Manitoba Telecom Services Inc. reports 2013 fourth-quarter and full-year results

Learn more about Manitoba Telecom Services Inc.'s 2013 results by visiting www.mtsallstream.com/investors.

Stock symbol: MBT

WINNIPEG, Feb. 6, 2014 /CNW/ - Manitoba Telecom Services Inc. ("the Company"), including its two primary operating subsidiaries, MTS Inc. ("MTS") and Allstream Inc. ("Allstream"), today reported results for the quarter and year ended December 31, 2013.

2013 highlights
(2013 highlights as compared to 2012)
Consolidated

• Updated financial guidance achieved on all metrics
• Revenues from strategic services (wireless, broadband and converged IP) up 3.3% to $845.3 million
• Achieved annualized cost reductions of $69.5 million
• Consolidated EBITDA before Allstream transaction-related costs up 0.2% to $586.5 million; after transaction-related costs, consolidated EBITDA down 5.8% to $551.3 million
• Free cash flow increased $3.4 million or 2.9%, to $121.0 million, after absorbing $35.2 million in transaction-related costs
• Capital expenditures down $42.0 million or 12.4%
• Earnings per share ("EPS") of $1.69 before a $1.52 pension plan decision expense and a $1.41 Allstream impairment loss
• $55 million in cash pre-funded into pension plans during Q4
• Strong asset returns in excess of 18% and higher interest rates more than offset impact of Supreme Court of Canada ("SCC") decision on future pension solvency funding
• Board of Directors declares $0.425 per share Q1 2014 cash dividend

MTS

• Wireless revenues up 3.6%; 7.4% excluding wireless wholesale
• Wireless data revenues up 21.4%
• Internet revenues up 6.9% and IPTV revenues up 4.5%
• ARPU growth in wireless and Internet
• Announcement of $50-million data centre build in Manitoba

Allstream

• Allstream quickly back to past performance levels, excluding re-structuring and transaction costs
• Increased gross margin percentage to 62.5%, up from 59.5%
• Converged IP revenues down 0.7%, but up 3.6% excluding impact of Government of Ontario disconnects
• EBITDA down 25.4% to $81.5 million, after $25.8 million in transaction-related costs

"MTS delivered strong results and clear progress against our plan in the fourth quarter," said CEO Pierre Blouin. "I am particularly pleased by how quickly Allstream is regaining the momentum we had prior to its proposed sale. At Allstream, our national IP fibre network surpassed the 3,000-building mark and we made significant progress in minimizing our cost structure. At MTS, we announced plans to build a state-of-the-art data centre in Winnipeg, expanded our wireless network sharing agreement with Rogers and expanded our 4G LTE wireless network to reach more than 800,000 Manitobans. Our dividend continues to be fully supported by strong and growing free cash flow at MTS. And we were rewarded for our pension solvency funding strategy with strong asset returns and rising interest rates in 2013, which together will significantly reduce our future pension solvency funding requirements and more than offset the impact of the Supreme Court's recent decision. We are pleased to have met our updated financial guidance for 2013 and look forward to delivering continued performance gains and increased free cash flow in 2014."

Consolidated
The Company's 2013 financial performance reflects management's focus on increasing cash flows by leveraging investments in MTS's wireless and broadband networks in Manitoba, and Allstream's Internet protocol ("IP") fibre network nationally. The Company's updated financial guidance was achieved on all metrics.

¹ The Company defines EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense)". See the "Notes" section of this news release for further information.
² EPS is based on weighted average shares outstanding of 68.2 million and 66.6 million for the twelve months ended December 31, 2013 and December 31, 2012, respectively. The increase in the number of weighted average shares outstanding is due to the December 2013 issuance of 8,855,000 common shares and participation in the Company's dividend reinvestment program. EPS excludes pension plan decision-related costs of $1.52 and International Financial Reporting Standards ("IFRS")-required Allstream impairment loss of $1.41 in 2013.
³ The Company defines free cash flow as "cash flows from operating activities less capital expenditures, and excluding changes in working capital, pre-funded pension solvency payments and spectrum costs". See the "Notes" section of this news release for further information.
⁴ Current 2013 outlook updated on October 7, 2013, following the Government of Canada's rejection of the proposed Allstream transaction. EPS excludes pension plan decision-related costs and IFRS-required write-down of Allstream's long-term assets.

