BCE, Inc. (NYSE:BCE) Q4 2009 Earnings Call February 4, 2010 8:00 AM ET
Thane Fotopoulos - IR
George Cope - President & CEO
Siim Vanaselja - CFO
Greg MacDonald - National Bank Financial
Simon Flannery - Morgan Stanley
Vince Valentini - TD Newcrest
Bob Beck - CIBC
Phillip Huang - UBS Securities
Dvai Ghose - Genuity Capital Markets
Glen Campbell - Merrill Lynch
Maher Yaghi - Desjardins Securities
Peter Rhamey - BMO Capital Markets
Good morning, ladies and gentlemen. Welcome to BCE's Conference Call on Fourth Quarter results and 2010 guidance. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead Mr. Fotopoulos.
Thank you, Ann. Good morning everyone and thank you for joining the call today. As you know earlier this morning we issued a news release announcing our Q4 and full year 2009 results as well as 2010 financial guidance.
The release as well as the slide presentation for this call are available on the investor section of our website at www.bce.ca. As always joining me today is George Cope President and CEO and Siim Vanaselja, our CFO. Siim will begin with a quick overview of our Q4 results before he moves into discussing 2010 guidance and George will then take you through an overview of the business and strategies that we've laid out for this year before we open up the floor to Q&A.
However before we begin I'd like to remind you that today’s remarks will contain forward-looking statements with respect to items such as revenue, EBITDA, adjusted EPS, free cash flow and capital intensity.
Several assumptions were made by us in preparing these forward-looking statements and there are risks that our actual results will differ materially from those contemplated by the forward-looking statements.
For additional information on such assumptions, please consult BCEs Safe Harbor notice concerning forward-looking statements dated February 4, 2010, filed with both the Canadian Securities Commission and with the SEC and which is also available on the Investor Relations section of our website.
Any forward-looking statements made today represent BCEs expectations as of today and accordingly are subject to change after such date 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 and I'm making this cautionary statement on behalf of both George and Siim whose remarks may, will indeed contain some forward-looking statements. On that note I'll turn it over to Siim to get us started.
Great, thanks Thane and good morning everyone. Thank you for joining us. So I'll start with a review of the results that we issued this morning on Slide 7. First I'd say that we're delighted to finish 2009 with a strong fourth quarter.
Financially we met or exceeded all of the increased financial guidance targets that we set for the Company at the end of the second quarter and we balanced that financial performance with good subscriber growth from strong holiday sales. All of this then gives us excellent momentum as we begin the New Year and lets us set higher expectations for our performance for 2010.
Revenue growth of 4.8% in the quarter was driven largely by the inclusion of The Source in our results as well as by progressively improving wireless revenue trajectory reflecting stronger post paid subscriber loadings and an improvement in the year-over-year trending of ARPU compared to the previous couple of quarters.
While the economy continued to impact our business performance in the fourth quarter, I'd say it did so to a lesser degree this quarter. Our EBITDA growth of 1.1% this quarter included the reversal of our accrued obligation in respect of Part II broadcast license fees which I spoke of at the end of the third quarter.
Those were for the last three broadcast years resulting from the industry settlement with the CRTC. Now, offsetting that was higher year-over-year Olympic expenditures, higher pension expense and higher FX charges, all of those amounting to an excess of $70 million of year-over-year impact in the quarter and this quarter we also incurred more marketing and acquisition spending on promoting the launch of our HSPA network and other growth services, so the result was that this quarter we activated 85,000 more wireless and TV subscribers year-over-year and we extended upgrade contracts to a significantly greater number of existing customers.
With the launch of our HSPA network at the beginning of November, capital spending was lower year-over-year in the quarter but still at a healthy level of investment in the amount of $640 million. That reflects our accelerated deployment of broadband fiber as well as ongoing network upgrades and grooming.
On a full year basis we increased our total capital investment on key strategic priorities while maintaining our capital intensity more or less at the higher end of our guidance range at 15.9%. On earnings, statutory EPS for the quarter increased to $0.46 per share.
That's from a loss of $0.06 per share last year and you'll recall that in the fourth quarter of 2008, we took valuation write-downs of some $372 million or $0.47 per share related to non-core investments.
In addition to these write-downs the year-over-year improvement was also supported by lower restructuring costs and gains on divestitures. The higher level of restructuring costs last year of about $0.15 per share compared to $0.06 per share this quarter and those were to accrue obligations related to our workforce reduction and real estate downsizing on the implementation of our hundred day plan as well as a little bit towards Bell's rebranding that took place last year.
This quarter, the gain on divestiture related to the sale of our remaining portfolio investment in Clearwire, we've now completely exited that portfolio holding. Proceeds in the quarter amounted to $48 million and that brings our total proceeds for Clearwire to $109 million.
Adjusted EPS before net investment losses and restructuring costs was in line with expectations at $0.51 per share for the quarter compared with $0.55 per share last year. EPS in last Fourth Quarter included $0.13 related to lower tax expense from the favorable resolution of past tax positions and the impact of statutory rate reductions and this quarter, by comparison we had about $0.03 of such favorable impacts.
Now, apart from those year-over-year tax items, adjusted EPS this quarter reflected improvement in EBITDA, lower interest expense and the accretion from fewer BCE common shares outstanding.
Finally, free cash flow. Even with higher pension funding year-over-year and increased investment in working capital this quarter, we generated robust free cash flow of $515 million for the quarter.
That's before taking into account the voluntary $500 million pension contribution that we made at the end of the year, end of last year. So in assessing the quarter I'm quite pleased with our overall execution and let me now turn to our segmented results starting with Wireline business.
We are reporting our best Wireline revenue growth quarter of the year at 4.2% owing to the contribution of the source and as well, continued good momentum at both Bell TV and our residential home phone business where the pace of voice erosion has remained stable.
This was the ninth consecutive quarter of improved year-over-year retail residential mass loss owing to the strength of our service bundles and home phone packages. Through customer win backs and decreasing select port losses, we drove higher attach rates for growth service RGUs which contributed a healthy 9% increase in average revenue per household.
Bell TV continued to outperform on all fronts, reporting its best net additions in four years and double digit revenue growth of 11.2%. That's on higher ARPU driven by programming upgrades and the flow through of some price increases.
All of this helped TV, EBITDA to grow 46% or by 18% year-over-year when excluding the favorable one-time impact of the Part II broadcast fee recovery. Our internet business I'd say stayed the course in Q4 adding a stable number of net new subscribers year-over-year and despite a competitive and maturing broadband market and some sales cannibalization from wireless sticks, our residential internet net adds were up 25%.
So that was driven by lower churn and stronger internet attach rates on the customers that we're winning back. Residential internet ARPU increased 3%, not withstanding some continued aggressive price discounting in the market. That ARPU increase reflects a growing mix of customers on premium service tiers as well as upside from usage based pricing and that ARPU increase will certainly be carried into 2010 and supported by some of the further price increases that we implemented at the beginning of January this year.
In our business markets quickly, we saw much the same trends that have been affecting performance through the course of 2009, even though we are not yet seeing significant signs of sustained turnaround in enterprise spending or usage volumes, I do think that we are encouraged that the rate in that loss erosion slowed in our business markets this quarter and also we saw the backlog and funnel in that segment starting to build up again. So good signs.
