Manitoba Telecom Services Inc. reports progress on strategic initiatives and second-quarter 2015 results; free cash flow grew 41% in Q2
WINNIPEG, July 30, 2015 /CNW/ - (TSX:MBT) Manitoba Telecom Services Inc. ("the Company"), including its two primary operating subsidiaries, MTS Inc. ("MTS") and Allstream Inc. ("Allstream"), today provided a strategic review implementation update and reported results for the period ended June 30, 2015, including a 41% increase in free cash flow from Q2 2014.
"The new strategies for MTS and Allstream have been readily embraced by the two organizations, and we have begun to see some encouraging initiatives and early progress as a result," said Jay Forbes, MTS Allstream, Chief Executive Officer. "In this last quarter, Allstream has been able to deliver double-digit IP revenue growth, a 6.5% increase in EBITDA before restructuring costs and $8.7 million in free cash flow, all the while maintaining the level of customer service that has historically set it apart from its competitors. Within MTS, we have identified opportunities to be more efficient and to become more customer-focused, and will launch corresponding initiatives to capture these opportunities in the third quarter."
STRATEGIC REVIEW UPDATE
Allstream turnaround
As a result of the Q1 2015 strategic review the Company has taken immediate action to improve free cash flow generation, allowing Allstream to become economically self-sufficient, including:
- a 25% or approximately 500 person staff reduction that should generate $50 million in annual cost savings and
- a 20% to 30% reduction in capital expenditures.
As of June 30, 2015, 242 employees have left the business while a further 263 employees have received working notice and have scheduled departure dates over the next 14 months. By year end, it is expected that 379 employees will have departed the business. Year to date salaries and benefits cost savings were $3.7 million, representing an annualized cost reduction of approximately $24 million. With the additional 137 in scheduled departures, the expectation is that annualized run-rate savings will grow to approximately $36 million by year end.
Further details on Allstream's planned headcount reductions and the impact on 2015 operations can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financial.
Allstream's new, more rigorous capital investment discipline has lowered capital intensity from 17.9% in Q2 2014 to 10.7% for this past quarter. In addition this reduction has been accomplished without negative consequences in sales gains, customer satisfaction or installations (converged IP wins increased by 5.6% in the first half of 2015 when compared to the same time frame in 2014).
Allstream's restructuring efforts, which are mostly complete for 2015, have resulted in $16.5 million in restructuring costs (as of June 30, 2015). By streamlining operations and improving capital investment decision-making, Allstream generated $8.7 million in free cash flow in the second quarter compared to $5.8 million in Q2 2014. For the full year, Allstream is expected to be cash flow positive net of restructuring costs.
"We enter the second half of the year with a solid, stable operating platform that is beginning to deliver the financial results we all believed Allstream was capable of generating," said Jay Forbes, MTS Allstream, Chief Executive Officer.
Allstream sale process
With restructuring largely complete and Allstream positioned to be free cash flow positive for 2015 and beyond, Management has shifted focus to manage a fully-planned exit of this business, one that will maximize value while promoting deal certainty. The Company has retained advisors, has a clear understanding of the approval process and requirements, and is constructing its information repositories for prospective purchasers, who Management plans to engage with in the second half of this year.
Pension plans pre-funding
On May 6, 2015 the Company completed the pre-funding of $120 million into its pension plans using its existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows. Further details on the pension plans and projected funding requirements under various economic circumstances can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financial.
MTS UPDATE
Acquisition of TTC
On June 1, 2015, the Company acquired the remaining 50% of the issued and outstanding shares of The Technology Consortium ("TTC") for a total cash consideration of $7.0 million, becoming TTC's sole shareholder. Through the purchase of EPIC Information Solutions in 2013 MTS was already a 50% stakeholder in TTC, which has long term contracts with the Manitoba Government and other public-sector clients to provide highly-trained professionals dedicated to offering a comprehensive range of both technical and business solutions. Such solutions include managed procurement services, on-site technical support, software distribution and versioning, mobile device management, print and imaging management and core information and technology ("IT") infrastructure support. Now as an integral part of the MTS family, TTC will help strengthen the Company's IT capabilities and create potential for revenue growth and profitability.
Further details on the TTC acquisition can be found in the Q2 2015 Financial Statements and Notes at www.mtsallstream.com/investors/financial.
MTS Total Internet
On June 18, 2015, MTS introduced a revolutionary new product that changes the way consumers can purchase their wireless and wireline Internet connectivity. MTS Total Internet provides customers with seamless Internet access anywhere in Canada, anytime, over any device and network all in one plan. With MTS Total Internet all household members can share their data across home, Wi-Fi and wireless connections and across multiple devices, making their Internet experience completely seamless and flexible. With no other communications service provider in Manitoba offering a similar service, the Company believes Total Internet can offer a sustainable competitive advantage in the market place.
MTS Data Centre
With the majority of MTS Data Centre construction completed, an official opening is scheduled for September 2015.
Wireless double cohort
On May 19, 2015, the Federal Court of Appeal dismissed the challenge of a consortium of wireless service providers, including MTS, that the Canadian Radio-televison Telecommunications Commission did not have the authority to apply the provisions of the Wireless Code to contracts that were already in place before the Code took effect. As a result of this decision, as of June 3, 2015, a large cohort of MTS customers were eligible to exit out of their wireless contracts. On this date MTS post-paid customers without contracts increased significantly, which will likely create a period of heightened competition through the balance of 2015. This change in our market place will likely lead to increased churn and increase our deferred wireless costs until the Company re-signs these customers and adds new subscribers.
The Company is taking action to mitigate this possible churn issue going forward by leveraging our differentiators, such as MyBundle, MyPlan, our new Total Internet offering and our strong relationships with Manitoba business customers. The Company has plans in place which should increase our percentage of customers on contract, while managing impacts on our deferred wireless costs, leveraging both two-year contract renewals with device subsidy and one-year contract extensions with no device subsidy.
Also as a result of this decision, the Company has fully amortized any outstanding deferred wireless costs related to the now invalid three-year contracts. With this accelerated amortization the Company recognized $9.9 million of additional expense in this quarter, of which $8.4 million would have otherwise been expensed in Q3 and Q4 2015, with the remaining $1.5 million expensed in 2016.
See our Q2 2015 Supplemental for additional discussion on the wireless double cohort impact.
EXECUTIVE LEADERSHIP CHANGES
On June 29, 2015, as part of the ongoing re-alignment at MTS Allstream, the Company announced the impending retirement of Kelvin Shepherd, President of MTS and the departure of Wayne Demkey, Chief Financial Officer. With the retirement of Kelvin Shepherd later this year, Chief Executive Officer, Jay Forbes, will assume the MTS president responsibilities in addition to his CEO role. Effective August 1, 2015, Paul Cadieux will assume the role of Chief Financial Officer. Paul joined the Company 18 years ago and has been a key contributor to MTS Allstream operations, most recently as Vice President Finance, Procurement and Real Estate.
Also in the quarter, Marvin Boakye was hired as Chief Human Resources Officer. With more than 20 years of experience in leading organization design and change, growing organizational capabilities, and positioning human resources groups as a key performance enabler, Marvin will support the talent development efforts at MTS Allstream.
To view more leadership team information, please visit www.mtsallstream.com/leadershipteam.
SECOND-QUARTER 2015 RESULTS
Consolidated financial results
| ($ millions, except EPS) | Q2 2015 | Q2 2014 | % variance | ||||
| Revenues | 398.3 | 403.3 | (1.2) | ||||
| Operations expense | 256.8 | 260.8 | 1.5 | ||||
| EBITDA before restructuring costs | 141.5 | 142.5 | (0.7) | ||||
| Restructuring costs | 19.6 | — | n.a.* | ||||
| EBITDA1 | 121.9 | 142.5 | (14.5) | ||||
| EPS2 | $0.13 | $0.37 | (64.9) | ||||
| EPS excluding restructuring costs | $0.31 | $0.37 | (16.2) | ||||
| Capital expenditures | 62.1 | 78.2 | 20.6 | ||||
| Free cash flow3 | 45.4 | 32.2 | 41.0 | ||||
| 1 EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense) |
| 2 Earnings per share ("EPS") is based on weighted average shares outstanding of 78.6 million for the three months ended June 30, 2015, 77.4 million for the three months ended June 30, 2014 |
| 3 Free cash flow includes cash flows from operating activities less investing activities and excludes changes in working capital, pension solvency funding and lawsuit payments, spectrum auction costs, restructuring costs, the acquisition of TTC and non-cash taxes |
| * not applicable |
Free cash flow
In Q2 2015, consolidated free cash flow increased $13.2 million from Q2 2014, mainly due to our recent efforts to improve both the intensity and effectiveness of our capital investment decision-making within both organizations ($16.1 million after adjusting for 2014 Scientific Research and Experimental Development Investment Tax Credits), partially offset by increased deferred wireless costs ($5.6 million).
