted marketing initiatives and our popular service bundle packaging are
contributing to new and growing revenue streams and, in addition, are
profitably managing the transition of customers from legacy services products
to growth services and products.
As expected, Rogers and AT&T have continued with the migration of
communications traffic to their own networks, however, the year-over-year
impact of this migration slowed to declines in revenue of $6.7 million and
$27.5 million for the three and twelve months ended December 31, 2008,
respectively. If this impact was excluded, legacy services revenues would have
decreased by 4.2% in 2008.Operating Revenues (Continuing Operations)
-------------------------------------------------------------------------
(in millions $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
Wireless 74.6 68.7 8.6
Data 168.4 176.7 (4.7)
Local 131.2 133.4 (1.6)
Long distance 80.2 90.2 (11.1)
Other 22.0 20.2 8.9
-----------------------------
Total 476.4 489.2 (2.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Wireless 289.7 269.1 7.7
Data 692.2 667.7 3.7
Local 527.5 533.3 (1.1)
Long distance 328.2 358.3 (8.4)
Other 83.9 78.2 7.3
-----------------------------
Total 1,921.5 1,906.6 0.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Q4 74.6 68.7 8.6
YTD 289.7 269.1 7.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our wireless portfolio consists of cellular, wireless data, paging and
group communications services that we offer in the Manitoba market.Primarily driving the year-over-year increases in our wireless services
revenues is our success with continuing to add new subscribers to our wireless
subscriber base. As at December 31, 2008, our wireless subscriber base had
reached 434,776 subscribers, growing by 10.2% over last year's level. The
success of our holiday campaign contributed to this overall increase in
subscribers in 2008. In addition, not only do we provide the largest wireless
coverage in Manitoba, our strategy of offering high-value product bundles that
are unmatched by our principal competitors contributes to the popularity and
usage of our wireless services.
We continue to see strong potential for growth in our wireless services
revenues in Manitoba. At the end of the fourth quarter of 2008, wireless
penetration in Manitoba was approximately 60.7% 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.
Our revenues from wireless data services increased significantly for the
year, growing by 55.6%. Subscribers are increasingly utilizing our next
generation wireless data services and service features, such as text messaging
and Web browsing services, which is driving these increases. Although our
average revenue per user ("ARPU") decreased by 2.7% to $57.40 for the twelve
months ended December 31, 2008, we have one of the leading ARPUs among our
principal competitors. Time limited promotional offers, which have lower
airtime usage and a lower network access price, along with lower wholesale
revenue, impacted wireless ARPU this quarter and year to date, however these
plans have attracted new first-time users, thereby increasing our customer
base, and have contributed positively to both revenues and EBITDA.Data Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 168.4 176.7 (4.7)
YTD 692.2 667.7 3.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.For the year, we achieved a solid increase in our data services revenues,
which was driven primarily by strong increases in revenues from next
generation services, which includes converged IP and unified communications
services, and consumer Internet services. In the fourth quarter of 2008, our
results are in line with our data services revenues in the third quarter of
2008, however, we experienced a particularly strong fourth quarter in 2007
with larger one-time sales, and as a result, the increase in growth services
in the fourth quarter did not fully offset the decline in legacy data
revenues.
The impact of customers transitioning from legacy services to growth
services, and reduced traffic on our network by Rogers and AT&T continued to
be felt in this quarter. If the data services revenues of Rogers and AT&T were
excluded from our performance, our data services revenues would have shown an
increase of 6.0% for the year, which reflects 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.
Solid growth in our next generation data services, which include
converged IP and unified communications services, was demonstrated with an
increase of 15.6% in 2008, as compared to last year. 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 sales of unified
communications contributed to our solid performance in the year.
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 December 31, 2008,
we were supporting 311 IP-VPN customers, which is 19.2% more than last year.
In the three months and year ended December 31, 2008, our consumer
Internet services revenue continued its strong growth, increasing
year-over-year by 14.7% and 19.2%, respectively. Our consumer high-speed
Internet customer base grew by 6.3% and reached 176,637 customers as at
December 31, 2008. In addition, higher average revenue per customer also
contributed to the increases in consumer Internet services with an 11.0%
year-over-year increase.Local Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 131.2 133.4 (1.6)
YTD 527.5 533.3 (1.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.The popularity of our residential service bundle package, which includes
wireless, Internet, digital television and alarm services bundles, continues
to provide a unique value proposition for our customers, and positions us for
long-term success in our markets. Customers utilizing our bundled service
packages grew by 10.4% in the fourth quarter of 2008 versus 2007. Through the
success of these programs, we continued to deliver "best in class" performance
against cable company competitors, and are minimizing the reduction in our
local services revenues. In the fourth quarter of 2008, our residential line
loss was less than 3,500, after adjusting for cottage-country seasonality. We
are confident in our ability to compete across Manitoba and win in this
competitive local services environment. This level of line loss demonstrates
the success of our service bundle and consumer marketing strategies in this
market. In addition, the revenues from our business local services are
relatively flat year-over-year and continue to perform well in the markets in
which we do business. Our overall customer connections, which include network
access services, high-speed Internet, wireless and digital television
subscribers, increased by 2.9% as compared to the fourth quarter of 2007.Long Distance Services
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 80.2 90.2 (11.1)
YTD 328.2 358.3 (8.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 international rates in our Enterprise Solutions
division were offset by competitive losses, lower rates and volumes in the
domestic and cross-border markets contributing to the decreases in our
revenues from long distance services.Other Revenues
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 22.0 20.2 8.9
YTD 83.9 78.2 7.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 9.6% or $1.1
million to $12.5 million in the fourth quarter, and by 17.2% or $7.3 million
to $49.7 million for the year. Strong growth in subscribers in the fourth
quarter and throughout the year contributed to these increases. In addition,
average revenue per subscriber strongly increased by 5.3% to reach $49.88
through increased subscriber usage of pay-per-view, video-on-demand, and
high-definition services, as well as price increases and a decrease in the
number of subscribers on promotional pricing plans.
In January 2009, we were the first company in Canada to launch a new
digital television service with combined technology from Alcatel-Lucent Canada
Inc. and the award-winning Microsoft Mediaroom Internet Protocol Television.