On Slide 9, for the 2009 year overall our Wireline segment revenue remained essentially unchanged year-over-year. The revenue lift from video and internet growth and from higher product sales in the back half of the year from The Source was largely offset by declining voice revenues and the pull back that I mentioned in the business market spending.
Still, our household marketing strategy together with improvements in service delivery did help reduce the total number of residential line losses by around 13% from 382,000 in 2008 to 334,000 losses in 2009 and that slowed the annual rate of erosion to 7.9%.
Our service bundles contributed to this improving trend with almost half of all bundle orders in 2009 now having at least one new product attached to it. Wireline EBITDA grew 1% year-over-year, that's very much the direct result of managing through the pace of erosion in the voice business through continued strong execution in our efficiency programs, we reduced overall labor expenses significantly, G&A and discretionary spending as well.
And with that, Wireline margins were essentially unchanged year-over-year at 36.6%, a level I'm happy to say that we've maintained now through the past five years, so again, underlying trends in our Wireline business and the prospects of improvement in the economy are encouraging as we move into 2010.
On the next slide, a pretty strong quarter overall for Bell Wireless. We successfully launched our new network in November in an aggressive but I'd say still disciplined manner activating a record number of gross activations in the fourth quarter which increased 11.3% to 523,000 and this was one of our best December performances ever reflecting good market response to our expanded device line up which includes the iPhone and the BlackBerry Bold and growth in demand for wireless turbo sticks.
Our post paid momentum has progressively improved through the course of the year and that carried over into the fourth quarter with post paid gross adds increasing 19%, net adds improving 38% all on stable churn.
So that as well will translate to stronger revenue growth for 2010. In terms of ARPU, clearly the single biggest factor affecting it this year has been the economy and competitive re-price.
In the Fourth Quarter we continued to see voice ARPU decline but at a slower pace than in the past few quarters and that improvement can be attributed partly to the fact that the economy began to weaken in the fourth quarter of 2008 so obviously the year-over-year comparisons are easier but I'd add that it also reflects reduced customer migrations to lower rate plans and higher smartphone activations which improve the mix of our higher ARPU generating customers.
In fact data now represents around 18% of our wireless service revenues up from 13% in 2008 and we had a 67% year-over-year increase in smartphone subscribers so they now make up close to 15% of our total customer base. Also notable is that even with the increased smartphone adoption, our COA per gross add was down 5.8% in the quarter, demonstrating that we effectively optimized all of the acquisition cost components.
So in our wireless business, we clearly gained some momentum in the marketplace. Over the course of 2009 we grew our market share of post paid net additions among the three national carriers from 19% in the first quarter to 29% in the third quarter and in the fourth quarter we neutralized our network and handset disadvantage deploying our new HSPA network and in January 2010 this year, we've begun rolling out The Source as a distribution channel for both Bell Wireless and Virgin.
To finish up on the quarter a few quick comments on the wireless financials on Slide 11, we had a better service revenue trajectory in the fourth quarter with growth of 2.1%, not still where we would like that to be but an improvement over the second quarter and third quarter and we see that momentum growing as we enter 2010 and wireless product revenues were up 43% in the quarter, mainly reflecting our full ownership of Virgin.
As I explained, wireless EBITDA decreased this quarter with stepped up activations and we also invested more in call centers to better support a rapidly growing base of data customers.
So okay that's it for the results. Let me turn to where we stand with our capital structure and capital markets objectives and then I'll turn to our 2010 financial guidance.
So I'm on Slide 13. As you know, we've now established a very clear set of capital structure policies to provide you transparency on how we will manage the company financially and how we will position ourselves in the capital markets.
There are four key elements of that. First, we will maintain an investment grade credit profile consistent with our credit metric policies; second, we'll maintain a strong level of liquidity through committed credit facilities in a very, very manageable debt maturity schedule third, we'll continue to be balanced in growing free cash flow while maintaining appropriate investment spending levels in our business and lastly we'll look to increase shareholder value in two ways.
One, by growing our dividend through growth in EPS and free cash flow and secondly, by applying surplus cash principally to share buybacks. I believe the Company has never been as focused in its capital market strategy or being as well positioned to execute on every element of it as we are today, so let me explain why.
On Slide 14, you can see that our balance sheet and liquidity position are extremely healthy. During the year we funded the acquisition of The Source, Virgin and the Montreal Canadians for $391 million.
We repaid $2.1 billion of long debt and $265 million of capital lease obligations. We repurchased approximately 40 million shares foreclose to $900 million and we contributed $500 million in special funding to our pension plan and after all common and preferred dividends we still closed 2009 with the cash balance of $660 million.
Slide 15, shows that we have a dividend coverage of more than 1.5 times free cash flow which is the highest among all major North American telcos offering what we believe to be an attractive BCE dividend deal now over 6% and with our debt maturity schedule we do not expect to be in the debt markets for at least the next year.
On Slide 16, you can see the track record of this management in returning cash to our shareholders and we'll continue on this same path reviewing our dividend on a regular basis relative to our pay out policy and reviewing our application of surplus cash balances also on an ongoing basis.
Finally, you'll see that our 2010 plan calls for higher EBITDA growth, lower pension expense and lower interest expense. I'll get into that in a minute, but that in turn will further strengthen our key credit ratios already comfortably in our policy range and provide greater financial flexibility to execute on our capital markets objectives going forward.
So with that let me now turn to our 2010 outlook and our financial guidance starting on Page 18. First in terms of how we see 2010 unfolding, the economic contraction that we experienced in 2009 appears to be on a path to stabilizing so we expect to see a gradual strengthening of the economy but really with momentum only beginning in the second half of the year.
That should help support improving performance in our business markets and a step up in wireless revenue growth driven by strong post paid subscriber acquisitions in 2009, higher expected smartphone penetration and increased data usage.
Moreover as the economy improves, we expect voice ARPU erosion to slow and roaming revenues to pick up consistent with higher rates of employment and travel. In our revenue guidance we're nevertheless maintaining a conservative outlook until we see how the year unfolds, so we're calling for revenue growth at Bell to remain relatively stable in 2010 at 1% to 2% growth.
For Bell's EBITDA our expectation for 2010 is for growth in the range of 2% to 4% which is a step up from 2009. Supporting that improvement is lower year-over-year pension expense and ongoing cost reductions particularly in procurement as we renew a number of key supplier contracts and that guidance range leaves us a good degree of cushion I should say to continue pursuing higher wireless activation levels with our new network and with The Source as a channel.
In our capital spending plans we'll continue to invest intelligently building for the future while maintaining Bell's capital intensity at or below 16% of revenues. At the BCE consolidated level our guidance is for adjusted EPS to grow between 6% and 10% over 2009 and for free cash flow to be in the range of $2 billion to $2.2 billion.
Overall, the financial guidance that we're announcing today I'd say reflects a well balanced business and financial plan which will generate good EPS and free cash flow growth while making significant reinvestment for the future of our business.
All of this provides a strong foundation for executing our capital market strategy, so with that let me give you a little bit more color on each of the components of our guidance starting with revenue.
Our revenue guidance of 1% to 2% growth includes the contribution from The Source and Virgin which we began to fully consolidate in the third quarter last year. That contribution in growth will mostly be in the product sales line in our Wireline segment and will mostly impact us in the first half of the year.