The following provides further insight into the operating results variances for the quarter:
- Revenues: MTS saw a $0.5 million increase in revenues from Q2 2014, as strong growth in Internet, IPTV, and wireless data revenues were partly offset by decreases in wireless voice, as well as local and long distance revenues. Allstream's revenues decreased by $7.1 million compared to Q2 2014 due to declines in local, long distance and other data revenues, partly offset by strong growth in converged IP revenues which were up by $6.6 million or 10.3%.
- Operations expense: Consolidated operations expense was down 1.5% in Q2 2015 as Allstream's cost reduction activities took hold; Allstream operations expense decreased by $8.7 million in Q2 2015 compared to Q2 2014 mainly due to savings from headcount reductions, lower cost of goods sold and other cost reduction initiatives. MTS (including other) operations expense increased by $3.1 million in quarter mainly the result of increased cost of goods sold (driven by higher equipment sales of $1.7 million) and pension expense ($2.0 million).
- Restructuring costs: Restructuring costs mainly represent costs associated with Allstream's workforce reduction. The workforce reduction has contributed $3.7 million in salaries and benefits cost savings year to date representing an annualized cost savings of approximately $24 million.
- EBITDA before restructuring costs: During the second quarter 2015, MTS (including other) EBITDA before restructuring costs was down 2.2% due mainly to an increase in cost of goods sold and pension expense. For the full year, the Company expects MTS (including other) EBITDA before restructuring to be higher than the prior year. Allstream's EBITDA before restructuring costs increased by $1.6 million or 6.5% due to the early impacts from restructuring activities.
- Net income and EPS: In Q2 2015, net income and EPS were down $18.4 million or $0.24, respectively, due largely to increased restructuring costs and increased depreciation and amortization expense which was accelerated in Q2 to reflect the change in government policy on three-year wireless contracts.
- Capital expenditures: Late Q1 2015 efforts at Allstream, coupled with more recent changes at MTS, saw capital expenditures decline significantly - $16.1 million or 20.6% from Q2 2014.
The following table provides further free cash flow disclosure.
| ($ millions) | Q2 2015 | Q2 2014 | % variance | ||||||
| EBITDA before restructuring costs | 141.5 | 142.5 | (0.7) | ||||||
| Add back (deduct): | |||||||||
| Deferred wireless costs | (20.6) | (15.0) | (37.3) | ||||||
| Finance costs | (15.7) | (17.5) | 10.3 | ||||||
| Current cash income tax expense | (0.1) | — | n.a.* | ||||||
| Pension funding and net pension expense | 4.5 | 0.2 | n.a. | ||||||
| Other operating activities, net | 0.4 | 2.6 | (84.6) | ||||||
| Other income | 3.1 | (1.6) | n.a. | ||||||
| Gain on revaluation of TTC | (5.6) | — | n.a. | ||||||
| Loss on disposal of assets | 0.3 | 1.0 | (70.0) | ||||||
| Total | 107.8 | 112.2 | (3.9) | ||||||
| Investing activities1 | (62.4) | (80.0) | 22.0 | ||||||
| Free cash flow for the period | 45.4 | 32.2 | 41.0 | ||||||
| 1 Excludes spectrum auction costs and the acquisition of TTC |
| * not applicable |
DIVIDEND
The Company's Board of Directors declared a quarterly cash dividend of $0.325 per share for the third quarter of 2015, payable on October 15, 2015 to shareholders of record at the close of business on September 15, 2015.
The third-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 and webcast
MTS will hold its second-quarter 2015 earnings results conference call with the investment community on Thursday, July 30, 2015 at 8:30 a.m. (Eastern time). Participants include Jay Forbes, 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 August 6, 2015 by dialing 1-855-859-2056 and entering passcode 69209121.
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 www.mtsallstream.com/investors/Q22015results.
A replay of the conference call will be available on the Company's website for one year.
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, sale of Allstream, 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.
Please note that forward-looking statements in this news release reflect Management's expectations as at July 30, 2015, 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 2014 annual MD&A, which is available on the Company's website at www.mtsallstream.com/investors and at www.sedar.com.
About Manitoba Telecom Services Inc. (MTS Allstream)
MTS Allstream (trading symbol: MBT) is one of Canada's leading communications solutions companies. We provide full-service telecommunications support for residential and business customers in Manitoba through MTS, and IP communications through Allstream, the only national provider focused exclusively on the business telecommunications market. We are proud to be widely recognized for our leadership in corporate social responsibility and governance practices. For more information about the MTS Allstream group of companies, visit: www.mtsallstream.com.
Q2 2015 Management's discussion and analysis
For the period ended June 30, 2015
July 30, 2015
This interim Management's Discussion and Analysis ("MD&A") of our financial results comments on our operations, performance and financial condition for the three and six months ended June 30, 2015. This MD&A is based on financial statements prepared under International Financial Reporting Standards ("IFRS"). All financial amounts, unless otherwise indicated, are in Canadian dollars and in accordance with IFRS.
Unless otherwise indicated, this interim MD&A for the three and six months ended June 30, 2015 is as at July 30, 2015.
In preparing this MD&A, we have taken into account information available to us up to July 30, 2015. In this MD&A, "we", "our" and "us" refer to Manitoba Telecom Services Inc. ("the Company"). This MD&A should be read in conjunction with our interim condensed consolidated financial statements for the three and six months ended June 30, 2015.
About us
For more information about our company, including our Annual Information Form, audited consolidated financial statements and annual MD&A for the year ended December 31, 2014, dated February 4, 2015, please visit our website at www.mtsallstream.com or visit SEDAR at www.sedar.com.
Risks and uncertainties
In conjunction with our second quarter 2015 interim condensed consolidated financial statements, Supplemental, and this interim MD&A, we urge you to read the important risks and uncertainties that are detailed in this MD&A.
Non-IFRS measures of performance (EBITDA and free cash flow)
In this MD&A, we provide information concerning earnings before interest, taxes, depreciation and amortization ("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 IFRS, and are not necessarily comparable to similarly titled measures used by other companies.
Regarding forward-looking statements
This interim MD&A and, in particular, but not limited to, the "Risks and uncertainties" section of this interim MD&A, 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, 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.
Please note that forward-looking statements in this interim MD&A reflect Management's expectations as at July 30, 2015, 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 interim MD&A and the financial information contained herein have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors ("the Board").
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 of this interim MD&A.
Business overview
The COMPANY
Manitoba Telecom Services Inc. provides a wide array of information and communication technology services throughout Canada. Headquartered in Winnipeg, we serve all telecommunication market segments in Manitoba through our MTS Inc. subsidiary ("MTS") as well as business customers across Canada through our Allstream Inc. subsidiary ("Allstream"). Our common shares are listed on the TSX (trading symbol: MBT) and our website is www.mtsallstream.com.
MTS
MTS offers a full suite of wireless and wireline communications services including voice, data, Internet and IPTV services to consumer customers in the province of Manitoba.
MTS provides a wide array of business solutions including information solutions and business telecommunications services. Information solutions includes information and technology infrastructure, application development, managed services, networking services and unified cloud services provided by both EPIC Information Solutions ("EPIC") and The Technology Consortium ("TTC"). TTC was recently acquired in June 2015. Further detail on this transaction can be found in the strategic review update section of this MD&A, under "MTS update" and in our Q2 2015 Financial Statements and Notes at www.mtsallstream.com/investors/financial.
MTS also provides residential and business security systems and products through it's AAA Alarms Systems Ltd ("AAA Security") subsidiary.
Allstream
Allstream is Canada's only national telecommunications provider focused exclusively on business customers. Allstream provides a leading suite of IP, unified communications and related solutions that help businesses unify the many ways they connect, to better serve customers, and improve efficiency and productivity. All our services run on the Allstream secure national network, which is built and managed using advanced IP and fiber technologies.
