Manitoba Telecom Services Inc (OTCPK:MOBAF) Q2 2016 Earnings Conference Call August 3, 2016 6:00 PM ET
Brenda McInnes - Vice President and Treasurer
Jay Forbes - President and CEO
Heather Tulk - Chief Customer Officer
Drew McReynolds - RBC Capital Markets
Good afternoon, my name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] Thank you. Brenda McInnes, Vice President and Treasurer, you may begin your conference.
Thank you, John. Hello, everyone. And thank you for joining us today our Q2, 2016 results call. Our news release and MD&A financial statements and supplemental information package can be found our website at mts.ca under the About Us link. Please note that the due to the arrangement agreement with BCE we do not expect to declare or pay any more dividends to shareholders prior to closing. Our last dividend was declared on May 11, 2016 and paid to shareholders on July 15, 2016. Our call will consist of comments by Jay Forbes, our President and CEO, followed by a question-and-answer period. Before we start, I'd like to remind all listeners that today's presentation and remarks may contain forward-looking statements. A number of assumptions were made by us in preparing this forward looking statements which represent our expectations as of today. As such, they are subject to the risks that actual results may differ materially from a conclusion, forecast or projections in such forward looking information. Therefore, forward looking statements should be considered carefully and undue reliance should not be placed on them. We disclaim 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. For additional information about such material factors and assumptions, please refer to our second quarter 2016 MD&A release today and our 2015 annual MD&A which are available on our website.
I'll now turn the call over to Jay.
Thanks Brenda. And good afternoon to everyone joining us on the call today. We would like to use our time this afternoon to discuss our progress on our multiyear transformation program and to provide an update on the BCE transaction. It has been a year since we completed the review that led to our strategy to transform MTS into a customer first organization. We've come along way in the past year making significant progress with the transformation initiatives we started in the third quarter of 2015. Our transformation program remains a top priority even with the pending sale of MTS to BCE. BCE strongly values our commitment to improve the customer experience. More on a transformation update in a minute but first I'd like to focus on our pending transaction with BCE, which is advancing nicely.
Following the May announcement we worked quickly to meet two important milestones. We secured the necessary approvals from the Manitoba courts and we've received an overwhelming endorsement from our shareholders with 99.66% of shares voted in support of the transaction.
Working jointly with BCE, we filed all the necessary applications for the required regulatory approvals with CRTC, the Competition Bureau and Industry Science and Economic Development, Canada or ISED. These three regulatory approvals are the last of the approvals needed to close the transaction. The regulatory process is an interactive process and we continue to do work with BCE and the regulators to ensure the approvals can be obtained as quickly as possible. With this in mind, we continue to expect the transaction to close in late 2016 or early 2017.
Meanwhile it's business as usual at MTS. As we remain focused on executing our strategy to generate the results we've committed to deliver to our customers and to our shareholders. All of our transformation program work streams have now been watched and as we look through implementing the various initiatives under this work streams, we expect to transform our operations, improve our customer experience and provide the levels of service that our customers demand and deserve. We also expect to realize significant free cash flow savings as these work streams become fully implemented over the next three years.
Let me briefly touch on our recent results and key financial highlights before we open the call to your questions. Two of our key performance indicators free cash flow and free cash flow per share increased this quarter both on sequential quarters and the year-over-year basis. Our free cash flow of $54.5 million for the quarter was up by $8.9 million over Q1, 2016 and $25.5 million from Q2, 2015 as we generate the substantial free cash flow from both EBITDA growth and reduced capital expending.
Our free cash flow per share of $0.73 was up by $0.15 over Q1 and $0.36 per share from Q2, 2015. Contributing to the increase was a completion of a share buyback program in Q2 when we purchased an additional $2.3 million shares. In total, we bought back just over 5 million shares and returned over $164 million to shareholders under our normal courses issuer bid through the first half of this year.
Capital investments were $15.5 million lower in Q2, 2015 giving us a capital intensity ratio of 14.3% which is below our 18% annual target. Our new capital investment process has been a key driver in lowering our capital investment spend in the first half of 2016 which ensures our capital investments are tied our strategic priorities and deliver economic benefits.
The new process has yields its savings and efficiencies some of which we plan to reinvest in the second half of 2016. Customer delays -- and the effective implementing a new process also contributed to the lower capital investment. As our new process matures we expect to capital intensity level to be more in line with our long -term target.
