Bell Aliant' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Bell Aliant, (BLIAF)

Bell Aliant Inc. (OTC:BLIAF) Q1 2013 Earnings Call May 1, 2013 4:30 PM ET

Executives

Zeda Redden – Vice President, Investor Relations

Karen Sheriff – President and Chief Executive Officer

Glen LeBlanc – Executive Vice President and Chief Financial Officer

Analysts

Dvai Ghose – Canaccord Genuity

Glen Campbell – Bank of America Merrill Lynch

Jeff Fan – Scotiabank

Maher Yaghi – Desjardins Capital Market

Tim Casey – BMO Capital Markets

Duane Campbell – Bank of America Merrill Lynch

Operator

Good afternoon, ladies and gentlemen, and welcome to Bell Aliant Inc. conference call and webcast. To begin this afternoon’s call, I would like to introduce Zeda Redden, Vice President, Investor Relations. Please go ahead.

Zeda Redden

Thank you, operator, and good afternoon everyone. And welcome to Bell Aliant’s first quarter 2013 results call. Earlier today, we issued our news release and first quarter MD&A and supplementary information package, which are posted on SEDAR and also on our website, and also posted on our website is a slide presentation that Karen Sheriff, our President and CEO, and Glen LeBlanc, Executive Vice-President and Chief Financial Officer, will be taking you through on this call.

As always, we caution you that today’s comments will contain forward-looking statements related to the finances and operations of the Company. Several assumptions were made by us in preparing these statements and there are risks and uncertainties that could cause our actual results to be materially different from these forward-looking statements. Additional information about these risks and assumptions can be found in the 2012 annual MD&A, as well as our first quarter 2013 MD&A and new release, all of which are posted on SEDAR and also on our website.

Any forward-looking statements made by Bell Aliant represent expectations as of today and, accordingly, are subject to change after such time. Except as maybe required by Canadian securities laws, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

We have scheduled the call for up to an hour, and following the presentation, we will have a question-and-answer period.

And with that, I’ll turn the call over to Karen.

Karen Sheriff

Zeda thank you, and a very good afternoon to everyone. Let me start off by saying I am very pleased with the strengths of our first quarter performance as shown on Slide 4 of our presentation.

Over the past four years, we’ve been executing a strategy with the objective of returning Bell Aliant to profitable growth. A major milestone net journey is first returning to revenue growth. When we released our 2013 guidance in February was evident that we believed that revenue growth was a real possibility this year and in the first quarter we did it. Now is that going to happen every quarter this year may be, it is certainly possible and we still have lots of work to do, but I’m encouraged by the very good start we had in the first quarter. Another important highlights from me from the first quarter is that our year-over-year EBITDA rate of change was the best we achieved in over three years. And this was done after the absorption of an unfavorable $4 million charge arising from a regulatory decision affecting our wholesale Internet business which was mostly a retroactive adjustment related to 2012.

Our revenue performance certainly contributed to our EBITDA results, but it is also helpful that we are once again holding the line on costs. Expense pressures, particularly those from rising TV content cost with the growing TV customer base were offset by expense reductions in other parts of the business. Over the last three years, we’ve established a strong track record for effectively managing costs. We did it again in Q1 and it is something we need to keep doing to continue to improve our results, so all of these things resulted in a solid first-quarter for us.

Now as I would like to say one quarter does not a trend make, but we are off to a very good start for the year. And while EBITDA still declined compared to the same quarter year ago, the GAAP has been progressively closing over the last several quarters. As I’ve said, we expect revenue growth will come first and EBITDA growth should follow. Our CapEx and free cash flow results also showed quite favorable trends from a year ago and Glenn will speak to these shortly.

And finally, FibreOP continues to propel us to solid customer and RGU growth. Our task is now to keep the momentum of improving trends going forward. I expect there may be lumpiness in the quarters ahead, however, I am confident that we are on the right track.

Turning now to Slide 5 much of the improvement in the quarter was a result of continued strong FibreOP performance as both our FibreOP internet and TV net additions were up over 40% of what we added in the first quarter of 2012. We continue to build more fibre to the home footprint testing 23,000 additional premises in the quarter to now stand at 679,000 premises passed. And as we said in February, we expect to reach approximately 800,000 premises by the end of the year and we are now entering the better weather and bigger construction periods of the year. That said, our real focus now is on loads getting customers connected to our fibre-to-the-home network.

Our overall FibreOP penetration is just below 20% of total premises passed. Some of our most matured FibreOP markets are approaching penetration rates in the high 30% ranges. So we have lots of room to increase our penetration numbers. In the footprint, we already have available. And as we’ve build more footprint, that will give us even more loading opportunity.

On the competitive front, the competitors in our market usually tend to price quite rationally. However, we are still seeing some very aggressive triple play promotional offerings in some of our markets, particularly in New Brunswick and Newfoundland. We are responding aggressively, but have chosen not to match the deepest discounts. Our strategy continues to be the focus on using our FibreOP services to compete on product superiority. In fact last week, we increased the speeds in our FibreOP bundles to add more value to our services to further differentiate our service from our competitors.

We expect Internet to be the key differentiator in the market going forward, and demand for the FibreOP service continues to be very high exceeding internal targets and churn rates are remaining low. So driven by FibreOP, we are holding our own on the competitive front with strong TV and high speed internet performance.

Turning now to a bit of the revenue specifics for the quarter, as shown on Slide 6, our local and long distance service revenues declined 4.9% and 10% respectively largely driven by NAS declines of 5.2% from a year earlier. Net NAS declines in the quarter improved slightly from the same quarter a year ago, as expansion under new markets help to offset the pressures of competitor forces particularly in non-fibre markets and technology substitution of both residential and business markets.

NAS churn in fibre markets continue to improve, which is an important trend as we continue to see our competitive pressures in non-fibre markets. Our NAS experience over the past quarters reiterates even further the importance of our fibre investment in gaining and retaining customers.

Turning now to our internet results, revenues grew 6.4% compared to the same quarter in 2012. The growth in internet revenue came from the strength of FibreOP customer additions and residential high speed ARPC stroke of 6% over the same quarter in 2012. Pricing action and increased usage arising from demand for greater bandwidth drove the increase in ARPC. We added 17,900 net FibreOP Internet customers in the first quarter, up 40% from the same quarter in 2012 with an increasing proportion being new-to-us customers rather than migrations from our existing DSL customer base. After taking into account these migrations and additions from entering new markets, our overall high speed net additions in the quarter were 8,700 up from 6,400 a year ago.

We had another good quarter for FibreOP TV additions adding 15,600 customers in the first quarter bringing total FibreOP TV customers to over 112,000 at the end of March. Our overall IPTV net additions in the quarter were 14,300 as FibreOP additions include some migration from our FTTN Bell Aliant TV service. With over 90% of new FibreOP subscribers taking the triple-play bundle, TV continues to be our largest contributor to revenue growth while helping to grow our customer base and increased customer retention rates.

TV ARPCs continue to grow in the first quarter from a year ago as a result of pricing action taken in the fall of 2012 and more customers migrating to the higher end bundles. Customers take up of HD and PVR continue to be strong, which also contributed to growing ARPC.

So to sum up the quarter, I’m very, very pleased with our start to 2013. We achieved the best year-over-year revenue and EBITDA performance we've had in over three years, FibreOP continue to perform well, and our overall subscriber results held their own in the phase of strong competitive activity. As I would like to say we're not out of the wood yet, and I expect there to be a few further bumps along the way going forward in 2013, but I'm feeling very good about the progress we are making.

And with that, I'll turn it over to Glen to talk about CapEx and free cash flow.

Glen LeBlanc

Thanks, Karen and good afternoon everyone. As Karen has said, we are very pleased with our first quarter results and our CapEx and free cash flow performance contributed to that.

CapEx in the first quarter was down $9 million from the same quarter a year ago with our increasing focus on loading our FTTH network, we had very strong growth in FibreOP net additions connecting approximately 5,000 more homes to our FTTH network in the first quarter than we did a year ago.

The increased cost associated with this were more than offset by our lower FTTH footprint expansion in the quarter compared to a year ago and reduced start-up cost associated with our central region from those which we entered in 2012.

Our legacy CapEx spending was also down from a year ago due to year-over-year timing. For the year, we continue to expect our CapEx to be in the range of $525 million to $575 million compared to $592 million in 2012. Free cash flow was up $15 million for the same quarter in 2012 largely a result of the lower CapEx.

Increased cash from operating activities including lower restructuring payments also contributed to the increase in free cash flow.

As we stated earlier in the year with our 2013 guidance, we expect our 2013 pre-cash flow to be in line with 2012 in the range of $500 million to $560 million. So this favorable variance in the first quarter will likely turn around in later quarter, as a result of timing of various cash outflows.

And lastly, as I know we can’t get through one of these calls although commenting on pension cost, we saw some interesting trends with interest rates in the quarter such that the discount rate used for accounting purposes went down slightly. While the discount rate used for solvency deficit calculations increased slightly. And again we had strong asset returns of 3.6% for the quarter. I’d like to say it really didn’t change very much and the deficient would not have changed a whole lot in the quarter from what we estimated at year-end.

Other than current service cost contributions, we expect virtually no further pension funding in 2013 and 2014 depending on [course] on where interest rates are in the December. Consequently we continue to expect to be within our long term targeted dividend pay out range of 75% to 85% of free cash flow this year. Leaving us some excess free cash flow, as we transition to paying higher annual corporate taxes in 2014.

So in summary, 2013 is progressing as good as or better than we expected. We are happy with the plan we have in place for 2013 and we continue to believe it will position us well to continue to generate solid cash flows going forward, further supporting our dividend to shareholders.

And with that, I’ll open the line up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We do have a first question from Dvai Ghose from Canaccord Genuity. Please go ahead.

Dvai Ghose – Canaccord Genuity

Yeah, thanks very much, good afternoon and congratulations on some of the milestones you reached in the quarter. Couple of questions if I may, on the residential line loss, I thought it bit of a contradiction you had some great acceleration in your Internet subs as well as on your TV side, but you saw an acceleration on residential line loss as well. Is that simply the market substituting, maturing and so on or where there some competitive phone offers from your cable competitors?

Karen Sheriff

Dvai, I think it is competition. Competition is pushing hard and we're seeing the most in our non-fibre markets. We are fighting hard, but as I said in my comments, we're being careful with hubs. It doesn't mean we're not doing some pricing, but we're not being as aggressive as some of the competitors are, we're trying to fight more with futures and we’re focusing on areas we can grow. And I think if I were as a marketer, if I saw that imbalance, it would tell me that they are picking up single lines.

Dvai Ghose – Canaccord Genuity

Right.

Karen Sheriff

Okay, so that's really what is occurring.

Dvai Ghose – Canaccord Genuity

Okay, so that's obviously not a big deal. The second question is on your fibre to the home build I know that Q1 is cold and therefore it’s not the maximum build, but if I look at years ago 23,000 homes to past, you added this quarter 58,000 year-ago, and I think was 40,000 the year before that. Is that some sort of conscious slowdown or whether there is some extraordinary weather conditions, because you need quite a big acceleration to make the 800,000 home targeted at year-end.

Karen Sheriff

Really, I mean, it’s – we’re going to hit our target, and we took a bit of a breather in the quarter as we get ready for the expansions that we’re doing across the areas particularly outside of Atlanta, Canada. And frankly Dvai, we actually did more than we had in our budget.

Dvai Ghose – Canaccord Genuity

Okay.

Karen Sheriff

So we’re fine.

Dvai Ghose – Canaccord Genuity

Okay great. And then let me – this isn’t really my question to you, and I’ll ask you candidly. As you know some American hedge funds have been shorting you stock on the anticipation of a potential dividend again cut next year, precipitated by the onset of full cash taxes, as well as some extra to cash taxes and the need to continue to invest in fibre. You know my views, but I’m interested in yours?