Executive leadership changes
On June 29, 2015, as part of the ongoing re-alignment at MTS Allstream, we announced the impending retirement of Kelvin Shepherd, President of MTS and the departure of Wayne Demkey, Chief Financial Officer. With the retirement of Kelvin Shepherd, our Chief Executive Officer, Jay Forbes, will assume the MTS president responsibilities in addition to his CEO role. Effective August 1, 2015, Paul Cadieux will assume the role of Chief Financial Officer. Paul joined the Company 18 years ago and has been a key contributor to MTS Allstream operations, most recently as Vice President Finance, Procurement and Real Estate.
Also in the quarter, Marvin Boakye was hired as Chief Human Resources Officer. With more than 20 years of experience in leading organization design and change, growing organizational capabilities, and positioning human resources groups as a key performance enabler, Marvin will support the talent development efforts at MTS Allstream.
To view more leadership team information, please visit www.mtsallstream.com/leadershipteam.
Strategic review update
Allstream turnaround
As a result of the Q1 2015 strategic review we have taken immediate action to improve free cash flow generation, allowing Allstream to become economically self-sufficient, including:
- a 25% or approximately 500 person staff reduction that should generate $50 million in annual cost savings and
- a 20% to 30% reduction in capital expenditures.
As of June 30, 2015, 242 employees have left the business while a further 263 employees have received working notice and have scheduled departure dates over the next 14 months as part of the workforce reduction plan. By year end, it is expected that 379 employees will have departed the business. Year to date salaries and benefits cost savings were $3.7 million, representing an annualized cost reduction of approximately $24 million. With the additional 137 in scheduled departures, we expect the annualized run-rate savings to grow to approximately $36 million by year end.
Further details on Allstream's workforce reduction plan and the impact on 2015 operations can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financials.
Allstream's new rigorous capital investment discipline has lowered capital intensity from 17.9% in Q2 2014 to 10.7% for this past quarter. In addition this reduction has been accomplished without negative consequences in sales gains, customer satisfaction or installations (converged IP wins increased by 5.6% in the first half of 2015 when compared to the same time frame in 2014).
Allstream's restructuring efforts, which are mostly complete for 2015, have resulted in $16.5 million in restructuring costs (as of June 30, 2015). By streamlining operations and improving capital investment decision-making, Allstream generated $8.7 million in free cash flow in the second quarter compared to $5.8 million in Q2 2014. For the full year, Allstream is expected to be cash flow positive net of restructuring costs.
The following table provides further information on Allstream's free cash flow.
| ($ millions) | Q2 2015 | Q1 2015 | Q4 2014 | Q3 2014 | Q2 2014 | |||||
| EBITDA before restructuring costs | 26.3 | 21.8 | 22.3 | 24.6 | 24.7 | |||||
| Investing activities | (17.6) | (17.8) | (23.1) | (27.5) | (29.1) | |||||
| Other items, net | — | (0.8) | 0.6 | 0.5 | (1.4) | |||||
| Free cash flow | 8.7 | 3.2 | (0.2) | (2.4) | (5.8) | |||||
Allstream sale process
With restructuring largely complete and Allstream positioned to be free cash flow positive for 2015 and beyond, we have shifted focus to manage a fully-planned exit of this business, one that will maximize value while promoting deal certainty. We have retained advisors, have a clear understanding of the approval process and requirements, and are constructing information repositories for prospective purchasers, who we plan to engage with in the second half of this year.
Pension plans pre-funding
On May 6, 2015 we completed the pre-funding of $120 million into our pension plans using our existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows. Further details on the pension plans and projected funding requirements under various economic circumstances can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financials.
MTS update
Acquisition of TTC
On June 1, 2015, we acquired the remaining 50% of the issued and outstanding shares of TTC for a total cash consideration of $7.0 million, becoming TTC's sole shareholder. Through the purchase of EPIC Information Solutions in 2013 MTS was already a 50% stakeholder in TTC, which has long term contracts with the Manitoba Government and other public-sector clients to provide highly-trained professionals dedicated to offering a comprehensive range of both technical and business solutions. Such solutions include managed procurement services, on-site technical support, software distribution and versioning, mobile device management, print and imaging management and core information and technology ("IT") infrastructure support. Now as an integral part of the MTS family, TTC will help strengthen our IT capabilities and create potential for revenue growth and profitability.
Further details on the TTC acquisition can be found in the Q2 2015 Financial Statements and Notes at www.mtsallstream.com/investors/financials.
MTS Total Internet
On June 18, 2015, MTS introduced a revolutionary new product that changes the way consumers can purchase their wireless and wireline Internet connectivity. MTS Total Internet provides customers with seamless Internet access anywhere in Canada, anytime, over any device and network all in one plan. With MTS Total Internet all household members can share their data across home, Wi-Fi and wireless connections and across multiple devices, making their Internet experience completely seamless and flexible. With no other communications service provider in Manitoba offering a similar service, we believe Total Internet can offer a sustainable competitive advantage in the market place.
MTS Data Centre
With the majority of MTS Data Centre construction completed, an official opening is scheduled for September 2015.
Wireless double cohort
On May 19, 2015, the Federal Court of Appeal dismissed the challenge of a consortium of wireless service providers, including us, that the Canadian Radio-television and Telecommunications Commission ("CRTC") did not have the authority to apply the provisions of the Wireless Code to contracts that were already in place before the Code took effect. As a result of this decision, as of June 3, 2015, a large cohort of our customers were eligible to exit out of their wireless contracts. On this date our post-paid customers without contracts increased significantly, which will likely create a period of heightened competition through the balance of 2015. This change in our market place will likely lead to increased churn and increase our deferred wireless costs until we re-sign these customers and add new subscribers.
We are taking action to mitigate this possible churn issue going forward by leveraging our differentiators, such as MyBundle, MyPlan, our new Total Internet offering and our strong relationships with Manitoba business customers. We have plans in place which should increase our percentage of customers on contract, while managing impacts on our deferred wireless costs, leveraging both two-year contract renewals with device subsidy and one-year contract extensions with no device subsidy.
Also as a result of this decision, we have fully amortized any outstanding deferred wireless costs related to the now invalid three-year contracts. With this accelerated amortization we recognized $9.9 million of additional expense in this quarter, of which $8.4 million would have otherwise been expensed in Q3 and Q4 2015, with the remaining $1.5 million expensed in 2016. See our Q2 2015 Supplemental for additional discussion on the wireless double cohort impact.
The following table provides further information on free cash flow from our Manitoba operations.