We launched this new digital television service, which provides the next
generation of high definition television, personal video recorder, improved
guide features and many other exciting advancements, in Portage la Prairie,
Manitoba and plan to provide our digital television customers in Winnipeg with
the option of this premium service later in the year.
As at December 31, 2008, our digital television subscriber base increased
by 10.1% to reach 84,544, representing a 34% market share, increasing from 32%
last year.OPERATING EXPENSES
Operations Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 329.0 334.4 (1.6)
YTD 1,286.8 1,237.2 4.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------We continue to focus on our cost reduction initiatives. Our 2008
efficiency program achieved $29.7 million in annualized savings as at December
31, 2008, which is at the top of the range of 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 related to the corresponding revenue increases. In addition, the
year to date increase in 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 $27.1 million
cost associated with the wireless transition and our participation in the AWS
spectrum auction in 2008 are excluded, expenses from continuing operations
were up by 0.7% due to increases in revenue.
We have been very effective at achieving cost efficiencies over the last
three years and expect to continue to find cost savings going forward. To
assist with our ongoing cost reduction initiatives, we began further review of
certain major processes in our Enterprise Solutions division in the second
quarter of 2008. 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 strongly contribute to
our cost reduction initiatives. In part as a result of this initiative, we are
eliminating approximately 170 positions in our Enterprise Solutions division
and the supporting corporate group. We are working to maximize internal
redeployment of the affected employees through retraining and employee
relocation, which also will help to minimize the related severance cost to us.
Our Enterprise Solutions division achieved stable year-over-year revenues for
the first time in several years along with improved momentum in the EBITDA
line, and we plan to maintain and build on this momentum throughout 2009 by
making our internal processes more efficient and cost effective, assuming that
the current projected economic conditions are sustained.
In the three and twelve months ended December 31, 2008, we incurred
one-time costs in the amounts of $9.3 million and $27.1 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, including the amount we
have incurred 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 we are of the opinion that these costs are
recoverable from them. We have commenced formal proceedings 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
-------------------------------------------------------------------------
Q4 13.7 3.0 n.m.
YTD 20.8 11.9 74.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------We have incurred costs of $20.8 million under our 2008 efficiency
program. These costs relate to the process improvement assessment and
implementation initiative that we commenced in the second quarter of 2008, and
include severance and other employee-related expenses, costs to review and
improve efficiencies in our current processes, and facilities consolidation of
select real estate. The workforce costs include severance associated with a
number of smaller initiatives that were undertaken throughout the year, as
well as severance associated with the elimination of approximately 170
positions in the fourth quarter of 2008. In 2008, cash payments of $17.2
million were applied against restructuring liabilities including prior years'
workforce reduction liabilities. This is outlined in Note 2 to our interim
consolidated financial statements.Amortization Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 83.4 79.7 4.6
YTD 330.0 318.7 3.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
("Multinet") and ICU Technologies Inc. ("ICU Technologies").
Other Income
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 (0.5) (0.5) -
YTD 7.1 6.7 6.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-over-year, there was no change to other income in the fourth quarter
and other income in the year 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
-------------------------------------------------------------------------
Q4 12.2 12.3 (0.8)
YTD 48.9 51.7 (5.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------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, which was offset partially by higher costs related to our
accounts receivable securitization program and syndicated credit facility.
Our debt to total capitalization ratio as at December 31, 2008 was 39.0%,
and continues to provide us with financial strength and flexibility going
forward. In addition, providing us with sufficient liquidity for our
refinancing needs in 2009 and 2010, we signed an agreement on January 5, 2009
with a group of Canadian banks to increase the size of our syndicated credit
facility from $350 million to $600 million, and to extend the term of the
facility to 2012.Income Tax Expense
-------------------------------------------------------------------------
(in millions $) 2008 2007 % change
-------------------------------------------------------------------------
Q4 23.9 45.0 (46.9)
YTD 98.1 123.3 (20.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------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 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 2015.
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 were charges of $7.5 million and
$9.0 million relating to changes in statutory tax rates or rate differential
on temporary differences in the second and fourth quarters of 2008,
respectively, as compared to $6.0 million and $49.6 million in the second and
fourth quarters of 2007. These were offset by favourable adjustments in our
tax asset valuation allowance of $12.8 million and $25.7 million, which
occurred in the second and fourth quarters of 2007, respectively, 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 Q4 Q3 Q2 Q1
earnings per share) 2008 2008 2008 2008
-------------------------------------------------------------------------
Operating revenues 476.4 479.9 486.4 478.8
Operating income 50.3 66.6 78.8 88.2
Net income and comprehensive income 13.7 38.1 38.0 54.2
Earnings per share 0.21 0.59 0.59 0.84
Diluted earnings per share 0.21 0.59 0.58 0.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $, except Q4 Q3 Q2 Q1
earnings per share) 2007 2007 2007 2007
-------------------------------------------------------------------------
Operating revenues 489.2 475.9 474.1 466.6
Operating income 72.1 82.5 92.2 91.2
Net income and comprehensive income 14.3 45.5 57.0 52.9
Earnings per share 0.22 0.70 0.88 0.80
Diluted earnings per share 0.22 0.70 0.88 0.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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,
$7.5 million and $9.3 million in the second, third and fourth
quarters of 2008, respectively.
- The recognition of restructuring expenses for our 2008 efficiency
program in the amounts of $7.1 million and $13.7 million in the third
and fourth quarters of 2008, respectively; 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.
- 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.
- 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
or rate differential on temporary differences, consisting of
$7.5 million and $9.0 million in the second and fourth quarters of
2008, respectively, and $6.0 million and $49.6 million in the second
and fourth quarters of 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q4 166.3 172.8 (6.5)
YTD 526.0 588.7 (62.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 fourth
quarter resulted primarily from wireless transition costs and increased
pension solvency funding, which were offset partially by increased cash from
other operating activities due to a refund of the directors' and officers'
trust. The directors' and officers' trust was established in 2002 to provide
additional coverage to directors and officers of Allstream in the event of any
legal claim arising before December 31, 2008, at which time the trust
terminated and the trust funds were returned to us.