Our revenue plan assumes stabilization in residential NAS line losses reflecting bundling and win back opportunities while business NAS erosion is expected to improve as the economy begins to strengthen gradually in the back half of the year.
Our revenue growth projections also reflect continued strong TV subscriber growth as well as continued, as we continue to leverage our High-Definition leadership, pursue our MDU penetration strategy and drive higher ARPU through higher premium box penetration and the flow through of price increases that we put through at the start of the year and while we expect internet market growth to moderate a bit overall in 2009, we intend to continue to grow our base of FTTN subscribers and to continue growing usage based internet revenues and we also expect improved data and ICT service revenue performance in our business market whereas I said our funnel is building nicely at the moment.
For wireless, our revenue forecast reflects increased subscriber loadings on smartphones and associated increases in data revenue growth and a higher market share of inbound roaming revenue, all this helping towards countering the continued downward pressure that we would expect invoice ARPU and the impact of new wireless entrance in the marketplace.
Overall I'd say a conservative revenue outlook but prudent in the context of our operating environment. Turning to Slide 20, as I mentioned, EBITDA for Bell is expected to be 2% to 4% higher than 2009.
On the cost side we expect an overall increase in wireless subscriber acquisition and retention costs from higher subsidies associated with increased smartphone adoption and from increased customer upgrades.
Also reflected in our guidance is incremental expense associated with being the network provider and lead sponsor for the Vancouver Olympics and importantly I should mention that we expect to incur approximately $60 to $70 million of Olympic related expenditures in the first quarter of 2010 so you'll see that in our first quarter reporting, as these expenses will not recur next year, I'd say we already have upside there built into our EBITDA plan for 2011.
Netting these pressures against increased contribution from our growth segments and further cost reductions we expect the EBITDA margins to remain again relatively stable year-over-year. In addition we should also benefit from a year-over-year appreciation in the Canadian Dollar given the size of our U.S. Dollar purchases of wireless devises, video set top boxes and cross border roaming traffic.
Lastly, we expect pension expense to be approximately $110 million lower in 2010 benefiting our EBITDA and I'll ask you to turn to Slide 21, for me to cover that. So the improvement in pension expense can be attributed to two factors. First as we announced on December 17, we made the $500 million special defined benefit plan contribution, this decreased our 2010 pension expense by about $45 million and secondly, our pension plan delivered a strong 15% return on assets for 2009 which also improved the funds valuation position.
I should mention that we expect to report a one time credit against pension expense in the first quarter of 2010. That's reflected in our guidance but in the first quarter, we will have valuation allowance adjustment to recognize the surplus in one of BCE's pension plans.
We're still in the process of finalizing that adjustment but we have estimated it to be an amount of some $25 to $50 million and that will help to partially offset some of the Olympic expenditure pressure that I also spoke of for the first quarter.
In terms of cash pension funding, Bell's solvency deficit at the end of 2009 was reduced to about $1.2 to $1.3 billion and the pension plan solvency ratio improved to 90%. After the impact of a decline in our discount rate, we expect our overall pension funding to decline in 2010 to approximately $500 million.
I should point out that with the steepening yield curve, on the horizon and an improving interest rate outlook, a 1% increase in future discount rates would substantially eliminate our pension deficit and again that underscores how sensitive our pension funding is to a change in interest rates as well as highlighting the importance of that special pension contribution that we made at the end of last year to reduce volatility.
Finally to close off on pension, you'll recall that all new employees since 2004 are now enrolled in our less costly defined contribution plan and as well, as we phase out post retirement benefits for all employees we should begin to see that reflected positively in our results beginning in 2011.
Moving to our tax outlook, we don't see a significant step up in cash taxes as we expect total payments in 2010 to be around $200 million compared to $168 million in 2009 and that 2010 number reflects the tax deductible nature of the special pension funding that we made that saves us about $135 million in cash taxes in the first quarter of 2010.
We also have a pool of unused R&D tax credits remaining in the amount of around $400, $440 million which are available to use against taxable income at the federal level and we expect to fully utilize those by 2012, so our cash tax liabilities remain quite manageable over the next couple of years with only a modest step up.
In terms of our accounting tax expense on the P&L, we do benefit from a statutory tax rate reduction to 30.6% in 2010 from 32.3% in 2009, owing to both federal and Ontario level reductions.
In consolidating the non-taxable earnings of Bell Aliant, we project an effective accounting tax rate for 2010 around 22% so that's higher than 2009 but our tax adjustments and recoveries in 2010 will be lower probably in the vicinity of $0.20 of EPS for 2010 versus the $0.30 of tax adjustments that we posted in 2009.
On Slide 23, we expect to see 2010 adjusted EPS between $2.65 and $2.75 per share or 6% to 10% year-over-year growth. That growth is coming from essentially three areas, first, stronger EBITDA performance, second earnings accretion generated from our share buyback programs and that amounts to about $0.03 of EPS this year and lastly we will have an improvement in net interest expense stemming from an overall decrease in long term debt outstanding with a lower average cost of debt through some of the re-financings that we did last year.
All in all, good expected earnings growth and support which supports the increase $1.74 common dividends that we announced effective for 2010, all while keeping our payout ratio still at the low end of our payout policy.
On Slide 24, I've provided the details of our free cash flow generation for 2010 which we're forecasting to be in the $2 to $2.2 billion range before common dividends. The year-over-year improvement reflects higher EBITDA before pension expense as well as an appropriate level of capital investment focused on our strategic priorities.
The increase in 2010 cash taxes will be more than offset by lower interest payments on long term debt and lower restructuring costs, we think restructuring costs will be in the range of $200 to $250 million for 2010.
Our free cash flow will also benefit as I referenced from a meaningfully stronger Canadian Dollar. We expect favorable FX impacts in 2010 on our U.S. Dollar spending which has been substantially hedged now at an average exchange rate of $1.10 versus $1.17 for 2009.
So our cash flow remains strong and reliable with growth opportunities from business performance, continued efficiency gains and ongoing tight working capital management that has served us well over the last couple of years and we expect to end 2010 with further surplus cash in the range of $500 to $600 million.
On the next slide, just for your purposes and clarity I've provided a break down of the key reconciling items between projected EBITDA and our free cash flow. I won't go through that. I think you'll see that it all lines up reasonably well with the guidance that we're providing this morning and on Slide 26 and 27, for your reference, we've provided you with the economic, the key economic and market assumptions framing our 2010 outlook as well as the main financial and operating assumptions that underline our guidance and lastly, before I turn it over to George to talk about our business operations and progress on our five strategic imperatives, I did want to conclude by briefly addressing the requirements that come into effect next January for all Canadian public companies to change over from Canadian GAAP to international financial reporting standards.
At Bell we've been preparing for that transition. Updates on our progress and the reporting impacts that the changeover will have on us have been disclosed in our 2009 MD&A and will continue to be disclosed in each of our quarterly reporting through the course of 2010.
Importantly the adoption of international standards require certain accounting policy choices to be made and that will have an impact on the presentation of our financial statements, not just us but for all Canadian companies irrespective of the industry.