| ($ millions) | Q2 2015 | Q1 2015 | Q4 2014 | Q3 2014 | Q2 2014 | ||||
| EBITDA before restructuring costs | 115.2 | 121.0 | 113.4 | 115.5 | 117.8 | ||||
| Investing activities1 | (44.8) | (43.2) | (43.8) | (54.4) | (50.9) | ||||
| Deferred wireless costs | (20.6) | (17.9) | (23.8) | (17.3) | (15.0) | ||||
| Finance costs | (14.8) | (14.6) | (15.0) | (15.0) | (16.9) | ||||
| Other items, net | 1.7 | 2.8 | 4.4 | 4.0 | 3.0 | ||||
| Free cash flow | 36.7 | 48.1 | 35.2 | 32.8 | 38.0 |
1 Excludes spectrum auction costs and the acquisition of TTC
Q2 2015 Discussion of operations - consolidated results
CONSOLIDATED
Consolidated statements of net income and other comprehensive income (loss)
| ($ millions, except EPS 1 and weighted average shares outstanding) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | ||||||
| MTS operating revenues | 250.7 | 250.2 | 0.2 | 506.5 | 498.7 | 1.6 | ||||||
| Allstream operating revenues | 154.8 | 161.9 | (4.4) | 314.8 | 323.8 | (2.8) | ||||||
| Intersegment eliminations | (7.2) | (8.8) | 18.2 | (15.0) | (17.7) | 15.3 | ||||||
| Total consolidated operating revenues | 398.3 | 403.3 | (1.2) | 806.3 | 804.8 | 0.2 | ||||||
| Operations expense | 256.8 | 260.8 | 1.5 | 522.0 | 514.7 | (1.4) | ||||||
| MTS EBITDA before restructuring costs | 115.6 | 117.3 | (1.4) | 234.2 | 237.4 | (1.3) | ||||||
| Allstream EBITDA before restructuring costs | 26.3 | 24.7 | 6.5 | 48.1 | 52.6 | (8.6) | ||||||
| Other EBITDA before restructuring costs | (0.4) | 0.5 | n.a.* | 2.0 | 0.1 | n.a. | ||||||
| Consolidated EBITDA before restructuring costs | 141.5 | 142.5 | (0.7) | 284.3 | 290.1 | (2.0) | ||||||
| MTS restructuring costs | 2.6 | — | n.a. | 2.8 | — | n.a. | ||||||
| Allstream restructuring costs | 14.8 | — | n.a. | 16.5 | — | n.a. | ||||||
| Other restructuring costs | 2.2 | — | n.a. | 2.7 | — | n.a. | ||||||
| Total consolidated restructuring costs | 19.6 | — | n.a. | 22.0 | — | n.a. | ||||||
| MTS EBITDA | 113.0 | 117.3 | (3.7) | 231.4 | 237.4 | (2.5) | ||||||
| Allstream EBITDA | 11.5 | 24.7 | (53.4) | 31.6 | 52.6 | (39.9) | ||||||
| Other EBITDA | (2.6) | 0.5 | n.a. | (0.7) | 0.1 | n.a. | ||||||
| Consolidated EBITDA | 121.9 | 142.5 | (14.5) | 262.3 | 290.1 | (9.6) | ||||||
| Depreciation and amortization | 96.6 | 83.3 | (16.0) | 185.8 | 156.8 | (18.5) | ||||||
| Other Income (expense) | 3.1 | (1.6) | n.a. | 3.8 | 0.2 | n.a. | ||||||
| Finance costs | (15.7) | (17.5) | 10.3 | (31.1) | (35.1) | 11.4 | ||||||
| Income before income taxes | 12.7 | 40.1 | (68.3) | 49.2 | 98.4 | (50.0) | ||||||
| Income tax expense | 2.3 | 11.3 | (79.6) | 12.1 | 27.7 | (56.3) | ||||||
| Net income for the period | 10.4 | 28.8 | (63.9) | 37.1 | 70.7 | (47.5) | ||||||
| Other comprehensive income (loss) for the period, net of tax |
114.3 | (35.8) | n.a. | 126.6 | (42.1) | n.a. | ||||||
| Total comprehensive income (loss) for the period | 124.7 | (7.0) | n.a. | 163.7 | 28.6 | n.a. | ||||||
| Weighted average shares outstanding (in millions) | 78.6 | 77.4 | 1.6 | 78.6 | 77.2 | 1.8 | ||||||
| EPS | $0.13 | $0.37 | (64.9) | $0.47 | $0.92 | (48.9) | ||||||
| EPS excluding restructuring costs | $0.31 | $0.37 | (16.2) | $0.67 | $0.92 | (27.2) | ||||||
| 1 Earnings per share |
| *not applicable |
Subsidiary-specific operating revenues details can be found in the MTS and Allstream discussion of operations sections.
Operations expense
Consolidated operations expense was down 1.5% in Q2 2015 as Allstream's cost reduction activities took hold; Allstream operations expense decreased by $8.7 million mainly due to savings from headcount reductions, lower cost of goods sold and other cost reduction initiatives. MTS (including other) operations expense increased by $3.1 million mainly the result of increased cost of goods sold driven by higher equipment sales of $1.7 million, and pension expense of $2.0 million.
Year to date consolidated operations expense was up 1.4%. MTS (including other) operations expense increased by $9.2 million mainly the result of increased cost of goods sold driven by higher equipment sales of $7.6 million and pension expense of $3.6 million. Allstream operations expense decreased by $4.5 million mainly due to savings from headcount reductions, lower cost of goods sold and other cost reduction initiatives.
Restructuring costs
Our restructuring costs mainly represent costs associated with Allstream's workforce reduction. The workforce reduction has contributed $3.7 million in salaries and benefits cost savings year to date representing an annualized cost savings of approximately $24 million.
EBITDA before restructuring
During the second quarter MTS (including other) EBITDA before restructuring was down 2.2% in quarter and 0.5% year to date due mainly to an increase in cost of goods sold and pension expense. For the full year, we expect MTS (including other) EBITDA before restructuring to be higher than the prior year. Wireless EBITDA was $55.5 million in Q2 2015 and $111.9 million year to date. See our Q2 2015 Supplemental for additional MTS wireless EBITDA information.
Allstream's EBITDA before restructuring costs increased 6.5% in quarter due to early impacts from restructuring activities. Year to date EBITDA before restructuring decreased 8.6% due mainly to overall revenue declines.
Depreciation and amortization expense
Our depreciation and amortization expense increased by $13.3 million in the second quarter of 2015 due to increased amortization of deferred wireless costs. In addition to incurring higher deferred wireless costs in the quarter, we have accelerated $9.9 million in expense associated with fully amortizing the remaining three year contracts, of which $8.4 million would have otherwise been expensed in Q3 and Q4, with the remaining $1.5 million expensed in 2016. On a year to date basis, depreciation and amortization expense increased by $29.0 million mainly the result of two factors. Firstly, 2014 expense included an $11.8 million recovery of Scientific Research and Experimental Development Investment Tax Credits ("SR&ED ITCs"). The remaining increase is mainly due to the Q2 2015 factors noted above.
Other income (expense)
Our other income increased $4.7 million in the second quarter and $3.6 million year to date, mainly due to a gain recorded in our operations as a result of our increased ownership interest in TTC, and the resulting remeasure of its previously held interest as of June 1, 2015. This is not a cash impacting item.
Finance costs
Our finance costs decreased $1.8 million in the second quarter and $4.0 million year to date, mainly a result of a lower interest rate on long-term debt refinanced in 2014.
Income tax expense
Income tax expense decreased $9.0 million in Q2 2015 and $15.6 million year to date, mainly due to decreased income before taxes.
We continue to have substantial capital cost allowance pools, tax losses and investment tax credits, which we expect will fully offset our taxable income and eliminate cash income taxes until 2023 at the earliest. The present value of these available tax assets is approximately $298.0 million. These tax assets have a book value of $451.6 million and are comprised of tax losses, the difference between our book value of fixed assets and their undepreciated capital cost for tax purposes, and unused SR&ED ITCs. See our Q2 2015 Supplemental for additional tax information.
Net income and EPS
Net income was down $18.4 million in Q2 2015 and $33.6 million year to date, and EPS was down $0.24 in Q2 2015 and $0.45 year to date. This was the result of 2015 restructuring costs and increased depreciation and amortization expense, which was accelerated in Q2 to reflect the change in government policy on 3 year wireless contracts.
Other comprehensive income (loss)
Other comprehensive income (loss) represents net actuarial gains and losses arising from changes in the present value of our defined-benefit pension liabilities and in the fair value of our defined-benefit pension assets. These items are recognized in other comprehensive income net of tax, and therefore, do not have an impact on net income or EPS.
The increase in other comprehensive income in Q2 2015 was due to a solid return on pension assets year to date.
MTS
Operating revenues detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Wireless | 87.6 | 87.1 | 0.6 | 175.2 | 173.0 | 1.3 | |||||
| Broadband and converged IP | 64.3 | 60.4 | 6.5 | 126.9 | 119.0 | 6.6 | |||||
| Information solutions | 6.5 | 5.3 | 22.6 | 18.2 | 11.0 | 65.5 | |||||
| Security and monitoring | 3.1 | 3.2 | (3.1) | 6.2 | 6.3 | (1.6) | |||||
| Unified communications | 6.4 | 5.7 | 12.3 | 13.4 | 11.1 | 20.7 | |||||
| Local access | 58.8 | 61.9 | (5.0) | 117.7 | 123.1 | (4.4) | |||||
| Long distance and data | 14.9 | 16.6 | (10.2) | 30.2 | 33.5 | (9.9) | |||||
| Other | 9.1 | 10.0 | (9.0) | 18.7 | 21.7 | (13.8) | |||||
| Total MTS operating revenues | 250.7 | 250.2 | 0.2 | 506.5 | 498.7 | 1.6 |
Bundles
MTS customers can select an assortment of services including wireless, IPTV, Internet, home phone and home security services, and then bundle these selections to create meaningful savings. Earlier this year we introduced the MyBundle® option which provides the best value and is recognized as the gold standard in Manitoba. In Q2 2015 we saw significant improvement in our bundled penetration which grew to 109,513 bundled customers, an increase of 5.0% over Q2 2014. Of our customers who subscribe to bundling, 55.8% have four or more services and 72.5% have home Internet and wireless services in their bundle. The latter are especially important as no other competitor in the market can offer this combinations of services.
