May 7, Charting a new course

Transcription

1 May 7, 2015 Charting a new course

2 Safe harbour notice This presentation includes forward-looking statements and information (collectively, statements ) including, but not limited to, statements pertaining to the Company s corporate direction, business opportunities, operations, financial objectives, future financial results and performance, strategic review, guidance and outlook, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts. Examples of statements that constitute forward-looking information may be identified by words such as believe, expect, project, should, anticipate, could, target, forecast, intend, plan, outlook, see, set, pending, eliminate and other similar terms. All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation. Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. 2 2

3 Overview of Strategic Review 3 3

4 Strategic Review Change is underway Performance has not met shareholder expectations Spent the last 120 days understanding why Developed fulsome strategy to realize intrinsic value Launched the first of many initiatives that reflect a new trend of growth and profitability "MTS possesses a number of unique strategic advantages that equip it to deliver enduring value for shareholders and I am excited about the initiatives already underway. We are well positioned to accelerate growth and profitability and ready to tackle opportunities head-on." Jay Forbes, CEO, MTS Allstream Addressing shareholder concerns promptly 4 4

5 Strategic Review Wide-ranging and thorough strategic review The Review Process Comprehensive assessments of past revenue performance for each product line by each market segment Extensive review of internal processes by an external advisor Thorough review of strengths, weaknesses, threats and opportunities CEO meetings with all stakeholders including customers, employees, shareholders and rating agencies Yielded In-depth situational assessments A common understanding of the issues and opportunities A finite set of clear strategic objectives A disciplined approach to execution that emphasizes accountability Developed fulsome strategy to realize intrinsic value 5 5

6 Strategic Review: Why is it Different this Time? FEBRUARY MARCH APRIL MAY - JUNE Situational Assessment Strategic Plan Strategy Map Pay For Performance Operating Budget Organizational Development Balanced Scorecard Capital Budget Organization Structure Strategic Initiatives VPP Measures & Targets Top Talent Measure Dictionary SU Measures & Targets Core Capabilities Communication Plans Employees, Investors, Customers, Governments, Distribution Partners, Rating Agencies, etc. Situational assessments deconstructed the business model to unearth a wealth of opportunity; Integrating the resulting strategic plans into key processes will improve execution 6 6

7 Immediate Initiatives to Enhance FCF Significant actions underway to stabilize and enhance recurring FCF Pension Plan Pre-funding Pre-funded $120 million into pension plans Eliminates solvency payments for 2015 and 2016 under any reasonable economic scenario (and beyond 2017 based on the consensus bank forecast) Materially stabilizes and enhances recurring free cash flow Allstream Cost Structure Initiatives undertaken to reduce workforce by 25% Disciplined capital allocation coupled with workforce reductions will reduce capex by 20% to 30% Run-rate opex and capital savings of $50 million by YE 2016 Allstream expected to be FCF positive in 2015 and beyond Significantly improved FCF visibility and stability 7 7

8 Laying the Foundation for Future Growth Sustainable dividend with appropriate payout ratio Appropriate payout ratio with a sustainable dividend based solely on MTS FCF Attractive yield with potential for dividend growth over time Surplus FCF available to invest in growth, cover contingencies, pursue opportunistic buy-backs and reduce debt Strong, stable and growing MTS Capable of long-term organic revenue growth of 1% to 3% per year Operating margin growth through operational excellence and efficiencies Disciplined capital spending supporting sustainable growth Improved Allstream Cost structure of a competitive carrier going to market with a laser focus Generating positive cash flow and appropriate return on capital Ability to evaluate options over time from a position of strength Conservative balance sheet Significant balance sheet flexibility and liquidity Appropriately funded pension plans Attractive credit profile with commitment to investment grade credit rating Long-term strategy in place to fully realize intrinsic value 8 8

9 Immediate Enhancements to FCF 9

10 Pre-funded Pension Plan Contributed $120 million pension pre-funding as at May 6 Eliminates solvency payments for 2015 and 2016 under any reasonable economic scenario and 2017 and beyond based on consensus bank forecast Materially enhances and stabilizes recurring free cash flow Funded via short-term borrowings Illustrative Cash Solvency Funding* (C$M) Change from Jan 1, 2015 discount rate E 2017E Forecast solvency deficit at end of 2017 (100 bps) (75 bps) (50 bps) (25 bps) bps bps (4) 50 bps (86) 75 bps (173) 100 bps (232) Current Rates 2015 Consensus Bank Forecast *Based on 6.0% ROA and includes impact of $120 million solvency pre-payment Eliminated pension funding volatility and risk 10 10