So it will have an impact on our financial statements and the calculation of our operating results that we're currently in the process of assessing and quantifying. Consequently, what we would like to do is hold an analyst information session after the end of the second quarter and we will outline for you the major changes that impact us and summarize those impacts as well as the transition rules and the impacts that those transition measures will have on our reporting. So thank you and let me turn it over to George.
Thanks, Siim. Good morning, everyone. I'm on Slide 31 and what I'd like to do over the next 15 minutes or so is take you through an update on our imperatives for 2010, some new announcements and a little insight into where I view the business at as well.
So on Page 31, no surprise to our investment community I'm sure is our focus for 2010 continues on our five strategic imperatives. We had made measurable progress on all of these imperatives in 2009 and that will be the focus in 2010. Success on these five strategic imperatives drives our ability to sustain the dividend growth model which as you know is the strategy from the company from a shareholder perspective.
Turning first of all to broadband network and services, Page 33, as Siim had mentioned we have had a step up in our RGU growth in the fourth quarter, 174% increase versus last year with the increase in wireless net adds, TV net adds strongest we've had in years and residential internet net adds up and a migration of our internet based more towards our FTTN network.
It is clear to us that our strategy of a four piece strategy of execution across brand distribution pricing and product is starting to work in the marketplace for the company as we begin to regain share the last half of the year in a number of key areas of the company and the market.
Turning to Page 34 and again, our imperative in investing in broadband networks and services as you know in 2009 we launched the new HSPA network, we continued our rollout of fiber to the node and announced in 2009 that we would deploy fiber to the condominium marketplace.
For 2010 this morning we're going to make a number of announcements as well on the area of Fiber-to-the Home for new neighborhoods and in aerial neighborhoods in Quebec I'll talk about in a moment as well as planned launch of IPTV for 2010.
Turning to Slide 35, given a little bit of an update on our fiber deployment strategies. At the end of this quarter, we will complete Toronto and Montreal from an FTTN perspective. At the end of the quarter, 1.8 million of our homes will have 25-Meg capability with VDSL2 deployed and all 1.8 million homes.
At the end of the year, 100% of our network will have VDSL2 cards available in all of our FTTN footprint. We will continue the execution of our MDU strategy of Fibre-to-the-Building over the next number of years, that by the end of 2012 about 1600 MDUs will have fiber.
We've also made a decision that all new neighborhoods in urban Markets and Ontario and Quebec in the future starting in the second half of 2010, we will build out executing on a fiber strategy, whether not aerial or in ground for new neighborhoods. Simply put, because we have the ditch to dug, we will put fiber in the ground versus copper to the home and that will begin in the second half of the year.
In addition, and looking at the unique layout of our network in the city of Quebec, we have made a decision that we will deploy Fiber-to-the Home using our aerial 85% aerial footprint we have there and 15% in the ground and you can see here on a slide that it costs us approximately $250 more to do that per home passed but when we account for the fact that we expect operating savings based on results from other carriers who deployed fiber, we frankly think the economics are very close now in terms of a footprint where you are 85% aerial and in such given the benefits of fiber we will execute that strategy as well.
So if you turn to Page 36, a little more color on the Quebec city decision versus deploying fiber to the node, because again we have a unique footprint there with 85% of the footprint aerial, quite frankly consistent with what Karen is doing at Bell Aliant where looking at their footprint they had a similar design that the costs quite frankly get very close between fiber to the node and Fiber-to-the Home, I think everyone would agree from an investment perspective then deploy Fiber-to-the Home and that's what we're going to begin to do so the Quebec city within three years will be 100% fiber market. We will also do all of this while executing our strategy of 16% capital intensity this year.
In addition turning to Page 37, as we will have deployed as we mentioned already VDSL2 for all of Toronto and Montreal and have built out our FTTN footprint for Toronto and Montreal we will begin launching IPTV services later this year.
We'll do that within our capital envelope of 16% as well. We selected Microsoft media room which is clearly become the standard in IPTV. We will avoid and I quote being on the bleeding edge of this technology, we are following companies who have launched this successfully in the U.S., and we think it's a complete compliment to our satellite business.
We have four times the market share outside the core downtown urban areas with our satellite service and if we're able to execute that same type of market share with IPTV, obviously the stickiness for other services and our enhanced relation with our customers and marketplace will only grow and given we have close to 2 million TV subscribers already, we can amortize some of the significant start up costs over the core TV business we already operate today.
Turning to Slide 38, it's important for investors to understand that we are executing our strategy of Fiber-to-the Home now in Quebec City. Fiber to the node continued to be rolled out and IPTV, all within the capital envelope of a 16% capital intensity and some people have wondered whether or not that intensity should be higher. Well I just wanted to clarify, you can see we are consistent with the other major carriers on a North American basis, where their guidance looks roughly 16% to 14.5% to 16% for 2010 and we're running their business close to the way we ran our business in 09.
I anticipate this year we get some help on the HSPA network and our capital intensity simply because we have an empty network that we've built out. Long term we expect the capital intensity of wireless to be 11% to 12% and obviously that's an X percent of our overall capital and the other part of that obviously from the Wireline side, there for it's higher than 16% so we end up at a number of 16.
So we're comfortable with that and 80% of our capital expenditures as last year are focused on our five strategic imperatives.
Turning to wireless on Page 40, wireless in 2009 was really a year of significant accomplishments, if you were positioning the company to compete strategically for a market share that's consistent with the other incumbents.
We now have we believe the leading wireless network not just in Canada but in the world. We believe from a distribution perspective at the consumer level given our acquisition of the source.
We have a handset line up that's competitive and second to none because we have both CDMA and HSPA and we think our new branding has been well received by the marketplace and we think in the flanker brand we're really well positioned because our acquisition of Virgin,
So 2010 of course is about executing against those strategic initiatives of 09. On Page 41 a few quick comments about our wireless trends. Net adds are up 6.3% in 09 but in the last half of the year, you'll see up 27%.
We only executed the launch of the new network for 60 of the 90 days in the third quarter, yet we had our best net adds in a long time and a record gross add. Our cost of acquisition being lower year-over-year is quite an accomplishment for our Management team given the launch of the smartphones that we launched on the HSPA network and as you can see the continued focus on cost discipline, we were able to actually in a year that was very tough from an ARPU perspective have our EBITDA to service revenue margin actually slightly increased.
So turning to 2010, our goal really from a market share perspective is quite simple. We want to achieve a third of the net adds in the post paid market relative to the incumbent competitors. We've begun to make traction on that in the third quarter. There's no way to know how we've done in the fourth quarter to our competitors report but certainly we're pleased with our fourth quarter results and it begun to rollout towards that market share and the new source stores with Bell product with the removal of Rogers as of the end of December.
One of the really exciting parts and yes costly at the same time parts for us is the incredible growth we're seeing in wireless data. We exited the year with 18% of our ARPU on the data side, Siim had mentioned 32% growth year-over-year. Interesting stat, we think HSPA Plus gives us an opportunity to start to attract higher ARPU clients.
Our ARPU of our first clients on our HSPA network in the first month was North of $90 so we know we're attracting the right client base to that new network and of course, we're seeing the other growth, the usage of the internet with the internet sticks and I think the really important thing for our investors which we are obviously following and executing on is making sure that it's a usage driven model and that's the model that we're pursuing and at this point the model that the Canadian market is pursuing and that's important to make sure we monetize this significant opportunity for our investors and at the same time for our customers from a great service perspective.