Wireless
MTS's vast and reliable wireless networks keep our customers connected across Manitoba. The combined power of our network coverage and Wi-Fi hotspots ensures that our customers can use their smartphones and devices to their fullest. For our business wireless customers we also offer Fleetnet 800TM and paging services.
Wireless revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Voice | 44.2 | 48.4 | (8.7) | 88.3 | 96.5 | (8.5) | |||||
| Data | 40.5 | 35.9 | 12.8 | 80.8 | 70.8 | 14.1 | |||||
| Other | 2.9 | 2.8 | 3.6 | 6.1 | 5.7 | 7.0 | |||||
| Total wireless revenues | 87.6 | 87.1 | 0.6 | 175.2 | 173.0 | 1.3 |
Voice: Revenues decreased in Q2 2015 and year to date, as a result of lower pricing on feature rich plans in the Manitoba market, lower airtime, toll and pre-paid revenues.
Data: Driven by strong demand for smartphones and corresponding data usage, revenues increased in Q2 2015 and year to date. Subscribers on data plans increased in Q2 2015 to 77.1% from 71.2% in Q2 2014.
Other: Year to date increased revenue is a result of higher one-time Fleetnet 800TM sales in Q1 2015.
See our Q2 2015 Supplemental for additional subscriber statistics.
Broadband and converged IP
Broadband services include revenues earned from providing high-speed Internet and IPTV services to residential customers, as well as converged IP connectivity to business customers. Our high-speed Internet service provides fast, reliable speeds with the most comprehensive Internet coverage in Manitoba. IPTV service, branded as MTS Ultimate TV® is available in 16 communities in the province.
On June 18, 2015, we introduced our new MTS Total Internet service. This service is intended to answer the needs of our customers to have seamless Internet plan anywhere, anytime, over any device. With MTS Total Internet all household members can share their data across home, Wi-Fi, and wireless connections and across multiple devices - on one plan and for one price - making their Internet experience completely seamless and flexible.
Broadband and converged IP revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Internet | 35.0 | 32.5 | 7.7 | 68.6 | 63.1 | 8.7 | |||||
| IPTV | 22.7 | 20.9 | 8.6 | 44.8 | 42.0 | 6.7 | |||||
| Converged IP | 6.6 | 7.0 | (5.7) | 13.5 | 13.9 | (2.9) | |||||
| Total broadband and converged IP revenues | 64.3 | 60.4 | 6.5 | 126.9 | 119.0 | 6.6 |
Internet: Q2 2015 saw revenue growth of 7.7% from strong subscriber growth of 3% and higher ARPU of 7% (resulting from price increases and customers taking higher-speed Internet services).
IPTV: Revenues increased in Q2 2015 from strong migrations to the higher APRU MTS Ultimate TV®, a lower number of customers receiving promotional pricing, and price increases.
See our Q2 2015 Supplemental for additional subscriber statistics.
Information solutions
Revenues from this line of business include revenues earned by EPIC and, as of June 1, 2015, TTC. Information solutions revenues were up $1.2 million quarter over quarter and $7.2 million year to date, largely on the strength of one-time equipment sales.
Security and monitoring
Provided by AAA Security, these services include the installation and monitoring of alarm services to residential customers.
Unified communications
Unified communications revenues are earned from the sale of IP telephony products and services. Increased revenues in Q2 2015 reflect greater hardware sales and maintenance.
Local access
Our local access services includes revenues earned from the sale of residential and business voice connectivity, including calling features, payphone revenue, wholesale revenues from services provided to third parties and contribution revenues. Local revenues were down, reflecting a combination of competitive losses and wireless substitution.
Long distance and data
This business line includes residential and business long distance services, business data services and wholesale data services provided to third parties.
Long distance and data revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Long distance | 8.2 | 9.3 | (11.8) | 16.5 | 18.7 | (11.8) | |||||
| Data | 6.7 | 7.3 | (8.2) | 13.7 | 14.8 | (7.4) | |||||
| Total long distance and data revenues | 14.9 | 16.6 | (10.2) | 30.2 | 33.5 | (9.9) |
Long distance: Revenues declined, due to customer migration to lower-priced long distance plans and reduced volumes, as customers continue to replace long distance calling with alternative methods of communication.
Data: Revenues were down in Q2 2015 and year to date, reflecting reprice, migration to converged IP and competitive losses.
Other
Other services include wholesale revenues earned from wireless carriers, sales and maintenance revenues for terminal equipment such as telephone switches to business customers, other miscellaneous consumer fees and intersegment transactions.
Other revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Wholesale | 1.7 | 3.3 | (48.5) | 3.7 | 7.8 | (52.6) | |||||
| Intersegment revenues | 3.5 | 3.5 | — | 7.2 | 7.4 | (2.7) | |||||
| Other | 3.9 | 3.2 | 21.9 | 7.8 | 6.5 | 20.0 | |||||
| Total other revenues | 9.1 | 10.0 | (9.0) | 18.7 | 21.7 | (13.8) |
Wholesale: Revenues were down as carriers move their customers from our CDMA network to their own networks.
ALLSTREAM
Operating revenues detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Converged IP | 70.8 | 64.2 | 10.3 | 139.4 | 126.9 | 9.9 | |||||
| Unified communications, hosting and security | 19.7 | 19.2 | 2.6 | 42.2 | 37.4 | 12.8 | |||||
| Local access | 29.6 | 34.0 | (12.9) | 60.1 | 69.3 | (13.3) | |||||
| Long distance and data | 28.5 | 33.2 | (14.2) | 58.2 | 68.8 | (15.4) | |||||
| Other | 6.2 | 11.3 | (45.1) | 14.9 | 21.4 | (30.4) | |||||
| Total Allstream operating revenues | 154.8 | 161.9 | (4.4) | 314.8 | 323.8 | (2.8) |
Converged IP
Converged IP services revenues are earned from the sale of converged IP-based networking and related products and services to business customers across Canada. Allstream's converged IP virtual private network ("VPN") service provides business organizations with a connectivity solution that enables growth and expansion to any location, while reducing costs and increasing productivity. Converged IP revenues grew in Q2 2015 and on a year to date basis as a result of both new converged IP installations and expansion of existing converged IP connections. The contract for Shared Services Canada ("SSC") awarded in 2012 was 96% installed at the end of Q2 2015 and is expected to be completed in late 2015.
In May 2015, the Government of Canada, through the work of SSC, announced that it had selected Allstream as one of two suppliers for GCNet WAN Services-Stream 1. SSC's GCNet WAN network will provide IP data communications services to 43 federal government departments and agencies including the Royal Canadian Mounted Police, National Defence, the Canada Revenue Agency and Environment Canada. Although not fully determined, the total value of the contract is expected to exceed $100 million, will last through 2022, and could extend to 2025. Implementation planning and preparation is well underway and the first circuits are expected be deployed later this year with deployment ramping up in 2016.
Unified communications, hosting and security
Unified communications and other revenues are earned from the sale of IP-related telephony products and services, along with revenues from IP-based security offerings to national business customers.
Unified communications, hosting and security revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Unified communications | 13.2 | 14.1 | (6.4) | 28.6 | 27.2 | 5.1 | |||||
| Hosting | 5.4 | 4.1 | 31.7 | 10.9 | 8.2 | 32.9 | |||||
| Security | 1.1 | 1.0 | 10.0 | 2.7 | 2.0 | 35.0 | |||||
| Total unified communications, hosting and security revenues | 19.7 | 19.2 | 2.6 | 42.2 | 37.4 | 12.8 |
Unified communications: Revenues decreased in Q2 2015 due to lower hardware installations and associated services.
Hosting: Revenues were up in Q2 2015 and year to date as a result of an increased emphasis on the sale of cloud services.
Security: Revenues were up in Q2 2015 and year to date as a result of one-time sales.
Local access
Revenues earned for the provision of business voice connectivity, including calling features, to national business and wholesale customers were down in Q2 2015 and year to date, reflecting declines in rates and line counts.
Long distance and data
Long distance and data services include revenues earned from the provision of long distance calling, along with data services such as private line networks, to business customers nationally.
