September 15, Charting a new course

Transcription

1 September 15, 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, sale of Allstream, 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, the expectation of not having to pay cash income taxes until 2023, 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 Who were we? How did we start 2015? 3 3

4 At the start of 2015 Two main operating subsidiaries MTS and Allstream MTS with a strong incumbent position in Manitoba Allstream is the only national competitive business carrier in Canada No requirement to pay cash taxes until at least 2023 Revenues ($ millions) 2014 $1,612.0 Capital expenditures ($ millions) 2014 * $ $1, $296.0 EBITDA ($ millions) Free cash flow ($ millions) 2014 $ * $ $551.3 Earnings per share ($ ) 2014 $ ($1.24) 2013 $121.0 * Excludes non-cash scientific research and experimental investment tax credits Implied blended EBITDA multiple 5.7X** ** Q analyst report; significantly lower than peers 100%+ free cash flow dividend payout ratio 4 4

5 At the start of 2015 The market leader in Manitoba with: Strong brand recognition, and The only carrier in the province capable of providing all major telecommunications services Revenues ($ millions) 2014 $1,001.8 Free cash flow* ($ millions) 2014** $ $ ** $143.8 EBITDA ($ millions) 2014 $472.0 * Excludes non-cash scientific research and experimental investment tax credits ** MTS includes MTS and Other 2013 $477.1 Was not growing year over year 5 5

6 At the start of 2015 A strong competitor in the Canadian business market, with: Deep metro fibre A national IP-fibre network Superior customer service Revenues ($ millions) 2014 $644.1 Free cash flow ($ millions) 2014 ($1.6) 2013 $ ($22.8) EBITDA ($ millions) 2014 $ $81.5 Improving but still a net user of free cash flow 6 6

7 What did we face? Company entered 2015 facing some significant issues 7 7

8 MTS Allstream / In review We entered 2015 facing some significant issues: Pension solvency funding uncertainty Allstream continued to provide disappointing results, dragging down free cash flow MTS was showing vulnerabilities, especially in wireless results These issues were contributing to lower than expected free cash flow levels, leading to concerns as to the sustainability of the dividend Significant investor concerns 8 8

9 What did we do? Situational assessment - gave rise to new strategies 9 9

10 MTS Allstream / Pre-funded pension plans 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 Consolidated illustrative solvency funding 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% return on assets and includes impact of $120 million solvency pre-payment Eliminated pension funding volatility and risk 10 10

11 Allstream / Introduced a tighter strategic focus and financial self-sufficiency Strategic assessment conclusions Too broadly focused (too many solutions/ customers/markets) Updated strategic focus Go to market with a laser focus Laser focus on IP products, in key customer segments in major metro markets Become a disruptive force in the ILEC legacy market Unstainable cost structure Underdeveloped customer acquisition capabilities Revenue retention challenges Capital investment process lacked discipline Shift to offense Create a competitive carrier cost structure Monetize non-strategic assets Shift company to offense with a more aggressive stance as the market distributor Rebuild marketing and sales groups to realize growth Reset and maintain cost structure appropriate for Allstream 25% workforce reduction implemented in 2015, expected to generate $50 million of savings by YE2015 Rigorous discipline to capital investments Realize immediate value through the exit of non-strategic assets (real estate, under-utilized networks etc.) Streamlining operations and improving capital investments 11 11

12 Allstream / Reduced Allstream s cost structure Allstream workforce reduced by over 500 employees (25% of workforce) 242 employees have left the business (as at June 30, 2015) 263 employees have scheduled departure dates over the next 14 months Annualized run-rate savings will be approximately $36 million by year end Reducing 2015 capital spending by 20% to 30% Significant strategic focus shift reduced our Q capital intensity by more than seven percentage points to 10.7% (17.9% in Q2 2014) Run-rate savings of $50 million achieved by end of 2016 In Q2 2015, Allstream achieved nearly half of the estimated $50 million in annual run-rate savings from workforce reductions Restructuring efforts are now largely complete at Allstream Year to date, we have incurred $16.5 million in restructuring costs with the expectation to generate an estimated $60 million to $70 million in annual free cash flow improvement by the end of 2016 Allstream expected to be FCF positive in 2015 and beyond 12 12

13 Changing how we do business Allstream We: Reaffirmed that Allstream was non-strategic Positioned Allstream for sale MTS We: Launched a strategic assessment MTS Allstream We: Reset the dividend to $1.30 per share Attractive yield with potential dividend growth over time Evaluating our options from a position of strength 13 13

14 How have we progressed? Early days, but we are pleased with our progress 14 14

15 Allstream / Drive to increase profitability Revenue In Q2 2015, Allstream s converged IP revenues were up by $6.6 million or 10.3% In May 2015 won Shared Services Canada IP data communications services contract with the total value of the contract expected to exceed $100 million Converged IP revenues ($ millions) Q Q Shift in focus to more profitable customer segments EBITDA Allstream s Q EBITDA before restructuring cost increased 6.5% when compared to Q due to the early impacts from restructuring activities Year to date EBITDA before restructuring costs decreased by 8.6% due mainly to overall revenue declines EBITDA before restructuring costs ($ millions) Q Q Cost rationalization Workforce reductions announced in May 2015 will result in $50 million of run-rate savings by the end of 2016 Split $40 million in opex and $10 million in capex 75% of the 500 terminated employees will have exited by the end of 2015 and 100% will have exited by the end of 2016 The annualized run-rate savings will be approximately $36 million by end of headcount PF 2014 headcount $50 million of run-rate savings Beginning to deliver the financial results Allstream is capable of 15 15

16 Allstream / Strategic initiatives realizing strong results ($ millions) Adjusted EBITDA Adjusted EBITDA Run-rate adjustment Q Q Q Q Q Impact of 34 notified but not yet terminated 8 employees 26 ($ millions) Adjusted free cash flow 2 Adjusted free cash flow Run-rate adjustment Impact of notified but not yet 8 terminated employees 9 ($ millions) Capital expenditures Q Q Q Q Q Q1 Q2 Q3 Q4 Recent performance exhibits strong traction from strategic initiatives, with focus on growth and profitability Savings from headcount reduction evident in EBITDA, FCF and CAPEX (1) Excludes restructuring costs. (2) Adjusted FCF defined as adjusted EBITDA less investing activities and other items, net Expected to be cash flow positive each year 16 16

17 MTS / Rebuilt our leadership team Jay FORBES Chief Executive Officer Kelvin SHEPHERD MTS President Mike STROPEL Allstream President Paul CADIEUX Chief Financial Officer Paul BEAUREGARD Chief Corporate Officer Heather TULK Chief Marketing Officer Marvin BOAKYE Chief Human Resources Officer Leveraging expertise Paul Cadieux assumed CFO role on August 1 Heather Tulk appointed Chief Marketing Officer in Q and Marvin Boakye appointed Chief Human Resources Officer in Q Kelvin Shepherd retiring at end of September 2015, at which time Jay Forbes will assume the role of President of MTS Organizational structure aligned with our strategic vision 17 17

18 MTS / Bolstered residential and business marketing capabilities MTS opportunities to be more efficient and customer-focused MTS update Recent acquisition of The Technology Consortium (TTC) provides a greater foothold into the Manitoba information and communication technology market place MTS Total Internet revolutionary new product provides customers with seamless Internet access anywhere in Canada, anytime, over any device and network all in one plan. First-of-its-kind plan in Canada, offering a sustainable competitive advantage Additional spectrum purchase acquired 15 MHz of paired AWS-1 spectrum in Manitoba from WIND Mobile for $45 million. The spectrum was financed using MTS' existing credit facilities which we plan to repay following the sale of Allstream MTS Data Centres-Waverly facility grand opening was on September 14. The centre is the most advanced commercial data centre in Manitoba offering a suite of colocation, managed hosting and cloud services MTS is a great company, with great potential 18 18

19 What is in store for the future? 19 19

20 Allstream / Positioned for sale Relationship with MTS Allstream is a distinct legal entity, operating as a standalone business owned by MTS Limited intercompany transactions, all of which are conducted at arm s length Allstream and MTS purchase commercial telecommunications services from each other Allstream and MTS have limited support function dependencies with respect to each other Transition arrangements are in place, setting up a straight-forward and timely separation Pension obligations Allstream and MTS have spent considerable time developing a pension structure that eliminates the acquirer s exposure to the pension deficit liability Labour union Constructive relationships facilitate transition and post-transaction integration Union positions have declined 48% since 2010 No disruptions in recent memory (30 plus years) Tax attributes Significant tax attributes reside at Allstream and are available to offset future earnings $163 million in NOLs and tax credits shelter $43 million in future taxes payable Allstream becoming financially self-sufficient 20 20