11 Reduced Allstream s Cost Structure Allstream workforce reduced by over 500 employees (25% of workforce) ~100 employees have left under a severance arrangement ~400 employees already provided working notice and will exit over next 18 months Reducing 2015 capital spending by 20% to 30% Q1 year over year reduction of 15% Run-rate savings of $50 million achieved by end of 2016 ~80% resulting from opex reductions and ~20% resulting from capex reductions Illustrative Run-Rate Free Cash Flow Impact 2014 By end of 2016 Allstream expected to be FCF positive in 2015 and beyond 11 11

12 A Sustainable Dividend Capable of Growth 12

13 MTS / Returning Cash to Shareholders Establishing sustainable dividend with appropriate payout Dividend of $1.30 per share Target payout ratio of 70% to 80% of MTS FCF Based solely on MTS free cash flow for sustainability Surplus FCF available to invest in growth, cover contingencies, pursue opportunistic buy-backs and reduce debt Targeting 70% to 80% of EPS long-term to address future cash taxes FCF to exceed EPS over mid-term Significant tax assets expected to support FCF until at least 2023 Elimination of discount and share issuance removes dilution from DRIP program Targeting dividend growth model Attractive yield with potential dividend growth over time Opportunistic NCIB accretive to EPS / FCFPS growth Sustainable dividend with long-term growth potential 13 13

14 Long-term Strategy to Realize Intrinsic Value MTS: A Strong Foundation to Build Upon 14

15 MTS / Manitoba A Great Place To Do Business One of the most diversified and stable economies in Canada Resilient to cyclical trends Steady annual population growth of about 1% Strong record of GDP growth in Manitoba is forecasted to continue Manitoba 2012 GDP by Industry (1) Nominal GDP Growth (2) Finance, Insurance and Real Estate 6.0% 22% 18% Trade Manufacturing 3.7% 4.0% 3.8% 4.6% Government 3% 3% 3% 6% 7% 7% 9% 10% 12% Construction Mining and Other Primary Transportation and Warehousing Utilities Information, Culture, Arts and Entertainment Agriculture Other Services E 2015E 2016E (1) Source: Statistics Canada, December 2013 (2) Source: Canadian banks consensus forecast Operating in a steady and growing economy 15 15

16 MTS / A Great Company With Even Greater Potential MTS Strengths Only provider with complete service offering Strong brand Highly knowledgeable sales and service staff MTS Foundation Next-gen networks with unmatched customer connectivity Leading market share MTS Opportunities Improve share growth Explore new horizons MTS Future Unleashing the potential of the Internet Customer focus Adjacencies New growth opportunities including product extensions / new products Emerging markets include The Internet of Things, Big Data, and Machine to Machine Internet & Wireless Use our network advantage to win the Smart Home of the future and ICT business Bundles 5-service bundles Multiple service relationships / leading churn Wireless 4G LTE 77% coverage HSPA 97% coverage Customer Focus Shift organization to become more focused on customer Evolve our brand Channels Strong branded retail channel Internet / TV Broadband 87% coverage* MTS Ultimate TV * Represents Fibre, VDSL2 and ADSL Analytics Understand customer needs better than the competition Voice Only home phone provider province-wide Business Connected by wireless and wireline to every business in MB All the tools and opportunities needed to grow our business 16 16

17 MTS / Our Strategic Focus Financial Increase total Shareholder return Grow profitably Customer Win Customers Own: Customer wireless and Internet in Manitoba by delighting our customers Own: Smart Home of the future Own: Business Communications and IT by being the trusted advisor Internal Process Make it simpler, faster and more economical Make it simple Improve cost structure Deliver faster Invest to grow Learning and Growth Create a Customer first organization and regain industry thought leadership Support our employees in delighting customers Deepen organizational capabilities in data, digital and marketing Increase shareholder value by growing share of revenue, effectively managing costs and directing capital to focus on growth 17 17

18 MTS / Make it Simpler, Faster and More Economical Deliver Faster Make it Simple As a 100+ year old company, we have layered policies that have added complexity and inefficiency for our customers and the employees that serve them We will simplify how we serve our customers by aggressively eliminating non-value added activities MTS will launch new services and respond to customers more quickly. We will provide our employees with the authority to make quicker decisions We will accept mistakes and learn from one another Improve Cost Structure As a company operating in a mature industry, our growth in profits needs to come from the relentless pursuit of efficiencies Finding ways to perform essential activities more efficiently will become our way of life Delivering a superior service on a cost-effective basis 18 18

