1 November 2011 www.mtsallstream.com
2 Safe harbour notice This presentation contains certain forward-looking information. Material factors or assumptions were applied in drawing conclusions or making a forecast or projection reflected in such forward information. Actual results may differ materially from a conclusion, forecast or projection in such forward-looking information. Additional information about such material factors and assumptions can be found in MTS filings with the Canadian securities regulatory authorities. Except as required by law, MTS disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
MTS Allstream is a leading telecommunications provider in Canada. 3 MTS Wireless High-speed Internet IPTV Allstream Converged IP Unified communications, security and monitoring Local access Long distance and legacy data Converged IP Unified communications and security Local access Long distance and legacy data
4 2011 strategic priorities Be the Manitoba leader in home service through unique bundle offerings Drive growth in high-margin, on-net IP-based services to improve profitability Deliver superior customer service, while aggressively improving our cost structure to produce strong cash flows in support of our dividend policy.
5
MTS: The market leader in Manitoba 6 MTS is positioned for market leadership for years to come. MTS revenue grew 0.7% in Q3 2011 over Q3 2010 Wireless up 7.3%, driven by 47.8% data revenue growth High-speed Internet up 8.3% IPTV up 19.9% MTS revenue mix Q3 2011 All other revenues 13% Wireless revenues represent 37% of MTS revenues for the first nine months of 2011. Local access 28% Broadband and converged IP 21%
MTS: The market leader in Manitoba 7 MTS is the only provider in Manitoba able to offer a wireless bundle or a four-service bundle. INNOVATIVE SERVICE BUNDLES Customers on a bundle generate higher average revenue per user ( ARPU ) and are less likely to switch to a competitors services. + + + + MTS is investing in fibre to the home; 25 new communities will have FTTH by 2013. Deep fibre penetration allows us to provide innovative services and enhances our bundle offering.
MTS: The market leader in Manitoba 8 MTS has the best wireless coverage in Manitoba through Wi-Fi, 4G and CDMA-EVDO networks. 4G & LTE wireless networks Wireless high-speed data coverage is now available to 97% of Manitobans, up from 72% with EVDO Deploying LTE technology in Winnipeg and Brandon in 2012 Over 185 MTS Wi-Fi hotspots across Manitoba available to wireless and Internet subscribers Strong demand for high-speed wireless data continued in Q3 2011, up 47.8% over Q3 2010. Delivers wireless high-speed data to 97% of Manitoba s population
MTS: The market leader in Manitoba 9 MTS is leveraging its competitive advantages to maintain strong market share across all segments and grow wireless, high-speed Internet and IPTV revenues. Strong market share in Manitoba Wireline Wireless 77% Internet 57% MTS s competitive advantages Top brand recognition Strong, exclusive distributers Product leadership Unmatched bundles Internet 57% IPTV 1 33% These competitive advantages create customer value and loyalty which contribute to strong results. 1 Greater Winnipeg market
10
Allstream: Driving growth in IP 11 Allstream is focused on high-margin IP revenues to increase profitability and seize the opportunity in this growing market. We are managing Allstream s revenue mix to shift our focus to high-margin IP revenues and exit low-margin lines of business. Allstream revenue trends 800 Local Access Converged IP Legacy & Other In Q3 2011, IP revenue grew 9.8% over Q3 2010 and IP-based services generated 30% of Allstream revenues. 600 400 200 0 2010 2011E 2012E 2013E 2014E 2015E With an average 9% market share, Allstream has lots of room to grow and is not impacted by market variations like the incumbents.
Allstream: Driving growth in IP 12 At Allstream, we have made decisions to improve revenue mix and grow EBITDA. IP is Allstream s highest-margin product with average gross margin of over 73%. Allstream gross margin increased 2.6 pts from YTD 2010 to YTD 2011. YTD 2011 56.9% Allstream s overall gross margin increased from 54.3% YTD 2010 to 56.9% YTD 2011, due to positive changes in revenue mix. COGS YTD 2010 Gross Margin 54.3% COGS Gross Margin *YTD is for the nine months ended September 30 th. Consult our Q3 2011 Supplementary Information Package for more information.
Allstream: Driving growth in IP 13 Allstream is focused on driving IP revenue growth, delivering stronger margins by expanding the on-net footprint, and managing legacy services for profitability. Circuits added in 2010 100% In 2010, 61% of new IP circuits were on-net. 80% 60% 39% Off-Net On-Net Sales levels remain strong; no impact from a declining economy 40% 20% 0% 61% In Q3 2011, over 55% of new IP circuits sold were on-net, a threefold increase over the proportion of on-net circuits in the base. IP gross margins are expected to gradually increase over time as the proportion of on-net circuits to off-net circuits grows.