Turning to Page 44, a number of priorities I'm just going to talk to the competition one, to the far right on your slides really just talking about the new entrants. Our focus is really four areas of competitive advantage. The fastest network in Canada with the largest footprint, our ability to bundle services as required, competing on innovation, distribution, brand and a handset line up second to none and we will use our flanker brands when required to compete on price in the marketplace and we'll react obviously competitively to the market to make sure our flanker brands maintain their market share as required to compete with new entrants.
Turning to Slide 46, an important part for value creation is our management of our NAS erosion. We are obviously very pleased to see that our residential line loss continued to reduce year-over-year for the ninth consecutive quarter and on a year-over-year basis you can see here as well.
We would like to see that to continue at a minimum stabilize. I know a number of the analysts expect that number to accelerate this year. That is not our plan. Our plan is to try to stabilize or continue to see it to improve. Where we would like to see a turnaround and expect it as Siim said in the second half of the year is a reduction on the NAS losses on the business side as we look to the economy to improve and see some growth we would hope in the second half of the year in the SMB market, where quite frankly as I think I've said every quarter has been very soft particularly in the Ontario marketplace.
Turning to Slide 47, quite frankly we just like to replay in 2010 of our 2009 TV results. We had a tremendous year on every metric, ARPU increasing EBITDA increasing market share of this growth with our net adds of 113,000 versus 30 last year, new distribution from The Source from our strategic relationship it would tell us and with a continued focus on our HD leadership in Canada and then complimenting that later on this year with those distribution channels in various markets in Toronto and Montreal beginning to have the ability to also sell IPTV in the marketplace.
Turning to Slide 48, I think everyone knows it's been a tough market for the business market and it has certainly for us as well this year, particularly from a revenue perspective. I thought investors would find it interesting to note though our significant cost reductions have really helped here is in fact our EBITDA margins grew 3% during the year, we reduced our CapEx in that business and so have been able to maintain actual EBITDA growth even with the revenue pressure through significant cost alignments such as the consolidation of Bell West, SMB and Enterprise under one leadership team and one integrated operation as the mid point this year. From a competitive perspective we did see here in 2009 but we did not lose any major contracts.
We expect 2010 to have if you will a reduction in competitive intensity in this area where we've seen one of our competitors sell their professional services business recently. Our focus of course will be to continue to be profitable and hopefully if there's some again, some improvement in the economy capture, our continued leading share in this segment of the telecom marketplace.
Turning to Slide 50, a couple quick comments on service. We had a, tremendous year on service improvement. The launch of same day next day of all three of our home products where 90% of the homes have seen same day next day service completion has driven a significant reduction in our cost while we've been able to improve service.
Calls handled by residential business this year were down 16%. Our satisfaction of our customers were up to 82% and so what we were really in summary able too do was reduce cost and improve service dramatically at the same time.
That investment will continue in 2010 on Page 51 where we will invest $140 million in new technologies to continue our journey on improvement of service. Our same day next day repair service now offers intervals as well. We reached a number of labor agreements in 2009 to give us labor stability going into 2010 and 11 and on the home consumer side, continuing to focus our call center more and more around the house than around the product portfolio and again working through technology to streamline our call routing to reduce even further the call volumes that we handle while at the same time improving our service level and we're clearly beginning to see the impact of this in our reduction of churn and our internet business and our satisfaction of our client base in the market and we believe we have an in home installation service second to none now in the telecom industry and all of the markets we compete in.
You'll begin to see us talking a little bit about our new service journey in the coming months just to start to build some brand equity back in our ability to deliver service to the marketplace, something quite frankly we suffered on not long ago.
And finally but clearly not least important, our continued focus on competitive cost structure and managing our costs. Turning to Page 54, you can see here that our workforce was reduced 5800 people since the introduction of the hundred day plan in June of 2008.
We have now reduced our management count 22%, the initial hundred day plan as you may recall was 15%. In the Fourth Quarter, we reduced our workforce an additional 830 people and in the second half of the year implemented a 5% Management reduction program that has now been completed and so some of these reductions in labor in the last half of the year obviously flow through to year-over-year expense savings for the entire year in 2010.
We also will continue to aggressively manage our outsourced contracts down, manage our fixed versus variable cost through a focus on variable pay performance and not if you will as people leave the organizations for different reasons of making sure we're holding our headcount as stable as we can without rehiring resources.
We've also de risked our overall operation where we now have over $300 million of compensation at risk in the company so that has dramatically changed the culture of the company and also provided obviously significant flexibility because if we don't perform then those type of expenses aren't being spent.
Page 55, continue that work in 2010, particularly in the area of our vendors that Siim had talked about. We anticipate a total savings of $50 to $60 million in 2010 simply from our IT outsourced contract negotiations we've done over the last few years with all of our vendors.
We will benefit from the Ontario sales tax harmonization. We will benefit from the reduction in labor because of the reduction in our overall staffing in the second half of 2009. We benefit from a lower capital tax rate and we benefit from improved currency and quite frankly just a culture at Bell now that's about lowering cost on a continual basis.
In Summary, I am quite frankly really pleased with our fourth quarter and our year. We met all of our financial guidance. The EBITDA growth of our Wireline business I think stands out as second to none in North America.
We are making the appropriate investments and beginning to see the benefits of those investments in RGU growth and today are deploying additional strategies around Fiber-to-the Home for Quebec city. With the deployment of our VDSL 2, the decision to launch IPTV and continuing investment in our HSPA plus network.
Our capital market strategy will continue to be executed in 2010. Our guidance indicates we're at the low end of our pay out ratio and that's important because it gives us obviously future flexibility for dividend increases which is consistent with our strategy and the ability to generate over $2 billion of cash flow, giving us a dividend coverage of 1.6, highest among North American telcos we think in attracting the yield is the yield that the stock is offering in the marketplace is about management executing against that strategy in 2010 and we'll leave the market to decide where the stock should be after that. With that thanks very much.
Thanks, George. Before I hand it over to Ann to begin the Q&A session I would ask the participants limit themselves to one question and one brief follow-up so we can get to everybody on the queue.
And with any time remaining, we'll then circle back for another round and it goes without saying I'm available for any clarifications, follow-ups or questions we don't get to in the call. So with that, Ann can you please explain the instructions? We're ready to start.
Certainly, thank you. (Operator Instructions) Our first question is from Greg MacDonald from the National Bank Financial. Please go ahead.
Greg MacDonald - National Bank Financial
Higher level capital structure question what's different about BCE to a certain extent is that you don't have a lot actually quite marginal debt maturities in the next few years, you have just shy of $700 million of cash on the balance sheet right now, free cash flow 2 to 2.2 net of dividends and buybacks, you'll produce probably a couple hundred million maybe as high as $400 million suggesting kind of $1 billion in cash at the end of 2010.
20 million share buyback looks like there could be some upside. Is that still an option in the second half of the year if things turn out to be the high end of that range or is there another reason to stockpile cash? Thanks.
Yeah, Greg, we are forecasting that we will finish 2010 with a cash balance in the range of $500 to $600 so your number of $1 billion is on the high side. One of the things you may recall is that we have a debt maturity in 2010 in the amount of $600 million that needs to be funded.