Karen Sheriff

Yeah, I think they got a long way. We’ve said repeatedly that we are not at all concerned about our dividend and the thing that’s so amusing to me if it wasn’t so sad is that given the trajectory of the business, the way the business is changing it gets further and further away rather than potentially closer. We’ve said repeatedly that we would, if we had to manage the pace of the fibre build and we have cash taxes next year, we have some one-time stuff, but it’s one-time, finishing the fibre build that’s small and the down trajectory is looking really, really good. So I think they got a long way.

Dvai Ghose – Canaccord Genuity

And you certainly to fight those your full year margins would collapse because of FTPA. So particularly congratulations for that. Thank you very much.

Operator

Thank you. The next question is from Glen Campbell from Bank of America Merrill Lynch, please go ahead.

Glen Campbell – Bank of America Merrill Lynch

Yes thanks very much. Again congratulations on a very good quarter. A few small interior, first, your cost to sales rose $10 million from $174 million to $184 million so 6% and that includes the $4 million of the CRTC, so given what you’re doing on TV that seems like a very, very small increase, and I’m wondering if there is some savings that you’re getting in there that would explain the strength, and I was also should tune the performance in the business line, its improved quarter-over-quarter, and then one final one after, thanks.

Karen Sheriff

Glen, do you want to do the first one?

Glen LeBlanc

Yeah want to look in them, I’m just going through my notes here Glen, if I note the exact details on the cost of sales, I’ll follow back on that one and your second question was on business line.

Glen Campbell – Bank of America Merrill Lynch

That’s right

Karen Sheriff

And what you want know about business line?

Glen Campbell – Bank of America Merrill Lynch

Improved performance is there an underlying change there as the…

Karen Sheriff

Glen, you know how businesses, it’s just lumpy.

Glen Campbell – Bank of America Merrill Lynch

Okay.

Karen Sheriff

The whole joint trajectory surprise there it’s a good quarter.

Glen Campbell – Bank of America Merrill Lynch

Okay, it’s great. And then the last one I had with some, you got your approval now for [St. Mary for] TV that’s an additional to Sudbury, could you give us a sense of whether you’re planning just to do those markets in the east or you’re going continue to back fill and sorry in Ontario to – whether you’re going to continue to back fill at Atlantic, Canada or do you have other markets planned for Ontario and Quebec.

Karen Sheriff

Well we haven’t – we’ve got a lot of footprint left to do this here and we haven’t announced the markets Glen, so I can safely say there will be expansion in both of Atlantic and in Central.

Glen Campbell – Bank of America Merrill Lynch

Okay thanks.

Glen LeBlanc

And nothing is leaping out at me as I search my notes here Glen of anything material that occurred in the quarter. If I can point anything such of the prior to end of the call, I will…

Karen Sheriff

No I think the real answer on all of that costs and all of the expenses is just great containment in a lot of little areas. Labors, very much under control and just a lot a good stuff nothing there isn’t one silver board in there.

Glen Campbell – Bank of America Merrill Lynch

Okay, terrific. Thank you very much.

Operator

Thank you, the next question is from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan – Scotiabank

Thanks and good afternoon. I’ve got a few questions, first, can you just clarify for us the four million impact on EBITDA for the quarter? If we adjust for that, do you think your EBITDA would have been $328 million?

Glen LeBlanc

Hi Jeff, it’s Glen. Yes, it would have been, so I know where you are going that the earnings in the quarter was, when you consider that was positive actually EBITDA growth, ignoring for this one-time event, the CRTC charges and that’s pretty exciting that we’ve seen that. That said, Karen’s remarks for one quarter does not a trend make and I wouldn’t want to guide that we believe that’s something that will be consistently repetitive in the future quarters, albeit it continues the trend that we’ve been talking about for three years is that each year we’re seeing consistent performance moving towards the ultimate objective of returning to growth.

Jeff Fan – Scotiabank

Okay.

Glen LeBlanc

It was a strong quarter for us though. But we have some investments in the business we’re making and we’re continuing to see our (inaudible) go up and those are the type of the trends that are ultimately going to lead to the long term...