Allstream: Driving growth in IP 14 In Q3 2011, Allstream connected 102 buildings to its network as part of targeted, success-based investment programs. Allstream s fibre network spans 30,000 km across Canada Connected fibre-fed buildings Allstream has fibre penetration in the four major urban business centres in Canada 2,022 2,089 2,164 2,211 2,313 IP margins are higher when traffic is on our network Q3-10 Q4-10 Q1-11 Q2-11 Q3-11
Allstream: Driving growth in IP 15 Allstream is managing legacy services for profitability and reinvesting these cash flows in IP services. Q3 2011 2010 2013 40% 26% 34% 30% 26% 40% 11% 24% 10% 11% 25% 23% Converged IP Local Access UC & Security LD & Legacy Data & Other IP revenues are expected to represent nearly 40% of Allstream s revenue mix by 2013.
Consolidated financial results 16
MTS Allstream: Strong foundation, strong future 17 MTS Allstream expects to meet its updated financial guidance for all metrics in 2011. 2011 financial outlook Revenues EBITDA Updated August 4, 2011 $1.700 B to $1.780 B $580 M to $610 M Original December 15, 2010 $1.665 B to $1.765 B $550 M to $590 M Earnings per share $2.40 to $2.80 $2.00 to $2.45 Capital expenditures Free cash flow Consolidated, in accordance with IFRS No change No change 16% to 18% of revenues $110 M to $150 M
MTS Allstream: Strong foundation, strong future 18 Our strategy is working, as proven by positive trends on all key financial metrics for the first nine months of the year. (in millions $, except EPS and capital intensity) YTD 2011 YTD 2010 % change Revenue 1,326.2 1,335.9 (0.7) EBITDA 447.5 429.3 4.2 EPS* $1.99 $1.72 15.7 Free cash flow* 111.5 98.2 13.5 Capital intensity* 15.3% 17.4% (2.1) pts Consolidated, in accordance with IFRS *EPS, free cash flow and capital intensity for the first nine months of 2011 were positively impacted by a one-time $20 million SR&ED investment tax credit received in Q2 2011.
MTS Allstream: Strong foundation, strong future 19 Consolidated free cash flow is expected to improve significantly in 2011 over the prior year. Reduced Capital Spending Reduced Restructuring Costs Reduced Pension Solvency Payments $110-$150M $34.1 M Increased EBITDA 2010 Free Cash Flow 2011 Free Cash Flow YTD results are on target to support our dividend and achieve 2011 free cash flow guidance. Contributing to the expected positive free cash flow in the fourth quarter of 2011 are substantial reductions in HSPA capital spending, pension solvency funding, and restructuring costs that were incurred in the fourth quarter of 2010.
MTS Allstream: Strong foundation, strong future 20 MTS Allstream delivers solid financial performance. Investment-grade debt ratings BBB/Stable for both DBRS and S&P We successfully issued $200 million of 7-year 4.59% medium term notes maturing on October 1, 2018. Net proceeds were used to refinance the Company s September 27, 2011 maturity. Stable consolidated EBITDA margins reflect prudent cost management and are expected to continue in 2011 $310 million tax asset means no cash tax payments until 2019 Stable EBITDA margins 33% 29% 32% 34% 2008* 2009* *Estimated, in accordance with IFRS 2010 YTD 2011
MTS Allstream: Strong foundation, strong future 21 The Company evaluates the funding of pension plans on annually based on the results of the actuarial valuations as well as corporate and economic forecasts Pension Deficit $400 Increasing pension deficits is an issue impacting all employers with defined benefit pension plans. MTS Dec 31, 2010 Annual Report: $226 million MTS Sept 30, 2011 Estimate: $315 million $300 $200 $100 $- Jan 1, 2011 Sept 1, 2011 Annual funding is determined by the solvency test: 2011 funding is approximately $5 million per month 2012 funding expected to be 20% to 30% higher Pension solvency funding rules allow funding with Letters of Credit (LOCs) which were used for the majority of 2011 funding ($25 million paid in cash) and are available for 2012 should we choose to do so. The Company s unique tax asset has made LOCs the preferred method for funding the pension plans in the short term. The Company does have the capacity to prepay, similar to the actions taken by our peers which could serve to reduce or eliminate annual solvency funding requirements in the longterm.
MTS Allstream: Strong foundation, strong future 22 The Company has demonstrated stability over time based on strong fundamentals, regional market strengths and strong financial metrics in support of the dividend. Strong performance for the first nine months of the year MTS delivers 2.2% year-over-year revenue growth Allstream delivers 9.4% year-over-year converged IP revenue growth MTS Allstream EBITDA increases $18.2 million, with free cash flow up by $13.3 million, over prior year Making investments in support of a long-term strategy 4G wireless network launched LTE technology deployment planned for Winnipeg and Brandon in 2012 Fibre to the home deployment in Manitoba Expanding our national fibre network with more on-net buildings MTS Allstream expects to meet its guidance ranges for all metrics in 2011.
23 Appendix Definitions EBITDA We define EBITDA as earnings before interest, taxes, depreciation and amortization, and other income. EBITDA should not be construed as an alternative to operating income or to cash flows from operating activities (as determined in accordance with International Financial Reporting Standards) as a measure of liquidity. Free cash flow We define free cash flow as cash flow from operating activities, less capital expenditures, and excluding changes in working capital. Free cash flow is the amount of discretionary cash flow that we have for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt.