Investor Presentation March 2012 www.mtsallstream.com
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. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Additional information about such material factors and assumptions can be found in MTS Allstream s filings with Canadian securities regulatory authorities. Except as required by law, MTS Allstream disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 2
MTS Allstream A leading national telecommunications provider in Canada and the market leader in Manitoba Revenues of $1.8 billion in 2011 Serving customers for more than 100 years Two divisions: MTS & Allstream Common shares listed on the Toronto Stock Exchange (trading symbol: MBT) 3
Success in 2011: MTS WIRELESS REVENUES INTERNET REVENUES IPTV REVENUES + 9% + 7% + 19% 2010 2011 2010 2011 2010 2011 4
Success in 2011: Allstream + $55M FREE CASH FLOW 2010 2011 2010 2011 2010 2011 2010 2011 + 34% EBITDA + 9% CONVERGED IP REVENUES + 14% FIBRE-FED BUILDINGS 5
Success in 2011: Highlights MTS Allstream delivered 10% total shareholder return MTS Allstream met its improved 2011 outlook MTS launched its 4G wireless network MTS expanded its extensive handset line-up with the iphone 4S MTS launched FTTH in 2 more communities in Manitoba Allstream added 299 buildings to its national IP fibre network 6
2012 strategic priorities Maintain our industry-leading position in Manitoba Drive growth in IP-based services and improve profitability Deliver superior customer service, while aggressively improving our cost structure to produce strong cash flows in support of our dividend policy. 7
Best brand Best coverage Best value Best customer retention 8
MTS Serves both residential and business customers in Manitoba The leading telecommunications provider in the province Complete range of products and services unmatched by any other provider in the province 1,323,750 customer connections 2011 operating revenues: $963.8M, up 2.3% over 2010 2011 EBITDA: $490.1M, up 0.7% from 2010 MTS revenues, mostly derived from growth services (wireless, broadband and converged IP), are on a solid growth trajectory MTS 2011 REVENUE MIX REVENUES $942M $964M Wireles s, 977 2010 2011 2012E Wireless Broadband & converged IP UC, security & monitoring Local access LD, legacy data & other 9
The market leader in Manitoba Best products & best delivery in Manitoba Focus on growth in wireless, IPTV & high-speed Internet Innovative & effective marketing Only telecom provider able to bundle services including wireless, IPTV, high-speed Internet, home phone and alarm monitoring Customer value and loyalty: bundle customers generate higher average revenue per user ( ARPU ) and have less than half the churn rate of non-bundle customers MTS owns the home 10
Bundles help drive ARPS growth WIRELESS IPTV RESIDENTIAL HIGH-SPEED INTERNET 2010 2011 2010 2011 2010 2011 11
Unparalleled brand recognition MTS is proud to support the home of the Winnipeg Jets - the MTS Centre in downtown Winnipeg. At this venue, MTS showcases its cutting edge consumer and business services. Photography by Gerry Kopelow
Broad and fast wireless networks 97 500k % of Manitobans can access MTS s 4G network Wireless subscribers 185 LTE Wi-Fi hotspots Launching in Winnipeg and Brandon in 2012 13
Staying in the lead EBITDA FREE CASH FLOW $487M $490M $140M $99M Wireless, 500 2010 2011 2012E 2010 2011 2012E 14
More IP More on-net More sales More focused 15
Allstream A leading competitor in the national business and wholesale markets Operates an extensive national broadband fibre optic network spanning more than 30,000 km 594,791 customer connections 2,388 fibre-fed buildings connected 2011 operating revenues: $801.8M, down 4.6% from 2010 2011 EBITDA: $108.5M, up 34.0% from 2010 ALLSTREAM 2011 REVENUE MIX Broadband & converged IP UC, security & monitoring Local access LD, legacy data & other Revenues from converged IP: 29% and growing 16
Focused on the opportunity Targeting 13,000 midmarket businesses in Canada Emphasizing converged IP communications and on-net sales Providing a superior customer experience Building market share as Canada s all-business communications provider Allstream s 30,000 km fibre network has 8 cross-border USA connections 17
Significant growth opportunity FIBRE-FED BUILDINGS 2,089 2,164 2,211 2,313 2,388 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Allstream s fibre network spans 30,000 km across Canada In 2011, Allstream connected 299 buildings to its network as part of targeted, success-based investment programs Over 20% of new buildings added in 2011 have more than one customer connected 18