For the year, the decrease in our cash flows from operating activities is
mainly due to wireless transition costs, restructuring costs, the one-time
recovery related to Decision 2007-10 in 2007 and increased pension funding,
which were offset partially by the refund of the directors' and officers'
trust and increased cash from working capital due to the net impact of
utilizing our accounts receivable securitization program, and a decrease in
current liabilities.Cash Flows used in Investing Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q4 94.2 135.6 (41.4)
YTD 343.5 323.0 20.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing activities represent cash used for acquiring, and cash received
from disposing of, long-term assets and other long-term investments.The decrease in cash flows used in investing activities in the fourth
quarter of 2008 is mainly due to lower capital expenditures and the impact of
our acquisition of Multinet in the fourth quarter of 2007. On a year to date
basis, the increase in cash flows used in investing activities were higher as
compared to last year mainly 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 costs related to 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 fourth quarter of 2008 were $88.5 million as compared to $112.6 million
and for the year were $282.5 million as compared to $287.2 million as compared
to the same periods in 2007, respectively. In addition, an amount of $4.4
million for the purchase of ICU Technologies earlier this year is included in
the year to date change.Free Cash Flow
-------------------------------------------------------------------------
(in millions $) Q4/08 Q4/07 % change
-------------------------------------------------------------------------
Free cash flow (continuing operations) 39.4 10.1 n.m.
Pension solvency funding (8.5) (0.9) n.m.
Wireless transition and AWS spectrum
auction costs (9.3) - n.m.
Restructuring expense (13.7) (3.0) n.m.
Wireless transition capital expenditures (2.2) - n.m.
Directors' and officers' trust refund 14.8 - n.m.
Restructuring capital expenditures - (12.0) n.m.
Tax recoveries - 0.8 n.m.
-----------------------------
Consolidated free cash flow 20.5 (5.0) n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions $) YTD/08 YTD/07 % change
-------------------------------------------------------------------------
Free cash flow (continuing operations) 261.3 258.5 1.1
Spectrum license costs (48.6) - n.m.
Pension solvency funding (30.6) (3.2) n.m.
Wireless transition and AWS spectrum
auction costs (27.1) - n.m.
Restructuring expense (20.8) (11.9) 74.8
Wireless transition capital expenditures (4.6) - n.m.
Directors' and officers' trust refund 14.8 - n.m.
Restructuring capital expenditures - (24.8) n.m.
Decision 2007-10 - 14.9 n.m.
Tax recoveries - 14.2 n.m.
-----------------------------
Consolidated free cash flow 144.4 247.7 (41.7)
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Free cash flow refers to cash flow from operating activities, less
capital expenditures, and excluding changes in working capital.The year-over-year increase in the fourth quarter of 2008 in our free
cash flow from continuing operations is primarily due to lower capital
expenditures and lower deferred wireless costs. The year to date increase in
2008 is primarily due to higher EBITDA from continuing operations and lower
capital expenditures, which were offset partially by increased normal pension
funding.
The increase in our consolidated free cash flow in the fourth quarter as
compared to the previous year is primarily due to lower capital expenditures
and increased cash for other operating activities due to the directors' and
officers' trust refund, which were offset partially by lower consolidated
EBITDA and increased pension solvency funding. For the year, the decrease to
our consolidated free cash flow is primarily due to lower consolidated EBITDA,
higher pension funding, and spectrum costs in 2008.Cash Flows used in Financing Activities
-------------------------------------------------------------------------
(in millions $) 2008 2007 $ change
-------------------------------------------------------------------------
Q4 62.1 41.8 20.3
YTD 165.9 382.5 (216.6)
-------------------------------------------------------------------------
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Financing activities refer to actions we undertake to fund our operations
through equity capital and borrowings.The increase in the fourth quarter is primarily due to the repayment of
notes payable. The year to date decrease in our cash flows used in financing
activities is primarily due to our purchase for cancellation of 2,377,500
common shares for $111.0 million in the first half of 2007, along with a $5.3
million net issuance of debt in 2008 versus a net repayment of $106.5 million
in 2007.
In the fourth quarter of 2008, we paid cash dividends of $42.0 million
and repaid net notes payable in the amount of $20.0 million. In the fourth
quarter of 2007, we paid cash dividends of $42.0 million.
Year to date in 2008, we paid cash dividends of $168.0 million, issued
net notes payable in the amount of $95.0 million and repaid long-term debt in
the amount of $89.7 million. Year to date in 2007, we paid cash dividends of
$170.6 million, repaid long-term debt in the amount of $106.5 million and
purchased common shares for cancellation in the amount of $111.0 million.Credit Facilities
-------------------------------------------------------------------------
utilized at
(in millions $) capacity December 31/08
-------------------------------------------------------------------------
Medium term note program 350.0 -
Accounts receivable securitization 150.0 127.0
Revolving credit facility(*) 600.0 201.9
--------------------------
Total 1,100.0 328.9
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(*) Increased to $600.0 million effective January 5, 2009We have arrangements in place that allow us to access the debt capital
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 $350.0 million medium term note program on January 18,
2008. On January 5, 2009, our revolving credit facility was increased from
$350.0 million to $600.0 million, of which $150.0 million is available to
back-stop our commercial paper program. In addition to these programs and
facilities, we have an accounts receivable securitization program of $150.0
million.