¹ The Company defines EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense)". See the "Notes" section of this news release for further information.
² EPS is based on weighted average shares outstanding of 70.3 million for the three months ended December 31, 2013; 67.7 million for the three months ended September 30, 2013; 67.5 million for the three months ended June 30, 2013; 67.2 million for the three months ended March 31, 2013; and 67.0 million for the three months ended December 31, 2012. The increase in the number of weighted average shares outstanding is due to the December 2013 issuance of 8,855,000 common shares and participation in the Company's dividend reinvestment program. EPS excludes pension plan decision-related costs of $1.48 in Q4 2013 and IFRS-required Allstream impairment losses of $0.24 and $1.17 in Q3 2013 and Q2 2013, respectively.
³ The Company defines free cash flow as "cash flows from operating activities less capital expenditures, and excluding changes in working capital, pre-funded pension solvency payments and spectrum costs". See the "Notes" section of this news release for further information.

• Revenues: $1,633.7 million, down $70.4 million or 4.1% from 2012. This was mostly due to legacy revenue declines, including $45.8 million in planned reductions at Allstream, the disruption in IP sales caused by the rejected transaction and an $11.2-million reduction in MTS wireless wholesale revenues as other carriers move their customers from MTS's CDMA network to their own HSPA networks. These anticipated declines were partly offset by revenue growth from strategic lines of business (wireless, broadband and converged IP), which increased by 3.3% over 2012, on the strength of higher ARPU and subscriber growth across these lines of business.
• EBITDA: $551.3 million, down $33.9 million or 5.8% from 2012, reflecting the negative impact of $35.2 million in costs associated with the proposed sale of Allstream. Excluding transaction and restructuring costs, 2013 consolidated EBITDA remained consistent with that of 2012: A $28.5-million reduction in operations expense and improving margins at Allstream, along with overall growth at MTS, offset legacy and wireless wholesale declines.
• EPS: $1.69, down $0.48 or 22.1% from 2012 before a $1.52 pension plan decision expense and a $1.41 Allstream impairment loss, resulting from an IFRS-required write-down of Allstream's long-term assets. This decrease was due to transaction and restructuring costs, partly offset by lower operations expense, income tax expense and depreciation and amortization expense from not depreciating Allstream assets when they were being held for sale, as required by IFRS.
• Free cash flow: $121.0 million, up $3.4 million or 2.9% over 2012, after absorbing $35.2 million in transaction and restructuring costs relating to the proposed Allstream sale. This increase in free cash flow was mainly due to lower capital expenditures.
• Capital expenditures: $296.0 million, down $42.0 million or 12.4% from 2012, mostly due to decreased spending from projects completed in 2012, such as investments in upgrades to the wireless billing system and LTE wireless network builds in Winnipeg and Brandon, and the completion of the 100-GB core network upgrade initiative at Allstream.
• Annualized cost savings: $69.5 million in 2013, approximately 40% resulting from transaction-related restructuring at Allstream. Cost savings exceeded the Company's 2013 target of $30 to $40 million.

MTS
MTS delivered growth in revenues from strategic services, while maintaining an industry-leading EBITDA margin of 47.9% in 2013. Revenues from strategic services (wireless and broadband and converged IP) generated growth of 4.9% in 2013, which offset declines in wireless wholesale, local, long distance and legacy data revenues. In 2013, MTS increased the number of customers with bundled services by 3.1%, to 99,456, and had average revenue per user ("ARPU") growth in wireless and Internet product lines. MTS delivered strong wireless performance, with subscriber revenue growth of 7.4%, a 1.2% increase in post-paid subscribers, a 21.4% increase in revenues from data subscribers and data subscriber ARPU growth of 20.4% over 2012.