That might be one of the differences or sorry, $400 million, that might be the difference to reconcile with your numbers but we're happy to work with you on that, so with regard to the share buyback that we announced, our intention is to execute that evenly over the course of 2010 and as I said in my remarks we'll continue to evaluate the performance of our business, how our cash surplus cash position builds throughout the course of the year and where our credit metrics are and we'll make further decisions on the use of that surplus cash as it builds.
Greg MacDonald - National Bank Financial
Thanks, and a quick follow on I guess I got the answer you plan to pay down the maturities in 2010 and so I would ask the question on top of that, where are you guys thinking about in terms of your targeted leverage ratios, particularly given how attractive the market is right now. I might suggest that there's an opportunity here, a quite unique opportunity to refinance. Is that something you're considering, if that's the case does it change your answer?
Well, yeah, Greg, we're always looking for interesting refinancing opportunities in the marketplace and we took advantage of an attractive market last year when we raised the $1 billion of debt that we did, so we're using that debt that we raised towards debt reduction, we repaid $600 million of one series of debt in 2009 from those proceeds so I said the remaining $400 million will be repaid in 2010.
That refinancing saved us approximately $25 million of interest expense annually going forward. As we look at the markets today and what the breakage costs would be with other debts, we don't see particular opportunities today to do further debt re-financings but once we will continue to monitor that, to your question on at what point are we comfortable with the credit metrics and capital structure of the company, I think we're kind of there.
Once we pay off this remaining $400 million, our credit ratios are very comfortably at the higher end of our policy is where we want to be. As you commented our debt maturities are way out in the future so I think it really puts us into a strong position to execute when it comes to surplus cash more in line with our capital markets objectives to return cash to shareholders.
Thank you. Our next question is from Simon Flannery of Morgan Stanley. Please go ahead.
Simon Flannery - Morgan Stanley
Thanks very much, good morning. You've had about a month when there was wind in the market. Perhaps you could obviously put some of the implications there in your guidance. Could you talk a little bit about where you think the pressure will be in 2010? Is it more prepaid than post paid, the extent is wireless substitution on the land line versus the wireless share loss and any ARPU impact, what are your early thoughts on the impact on wind and the likely other competitors over the rest of the year? Thanks.
Well I think as we think through the question and it's obviously an important one and one that we're going to have to gauge as we see in the marketplace, our strategy as I mentioned is pretty clear and that is the new network we have, the advantages we have, the distribution we've put in place, the new branding, all of those elements are there and the acquisition of Virgin were driven the Virgin particularly by the anticipation of the new entrance and making sure we had a new strong flanker brand to compete.
Clearly a new entrance sets the floor on pricing generally based on what they're all saying so the ceiling is a gap between their product price and what our top products can charge well and then our flanker brands can compete head-to-head and we're just going to have to monitor it.
At this Pont it's having literally no impact at all but there are a number of new players coming and in Quebec one of our significant competitors, so we'll have some implication for sure for us in the market and that's reflected obviously in our guidance and we're certainly very happy we've got our new network launched and out prior to the first quarter which had been our initial plan and we've begun as I've said on the distribution side with the new channels that we've put in place, so that point it's going to be straight on competition and we're ready to compete at every level and that's why we've got the different products and portfolios we have.
Simon Flannery - Morgan Stanley
And any early lead on The Source as part of that strategy?
The Source we were not allowed to go in with Bell product until January and so the rollout every night we do 20 to 30 stores, I think we're close to 350 to 400 stores as we ended January.
Training the people, we've now just announced Virgin with HSPA and Virgin’s now in the stores and we would anticipate a momentum on The Source building into March and start to see some of the sales from that that used to go to our competitor going our way and we're already seeing early positive results.
Thank you. Our next question is from Vince Valentini of TD Newcrest. Please go ahead.
Vince Valentini - TD Newcrest
Yeah, thanks very much. The question is on the smartphone subsidy. I was very surprised to see your COA down 6% in the fourth quarter and wondering also if you can flush out what retention costs may have been, I didn't see that in the note yet and looking forward into next year, was there anything unusual in Q4? Did you have some tremendous procurement savings or other savings to your distribution chain that came into offset the initial costs of the iPhone and the other expense of smartphones because every other carrier we've seen launch it had sort of a wave of people upgrading to the device that costs money and then obviously a surge of new customers taking it. It's a nice problem to have given the lifetime economics but still it creates a bit of a near term depression on margins that doesn't seem to be impacting your numbers in Q4 or your guidance for 2010 so just wondering if you can talk about that a bit.
First of all not to highlight a negative but we didn't have EBITDA growth in wireless this quarter, so clearly that's part of what's driving it. A couple things happened on COA and it's a good question.
Our gross adds were the strongest we have ever had and of course you amortize your advertising expense over your gross adds and so that's helped us even though I think people would say we've certainly seen the campaign knows we're pretty aggressive in spending advertising dollars, or amortizing over a gross add number that quite frankly we were thrilled to achieve helped us out.
Secondly, we did and it's a good question, Vince, we did over the year enter into some new agreements on the distribution side with some of our key channels to lower our cost of commissions and so that's in there and that will be for us that's a continuing new agreement for us and so that was helpful as well, and then it is important, there was only two of the three months that we had the new network up and so I don't think we've discovered some magic bullet to this issue for sure and so that's part of it and we don't really report our upgrade cost but there's no doubt they're increasing and that is what the pressure you see on the EBITDA that's there.
Our expectation in 2010 is to really aggressively continue to manage our costs in the ILEC to give us the flexibility to drive the market share we're looking to achieve on wireless and as Siim said the 2% to 4% guidance left us if you will wiggle room there in terms of the amount of gross adds we may do as a result of the new network.
Vince, I'd just add that the big benefit that we got was the Part II tax savings that helped offset the increased subscriber acquisition cost, the additional spending on the Olympics, the higher pension and the higher FX in the quarter.
That wouldn't obviously be in our wireless EBITDA.
Wouldn't be in the metrics.
Thank you? Our next question is from Bob Beck of CIBC. Please go ahead.
Bob Beck - CIBC
George, could you please talk a bit more about the decision to do the Fiber-to-the Home in Quebec? Obviously, the aerial construction is an opportunity there. How much of this is geared toward your expectations for competing in that market for a quad play fairly soon and related to that are there any other larger markets in your footprint that would have a similar or at least advantageous aerial construction makeup?
I'm glad you asked actually. We looked at this for quite a while. Quebec City we had actually just started to do fiber to the node and we've got to relook at this because of this 85%, 15 issue. And when we ran the numbers and believe me we ran them over and over for obvious reason, the CapEx is higher and it's on Page 35 to do a new neighborhood Fiber-to-the-Home with aerial versus the fiber to the node of existing neighborhoods to the tune of a couple hundred dollars, $250 per home past.
The issue is there is an operating savings that we will benefit from through doing the entire city, Fiber-to-the Home. By the it won't just be home but all of business as well that we will do so the entire city is done and once we've done that city we believe based on our discussion with other companies have done fiber there's an OpEx savings that can be as high as $80 to $100 a year per household that you have as a subscriber and so you have to present value that that back again so then you say okay now you're at this choice and one is Fiber-to-the Home and one is fiber to the node and any small assumption of any type of improvement in market share or ARPU swings the business case because of the 85% aerial to doing the Fiber-to-the Home and that's why we've done that and then your second question, there are other areas, principally in Quebec that have the same type of footprint and rather than disclose that today for competitive reasons we really would like to see the Quebec rollout learn, we'll follow what Karen is doing at Bell Aliant where she has a similar type of 85%, 15% footprint and use some of those early results to look at other areas in the province of Quebec where quite frankly it is more aerial than anywhere else we have footprint.