As at December 31, 2008, we utilized $127.0 million of our accounts
receivable securitization program, and $201.9 million of our revolving credit
facility, which includes $106.9 million in undrawn letters of credit. Of this
amount, $80.7 million represents letters of credit issued under the Solvency
Funding Relief Regulations enacted in 2006 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 $) December 31/08 December 31/07
-------------------------------------------------------------------------
(Cash and cash equivalents)
bank indebtedness (6.5) 10.1
Proceeds from accounts receivable
securitization 127.0 43.0
Notes payable 95.0 -
Capital lease obligations, including
current portion 18.8 22.5
Long-term debt, including current portion 650.2 739.5
--------------------------
Total debt 884.5 815.1
Shareholders' equity 1,382.0 1,404.0
--------------------------
Total capitalization 2,266.5 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. Our debt to total capitalization ratio of
39.0% as at December 31, 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 19, 2008 at "BBB" on our senior
debentures and "R-2 (high)" on our commercial paper, and maintained its stable
outlook. On December 16, 2008, 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 January 27, 2009
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 64,637,917 1,265.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options:
-------------------------------------------------------------------------
Weighted Average Exercise
Options Number Price Per Share
-------------------------------------------------------------------------
Outstanding 2,173,940 $42.00
Exercisable 1,039,460 $40.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contractual Obligations, Financial Instruments, Off-Balance Sheet
Arrangements, and Other Financial ArrangementsOur 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, second and
third quarters of 2008, and our 2007 annual MD&A. For additional details,
please consult our interim MD&As for the first, second and third 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,
second and third quarters of 2008, and our 2007 annual MD&A. For additional
details, please consult our interim MD&As for the first, second and third
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,
second and third quarters of 2008, and our 2007 annual MD&A. For additional
details, please consult our interim MD&As for the first, second and third
quarters of 2008, and our 2007 annual MD&A, which are available on our Web
site at www.mtsallstream.com.
International Financial Reporting Standards ("IFRS")
In February 2008, the Canadian Accounting Standards Board confirmed
January 1, 2011 as the date IFRS will replace Canadian GAAP for publicly
accountable enterprises. Currently, there are a number of areas where
accounting standards under IFRS are different from those under Canadian GAAP.
Also, because IFRS continues to evolve, it is expected that IFRS at the
transition date will differ from current IFRS. Our first financial statements
under IFRS will be for periods commencing January 1, 2011.
We have commenced our IFRS changeover project, which consists of four
phases, namely, IFRS diagnostic gap assessment, design and planning, solution
development and implementation. We have completed phase one of the project,
which consisted of the identification of the key differences between IFRS and
Canadian GAAP. We currently are working on phases two and three, including the
evaluation and selection of accounting policies, the assessment of
implications to systems, processes and controls, and training. During these
phases, we will complete the necessary work required to quantify the impact of
the changeover to IFRS on our financial position and results of operations.
These impacts may be material. Based on our work to date, we believe that the
areas of highest impact are property, plant and equipment and employee
benefits.RISKS AND UNCERTAINTIES
-----------------------Our risks and uncertainties remain substantially unchanged from those
that were disclosed in our interim MD&As for the first, second and third
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, second and
third 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. Effective September 29, 2008, we started
activating new wireless customer additions and handset upgrades on new service
platforms independent of Bell Mobility and have since migrated a significant
portion of existing wireless customers to our new service platforms. We plan
to complete moving all of our wireless customers to the new service platforms
in 2009, and in accordance with the transition agreement we signed with Bell
Mobility, we have given Bell Mobility notice of termination of that agreement,
with such termination to be effective June 24, 2009.
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, 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 license to operate as a broadcasting
distribution undertaking ("BDU") 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 this 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 opposed those applications, and applied separately to have the
decision reviewed and varied with respect to the treatment of Ethernet and
asymmetric digital subscriber line ("ADSL"). On December 11, 2008 and January
26, 2009 in Telecom Decision CRTC 2008-118 pertaining to Ethernet and Telecom
Decision 2009-34 pertaining to ADSL, the CRTC dismissed our applications, and
initiated a further proceeding concerning the appropriate unbundling of ADSL.
On December 11, 2008, we expressed our intention to petition Cabinet, which is
the next statutorily prescribed level of appeal. We expect to file our
petition during the first quarter of 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 subsequently tendered payment and filed documentation
demonstrating compliance with the foreign investment restrictions applicable
to prospective licensees as required by the federal government, and on
December 15, 2008, we were issued these licenses by Industry Canada. The
initial term of the licenses runs from December 15, 2008 to December 14, 2018.
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 that it will 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.
New Media and Internet Traffic Management Practices (Net Neutrality)
On October 15, 2008, by way of Broadcasting Notice of Public Hearing CRTC
2008-11, and on November 20, 2008, by way of Telecom Public Notice CRTC
2008-19, the CRTC commenced consultations to consider issues relating to the
regulation of so-called new media and issues relating to wholesale and retail
Internet trafficking practices (net neutrality), respectively. The issues
raised in these two proceedings are interrelated in our view, and bear on the
essential facilities framework that was established by the CRTC in 2008.
Determinations to be made as a result of these proceedings will have
implications for companies that, like us, are Internet service providers or
BDUs, and for content providers. As in the essential services proceeding
initiated by the CRTC, we intend to argue that rules adopted by the CRTC
should recognize that competitive market forces are key to ongoing innovation
and investment both in network infrastructure and in services and content
being offered over that infrastructure. We will argue that subsidies that tax
BDUs do not promote Canadian content, and that a competitively,
technologically neutral and transparent wholesale regime is the best means of
addressing concerns around Internet traffic management practices. Both
proceedings will involve public hearings in 2009, with decisions to be
received likely before year-end.
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, which are in a deficit position, 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 $30.6
million in solvency and special funding payments were made 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 addition, the federal government recently announced new
temporary solvency relief for federally regulated pension plans in 2009. The
impact on our funding will be determined once the detailed regulations are
released.
In the second half of 2008, worldwide equity markets experienced
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, the ability to provide a return on plan assets that meets or
exceeds the long-term assumptions used by our actuaries to value these plans.
However, since challenging market conditions persisted to the end of 2008, we
expect increased solvency funding requirements will be determined in the
January 1, 2009 actuarial valuations.2009 OUTLOOK
------------
Forward-looking statements disclaimerThis 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 statements. Forward-looking statements reflect our
expectations as at February 5, 2009. 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", "see", "set", "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 this interim MD&A, our interim MD&As for the first, second
and third quarters of 2008, and our 2007 annual MD&A. Please note that
forward-looking statements reflect our expectations as at February 5, 2009. 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);
fluctuations in pension plan funding requirements (pension solvency funding);
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 this interim MD&A, our interim MD&As for the first, second and third
quarters of 2008, and our 2007 annual MD&A.-------------------------------------------------------------------------
2009 Financial Outlook - Continuing Operations
-------------------------------------------------------------------------
Revenues $1.900 billion to $1.980 billion
EBITDA $645 million to $685 million
EPS $2.90 to $3.20
Free cash flow $250 million to $280 million
Capital expenditures 13% to 15% of revenues
-------------------------------------------------------------------------
-------------------------------------------------------------------------We expect to deliver growth of up to 2% in overall revenue, EBITDA, EPS
and free cash flow in 2009 as we continue to execute on our long-term
strategy.