• Wireless subscriber revenues: $352.1 million, up $24.4 million over 2012, driven by a 21.4% increase in wireless data revenues. 67.4% of MTS's growing post-paid subscriber base now has data plans, driven by increasing demand for smartphones and data usage.
• Wireless wholesale revenues: Down as expected, as other carriers move their customers from MTS's CDMA network to their own HSPA networks. This decline is expected to be less pronounced in future years and should be partly offset by increased wholesale HSPA revenues.

• Internet revenues: $117.7 million, up $7.6 million over 2012, resulting from a 7.6% increase in the high-speed Internet subscriber base, which reflects the strength of MTS's bundle offer in Manitoba.
• IPTV revenues: $82.0 million, up $3.5 million over 2012, driven by strong subscriber growth of 7.4%, reflecting the quality of MTS's feature-rich television offering.
• Converged IP revenues: $28.4 million, up $4.1 million over 2012, driven by strong demand for IP services from Manitoba's business community and migration from legacy data services.

Unified communications, security and monitoring

• Unified communications, security and monitoring revenues: $40.3 million, up $4.1 million over 2012, reflecting additional revenues from Epic Information Solutions, partly offset by reduced hardware sales.

Local access

• Local access revenues: $251.9 million, down $14.6 million from 2012, including a one-time $3.4-million retroactive adjustment from a Canadian Radio-television and Telecommunications Commission ruling, lower feature revenue and line losses resulting from wireless substitution. The success of MTS's bundle continues to be a factor in retaining more local access lines than do competitors.

Long distance and legacy data

• Long distance and legacy data revenues: $71.0 million, down $5.1 million from 2012.
• Long distance revenues: $40.4 million, down $4.0 million or 9.0% from 2012, mainly due to decreased long distance rates and customers replacing long distance calling with email, text messaging and social networking.
• Legacy data revenues: $30.6 million, down $1.1 million or 3.5% from 2012, as a result of customers continuing to migrate towards converged IP services.

Allstream
Allstream's 2013 results reflect the negative impact of a prolonged regulatory process and the rejection of its proposed sale. Allstream is focused on continuing to drive growth in on-net IP-based services and improving profitability, a strategy that delivered 10 consecutive quarters of year-over-year EBITDA growth prior to the announcement of its proposed sale on May 24, 2013. Allstream's gross margin percentage increased to 62.5% in 2013, up from 59.5% in 2012. Allstream is quickly returning to past performance levels, as revenues from IP services in Q4 2013 were up 1.0% over Q4 2012. This momentum is expected to continue in 2014.

Converged IP

• Converged IP revenues: $241.9 million, down $1.7 million from 2012. Allstream's converged IP revenues continue to be impacted by disconnects related to the Government of Ontario's decision to change its telecommunications procurement policy. At its peak in 2009, this contract generated revenues of $33.3 million per year. This contract generated $5.2 million in revenues in 2013. The bulk of the decline is complete, with only a moderate impact expected in 2014. Excluding the impact of this contract, converged IP revenues would have grown 3.6% in 2013.
• Converged IP growth: Revenues from converged IP services returned to year-over-year growth in the fourth quarter of 2013, up 1.0% over Q4 2012. This progress is expected to continue in 2014, as Shared Services Canada circuit installations take place. Installations began in Q3 2013, with expected completion in Q4 2014. Once the circuits are fully installed, the Shared Services Canada contract is expected to contribute to solid IP growth in 2014.
• National IP network expansion: Added 280 buildings to Allstream's national IP fibre network in 2013, which totaled 3,003 fibre-fed buildings as at December 31, 2013, for an increase of 10.3% over 2012.

Unified communications, hosting and security

• Unified communications, hosting and security revenues: $76.0 million, down $2.3 million from 2012, mainly due to a decrease in one-time product sales, partly offset by an increase in service revenue.