19 MTS / Create a Customer-First Organization MTS has strong brand recognition and loyalty Our employees are dedicated and want MTS to succeed We have unique market knowledge and product offerings However, we can do better We Have Created new Chief Marketing Officer role Our processes are bureaucratic and not always customer friendly Our employees have not always been empowered to do the right thing We Will Focus change on: Leadership and accountability Employee training Service enhancements Call centres Taking customer feedback to heart and delivering greater value 19 19

20 MTS / Maintain and Grow Consumer Segment Strong and growing Consumer segment Attractive revenue mix with ~71% of revenue from growth services Well positioned in growing wireless, TV and Internet verticals Continued Shift to Growth Services Leading Consumer Market Share Strong Growth in Key Verticals Consumer Rev (2014): $650M 77% Consumer Revenue CAGR ( ) 25% 4% 42% 52% 34% 54% 6% 10% 8% 16% 13% Growth Services: 71% of Consumer revenue vs. 57% in 2010 (1) Wireless TV Internet Local & LD Wireless TV Internet Wireless TV Internet Local and LD Other Note: represents revenues for consumer segment only. TV market share is our share in the current 70% of households in Manitoba passed with fibre or VDSL. (1) Represents combined consumer and business total wireless market share. Source: CRTC Communications Monitoring Report. Best-in-class consumer market platform 20 20

21 MTS / Lead the Continued Growth of Wireless Core wireless business well positioned for growth Significant competitive advantage: network, bundles, brand Subscriber revenue (ex. wholesale) achieving strong growth led by excellent consumer postpaid performance Strong data ARPU growth driven by increased usage on LTE Wholesale revenue churn largely complete by end of 2015 Launching new customizable options such as new wireless MyPlan Data ARPU ($ millions) Subscriber Revenue (ex. Wholesale & Other) $21.44 $ $15.02 $17.80 $ Consumer Postpaid Business Postpaid Prepaid Strong and growing wireless franchise 21 21

22 MTS / Grow Share in the Business Segments Untapped opportunity within Manitoba business market Stable Manitoba business market Changing business needs creating new market opportunities Have underperformed market due to lack of focus MTS Business Market Share 82% 78% 59% 51% Launching MTS Business Solutions profit centre Building out channels, processes and products around business customers and their requirements Investing in people, process and capital to grow Profit centre provides end-to-end accountability for customers Leveraging network, knowledge and product advantages for SMBs Target fair share of stable and attractive business market (1) Wireless Internet Converged Local & LD IP & Other (1) Represents combined consumer and business total wireless market share. Source: CRTC Communications Monitoring Report. Trusted advisor to Manitoba businesses for ICT needs 22 22

23 MTS / Expand Operating Margins Reducing costs by changing how we do business Organization Non-Labour Expenditures Call Centre and Field Force Operations Customer Experience and Revenue Multi-year plan to drive costs out of the business 23 23

24 MTS / Expand Operating Margins Demographic shift creates significant opportunities Nearly 500 employees (15% of employees) are expected to retire over next five years, with another 600 employees eligible System and process improvement will allow most of these departures to be absorbed as productivity savings or used to onboard new skill sets/capabilities , *Over age 59 Cumulative Likely Retirements* Eligible to Retire Productivity gains through natural attrition 24 24

25 MTS / More Disciplined Capital Investment Disciplined process focused on return on investment Capital Allocation Overhaul the process to reduce capital intensity and improve efficiency Prioritize spending based on return on investment and strategic fit 21% Capital Intensity (2014) 20% Processes Eliminate activities that no longer add value Improve essential activities to make them more efficient Enhance on-line self service capabilities to reduce costs and improve customer service 18% 18% MTS BCE TELUS Rogers MTS excludes one-time SR&ED credits Capital investment focused on sustainable growth 25 25

26 MTS / Performance Management Implemented an integrated performance management system that drives accountability and alignment Balanced Scorecard Created Balanced Scorecards to communicate, align and redirect resources Strategic Initiatives Identified the few key undertakings that would deliver out-sized contribution to the realization of our strategic objectives At-Risk Compensation Tightened the alignment between executive compensation and shareholders expectations Executive and senior leader variable compensation Large percentage at risk Tied to the successful realization of MTS strategic objectives Includes relative total shareholder return (TSR) for performance share units (PSUs) Delivering crisp execution 26 26

27 MTS / Summary Unrivaled asset base with attractive growth potential Well positioned in stable, growing market Manitoba GDP Growth Forecast Opportunities for continued growth Top choice for Manitobans' ICT needs 6.0% 3.7% 4.0% 3.8% 4.6% Growing share of wallet in Consumer and Business Laser focus on operational efficiencies E 2015E 2016E Source: Consensus bank economic forecast. Strategic & disciplined capital investment Strong and stable growth in revenue, EBITDA and FCF Charting a new course 27 27