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 we have a leading presence in national enterprise markets.
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 strong growth in our Internet, digital
television and wireless services in 2009 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 solid 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 Conference
Board of Canada, as of October 2008, we assumed a national growth rate of
approximately 1.5% for gross domestic product and a growth rate of 2.4% for
gross domestic product for the province of Manitoba. However, these
assumptions may be impacted by current economic conditions and the uncertainty
in the Canadian economy, which may have a negative impact on our actual
results in 2009.
Market Assumptions
As competition in the overall marketplace continues, the broad market
segment trends that have taken shape in recent years will also persist in
2009. Growth in service areas such as Internet, digital television, and
IP-based next generation services, including unified communications,
specifically for business customers, is expected to continue at similar levels
in 2009. We are assuming that there will not be any material changes to the
continued growth of wireless services in 2009, notwithstanding anticipated
changes to relationships and market dynamics. The competitive pressure
experienced in traditional legacy services, which include data connectivity,
local and long distance services will continue in similar trends as it did in
2008. Likewise, it is anticipated that customer demand will continue to
migrate to next generation services. To face the continued strong competition
in the enterprise markets, we have been 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 prudently prepared our operations and
strategies 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:- continuing strong overall growth from growth services; and
- overall revenue growth of up to 2%.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 2009.
Cost Reduction Assumptions
Key to our operating and financial progress will be our strong track
record of controlling costs. We have doubled our target cost reduction for
2009 over that of 2008, and we expect to achieve further cost reductions this
year of between $35 million and $45 million. We expect to reduce operating
costs and enhance productivity by optimizing certain key internal business
processes and refocusing our sales team. To capture these additional savings,
we expect to incur one-time costs of approximately $15 million to $20 million
in 2009. These costs are not included in our 2009 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 2009. 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. We have adopted a prudent
expenditure and investment strategy that is scalable and provides flexibility
to adjust the pace of investment according to economic conditions. 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 2009,
our capital program is expected to comprise 13% to 15% of our revenues.
Our cash requirements for 2009 include two non-recurring obligations of
approximately $15 million to $20 million for restructuring programs; and
approximately $10 million to $15 million for wireless transition costs. We
expect our pension solvency funding requirement to be approximately $40
million to $50 million.
FIRST QUARTER DIVIDEND
The Board of Directors of MTS today declared a quarterly cash dividend of
$0.65 per share. The first quarter dividend is payable on April 15, 2009 to
shareholders of record at the close of business on March 16, 2009.
The first 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 fourth quarter 2008 conference call with the investment
community is scheduled for 4:00 p.m. Eastern time on February 5,
2009. The dial-in number is 1-800-733-7571. 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
February 15, 2009 and can be accessed by dialing 1-877-289-8525 or
1-416-640-1917 (access code 21294041 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 February 5, 2009. 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 "2009 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
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions, except
earnings per share) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating revenues $ 476.4 $ 489.2 $ 1,921.5 $ 1,905.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating expenses
Operations 329.0 334.4 1,286.8 1,237.2
-------------------------------------------------------------------------
Restructuring (Note 2) 13.7 3.0 20.8 11.9
-------------------------------------------------------------------------
Amortization 83.4 79.7 330.0 318.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
426.1 417.1 1,637.6 1,567.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 50.3 72.1 283.9 338.0
-------------------------------------------------------------------------
Other income (expense) (0.5) (0.5) 7.1 6.7
-------------------------------------------------------------------------
Debt charges (12.2) (12.3) (48.9) (51.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income before income
taxes 37.6 59.3 242.1 293.0
-------------------------------------------------------------------------
Income tax expense
(recovery) (Note 4)
Current - (0.8) 0.3 (14.0)
-------------------------------------------------------------------------
Future 23.9 45.8 97.8 137.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
23.9 45.0 98.1 123.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income and
comprehensive income for
the period $ 13.7 $ 14.3 $ 144.0 $ 169.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share
(Note 8) $ 0.21 $ 0.22 $ 2.23 $ 2.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per
share (Note 8) $ 0.21 $ 0.22 $ 2.23 $ 2.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)
For the periods ended
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 125.1 $ 148.5 $ 120.8 $ 183.9
-------------------------------------------------------------------------
Net income for the period 13.7 14.3 144.0 169.7
-------------------------------------------------------------------------
Dividends declared (42.0) (42.0) (168.0) (168.3)
-------------------------------------------------------------------------
Purchase of outstanding
shares (Note 8) - - - (64.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, end
of period $ 96.8 $ 120.8 $ 96.8 $ 120.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31 2008 2007
-------------------------------------------------------------------------
(in millions)
Assets
Current assets
Cash and cash equivalents $ 6.5 $ -
-------------------------------------------------------------------------
Accounts receivable (Notes 3 and 5) 62.2 176.1
-------------------------------------------------------------------------
Future income taxes (Note 4) 90.5 109.1
-------------------------------------------------------------------------
Other current assets (Note 6) 73.5 55.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
232.7 341.0
Capital assets
Property, plant and equipment 3,796.1 3,751.5
-------------------------------------------------------------------------
Intangible assets 79.9 27.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3,876.0 3,779.2
-------------------------------------------------------------------------
Accumulated amortization 2,320.1 2,274.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,555.9 1,505.1
Other assets 385.9 334.8
-------------------------------------------------------------------------
Future income taxes (Note 4) 436.8 517.9
-------------------------------------------------------------------------
Goodwill 41.7 40.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,653.0 $ 2,739.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness $ - $ 10.1
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
(Note 5) 351.6 404.2