Legacy services

• Local access revenues: $154.7 million, down $25.0 million from 2012, mainly due to Allstream's decision to accelerate its exit from low-margin wholesale resold business lines. Excluding deliberate exits, local access revenues were down 4.2%, or $7.6 million.
• Long distance and legacy data revenues: $155.5 million, down $30.5 million from 2012.
• Long distance revenues: $76.7 million, down $15.1 million or 16.4% from 2012, mainly due to decreased volumes and lower rates.
• Legacy data revenues: $78.8 million, down $15.4 million or 16.3% from 2012, largely due to a combination of competitive churn, re-pricing of services and customer migration to IP-based services.

Leadership changes
On December 31, 2013, Chief Corporate Officer Chris Peirce retired from the Company. Paul Beauregard, former Chief Administrative Officer and Corporate Secretary, assumed Mr. Peirce's responsibilities and became Chief Corporate and Strategy Officer and Corporate Secretary. Mr. Beauregard is now responsible for the strategy, corporate development, regulatory, corporate communications and community investment functions of the Company, and continues to be responsible for the oversight of all legal and human resource matters at the Company, as well as coordinating and supporting the Company's Board of Directors. On January 17, 2014, Allstream President Dean Prevost stepped down from the Company, in order to pursue other interests. Michael Strople, former Chief Operating Officer of Allstream, has assumed the role of Allstream President. Mr. Strople has been with Allstream since 2005. In his former role as Allstream's Chief Operating Officer, with responsibility for operations, sales, marketing and technology, he worked closely with Mr. Prevost and the Company's executive team. Mr. Strople has been a key contributor to the development of Allstream's successful strategy to focus on driving growth in high-margin on-net IP-based services and to expand into the mid-market, which has resulted in many improvements in the business.

Pension funding

Supreme Court of Canada decision
The Company announced on January 30, 2014 that the SCC reinstated a lower court ruling on a lawsuit regarding the administration of one of MTS's pension plans following the Company's privatization in 1997. The Company and its outside advisors are reviewing the implications of the ruling, which is complex.

While the total dollar value of the judgment is understood and will not exceed $142.1 million, the cash flow impact is subject to the determination of the implementation details and requires further negotiations with and between the plaintiffs, as well as other potential beneficiaries who are not represented by the plaintiffs. Accordingly, the timing of any funding which may be required for the judgment is not known at this time, and may be impacted by the nature of the specific benefits that will ultimately be negotiated. It is expected that a significant portion of the negotiated benefits will be in the nature of pension benefits which are normally funded over time in accordance with the Pension Benefits Standards Act, 1985 (Canada). The Company will disclose the specific implementation plan once they are known, as well as the expected impact on cash flows.

Accounting treatment of SCC decision

IFRS requires that the Company treat this ruling as a past service cost, which must be expensed immediately, regardless of the timing of any potential cash flow impact. As a result of the SCC's ruling, the Company has recorded a $142.1 million non-cash charge against income in the fourth quarter of 2013, to reflect the total estimated value of the pension benefits and other estimated costs.

Solvency deficit

During 2013, the Company's pension plans performed strongly and experienced an average return on assets exceeding 18%. These asset returns, combined with a rising interest rate environment, have reduced the Company's solvency deficit from more than $600 million at January 1, 2013 to less than $300 million (estimated) at January 1, 2014, including the full value of the SCC ruling as well as the new mortality tables to be implemented in 2014. As a result, the Company's pension solvency deficit is now only half of what it was one year ago.

Plan funding

In December 2013, the Company pre-funded $55 million of solvency payments into its pension plans. Excluding any impact that may result from the SCC decision, this prefunding is sufficient to cover all required solvency payments in 2014. Further payments into the pension plan, if any are required in 2014, would only be determined once the implementation plan for the SCC's decision becomes clearer.

The Company expects to have sufficient liquidity to satisfy its pension funding obligations, including the impacts which may result from the SCC judgment, using the funds raised in the equity financing that closed in December 2013. The Company will not be using cash flow from operations to meet its pension funding obligations and expects to maintain its current credit rating under any funding scenario. Additionally, the Company continues to generate strong free cash flows, which it expects will be more than sufficient to fund the Company's ongoing cash needs.