EBITDA before restructuring in transformation expenses which forms a basis of our free cash flow was up $5.5 billion in Q2, 2016 when compared to Q2 of 2015. This was mainly due to reduction in operating expenses resulting from our restructuring and transformation initiatives as well as an increase in revenue in the quarter. You can find more details in our financial results in our Q2, 2016 MD&A and supplemental.
We delivered strong financial results in the second quarter with our free cash flow and free cash flow per share continuing to improve. I am extremely pleased with the momentum we've created in our business over the last several quarters. And I'd like to end by thanking our employees. It is all of their hard work, their dedication to customers and the willingness to embrace change that is allowing us to build a foundation for the future. Together our efforts are providing notable benefits to our customers and to our shareholders.
With that we would be happy to take whatever questions you might have.
Our first question comes from the line of Drew McReynolds from RBC Capital Markets.
Yes, thanks very much. Brenda, just maybe for you just trying to gauge where the pension solvency deficit is, and obviously the supplementary you provide the grid there. Am I reading it right when I look at the current rates line and then look at your year-to-date performance on the plan assets are roughly flat and then I can conclude where the deficit is as of the end of Q2?
Yes. That is -- it's a high level proxy but it's as close as we can get with the information that we have right now.
Okay. Okay, no I just wanted to confirm that. And then also just in terms of the annualized free cash flow improvements, I noticed the $53 million was the same as of last quarter. Just wondering, you know obviously purely timing I suppose in terms of kind of realizing nothing incremental between Q2 and Q1? Or did I see a different amount last quarter?
Yes. In terms of that we got after very quick start with both capital investment program overhaul as well as the streamlining of back office. We are able to -- as a consequence of both those generate a very positive uptick in terms of free cash flow momentum. And as we guided the analysts' community the next set of initiatives that we are undertaking including price and promotions and discounts to the online customer experience et cetera are going to be required more lengthy planning periods and long execution. As well as some of that $100 million investment that we spoke to as well. So we are very much on track to implement these additional programs in 2016. And we'll start to see an upturn in terms of the cumulative benefits that we expect of a total -- that $100 million of improved free cash flow as the year unfolds.
Okay. Appreciate that, Jay. And then with respect to the year-over-year EBITDA growth, which was certainly an improvement sequentially, presumably again that's timing related in terms of the flow through of what was realized in Q1. Is that correct?
This is correct. We had a lot of the departures in terms of streamlining of operations took place in December but there was goodly amount of those that were more towards end of the first quarter and so you'll begin with each subsequent quarter to see that annualized run rate in excess of $20 million that we expect in terms of the free cash flow improvement coming from those operating segments.
Okay. No, that's great. Last question for me then. Just in terms of just operating metrics, your wireless churn year-over-year very impressive. Can you just provide a little bit of color around that? Is that a function of some of the things you're doing internally? Is there anything unusual kind of this quarter to drive that? Thank you.
Drew, on this one I'll let Heather give you a little bit detail behind her program, she came in as our chief customer officer about a year ago and had this firmly in her sight so it's kind of one of the key priorities she want to introduce into the organization in terms of more aggressive stands long term management and very pleased with results that we've been to build albeit in a short time she has been with us and maybe Heather you could talk a little bit about some of those improvements.
Thank you very much, Jay. Thanks for the compliment. It's certainly credit to the team not just to me that's for sure. But as we mentioned, churn management has been huge focus for us over the last number of quarters. Obviously, we didn't see the early results we might have liked to. It was offset with some of the impacts of the double cohort last year. But we are proud that to say that we've seen improvement in our post stage churn now with the third consecutive quarter and when you pick up the slight glitch or bump around the double cohort period certainly market improvements since early last year. Period under that, Drew, we are seeing improvements in both our off contract and on contract churn which is a very big focus for us. Obviously when you are going into the shortening of the contract from three years to two years contract that mix was going to go against us significantly with more customers off contract, contract churn is anywhere from 4x to 6x on contract churn. So we really had that as a headwind that we needed to address it. So we put a number of programs in place to really manage our churn right through the organization everything from focusing in our marketing program to focus in our contact centers to a lot of work we've done around our retention queues and our retention management with both our dealers and contact center channel so really wasn't a silver bullet here it's a series of bronze bullets. And as you mentioned we are really, really proud of the trend we are on and the fact that we've been able to land this churn at this level even with a much higher than historical level of their customer off contract at any given time.
That concludes the question-and-answer session. Ms McInnes, please continue.
Ladies and gentlemen, we've reached the end of our Q2, 2016 results conference call. Once again thank you for joining us today.
Thank you. The conference call is now over.
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