-------------------------------------------------------------------------
Advance billings and payments 51.4 49.2
-------------------------------------------------------------------------
Current portion of long-term debt (Note 5) 220.0 89.7
-------------------------------------------------------------------------
Notes payable (Notes 5 and 7) 95.0 -
-------------------------------------------------------------------------
Current portion of capital lease obligations 3.8 6.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
721.8 559.3
Long-term debt (Note 5) 430.2 649.8
-------------------------------------------------------------------------
Long-term portion of capital lease obligations 15.0 16.4
-------------------------------------------------------------------------
Deferred employee benefits 44.2 45.0
-------------------------------------------------------------------------
Other long-term liabilities (Note 5) 58.1 62.1
-------------------------------------------------------------------------
Future income taxes (Note 4) 1.7 2.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,271.0 1,335.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Share capital (Note 8) 1,265.8 1,265.5
-------------------------------------------------------------------------
Contributed surplus 19.4 17.7
-------------------------------------------------------------------------
Retained earnings 96.8 120.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1,382.0 1,404.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 2,653.0 $ 2,739.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
For the periods ended
December 31 Three months ended Twelve months ended
-------------------------------------------------------------------------
(in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from operating
activities
Net income $ 13.7 $ 14.3 $ 144.0 $ 169.7
-------------------------------------------------------------------------
Add items not affecting
cash
Amortization 83.4 79.7 330.0 318.7
-------------------------------------------------------------------------
Future income taxes
(Note 4) 23.9 45.8 97.8 137.3
-------------------------------------------------------------------------
Deferred wireless costs (11.4) (14.7) (40.2) (41.0)
-------------------------------------------------------------------------
Pension funding and net
pension credit (14.2) (7.1) (56.6) (23.3)
-------------------------------------------------------------------------
Other, net 15.8 1.6 5.1 (1.7)
-------------------------------------------------------------------------
Changes in non-cash
working capital 55.1 53.2 45.9 29.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from operating
activities 166.3 172.8 526.0 588.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from investing
activities
Capital expenditures,
net (90.7) (124.6) (335.7) (312.0)
-------------------------------------------------------------------------
Acquisition (Note 9) (0.4) (8.1) (4.4) (8.1)
-------------------------------------------------------------------------
Other, net (3.1) (2.9) (3.4) (2.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
investing activities (94.2) (135.6) (343.5) (323.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from financing
activities
Dividends paid (42.0) (42.0) (168.0) (170.6)
-------------------------------------------------------------------------
Repayment of long-term
debt - - (89.7) (106.5)
-------------------------------------------------------------------------
Issuance (repayment) of
notes payable, net (20.0) - 95.0 -
-------------------------------------------------------------------------
Issuance of share
capital (Note 8) - - 0.2 5.9
-------------------------------------------------------------------------
Purchase of outstanding
shares (Note 8) - - - (111.0)
-------------------------------------------------------------------------
Other, net (0.1) 0.2 (3.4) (0.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows used in
financing activities (62.1) (41.8) (165.9) (382.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in cash and cash
equivalents 10.0 (4.6) 16.6 (116.8)
-------------------------------------------------------------------------
(Bank indebtedness) cash
and cash equivalents,
beginning of period (3.5) (5.5) (10.1) 106.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents (bank
indebtedness), end of
period $ 6.5 $ (10.1) $ 6.5 $ (10.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MANITOBA TELECOM SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the years ended December 31, 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") section
3064 Goodwill and Intangible Assets and the updates to CICA Handbook
section 1000 Financial Statement Concepts will apply to the Company.
This guidance establishes updated standards for the recognition,
measurement, presentation and disclosure of intangible and deferred
assets. The Company does not expect to be materially affected by the
new recommendations.
2. RESTRUCTURING
For the years ended December 31, 2008 and 2007, the Company recorded
restructuring expenses as follows:
2008 2007
---------------------------------------------------------------------
Workforce 11.2 -
---------------------------------------------------------------------
Other 9.6 11.9
---------------------------------------------------------------------
20.8 11.9
---------------------------------------------------------------------
---------------------------------------------------------------------
The liability for restructuring costs as at December 31, 2008 is as
follows:
---------------------------------------------------------------------
Balance December 31, 2007 7.9
---------------------------------------------------------------------
2008 restructuring costs 20.8
---------------------------------------------------------------------
Less:
---------------------------------------------------------------------
Cash payments (17.2)
---------------------------------------------------------------------
Reversals of provisions (0.2)
---------------------------------------------------------------------
Balance December 31, 2008 11.3
---------------------------------------------------------------------
---------------------------------------------------------------------
The efficiency program in 2008 is aimed at achieving process
improvements and implementing further cost reduction initiatives.
Restructuring costs include severance and other employee-related
expenses, costs to review and improve efficiencies in current
processes, and facility consolidation of select real estate. The
workforce costs include severance associated with a number of smaller
initiatives undertaken throughout the year, as well as severance
associated with the reduction of approximately 170 positions in the
fourth quarter of the year. These charges were offset partly by the
reversal of previously recorded restructuring expenses as a result of
actual payments being lower than estimated. The initiative in the
fourth quarter of 2008 is part of the Company's current cost
reduction initiative which will continue in 2009.
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 (2007 -
$0.2 million) has been recognized by the Company as at December 31,
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 December 31, 2008, the
Company had received $127.0 million (2007 - $43.0 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
$161.1 million (2007 - $55.2 million) and the reserve accounts of
$34.1 million (2007 - $12.2 million).
During the year ended December 31, 2008, the Company recognized a
pre-tax loss of $0.2 million (2007 - $0.4 million) on the sale of
accounts receivable, which is recorded in other income.
During the year ended December 31, 2008, cash flows received and paid
to the trust in revolving period securitizations were
$2,775.5 million (2007 - $845.0 million).