Dividend
The Company's Board of Directors declared a quarterly cash dividend of $0.425 per share for the first quarter of 2014, payable on April 15, 2014 to shareholders of record at the close of business on March 14, 2014.

The first-quarter dividend is designated 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 that reduce income tax otherwise payable.

Investment community conference call

MTS will hold its fourth-quarter and annual 2013 results conference call with the investment community on Thursday, February 6, 2014 at 5 p.m. (Eastern Time). Participants include Pierre Blouin, Chief Executive Officer and Wayne Demkey, Chief Financial Officer.

To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until Thursday, February 13, 2014 by dialing 1-855-859-2056 and entering passcode 29939599.

Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on the Company's website (www.mtsallstream.com/investors) or by entering http://event.on24.com/r.htm?e=735392&s=1&k=B1F1DB3C55B35BC1168BB1B394CA98CF. A replay of the conference call will be available on the Company's website for one year.

Notes
(1) The Company defines EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense)". The term "EBITDA", as it relates to 2013 and 2012 results prepared using International Financial Reporting Standards ("IFRS"), does not have any standardized meaning according to IFRS. It is therefore unlikely to be comparable to similar measures presented by other companies.

^* not applicable

(2) The Company defines free cash flow as "cash flows from operating activities, less capital expenditures and excluding changes in working capital, pre-funded pension solvency payments and spectrum costs". Free cash flow is the amount of discretionary cash flow that the Company has for purchasing additional assets beyond its annual capital expenditure program, paying dividends, buying back shares and/or retiring debt. The term "free cash flow", as it relates to 2013 and 2012 results prepared using IFRS, does not have any standardized meaning according to IFRS. It is therefore unlikely to be comparable to similar measures presented by other companies.

^* not applicable

(3) More information can be found in the Company's 2013 annual MD&A, 2013 audited consolidated financial statements for the year ended December 31, 2013 and 2013 Annual Information Form, which are available on the Company's website at www.mtsallstream.com/investors and will be available on the SEDAR website.

Forward-looking statements disclaimer
This news release 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, 4G LTE wireless network expansion, fibre-to-the-home deployment, national IP fibre network expansion, pension funding, the outcome of the negotiations, the time, method, quantum and implementation of any payment obligations, the Company's future cash flows, liquidity, credit ratings and profitability, and other events that could occur as a result of the SCC's decision, 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" 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.

Please note that forward-looking statements in this news release reflect Management's expectations as at February 6, 2014, and thus are subject to change thereafter. The Company disclaims 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 news release and the financial information contained herein have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the "Risks and uncertainties" section and elsewhere in the Company's 2013 annual MD&A, which is available on the Company's website at www.mtsallstream.com/investors and on the SEDAR website.

About Manitoba Telecom Services Inc. (MTS Allstream)
MTS Allstream is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The company has more than 100 years of experience, with approximately 5,000 employees across Canada. MTS Allstream's business is dynamic and consists of two operating divisions. In Manitoba, MTS is the leading full-service telecommunications provider for residential and business customers.

MTS's suite of services includes the latest in wireless technology, broadband services, IPTV, voice services, home security, and an extensive range of business solutions. Across Canada, Allstream is a leader in IP communications and is the only national provider that focuses exclusively on the business telecommunications market. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national fibre optic network spans more than 30,000 kilometers. MTS Allstream has spent 12 consecutive years on the Jantzi Social Index for leadership in social responsibility, and is the recipient of the 2011 Governance Gavel Award from the Canadian Coalition for Good Governance, recognizing clear and effective public disclosure and leading governance practices.

MTS Allstream's common shares are listed on the TSX (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com.

For more information about MTS's products and services, please visit www.mts.ca. For more information about Allstream's products and services, please visit www.allstream.com.

SOURCE MTS Allstream