Dan McKeen

The other thing to not forget Jeff is that most, a lot of that was retro, so of the four little over three was retro, but we will have about $1 million ahead of quarter for the rest of this year. So it’s not, we’re not totally out of the woods, but yes it was a pinch me quarter.

Jeff Fan – Scotiabank

Okay. Second question, just on your revenue in the other category, looks like there was some growth in that category coming from custom work and pole attachment, just wondering whether those are reoccurring and what kind of margin impact are we talking about from those revenues?

Glen LeBlanc

Hi Jeff, it’s Glen again. I’m not going to get into margins with you, but about two thirds of that, I would say is recurring. About a third of it was one time. When I look out to our forecast I would say we do anticipate that some of that positive trends occurring in Q1 will continue about two thirds of it.

Jeff Fan – Scotiabank

Okay. And last question on pension, you gave us very good color on your deficit funding and the minimal funding for this year and next year. My question is kind of beyond that everything else equal, assuming that you finished drawing down the voluntary lump some that you put in a year ago, what is your projection on pension funding requirement beyond that?

Glen LeBlanc

There is a load of question Jeff everything else equal. I’ll try to answer in the most simplistic manner I could. If everything was equal in the pension environment and you had approximate $700 million funding deficit that’s required to be funded over a five-year period, then I guess it would be $140 million a year until the deficit was completely eliminated. So that’s the most rudimentary manner in which you could model this.

Now, I don’t want you to model it that way, because that assumes that we know there is smoothing, we know there’s – we continue to knock as it returns out of the park. I don’t anticipate that interest rates are not going to rise over the next five years. So that would assume a no rising interest-rate environment. Every 25 basis point movement in interest-rate is about $140 million change in reduction in the deficit.

So I’m answering your question that you asked, but I don’t think you know that it’s ever that simple.

Jeff Fan – Scotiabank

Okay that’s fair. Thanks a lot.

Operator

Thank you. The next question is from Maher Yaghi from Desjardins Capital Market. Please go ahead.

Maher Yaghi – Desjardins Capital Market

Yes, thank you for taking my question and congratulation again on the quarter. I just wanted to ask you, you mentioned Karen that you are reaching 30% penetration in some of your mature markets. Are you seeing those penetration rates going or seeing some the secondary derivative of the growth coming down and its not do you believe you can have 50% over the next two years. And also in terms of that 30% is it, when you’re looking at mature markets when you talk about mature markets, is it in most of the mature markets or in certain pockets?

And second question I have is on CapEx. When you look out beyond 2014, you have the highest amount of cash flow, which when you look out beyond that is it fair to assume that CapEx have been scheduled to climb and may be 16% is the range you would like to have the CapEx run at and if so then that 75% to 85% range in terms of free cash flow used for dividend should not be a problem.

Karen Sheriff

Second derivatives – so I actually think I know what that is. The penetration is not plateauing and this is a discussion we’ve actually had I think a few times with investors as well. So even in some of the older markets where penetration is high, it’s still clicking along. It’s not as high as it was in the early days for six months or the peek but it’s still moving up very nicely. And then in terms of the dispersion of markets, there is obvious dispersion there but there is more commonality may than there is dispersion. There is a lot of commonality across markets but not every market is exactly the same.

Glen LeBlanc

Okay. I’ll take the second one Karen on CapEx, the real short answer to your question Maher is yes. We embarked upon a very aggressive network build program in 2010, 2011 and 2012, 2013. And you’ve seen our CapEx on $500 million to by last year’s $592 million. But upon the completion of the construction plan are ultimately reaching approximately a million homes that we deemed to be economic, we see CapEx following back to historical levels and not having that – our network will be build and historical levels are 15% to 17% and that's where we see ourself headed when the heavy investment period of rebuilding our company has done.

And when that is done, it kind of coincides with the recurring taxes that we’ll have to pay into the future and we see those offsetting one another. So we’re able to accomplish 75% to 85% payout today, when we don't have taxes, what we see tomorrow is the CapEx number will fall, the tax number will offset that and we’ll need our stated objective and payout in the long-term.