More on-net is more profitable Allstream s revenue mix is being managed to shift its focus from lowmargin lines of business to high-margin IP revenues In 2011, 47% of new IP circuits provisioned on Allstream s fibre network were completely on-net IP gross margins are expected to gradually increase over time as the proportion of on-net circuits to off-net circuits grows % OF ON-NET IP CIRCUITS 19% 24% 2010 2011 TOTAL GROSS MARGIN 54% 58% 2010 2011 19
More IP revenue CONVERGED IP $235M $208M $217M 2009 2010 2011 20
Driving growth in on-net IP 2010 2011 2012 26% 40% 35% 29% 31% 34% 10% 24% 11% 25% 11% 24% Converged IP Local Access UC & Security LD & Legacy Data & Other Allstream is focused on driving IP revenue growth, delivering stronger margins by expanding its on-net footprint, and managing legacy services for profitability In 2011, IP sales wins were up 21% over 2010 21
Improving financials EBITDA Solid EBITDA growth 2010 2011 2012E Improving free cash flow FREE CASH FLOW 22
Consolidated financial results 23
MTS Allstream met 2011 outlook Revenues $1.700 - $1.780B $1.766B EBITDA $580 - $610M $594.4M Earnings per share $2.40 - $2.80 $2.55 Free cash flow $110 - $150M $129.8M Capital expenditures Improved 2011 outlook (as at 4/8/2011) 16-18% of revenues 2011 results 16.3% of revenues 24
2012 outlook 2012 outlook 2011 results Revenues $1.675 - $1.775B $1.766B EBITDA $590 - $630M $594.4M Earnings per share $2.20 - $2.65 $2.55 Free cash flow $110 - $150M $129.8M Capital expenditures 18% - 20% of revenues 16.3% of revenues 25
Solid financials Stable consolidated EBITDA reflects prudent cost management and is expected to continue in 2012 Investment-grade debt ratings: BBB/Stable for DBRS and S&P EBITDA $594M Increase in growth services Increase in cost efficiencies Other Legacy decline $590 - $630M 2011 2012E 26
Strong free cash flows FREE CASH FLOW $130M $110 - $150M $34M 2010 2011 2012E Free cash flow outlook for 2012 is $110 to 150 million, which is in excess of the cash dividend paid in 2011 The Company plans to reinvest the expected increase in EBITDA in 2012 27
Targeted cost reductions $34.4M $28.8M $25 - $35M 2010 2011 2012E 28
Unique tax asset $ 330M Estimated NPV of tax asset Tax asset worth $5.00 per share, as at December 31, 2011 We do not expect to pay cash taxes before 2019 29
Pension solvency Future pension funding primarily influenced by longterm Government of Canada interest rates, which are at historic lows Note: A 300 bps increase in interest rates would eliminate funding obligations under the pension solvency test Pension plans are 98% funded on a going concern basis MTS Allstream has sufficient options to fund plans beyond 2012 without impacting annual free cash flow 30
Other developments On March 14, 2012, the federal government announced the elimination of investment restrictions for telecommunications companies with less than 10% market share by revenue. This expands the range of strategic alternatives available for Allstream, including access to foreign capital and forming strategic partnerships. Also on March 14, the federal government announced a framework for the 700 MHz spectrum auction. Key items favourable to regional providers like MTS are that all blocks will be auctioned on a regional basis and that spectrum caps will ensure regional carriers have access to prime spectrum. In February 2012, the Manitoba Court of Appeal reversed a prior judgment and award of $100 million, which confirmed that the company complied with applicable law relating to its employee pension plans when MTS was privatized in 1997. The litigation was based on whether pension members were given equivalent pension benefits to the former government plan. 31
Focused on success Strong performance in 2011: MTS delivered 2.3% year-over-year revenue growth Allstream delivered 8.7% year-over-year converged IP revenue growth MTS Allstream EBITDA increased $29.6 million over 2010 Making investments in support of a long-term strategy: MTS launched its 4G wireless network MTS plans to deploy LTE technology in Winnipeg and Brandon in 2012 MTS plans to continue to deploy fibre-to-the-home in Manitoba Allstream is expanding its national fibre network with more on-net buildings Creating shareholder value: MTS Allstream generated 10% total shareholder return in 2011 32
Allstream: extending its reach More IP More on-net More sales More focused FIBRE-FED BUILDINGS 1,922 2,089 2,388 2009 2010 2011 33
MTS: Manitobans first choice Best brand Best coverage Best value Best customer retention 34
2012: leveraging our strengths Leading the telecom market in Manitoba Improving value at Allstream Solid return for investors 35
Appendix - Definitions EBITDA: EBITDA is defined 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: Free cash flow is defined 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 available for purchasing additional assets beyond our annual capital expenditure program, paying dividends, buying back shares, and/or retiring debt. 36