Long distance and data revenue detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Long distance | 14.9 | 16.8 | (11.3) | 30.4 | 34.9 | (12.9) | |||||
| Data | 13.6 | 16.4 | (17.1) | 27.8 | 33.9 | (18.0) | |||||
| Total long distance and data revenues | 28.5 | 33.2 | (14.2) | 58.2 | 68.8 | (15.4) |
Long distance: Revenues were down due to customer migration to lower-priced long distance plans and reduced volumes as customers continue to seek out alternative methods of communication.
Data: Revenue declines were due to a combination of competitive churn, customer migration to converged IP-based services and re-pricing of services.
Other
Other services includes revenues earned from MTS, the routing and exchange of wholesale long distance network traffic, customer late-payment charges and other miscellaneous items.
Other revenues detail
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||
| Intersegment revenues | 3.7 | 5.3 | (30.2) | 7.9 | 10.3 | (23.3) | |||||
| Other | 2.5 | 6.0 | (58.3) | 7.0 | 11.1 | (36.9) | |||||
| Total other revenues | 6.2 | 11.3 | (45.1) | 14.9 | 21.4 | (30.4) |
Other: Revenue declines were mainly due to lower international and cross-border volumes for global hubbing, a low-margin wholesale voice service.
SELECTED QUARTERLY FINANCIAL INFORMATION
Selected quarterly financial results - consolidated
| ($ millions, except EPS and weighted average shares outstanding) | Q2 2015 | Q1 2015 | Q4 2014 | Q3 2014 | Q2 2014 | Q1 2014 | Q4 2013 | Q3 2013 | |||||||
| Operating revenues | 398.3 | 408.0 | 404.8 | 402.4 | 403.3 | 401.5 | 408.5 | 408.4 | |||||||
| EBITDA before restructuring costs | 141.5 | 142.8 | 135.7 | 140.1 | 142.5 | 147.6 | 128.0 | 142.7 | |||||||
| Free cash flow | 45.4 | 51.3 | 35.0 | 30.4 | 32.2 | 49.0 | 3.0 | 46.1 | |||||||
| Capital expenditures | 62.1 | 60.5 | 81.8 | 84.7 | 78.2 | 43.6 | 87.7 | 68.6 | |||||||
| Net (loss) income | 10.4 | 26.7 | 24.2 | 36.8 | 28.8 | 41.9 | (87.8) | 25.4 | |||||||
| EPS | $0.13 | $0.34 | $0.31 | $0.47 | $0.37 | $0.54 | ($1.25) | $0.38 | |||||||
| EPS excluding restructuring costs | $0.31 | $0.36 | $0.31 | $0.47 | $0.37 | $0.54 | ($1.25) | $0.38 | |||||||
| Weighted average shares outstanding1 (in millions) | 78.6 | 78.4 | 78.1 | 77.7 | 77.4 | 77.1 | 70.3 | 67.7 |
| 1The Q1 2014 and Q4 2013 increases in the number of weighted average shares outstanding are due to the December 2013 issuance of 8,855,000 common shares and participation in the Company's dividend re-investment program. The increase in the number of weighted average shares outstanding in other quarters is due to participation in our dividend re-investment program. |
Our interim financial results for the last eight quarters (Q2 2015 to Q3 2013) reflect the following significant transactions and trends:
- Workforce reduction plan and restructuring costs - In the first and second quarter of 2015 we paid $11.5 million and $8.0 million, respectively in salaries and benefits costs related to staff who will be leaving Allstream and recorded $1.7 million and $14.8 million in restructuring costs, respectively. Narrowing our strategic focus has created the opportunity to quickly address our cost structure; 242 employees have left the business and a further 263 have received working notice and will exit the business throughout the current year and into 2016. Year to date salaries and benefits cost savings were $3.7 million, representing an annualized cost reduction of approximately $24 million. With the additional 137 in scheduled departures, we expect the annualized run-rate savings to grow to approximately $36 million by year end.
- Wireless double cohort - As a result of the May 19, 2015 CRTC decision, in the second quarter of 2015 we have fully amortized any outstanding deferred wireless costs related to the now invalid three-year wireless contracts. With this accelerated amortization we recognized $9.9 million of additional expense in the quarter, of which $8.4 million would have otherwise been expensed in Q3 and Q4 2015, with the remaining $1.5 million expensed in 2016. The EPS impact of this accelerated amortization in Q2 2015 is $0.09.
- Spectrum auctions - In Q2 2015, MTS acquired a block of 2500 MHz spectrum in the Industry Canada 2500 MHz (BRS) auction for $2.4 million. This is in addition to the 700 MHz spectrum which was acquired in Q2 2014 for $8.9 million.
- Pension plan pre-funding - On May 6, 2015 we completed the pre-funding of $120 million into our pension plans using our existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows.
- SR&ED ITCs recovery adjustments - In Q3 2014 and Q1 2014, we realized positive SR&ED ITCs recovery adjustments which increased EPS by $0.11 in Q3 2014 and by $0.12 in Q1 2014 by reducing depreciation and amortization expense. The Q1 2014 SR&ED ITCs recovery constitutes the net adjustment relating to four taxation years, ending December 31, 2011. The Q3 2014 SR&ED ITCs adjustment reflects the final asset allocations to which the ITCs relate.
- Equity issuance - On December 6, 2013, we announced that we had issued 8,855,000 common shares, issued at a purchase price of $28.10 per common share, for gross proceeds of $248.8 million. The net proceeds were approximately $238 million, determined after deducting the underwriters' commission and expenses.
- Costs related to Supreme Court of Canada's ("SCC") ruling - In Q4 2013, we recorded a $142.1-million non-cash charge against income to reflect the total estimated value of pension benefits and other estimated costs related to the SCC's ruling on a lawsuit regarding the administration of one of MTS's pension plans following the Company's 1997 privatization. The SCC's decision negatively impacted Q4 2013 EPS by $1.48.
- Allstream - As a result of the proposed sale of Allstream in 2013, we recorded after-tax impairment charges of $16.7 million or $0.24 per share in Q3 2013. These accounting adjustments do not affect cash and are required by IFRS.
Liquidity and capital resources
SUMMARY of CASH FLOWS
| ($ millions) | Q2 2015 | Q2 2014 | % variance | YTD 2015 | YTD 2014 | % variance | |||||||
| Cash flows from (used in): | |||||||||||||
| Operating activities | (39.7) | 85.2 | n.a.* | (3.1) | 162.2 | n.a. | |||||||
| Investing activities | (70.1) | (88.9) | 21.1 | (131.1) | (156.3) | 16.1 | |||||||
| Financing activities | 89.4 | 0.4 | n.a. | 90.5 | (99.3) | n.a. | |||||||
| Change in cash and cash equivalents for the period | (20.4) | (3.3) | n.a. | (43.7) | (93.4) | 53.2 | |||||||
| *not applicable |
Operating activities
"Cash flows (used in) from operating activities" refers to cash we generate from our business activities.
Cash flows from operating activities decreased $124.9 million in Q2 2015 mainly due to a combination of the pension solvency prepayment of $103.1 million, and an increase in restructuring costs of $19.6 million. On a year to date basis, cash flows from operating activities decreased $165.3 million mainly due to a combination of the pension solvency prepayment of $120.0 million, one-time pension lawsuit payments of $12.4 million, an increase in restructuring costs of $22.0 million and deferred wireless costs of $8.5 million.
Investing activities
"Investing activities" refers to cash used for acquiring, and cash received from disposing of, long-term assets and other long-term investments.
Cash flows used in investing activities decreased $18.8 million in quarter due to a combination of planned reductions in capital spending of $16.1 million and lower spectrum auction costs of $6.5 million, partly offset by the acquisition of the remaining 50% ownership in TTC of $5.3 million. Year to date capital expenditures decreased $20.9 million ($44.5 million after adjusting for the 2014 one-time impact of the SR&ED ITCs). On a year to date basis, the planned reductions in capital expenditures combined with lower spectrum auction costs, were partially offset by the acquisition of the remaining 50% ownership in TTC resulting in decreased cash flows used in investing activities of $25.2 million.
Financing activities
"Financing activities" refers to actions we undertake to fund our operations through equity capital and borrowings.
Cash flows from (used in) financing activities increased $89.0 million in Q2 2015 mainly due to the issuance of a $112.7 million note payable partially offset by the Q2 2014 net issuance of long-term debt of $25.0 million. Year to date cash flows from financing activities increased $189.8 million mainly due to the issuance of notes payable in 2015, partly offset by the 2014 net repayment of long-term debt.