Maher Yaghi – Desjardins Capital Market

Thanks for that. And just on the penetration rates I mentioned 50% is achievable in most areas we're going to be covering by IPTV is that an objective you could have?

Karen Sheriff

Yeah, I have never put out there what our objective is, but in a market that largely has two players to do decently you've got kind of split in half. So I still think that's very achievable.

Maher Yaghi – Desjardins Capital Market

Thank you very much.

Operator

Thank you. The next question is from Tim Casey from BMO Capital Markets. Please go ahead.

Tim Casey – BMO Capital Markets

Thanks. Karen, you talked about the relative differences in some of your cable partners, can you talk about trend among them? Are your cable competitors getting more intense over the last few quarters or is it relatively stable level of competition?

Karen Sheriff

I would say more, and as the size of our TV loads has grown and it has taken more 40% every year so that's pretty big jump between the yield now. So we have seen more competition than we had or I would say more aggressive competition over the last few quarters and particularly over the last couple of quarters than we had before that.

Tim Casey – BMO Capital Markets

And would that competition be for existing areas or new builds or for maturing customers or is it sort of all across-the-board?

Karen Sheriff

I think there is competition all across-the-board, but in obvious area and I think you've heard competitors say this is a very heavy attack, where we don't have fibre and we are a bit more vulnerable there, but I would say that the office are ridiculous all over the place.

Tim Casey – BMO Capital Markets

Thanks for that.

Operator

Thank you. (Operator Instructions) The next question is from Duane Campbell from Bank of America Merrill Lynch. Please go ahead.

Duane Campbell – Bank of America Merrill Lynch

Yeah, thanks for fitting me in again. Karen you made a very brief reference to the possibility of bumps later on the year that might put at risk the positive revenue growth we are now seeing. I was wondering if there is anything in particular you're seeing there. And then I had a second question, I guess the fair arguments on the stock is that CapEx may not come down as much as we might hope, because there will be ongoing loadings to replace the natural churn basis as your fibre grows. I’m wondering to what degree let’s say what we think of is core maintenance CapEx on the copper plant will go down as well as the fibre footprint increases to offset that pressure from loadings, thanks.

Karen Sheriff

Good questions. Nothing in particular on the revenue front except the vagaries of, I didn’t expect the CRTC to do what they did this quarter. So there isn’t anything specific in my mind, except that I’m not ready at this point at all to change our guidance and it could move around and it could be lumpy. Revenue could be lumpy, EBITDA could be lumpy and just like we had incredible quarters Q3, Q4 on all loads, including NAS and we could have some lumps on net ads as well. So there’s really nothing specific behind that.

On CapEx you’re absolutely right, and I know we talked about this a bit in the past. I think one of the things people are forgetting is the cost savings that we get from fibre. And we know Verizon is at that point now, I get questions all the time on what is the opportunity, when do you get the opportunity. And some of it happens right at the beginning so there is grooming on the copper network that we’ve already in some places being able to abandon and that savings in the millions already.

And there are more savings that we will get over time and there will also be a point out there in the future where we can start to turn down neighborhoods and say, we need more money on CapEx. So fibre-to-the-home really is and will continue to be an enabler to keeping those costs down. And the biggest thing that changes the amount of investment is really the builds. We are offset to absorb the loads.

Duane Campbell – Bank of America Merrill Lynch

Okay. I know you want to put specific numbers around it, but would it be fair to say that have big chunk of the CapEx on loading and would actually be match by savings on the what we think this being maintenance?

Karen Sheriff

I can’t even begin to go there.

Duane Campbell – Bank of America Merrill Lynch

Okay fair enough. Thank you.

Operator

Thank you. There are no questions registered at this time. I would now like to turn the meeting over to Ms. Zeda Redden. Please go ahead.

Zeda Redden

Thanks everyone for joining us this afternoon. If you have any follow-up questions don't hesitate to get in touch with me. And have a good evening.

Operator

Thank you. The conference is now ended. Please disconnect your lines at this time. And we thank you for your participation.

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