The key assumptions used to determine the loss on sale of receivables
and the fair values attributed to the retained interest for the year
are as follows:
2008 2007
---------------------------------------------------------------------
Annual discount rate 3.19% 5.27%
---------------------------------------------------------------------
Weighted average life of receivables
sold (days) 39 37
---------------------------------------------------------------------
Credit loss ratio 0.58% 0.60%
---------------------------------------------------------------------
Servicing fee liability 1.0% 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 3.1 18.9
---------------------------------------------------------------------
Rate differential on temporary differences 3.7 -
---------------------------------------------------------------------
Reduction of valuation allowance - (13.1)
---------------------------------------------------------------------
Other items 0.8 0.6
---------------------------------------------------------------------
Effective tax rate 40.5% 42.1%
---------------------------------------------------------------------
---------------------------------------------------------------------
The balances of future income taxes as at December 31, 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 169.4 360.6
---------------------------------------------------------------------
Property, plant and equipment 488.8 374.6
---------------------------------------------------------------------
Employee Benefits (69.7) (55.0)
---------------------------------------------------------------------
Other 1.1 8.5
---------------------------------------------------------------------
Total future income tax asset 589.6 688.7
---------------------------------------------------------------------
Valuation allowance (64.0) (64.4)
---------------------------------------------------------------------
Net future income tax asset 525.6 624.3
---------------------------------------------------------------------
---------------------------------------------------------------------
Future income taxes are comprised of:
2008 2007
---------------------------------------------------------------------
Current future income tax asset 90.5 109.1
---------------------------------------------------------------------
Long-term future income tax asset 436.8 517.9
---------------------------------------------------------------------
Long-term future income tax liability (1.7) (2.7)
---------------------------------------------------------------------
Net future income tax asset 525.6 624.3
---------------------------------------------------------------------
---------------------------------------------------------------------
During the year ended December 31, 2008, the Company recovered
$0.5 million in cash income taxes (2007 - recovered $3.0 million).
As at December 31, 2008, the Company had non-capital loss
carryforwards available to reduce future years' taxable income, which
expire as follows:
---------------------------------------------------------------------
2009 450.9
---------------------------------------------------------------------
2014 7.9
---------------------------------------------------------------------
2026 and beyond 84.1
---------------------------------------------------------------------
542.9
---------------------------------------------------------------------
---------------------------------------------------------------------
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
$639.4 million (2007 - $740.3 million) as at December 31, 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 December 31, 2008:
---------------------------------------------------------------------
0-30 days 125.4
---------------------------------------------------------------------
31-60 days 43.5
---------------------------------------------------------------------
61-90 days 10.2
---------------------------------------------------------------------
Past 90 days 10.5
---------------------------------------------------------------------
Total 189.6
---------------------------------------------------------------------
Less: accounts receivable securitization (127.4)
---------------------------------------------------------------------
Accounts receivable outstanding 62.2
---------------------------------------------------------------------
---------------------------------------------------------------------
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:
2008 2007
---------------------------------------------------------------------
Balance, beginning of the period 13.3 10.8
---------------------------------------------------------------------
(Decrease) increase in allowance (net of
recoveries and accounts written-off) (2.7) 2.5
---------------------------------------------------------------------
Balance, end of the period 10.6 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
---------------------------------------------------------------------
Accounts payable and
accrued liabilities 351.6 - - -
---------------------------------------------------------------------
Notes payable 95.0 - - -
---------------------------------------------------------------------
Long-term debt,
including current
portion 220.0 11.9 219.1 199.2
---------------------------------------------------------------------
Other long-term
liabilities - 9.3 8.3 40.5
---------------------------------------------------------------------
666.6 21.2 227.4 239.7
---------------------------------------------------------------------
---------------------------------------------------------------------
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. The Company's accounting policy is to adjust
outstanding foreign currency forward contracts from book value to
fair value as at the balance sheet date. As at December 31, 2008, the
Company does not have any outstanding foreign currency forward
contracts to purchase U.S. dollars (2007 - $59.7 million U.S.).
During the year ended December 31, 2007, the Company recorded a
$1.2 million loss in other income relating to the adjustment of
outstanding foreign currency forward contracts to fair value. During
the year ended December 31, 2008, the Company recorded a $1.2 million
recovery of expense in other income.
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
2008 2007
---------------------------------------------------------------------
Prepaid expenses 43.0 42.1
---------------------------------------------------------------------
Inventories 30.5 13.7
---------------------------------------------------------------------
73.5 55.8
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company performs periodic reviews of inventory for obsolescence
and, during the year ended December 31, 2008, expensed $1.7 million
in obsolete inventory (2007 - $0.6 million). During the year ended
December 31, 2008, the Company expensed $47.9 million of inventory
relating to cost of goods sold (2007 - $42.0 million).
7. NOTES PAYABLE
As at December 31, 2008, 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 December 31, 2008, the
Company had utilized $95.0 million in notes payable under its
revolving credit facility and had not utilized the commercial paper
back-stop facility. As at December 31, 2008, the Company had
$106.9 million in undrawn letters of credit outstanding. The Company
paid short-term interest costs of $2.5 million (2007 - nil) for the
year ended December 31, 2008.
On January 5, 2009, the Company's bank credit facility was increased
to $600 million, which consists of $150 million to support the
Company's commercial paper program, and a $450 million revolving
credit facility for cash management purposes and the issuance of
letters of credit.
8. SHARE CAPITAL
As at December 31, 2008, share capital consists of 64,637,917 issued
and outstanding Common Shares (2007 - 64,631,667).
During the year ended December 31, 2008, 6,250 stock options were
exercised (2007 - 191,460 stock options) for cash consideration of
$0.2 million (2007 - $5.9 million), of which $0.3 million was
credited to share capital (2007 - $6.9 million) and $0.1 million was
charged to contributed surplus (2007 - $1.0 million).
During the year ended December 31, 2007, the Company purchased
2,377,500 Common Shares for cancellation for cash consideration of
$111.0 million pursuant to its normal course issuer bid. The excess
of the purchase price over the stated capital in the amount of
$64.5 million was charged to retained earnings in 2007.