In the first and second quarters of 2015 and each quarter of 2014, cash dividends of $0.425 per common share were paid to shareholders, as approved by the Board. During the six months ended June 30, 2015, 811,326 Common Shares were issued as a result of participation in our Dividend Reinvestment Plan. These shares were issued for net proceeds of $20.0 million.
Free cash flow
Our free cash flow definition includes cash flows from operating activities less investing activities and excludes changes in working capital, pension solvency funding and lawsuit payments, spectrum auction costs, restructuring costs, the acquisition of TTC and non-cash taxes. See our Q2 2015 Supplemental for restated prior year cash flows. The following table provides a reconciliation of free cash flow from EBITDA by subsidiary to consolidated results.
| Second-quarter free cash flow | MTS1 | Allstream | Consolidated | |||||||||||
| ($ millions) | Q2 2015 | Q2 2014 | Q2 2015 | Q2 2014 | Q2 2015 | Q2 2014 | % variance | |||||||
| EBITDA before restructuring costs | 115.2 | 117.8 | 26.3 | 24.7 | 141.5 | 142.5 | (0.7) | |||||||
| Add back (deduct): | ||||||||||||||
| Deferred wireless costs | (20.6) | (15.0) | — | — | (20.6) | (15.0) | (37.3) | |||||||
| Finance costs | (14.8) | (16.9) | (0.9) | (0.6) | (15.7) | (17.5) | 10.3 | |||||||
| Current cash income tax expense | (0.1) | — | — | — | (0.1) | — | n.a.* | |||||||
| Pension funding and net pension expense | 3.8 | 1.5 | 0.7 | (1.3) | 4.5 | 0.2 | n.a. | |||||||
| Other operating activities, net | 0.1 | 1.9 | 0.3 | 0.7 | 0.4 | 2.6 | (84.6) | |||||||
| Other income | 3.2 | (0.5) | (0.1) | (1.1) | 3.1 | (1.6) | n.a. | |||||||
| Gain on revaluation of TTC | (5.6) | — | — | — | (5.6) | — | n.a. | |||||||
| Loss on disposal of assets | 0.3 | 0.1 | — | 0.9 | 0.3 | 1.0 | (70.0) | |||||||
| Total | 81.5 | 88.9 | 26.3 | 23.3 | 107.8 | 112.2 | (3.9) | |||||||
| Investing activities2 | (44.8) | (50.9) | (17.6) | (29.1) | (62.4) | (80.0) | 22.0 | |||||||
| Free cash flow for the period | 36.7 | 38.0 | 8.7 | (5.8) | 45.4 | 32.2 | 41.0 | |||||||
| 1 MTS includes MTS and other |
| 2 Excluding spectrum and TTC |
| *not applicable |
| Year to date free cash flow | MTS1 | Allstream | Consolidated | |||||||||||
| ($ millions) | YTD 2015 | YTD 2014 | YTD 2015 | YTD 2014 | YTD 2015 | YTD 2014 | % variance | |||||||
| EBITDA before restructuring costs | 236.2 | 237.5 | 48.1 | 52.6 | 284.3 | 290.1 | (2.0) | |||||||
| Add back (deduct): | ||||||||||||||
| Deferred wireless costs | (38.5) | (30.0) | — | — | (38.5) | (30.0) | (28.3) | |||||||
| Finance costs | (29.4) | (34.0) | (1.7) | (1.1) | (31.1) | (35.1) | 11.4 | |||||||
| Current income tax expense | (0.3) | (0.1) | — | — | (0.3) | (0.1) | n.a.* | |||||||
| Pension funding and net pension expense | 9.4 | 5.3 | 1.4 | (0.7) | 10.8 | 4.6 | n.a. | |||||||
| Other operating activities, net | (3.2) | (1.5) | (0.6) | (0.3) | (3.8) | (1.8) | n.a. | |||||||
| Other income | 3.7 | 0.2 | 0.1 | — | 3.8 | 0.2 | n.a. | |||||||
| Gain on revaluation of TTC | (5.6) | — | — | — | (5.6) | — | n.a. | |||||||
| Loss on disposal of assets | 0.5 | 0.4 | — | 0.3 | 0.5 | 0.7 | (28.6) | |||||||
| Total | 172.8 | 177.8 | 47.3 | 50.8 | 220.1 | 228.6 | (3.7) | |||||||
| Investing activities2 | (88.0) | (97.6) | (35.4) | (49.8) | (123.4) | (147.4) | 16.3 | |||||||
| Free cash flow for the period | 84.8 | 80.2 | 11.9 | 1.0 | 96.7 | 81.2 | 19.1 | |||||||
| 1 MTS includes MTS and other |
| 2 Excluding spectrum and TTC |
| *not applicable |
Consolidated free cash flow was up both in quarter $13.2 million, and year to date $15.5 million, mainly due to our recent efforts to improve both the intensity and effectiveness of our capital investment decision-making within both organizations ($16.1 million for the quarter and $20.9 million year to date, after adjusting for 2014 SR&ED ITCs), partially offset by increased deferred wireless costs ($5.6 million for the quarter and $8.5 million year to date).
CAPITAL MANAGEMENT
We have arrangements in place that allow us to access the debt capital markets for funding when required. Borrowings under these facilities typically are used to re-finance maturing debt, to fund new initiatives and to manage cash flow fluctuations.
Credit facilities
| ($ millions) | Utilized at June 30, 2015 |
Capacity | |
| Medium-term note program | 225.0 | 500.0 | |
| Revolving credit facility | 122.1 | 400.0 | |
| Additional credit facilities | 299.3 | 300.0 | |
| Accounts receivable securitization | 103.7 | 110.0 | |
| Total | 750.1 | 1,310.0 |
We renewed our medium-term note ("MTN") program on September 30, 2013 for $500 million. On May 26, 2014 we issued $225 million of 4.0% MTNs under this program with a maturity date of May 27, 2024. We have a $400-million revolving credit facility, of which we had utilized $122.1 million at June 30, 2015 for undrawn letters of credit and to partially fund the pension prepayment. We also have two additional credit facilities totalling $300 million, which are used solely for the issuance of letters of credit. As at June 30, 2015, a total of $299.3 million was utilized for undrawn letters of credit. In addition to these programs and facilities, we have a $110-million accounts receivable securitization program, of which $103.7 million was utilized as at June 30, 2015.
Capital structure
| ($ millions) | June 30, 2015 | December 31, 2014 | ||
| Bank indebtedness (Cash and equivalents) | 10.3 | (33.4) | ||
| Notes payable | 137.7 | — | ||
| Finance lease obligations, including current portion | 54.8 | — | ||
| Long-term debt, including current portion | 873.6 | 873.1 | ||
| Net debt | 1,076.4 | 839.7 | ||
| Shareholders' equity | 1,177.0 | 1,052.3 | ||
| Total capitalization | 2,253.4 | 1,892.0 | ||
| Debt to capitalization | 47.8 | % | 44.4 | % |
Our capital structure illustrates the amount of our assets that is financed by debt versus equity. Our debt to total capitalization ratio of 47.8% at June 30, 2015 continues to represent financial strength and flexibility.
Credit ratings
| S&P - Senior debentures | BBB (negative) | DBRS - Senior debentures | BBB (stable) | |||||||||
| S&P - Commercial paper | A-2 | 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. On May 8, 2015, S&P confirmed its credit ratings on our long-term corporate credit and senior unsecured debt at "BBB", and also confirmed our commercial paper rating of "A-2". However, S&P revised its outlook to negative from stable. DBRS confirmed its ratings on May 7, 2015, with our senior debentures at "BBB" and our commercial paper rating of "R-2 (high)". DBRS's outlook remained stable.
Outstanding share data
| As at July 20, 2015 | As at June 30, 2015 | ||||
| Common shares outstanding | 79,262,469 | 78,934,718 | |||
| Stock options outstanding | 1,851,504 | 1,851,504 | |||
| Stock options exercisable | 1,816,725 | 1,816,725 |
FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET ARRANGEMENTS and OTHER FINANCIAL ARRANGEMENTS
Foreign currency forward contracts
We use foreign currency forward contracts to manage the foreign currency exposure. Foreign exchange gains and losses on these foreign currency forward contracts are recorded in the consolidated statement of financial position as an asset or a liability, with changes in fair value recognized in the consolidated statement of net income. As at June 30, 2015, we had outstanding foreign currency forward contracts to purchase $27.9 million U.S.