28 Long-term Strategy to Realize Intrinsic Value: An Improved Allstream 28

29 Allstream / Changing How Allstream Does Business Assessment Too broadly focused (too many solutions, customers and markets) Unsustainable cost structure Underdeveloped customer acquisition capabilities Revenue retention challenges Capital investment process lacked discipline Tightened Strategic Focus A laser focus on IP products, in key customer segments, in five major markets A disruptive force in the ILEC legacy market Streamlined Costs A competitive carrier cost structure - 25% workforce reduction Rigorous discipline to capital investments - 20% to 30% opportunity in 2015 Cash Flow Positive Expected to be cash flow positive each year 29 29

30 Allstream / Great Asset, Lacks Fit with MTS Unique collection of assets with strong growth potential National IP network spanning all major metro markets coast-to-coast 1 of only 3 national providers in business markets Extensive network reach with full suite of secure, reliable IP services Upside from Shared Services Canada contract Strong growth and FCF potential However, Allstream s growth/risk profile is quite different from MTS s We will improve the cost structure and generate positive FCF as we consider our options for Allstream Will evaluate our options from a position of strength 30 30

31 Overview of Q Results 31

32 Q Financial Results ($ millions, except earnings per share) Q Q % Variance MTS revenues Allstream revenues Consolidated revenues MTS 1 EBITDA Allstream EBITDA Consolidated EBITDA MTS 1 free cash flow Allstream free cash flow Consolidated free cash flow MTS capital expenditures Allstream capital expenditures Consolidated capital expenditures Earnings per share $0.34 $ Includes all Manitoba operations 2 Adjusted for Scientific Research and Experimental Development Investment Tax Credits ("SR&ED ITCs") to conform to 2015 presentation Impact of local, LD and data revenue margin decline as well as restructuring costs of $1.7million Allstream is on track towards the expected positive FCF for 2015 Note that Q included favourable $0.12 SR&ED impact Q Allstream EBITDA includes $11.5 million in salary costs for staff on working notice that will be leaving the business Financial highlights for Q

33 2015 Outlook 33

34 2015 Outlook / Strong FCF Generation 2015 Outlook Strong, stable and growing MTS Allstream expected to be FCF positive even after estimated restructuring costs of $16 million 2015 EPS expected to be impacted by: non-cash adjustments of ~($0.48) made up of ($0.23) of actual 2014 amortization for SR&ED adjustment, ~($0.15) of COA amortization and ~($0.10) non-cash pension expense and other, and Allstream restructuring costs of ~($0.15) Long-term MTS Targets Organic revenue growth of 1% to 3% EBITDA margin maintenance/expansion Recurring capital intensity of 18% to 19% ($ millions, except for EPS) 2015 outlook 2014 result MTS EBITDA Higher Free Cash Flow * Higher Allstream EBITDA Lower - primarily due to restructuring 99.5 Free Cash Flow Positive (1.6) Consolidated EPS $0.90 to $1.20 $1.70 FCF excludes pension solvency and lawsuit payments, spectrum and changes in working capital; change from prior year definition which included non-cash portion of SR&ED ITCs. Significantly improved FCF profile underpinning dividend 34 34

35 Favourable Credit Profile Relative to Peers Conservative leverage relative to peer group Leverage (incl. deferred wireless costs) of 1.8x relative to peer average of 2.7x reflects impact of funding $120 million into pension plans Strong interest coverage (incl. deferred wireless costs) of 9.1x relative to peer average of 8.2x 2014 Net Debt / LTM EBITDA LTM EBITDA / Interest (2) 2.7x 2.5x 3.1x Avg: 2.7x 2.4x 9.1x 8.6x 9.8x Avg: 8.2x 8.0x 1.8x 1.7x 6.3x (1) (2) (3) (1) (3) MTS BCE TELUS Rogers Shaw BCE TELUS Rogers Shaw Note: Interest expense excludes pension related interest, capitalized interest, interest income, amortization of financing fees and other non-recurring items. Interest expense as reported and does not incorporate adjustments for issuance of debt post the most recently reported quarter. (1) EBITDA adjusted to include deferred wireless costs. (2) Includes 50% of preferred shares. (3) EBITDA pro forma for acquisition of ViaWest. Interest coverage represents FY2014 as segmentation of finance expense is not provided quarterly. Attractive credit metrics relative to peer group 35 35

36 MTS / Meaningful Shareholder Returns z A SUSTAINABLE DIVIDEND CAPABLE OF GROWTH 36 36

37 For further information, please contact: Investors Paul Peters Investor Relations