21 MTS a strong foundation to build upon 21 21

22 MTS / Simpler, faster and more economical Simpler 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 Ability to upgrade wireless device online Faster New services launched and MTS is responding to customers more quickly. Employees have authority to make quicker decisions Total Internet MyPlan Economic As a company operating in a mature industry, our growth in profits needs to come from the relentless pursuit of efficiencies Restructuring Delivering a superior service on a cost-effective basis 22 22

23 MTS / Create a customer-first organization MTS has: Strong brand recognition and loyalty Dedicated employees who want MTS to succeed Unique market knowledge and product offering However, we can do better: Our processes are bureaucratic and not always customer friendly Our employees have not always been empowered to do the right thing We have: Created new Chief Marketing Officer role Opened Manitoba s first Tier 3 design-certified data centre Created Transformation Management Office designed to help us become a more customer-first, nimble and simple company Taking customer feedback to heart and delivering greater value 23 23

24 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 Consumer Rev (2014): $650M Leading consumer market share 77% Strong growth in key verticals 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) 1 Wireless 1 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 24 24

25 MTS / Wireless: moving to offense We have: Launched MTS Total Internet a revolutionary new product that provides customers with seamless Internet access anywhere in Canada, anytime, over any wireless device, and allows sharing of their data across home, Wi-Fi and wireless connections, across multiple devices and all in one plan Created the MTS MyPlan a wireless plan which allows customizable options Provided an online wireless upgrade service MTS wireless customers can now shop online 24/7 for a new device Competitive differentiator: MyBundle customers can save by bundling up to six-services, including up to five wireless devices, the gold standard in Manitoba Wireless impacted by regulatory changes (double-cohort) Due to regulatory changes, customers on three-year contracts are able to sign-up for new plans at the same time as customers on the first wave of two-year plans Double-cohort impacted our Q wireless subscriber net additions Also resulted in some additional churn due to pent-up demand for devices Strong and growing franchise 25 25

26 MTS / Grow share in the business segments Untapped opportunity within Manitoba business market Stable Manitoba business market Changing business needs creates new market opportunities Have underperformed market due to our lack of focus We are: Building out channels, processes and products around business customers and their requirements Investing in people and processes Providing end-to-end accountability for customers Leveraging network, knowledge and product advantages for SMBs Targeting our fair share of stable and attractive business market Offering colocation, managed hosting and cloud services through our recently opened and Manitoba s first Tier 3 design-certified data centre Strengthening our IT capabilities and revenue potential with the recent TTC acquisition Trusted advisor to Manitoba businesses for ICT needs 26 26

27 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 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 Capital intensity (2014) 21% 20% 18% 18% Expect capital intensity for 2015 and future years to be closer to peer group (18% to 19%) MTS BCE TELUS Rogers MTS excludes one-time SR&ED credits Capital investment focused on sustainable growth 27 27

28 MTS / Performance management Follow an integrated performance management system that drives accountability and alignment Strategic initiatives Positioning the company to deliver on our strategic objectives Balance scorecards Balance scorecards used to communicate, align and redirect resources 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 for performance share units Delivering crisp execution 28 28

29 MTS / Summary Unrivaled asset base with attractive growth potential Well-positioned in stable, growing market Continued growth opportunities Manitoba GDP growth forecast 6.0% Top choice for Manitobans' ICT needs 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 and disciplined capital investment Strong and stable growth in revenue, EBITDA and FCF Continue to capture opportunities to be more efficient and customer-focused 29 29

30 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 ~($0.15) ($ 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) Long-term MTS targets Organic revenue growth of 1% to 3% EBITDA margin maintenance/expansion Recurring capital intensity of 18% to 19% Consolidated EPS $0.90 to $1.20 $1.70 * MTS EBITDA excludes restructuring costs. In addition MTS FCF excludes pension solvency payments, spectrum auction costs and the acquisition of TTC; change from prior year definition which included non-cash portion of SR&ED ITCs. Significantly improved FCF profile underpinning dividend 30 30

31 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 31 31

32 MTS / Meaningful shareholder returns z A SUSTAINABLE DIVIDEND CAPABLE OF GROWTH 32 32

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