Accounts receivable securitization
Under the terms of our accounts receivable securitization program, we have the ability to sell, on a revolving basis, an undivided interest in our accounts receivable to a securitization trust, to a maximum of $110 million. We are required to maintain reserve accounts, in the form of additional accounts receivable over and above the cash proceeds received, to absorb any credit losses on the receivables sold. We are required to maintain certain financial ratios with respect to our accounts receivable, or the cash proceeds must be repaid. We also are subject to certain risks of default which, should they occur, could cause the agreement to be terminated early. As at June 30, 2015, we had $103.7 million outstanding under our accounts receivable securitization program.
Critical accounting estimates and assumptions
In our 2014 annual audited consolidated financial statements and notes, as well as in our 2014 annual MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business operations and our results of operations. Our critical accounting estimates and assumptions remain substantially unchanged from those disclosed in our 2014 annual audited consolidated financial statements and notes and 2014 annual MD&A.
Changes in accounting policies
Our second-quarter 2015 interim condensed consolidated financial statements have been prepared using the same accounting policies and methods of application as those used in our audited consolidated financial statements for the year ended December 31, 2014.
We have not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but are not yet effective. We expect the following standards and amendments described below to be applicable to our consolidated financial statements at a future date. The following standards and interpretations are currently being reviewed to determine the potential impact:
IFRS 9, Financial Instruments
The final version of IFRS 9, Financial Instruments, was issued in July 2014, and replaces earlier versions of IFRS 9 and completes the IASB's project to replace IAS 39. The new standard introduces new classification and measurement requirements for assets and liabilities, and a new, expected loss impairment model that will require more timely recognition of expected credit losses for financial instruments. Entities will also be required to have additional disclosure to provide information that explains the basis for their expected credit loss calculations and how they measure expected credit losses and assess changes in credit risk. The standard also introduces a new hedge accounting model that aligns the accounting treatment with risk management activities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively, with earlier application permitted.
IFRS 15, Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and establishes a five-step revenue recognition model that applies to revenue arising from contracts with customers. IFRS 15 requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to customers at an amount that reflects the expected consideration receivable in exchange for transferring those goods or services. This standard also provides guidance on the accounting treatment for contract acquisition and contract fulfillment costs and requires enhanced disclosures as to the nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. This standard supersedes IAS 18, Revenues, IAS 11, Construction Contracts and a number of revenue-related interpretations. IFRS 15 is mandatorily applicable for annual periods beginning on or after January 1, 2017; however, the International Accounting Standards Board ("IASB") has voted to delay this mandatory application date by one year, with earlier adoption permitted. At this time the final amendments to the standard detailing the delay is expected to be released by the IASB in September 2015. Entities will transition following either a full or modified retrospective approach.
We expect the application of this new standard to impact the reported results in our consolidated financial statements. The expected impacts include a change in the allocation of contract revenues between services and equipment, and a shift in the timing over which those revenues are recognized. We also expect a shift in the timing of recognition for contract acquisition and fulfillment costs.
Amendments to IAS 1, Presentation of Financial Statements
Amendments to IAS 1, Presentation of Financial Statements, was issued in December 2014. These amendments provide guidance on the application of professional judgement in determining what information to disclose and how to structure it in their financial statements. The amendments are effective for annual periods beginning on or after January 1, 2016, with earlier adoption permitted.
Regulatory developments
MTS and Allstream are subject to regulations that materially impact how they can conduct business. The telecommunications and broadcast industries in which we operate are federally regulated, pursuant to both the Telecommunications Act and the Broadcasting Act. We are also subject to other federal and provincial regulations that shape how we conduct our business. Our regulatory environment is as described in our 2014 annual MD&A and is updated for material developments every quarter. In Q2 2015, there have been the following material developments:
Wireless roaming
On July 1, 2015, the repeal of the legislated wholesale roaming rates became effective. Market rates now govern wholesale roaming rates for parties other than Bell, Rogers and Telus. While this could provide strategic benefits to MTS in the future, it will require that MTS re-negotiate formal roaming rates with smaller wireless providers on whose networks MTS wireless customers roam.
Wireless spectrum auctions
On May 12, 2015, the 2500 MHz auction result were announced by Industry Canada. MTS won two licenses (one paired block) covering its operating territory in Manitoba and paid $2.24 million. Bell, Rogers, Telus and Xplornet won the other licenses up for bid in Manitoba. A further auction of Residual Spectrum Licences in the 700 MHz and AWS-3 Bands will be held on August 25, 2015.
Federal Court of Appeal ruling on wireless code challenge
On May 19, 2015, the Federal Court of Appeal dismissed the challenge of a consortium of wireless service providers, including MTS, that the CRTC did not have the authority to apply the provisions of the Wireless Code to contracts that were already in place before the Code took effect. As a result, as of June 3, 2015, a double cohort of customers are entitled to exit out of their contracts - many 12 months earlier than initially contracted thereby creating risks of churns, contract re-pricing and increased deferred wireless costs, in addition to potential loss on the device subsidy (these initial contracts contained a subsidy for their device that was expected to be recovered over a 36 month period, not a lesser period). With this decision, we have fully amortized any outstanding deferred wireless costs related to three year contracts.
Pick-and-pay television services
As part of the Let's Talk TV decision, the CRTC announced they will be implementing a new Code of Conduct for TV contracts. During Q2, the CRTC issued a call for comments on a television service provider code of conduct working document. The code of conduct is anticipated to be issued in September of 2015. It is unclear how this would impact MTS or what new obligations this could create.
Wholesale wireline service
On July 22, 2015, the CRTC issued its decision regarding its recent review of wholesale wireline services and related policies. The CRTC decided to mandate incumbent local exchange carriers ("ILEC") to begin phasing in the implementation of disaggregated wholesale high-speed access ("WHSA") services (for example, access to the ILECs' last mile facilities), including access to fibre-access facilities. There will be further proceedings to consider the appropriate configurations and costing/pricing of these disaggregated WHSA services in Ontario and Quebec, and in the future this could be extended to other jurisdictions, including Manitoba. MTS expects that competitor demand is likely to emerge more slowly and later in Manitoba than in markets such as Ontario, as evidenced by current low demand for existing WHSA services. Wholesale access to the incumbent carriers' Ethernet services, which was also at issue in the review, was not mandated and the CRTC ordered the phased out of mandated aggregated unbundled local loops. None of these developments are expected to have a material impact on the businesses of either MTS or Allstream.
Risks and uncertainties
Risk management practices are part of our standard operations, across all of our businesses. Identifying and managing our principal risks form part of our management's regular business planning process because risk, as well as associated opportunities, are important considerations in our current and future business strategy.
Once we set our strategic objectives, our risk management program is used to identify and assess the associated principal risks and considers the activities being taken to mitigate them. The program is managed through an executive-level strategic risk committee, together with our enterprise risk management team.
The Health Committee Study of Safety Code 6 concern summarized below is the only new material item for the quarter that has not been disclosed in the risks and uncertainties section of either our Q1 2015 MD&A or our 2014 annual MD&A.
Health Committee Study of Safety Code 6
On June 17, 2015, the Parliamentary Health Committee tabled a report on Safety Code 6. The expert opinion of Health Canada that wireless devices do not cause adverse health effects is included in the study, but the Committee made numerous recommendations to the government on raising public awareness on the potential risks of exposure to RF fields. The government has 6 months to consider the recommendations and respond.
Controls and procedures
There have been no changes in our internal control over financial reporting during our most recent interim period (ended June 30, 2015) that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Internal control over financial reporting is described in our 2014 annual MD&A.
Non-IFRS measures of performance
In this interim Q2 2015 MD&A, we provide information concerning 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 IFRS, and are not necessarily comparable to similarly titled measures used by other companies.
EBITDA
We define EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense)". EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with IFRS), as a measure of liquidity.
We define Allstream adjusted EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense), and add back salaries and benefits relating to the workforce reduction plan, and associated restructuring costs".
FREE CASH FLOW
We define free cash flow as "cash flows from operating activities less investing activities and excluding changes in working capital, pension solvency funding and lawsuit payments, spectrum auction costs, restructuring costs, the acquisition of TTC and non-cash taxes".
SOURCE MTS Allstream
Investors:
Paul Peters, Investor Relations
204-941-6178
[email protected]
Media:
Melanie McKague, Corporate Communications
204-941-8576
[email protected]
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