Earnings per share reconciliation
The following table provides a reconciliation of the information used
to calculate basic and diluted earnings per share:
2008 2007
---------------------------------------------------------------------
Net income
---------------------------------------------------------------------
Basic and diluted 144.0 169.7
---------------------------------------------------------------------
Weighted average shares outstanding
(in millions)
---------------------------------------------------------------------
Weighted average number of shares
outstanding - basic 64.6 65.0
---------------------------------------------------------------------
Dilutive effect of outstanding stock options - 0.2
---------------------------------------------------------------------
Weighted average number of shares
outstanding - diluted 64.6 65.2
---------------------------------------------------------------------
Earnings per share ($)
---------------------------------------------------------------------
Basic earnings per share 2.23 2.61
---------------------------------------------------------------------
Diluted earnings per share 2.23 2.60
---------------------------------------------------------------------
---------------------------------------------------------------------
9. 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 purchase price of
$4.4 million. This acquisition was accounted for using the purchase
method, and the purchase price has been allocated to assets of
$4.6 million, liabilities of $1.4 million, and goodwill of
$1.2 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.
10. STOCK-BASED COMPENSATION
The following tables provide further information on outstanding stock
options:
2008 2007
---------------------------------------------------------------------
Weighted Weighted
average average
Number exercise Number exercise
of price per of price per
shares share shares share
---------------------------------------------------------------------
Outstanding, beginning
of year 1,876,090 42.12 1,721,150 40.01
---------------------------------------------------------------------
Granted 508,000 42.24 413,000 47.18
---------------------------------------------------------------------
Exercised (6,250) 29.91 (191,460) 30.14
---------------------------------------------------------------------
Terminated (203,900) 44.05 (66,600) 44.90
---------------------------------------------------------------------
Outstanding, end of year 2,173,940 42.00 1,876,090 42.12
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable, end of year 1,039,460 40.54 725,070 39.39
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
average Range of
exercise exercise
Year Options Options price per price per Expiry
granted outstanding exercisable share share date
---------------------------------------------------------------------
2008 455,000 - 42.24 42.24 2018
---------------------------------------------------------------------
2007 357,000 82,600 47.20 44.00 - 49.37 2017
---------------------------------------------------------------------
2006 266,300 120,500 39.85 38.78 - 47.76 2016
---------------------------------------------------------------------
2005 621,700 389,300 42.77 40.44 - 49.03 2015
---------------------------------------------------------------------
2004 147,280 120,400 45.61 45.61 2014
---------------------------------------------------------------------
2003 102,160 102,160 34.84 34.75 - 35.81 2013
---------------------------------------------------------------------
2002 122,100 122,100 34.29 33.58 - 34.71 2012
---------------------------------------------------------------------
2001 56,500 56,500 37.07 36.42 - 38.81 2011
---------------------------------------------------------------------
2000 40,000 40,000 31.89 23.81 - 35.60 2010
---------------------------------------------------------------------
1999 5,900 5,900 16.99 16.99 2009
---------------------------------------------------------------------
---------------------------------------------------------------------
11. SEGMENTED INFORMATION
As at December 31, 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. These
changes reflect improvements in the Company's ability to capture
expenses by division for 2008. 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 tables provide further segmented information:
Years ended December 31
---------------------------------------------------------------------
Consumer Enterprise
Markets Solutions
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External 818.0 802.3 1,103.5 1,103.5
---------------------------------------------------------------------
Internal 0.4 0.4 0.1 0.1
---------------------------------------------------------------------
EBITDA 389.2 405.0 227.2 258.5
---------------------------------------------------------------------
Restructuring - 2.4 19.9 9.5
---------------------------------------------------------------------
Amortization 235.8 234.1 93.9 84.1
---------------------------------------------------------------------
Goodwill 11.8 11.8 29.9 28.7
---------------------------------------------------------------------
Assets 1,758.0 1,966.5 1,719.5 1,481.6
---------------------------------------------------------------------
Capital expenditures, net 216.2 167.5 119.0 144.4
---------------------------------------------------------------------
---------------------------------------------------------------------
Years ended December 31
---------------------------------------------------------------------
Other Total
2008 2007 2008 2007
---------------------------------------------------------------------
Operating revenue
External - - 1,921.5 1,905.8
---------------------------------------------------------------------
Internal 39.4 38.1 39.9 38.6
---------------------------------------------------------------------
EBITDA (2.5) (6.8) 613.9 656.7
---------------------------------------------------------------------
Restructuring 0.9 - 20.8 11.9
---------------------------------------------------------------------
Amortization 0.3 0.5 330.0 318.7
---------------------------------------------------------------------
Goodwill - - 41.7 40.5
---------------------------------------------------------------------
Assets 59.3 46.5 3,536.8 3,494.6
---------------------------------------------------------------------
Capital expenditures, net 0.5 0.1 335.7 312.0
---------------------------------------------------------------------
---------------------------------------------------------------------
Reconciliations of net income and assets are as follows:
Years ended December 31 2008 2007
---------------------------------------------------------------------
Consolidated net income
Total EBITDA 613.9 656.7
---------------------------------------------------------------------
Amortization (330.0) (318.7)
---------------------------------------------------------------------
Other income 7.1 6.7
---------------------------------------------------------------------
Debt charges (48.9) (51.7)
---------------------------------------------------------------------
Income tax expense (98.1) (123.3)
---------------------------------------------------------------------
144.0 169.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets
Assets for operating segments 3,536.8 3,494.6
---------------------------------------------------------------------
Eliminations (1,411.1) (1,382.3)
---------------------------------------------------------------------
Future income taxes 527.3 627.0
---------------------------------------------------------------------
Consolidated total assets 2,653.0 2,739.3
---------------------------------------------------------------------
---------------------------------------------------------------------
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 on 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:
December 31 December 31
2008 2007
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(Cash and cash equivalents)
bank indebtedness (6.5) 10.1
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Proceeds from accounts receivable
securitization (Note 3) 127.0 43.0
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Notes payable 95.0 -
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Capital lease obligations, including
current portion 18.8 22.5
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Long-term debt, including current portion 650.2 739.5
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Total debt 884.5 815.1
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Shareholders' equity 1,382.0 1,404.0
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Total capitalization 2,266.5 2,219.1
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Debt to capitalization 39.0% 36.7%
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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 and bank credit facility 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. COMPARATIVE FIGURES
The prior year figures have been reclassified when necessary to
conform to the current year'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