Bob Beck - CIBC
Thanks and notwithstanding the aerial makeup and your comments about your CapEx spending relative to your North American Telco peers, any thoughts? You've got tons of cash, the balance sheet is in great shape, is there any thoughts to accelerating CapEx just for the prospect even know withstanding Fiber-to-the Home but even further on the fiber to the node?
Well at the moment, the pace that we're going at is frankly, we've accelerated the pace on all areas. You can tell with IPTV, there's some additional operating cost to launch that business and our sense is success of RGUs can obviously breed a different discussion with our shareholders and investment community but right now we're pretty comfortable that 16 is where we want the discipline and the target and the company and frankly we benchmark still a little high to other carriers on a global basis. There are carriers in Europe as people on this line will know we're running 12%, 13%, 14% now there are differences, clearly in every market and so at this point we find it hard to justify spending more than the 16 and it's what we can execute successfully on as well given the resources we have in the company and that's an important new discipline that we've tried to bring to the organization and of course obviously surplus cash as we're going to constantly look at uses of that cash with a key strategy obviously to making sure we can grow our dividend model.
Thank you. Our next question is from Phillip Huang of UBS Securities. Please go ahead.
Phillip Huang - UBS Securities
Great. Thanks very much. Just wanted to make sure I understand your thoughts on the dividend. I know it's still early in the year but given your strong EPS guidance the payout looks quite conservative.
Is it fair to assume that you will not rule out a dividend increase in the second half if everything goes according to plan and maybe you can identify some of the major items that you need to have greater visibility on before making that decision.
We won't rule it in or rule it out. We're just going to operate the company with the strategy of a dividend growth model that keeps us within our EPS results and so obviously one way or another our earnings were better than we had anticipated it would be inconsistent to not consider that.
Likewise if we're in our pay out range it would be inconsistent to consider increasing it, and so we've got to see the year unfold and hopefully people have seen over the last year and a half we are committed provided we are executing real growth, that means real EBITDA and real cash flow growth and executing all these fiber strategies first and foremost to then return money to shareholders as we can in a prudent and timely way.
Phillip Huang - UBS Securities
Got it and maybe just a quick follow-up on the residential line erosion. Heard you say accelerate this year in Q4, was just wondering if you could give us a sense how much of the erosion this quarter or in 2009 is related to wireless substitution and what your view on or assumption on wireless substitution?
We're about 10% on wireless substitution is what we see in the market today in Canada, our acceleration as you use the term and NAS erosion has not been our retail franchise. What has accelerated is wholesale NAS additions for us, have just basically dried up in the economy, so we were actually having some if you will NAS adds through wholesalers that just aren't happening now and so our consumer product division, we call BRF, actually had its ninth quarter of improving NAS.
So where we actually need to see some turnaround from our perspective in 2010 is in the business side and I've mentioned on every call that until we see some economic growth in the small medium business that has an impact on our NAS, because organizations just aren't adding offices, resources, etc. and so we basically said here today that we would like to see and I think Kevin who is our President was on the line he wants to see an improvement year-over-year.
We would like to see it stable given the uncertain surroundings around the substitution that everyone keeps talking about and we're obviously a large NAS service provider so if that does accelerate we would be impacted and that's why we would like to see that line be stable on the consumer side.
Thank you. Our next question is from Dvai Ghose of Genuity Capital Markets.
Dvai Ghose - Genuity Capital Markets
Good morning its Dvai Ghose I just want to revisit Vince's question on HSPA sales in the quarter because I'm seeing contradictory data and I'm very confused as to how many HSPA devises you actually sold.
On the one hand as you said you had good gross in net adds and equipment sales are up 43% all suggesting you did pretty well. On the other hand I assume HSPA is focused on smartphones and post paid so if 43% of gross adds are prepaid and 33% of the net which is pretty much as it was a year ago.
Your COA is down and I believe that your COR from your IRP was about 4.5% of network revenue in the quarter versus 10% to 12% for peers and also on the subside you did write off 37,000 subscribers which may have artificially boosted the subscriber growth in the quarter so I'm very confused and was wondering if you could clarify the issue by telling us how many HSPA devises you sold in the quarter.
First of all I'm sorry you're confused but let me try to clarify it for you. The sub write off had nothing to do at all with the results, didn't artificially inflate anything those are prior period. We went right across all of the organization and you'll see other areas too where we did the same thing opening sub adjustments for stuff from previous years with just a consistent scrub through our controllers office to get every one of the measurements consistent across all the BDUs so it had no impact whatsoever on our fourth quarter results.
I'm not going to disclose our HSPA sales because no one would like to know more than our competitors. All I can tell you is for our gross adds to be up as we said year-over-year to the number that we're focusing on, really happy so I don't know why there would be confusion.
The confusion might be our COAs lower because our handset prices are higher than our competitors and that could be part of it as we're now actually if you look at BlackBerry pricing we have the highest BlackBerry pricing in the market yet we were able to grow our gross sales, I indicated that we re-executed our distribution contract with one of our core channels which lowered our COA and so by large, we are absolutely ecstatic with the quarter from a wireless perspective with the 60 days of the 90 taking place, so and obviously, the higher COA and gross adds flow through and impacted our EBITDA an on COM, it is up.
There's no doubt. We're not disclosing it but there's no doubt that our cost of upgrades went uptick largely with the iPhone where we've had people who have access to that unit now and we would rather have them move to us obviously than move the competitor.
And Dvai while we do not disclose the number of smartphone activations, we did, I did say in my comments that we had a 67% year-over-year increase in smartphone subscribers in the fourth quarter so I think that's pretty indicative of the kind of mix we had in our activations in Q4.
I think maybe that Dvai, helped on the wireless for the first time in a while we saw a little bit of network service revenue increase and that's been pretty tough to come by with the decline in ARPU, so maybe that's the difference.
Dvai Ghose - Genuity Capital Markets
Just a quick follow-up to Siim. You mentioned also on a consolidated basis how the impact of the subsidy is offset by the Part II fee rebate it expresses you as George pointed out to a different line item but when consolidated offset. Can you qualify that as well? You said 40 million on a previous call but based on your earlier comments it seems less.
Yeah, the total amount of Part II fee recovery was $54 million of which $40 million related to past period because this was a settlement in respect of the prior three regulatory periods.
Thank you. Our next question is from Glen Campbell of Merrill Lynch. Please go ahead.
Glen Campbell - Merrill Lynch
Yes, thanks very much. A question on pensions, Siim, you gave helpful information on the balance at the end of the year and outlook for 2010. I was wondering if you could give us a sense of what the solvency deficit would be excluding the impact of smoothing and if there's no change in assumptions and if the plan delivers what it's supposed to this year, in line with assumptions, what would funding be like over the next couple of years? How much would it rise from the 2010 level? Where would it peak, and so on? Thanks.
Yeah, so on an unsmoothed basis as I said, the deficit is $1.2, $1.3 billion. We haven't finalized the valuation. On a market value or unsmooth basis, that would increase by close to a further $1 billion.
Now, under the new pension reform measures that came into effect, what they did was eliminate the use of smoothing or that market related value methodology, but they replaced it with a calculation that enables us to use a three year average of solvency ratios in calculating pension funding and in addition, they allowed that past deficits will effectively get a fresh start for purposes of the five year funding rule, so what we do now is take the remaining old deficit at the end of a particular year and rather than amortizing that straight line over the next four years, you add to it or deduct to it in the following year what the incremental change in deficit is and then that new deficit, you get a fresh start in amortizing it over five years, so that actually gives us a benefit in our pension funding and with that, we would expect that our level of pension funding, although highly dependent on what asset returns are and what interest rates, if those sort of stay within the range that we're in, we could see a modest increase in pension funding going forward for the next couple of years but nothing of substance if you go from the $500 to the $600 million level.
Glen Campbell - Merrill Lynch
And I guess a way to think about that is all things being equal to present value of that funding would equal say roughly $2.2 billion that you outlined?
It would be under the new rules it would be less.
Glen Campbell - Merrill Lynch
Okay and then just a quick follow up. You talked about some benefits by changing the entitlements of retirees, getting rid of the post retirement benefits and so on and the changeover to defined contribution. If we look out two or three years what sort of savings on annual operating expenses could we expect from that?
Yeah, the biggest one is the change in post retirement benefits that begins in 2011. I think that sort of gets fully phased in by around 2012, 13 and if I recall correctly, that should add something in the range of $5 to $7 million of EBITDA pick upper year for us.
Glen Campbell - Merrill Lynch
Okay, so not a big number. Thanks very much.
And the only last thing that I think is important to Siim's point, the discount rate had such an impact, if we do see an increase in interest rates as Siim said I think a 1% change where you don't have any? Any deficit funding so that's how significant that is.
Just to give you an indication, if you go back only a few years, we were using a pension discount, a solvency discount rate of 5.5%. In 2008, that had gone down to 4.85%. In 2009, we're going to have to use a rate of 4.5%, so we're at very, very historic low levels of discount rate and if we over the next few years manage to get anywhere back up to the 5.5% range our deficit would be eliminated.
Thank you. Our next question is from Maher Yaghi of Desjardins Securities.
Maher Yaghi - Desjardins Securities
Yes, good morning this is Maher Yaghi. Just have a question on your top line revenue growth forecast for 2010. Can you strip out any of the acquisition numbers in there and give us maybe what is your expected organic growth on the top line?
We've acquired The Source in the middle of 2009. I indicated that for the first two quarters of 2010, we will get some benefit from incremental pick up in revenues from The Source. There's not a lot of contribution if any that that delivers to EBITDA and certainly none to our earnings but when you look at The Source’s performance quarter by quarter, their year being in the retail business is really all about the fourth quarter and as we've put our 2010 plan just like all our other business units, The Source’s now integrated and consolidated into those results so we're just providing our overall revenue guidance of 1% to 2%.
The only other thing I'll add and Siim said at the beginning and it's on Page 7, there's two core areas of revenue growth that we're looking, obviously one we get the benefit you've raised which is The Source and the other is with the improvement in post paid momentum in our wireless business in the last half of the year and again an outlook that would say we don't expect ARPU to continue to decline at the rate it did from 09 versus 08 and 09 to 10, those are the two key areas of revenue growth we're looking for.
Yeah, and what you'll see each quarter as we customarily do in our reporting is our service revenues which is really the contributor, the real contributor to the profitability of the business and those service revenues do not include any source in it.
Maher Yaghi - Desjardins Securities
Okay, great and just a follow up question on maybe if I can ask you guys about your views and how BCE approaches potential change in ownership rule in the telecommunication sector in Canada, if that were to happen as some suggest as early as a step wise manner, how do you expect BCE to benefit from that change?
Well, I think rather than speculate on that, but in the industry as many years as I have, if the government looks at a review of foreign ownership rules then obviously we would be a key participate or in that process and at the end of the day we would just have to respond to what the government made a decision on and increase in foreign ownership, theories would say it will bunch up access to more capital and I would say that Bell doesn't suffer from access to capital, so we would just have to follow that development to be as transparent as I can be.
Maher Yaghi - Desjardins Securities
Would you change your capital allocation in case the foreign ownership rule is open only to new incumbents, new entries in the wireless sector and would that impact how you plan to spend your capital into deploying FTTH and other wireless ventures?
Well as I said, it's such first of all I can't imagine but that would be a very, very poor decision by a regulator to do that, it would be not in the interest of any of the major Canadian companies and employ the majority of the people in the industry if they were to have two sets of rules is what you're implying and then secondly we have to react accordingly but my instincts are strategy wouldn't change at all but that's an instinct to your question. We would have to think about it.
Ann as we're running out of time this will be our last question.
Thank you. Our last question is from Peter Rhamey of BMO Capital Markets.
Peter Rhamey - BMO Capital Markets
Hi good morning. Thanks for taking the question that got in under the wire two questions if I can since it's the last question. George, maybe I was hoping you could address the whole issue of pricing power in the market.
I think we're hearing from other carriers that the ability to increase prices has been somewhat reduced and so people are treading lightly yet you've got upgrades in terms of services in IPTV of course into richer packages and on high speed internet speed packages into higher speeds so I was hoping you might be able to give us some additional color in the Bell territory, both in Quebec and Ontario and what you're seeing there and what are your prospects and what are you assuming on the second half of 2010 in terms of any improvement, thank you.
Well the thing we're seeing is people using more of our services is what's driving the increase in household ARPU for our consumer business. The migration of people to our higher speed FTTN products drives higher ARPU because people are using the service obviously more and more and our usage based billing model is starting to generate some revenue for us as well so it's not necessarily price increases so much as it also is people using a services more and then generating more revenue.
Best example that's probably our TV product. We've had a $10 increase in revenue per customer in the last two years. We've not had a $10 ARPU price increase over that period, so it is certainly that's what we're seeing driving the revenue for the Company on some of the improvement in our household ARPU.
On top of that depending on each of the markets on a competitive perspective we have in some cases been able to pass price increases through in the marketplace and it's a function of whether or not the market absorbs them and if we go too far then we have to adjust accordingly and some of those price increases that we do happen on an annual basis and some happen in January on some of our products in the area of our internet and some of our phone services and likewise some of our competitors I guess I have done some different things.
But yeah, you've got to be, it is so competitive, it's really about getting your customers using the services to drive the incremental revenue.
Peter Rhamey - BMO Capital Markets
Great, thank you and just more of a factual question here for Siim, on the tax rate 22% statutory in 2010 is your call. What would it be if Bell Aliant was fully taxed because I'm looking to transition in 2011 and trying to model out effective tax rates in that year, thank you.
Do we have it or could we get it fir Peter?
We can get that for you. It would be closer to the statutory tax rate adjusted for approximately $0.20 of EPS upside from one-time tax adjustments that we're expecting in 2010.
Peter Rhamey - BMO Capital Markets
Great. I'll get the details off line, thank you.
Thanks for your time everyone time and it was a long call but I appreciate everyone listening in.
Thank you. The conference has now ended. Please disconnect your lines at this time.
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