News release Manitoba Telecom Services Inc. reports progress on strategic initiatives and second-quarter 2015 results; free cash flow grew 41% in Q2 WINNIPEG, MB, July 30, 2015 (TSX:MBT) Manitoba Telecom Services Inc. ("the Company"), including its two primary operating subsidiaries, MTS Inc. ( MTS ) and Allstream Inc. ( Allstream ), today provided a strategic review implementation update and reported results for the period ended June 30, 2015, including a 41% increase in free cash flow from Q2 2014. The new strategies for MTS and Allstream have been readily embraced by the two organizations, and we have begun to see some encouraging initiatives and early progress as a result," said Jay Forbes, MTS Allstream, Chief Executive Officer. "In this last quarter, Allstream has been able to deliver double-digit IP revenue growth, a 6.5% increase in EBITDA before restructuring costs and $8.7 million in free cash flow, all the while maintaining the level of customer service that has historically set it apart from its competitors. Within MTS, we have identified opportunities to be more efficient and to become more customer-focused, and will launch corresponding initiatives to capture these opportunities in the third quarter." STRATEGIC REVIEW UPDATE Allstream turnaround As a result of the Q1 2015 strategic review the Company has taken immediate action to improve free cash flow generation, allowing Allstream to become economically self-sufficient, including: a 25% or approximately 500 person staff reduction that should generate $50 million in annual cost savings and a 20% to 30% reduction in capital expenditures. As of June 30, 2015, 242 employees have left the business while a further 263 employees have received working notice and have scheduled departure dates over the next 14 months. By year end, it is expected that 379 employees will have departed the business. Year to date salaries and benefits cost savings were $3.7 million, representing an annualized cost reduction of approximately $24 million. With the additional 137 in scheduled departures, the expectation is that annualized run-rate savings will grow to approximately $36 million by year end. Further details on Allstream's planned headcount reductions and the impact on 2015 operations can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financial. Allstream's new, more rigorous capital investment discipline has lowered capital intensity from 17.9% in Q2 2014 to 10.7% for this past quarter. In addition this reduction has been accomplished without negative consequences in sales gains, customer satisfaction or installations (converged IP wins increased by 5.6% in the first half of 2015 when compared to the same time frame in 2014). Allstream's restructuring efforts, which are mostly complete for 2015, have resulted in $16.5 million in restructuring costs (as of June 30, 2015). By streamlining operations and improving capital investment decision-making, Allstream generated $8.7 million in free cash flow in the second quarter compared to $5.8 million in Q2 2014. For the full year, Allstream is expected to be cash flow positive net of restructuring costs. - 1 -
We enter the second half of the year with a solid, stable operating platform that is beginning to deliver the financial results we all believed Allstream was capable of generating," said Jay Forbes, MTS Allstream, Chief Executive Officer. Allstream sale process With restructuring largely complete and Allstream positioned to be free cash flow positive for 2015 and beyond, Management has shifted focus to manage a fully-planned exit of this business, one that will maximize value while promoting deal certainty. The Company has retained advisors, has a clear understanding of the approval process and requirements, and is constructing its information repositories for prospective purchasers, who Management plans to engage with in the second half of this year. Pension plans pre-funding On May 6, 2015 the Company completed the pre-funding of $120 million into its pension plans using its existing credit facilities. This one-time pre-funding eliminates the need for solvency payments for 2015 and 2016 under any reasonable economic scenario (and for 2017 and beyond based on consensus bank forecasts for long-term interest rates) with the expectation of enhancing the stability and predictability of free cash flows. Further details on the pension plans and projected funding requirements under various economic circumstances can be found in the Q2 2015 Supplemental at www.mtsallstream.com/investors/financial. MTS UPDATE Acquisition of TTC On June 1, 2015, the Company acquired the remaining 50% of the issued and outstanding shares of The Technology Consortium ( TTC ) for a total cash consideration of $7.0 million, becoming TTC's sole shareholder. Through the purchase of EPIC Information Solutions in 2013 MTS was already a 50% stakeholder in TTC, which has long term contracts with the Manitoba Government and other public-sector clients to provide highly-trained professionals dedicated to offering a comprehensive range of both technical and business solutions. Such solutions include managed procurement services, on-site technical support, software distribution and versioning, mobile device management, print and imaging management and core information and technology ("IT") infrastructure support. Now as an integral part of the MTS family, TTC will help strengthen the Company's IT capabilities and create potential for revenue growth and profitability. Further details on the TTC acquisition can be found in the Q2 2015 Financial Statements and Notes at www.mtsallstream.com/investors/financial. MTS Total Internet On June 18, 2015, MTS introduced a revolutionary new product that changes the way consumers can purchase their wireless and wireline Internet connectivity. MTS Total Internet provides customers with seamless Internet access anywhere in Canada, anytime, over any device and network all in one plan. With MTS Total Internet all household members can share their data across home, Wi-Fi and wireless connections and across multiple devices, making their Internet experience completely seamless and flexible. With no other communications service provider in Manitoba offering a similar service, the Company believes Total Internet can offer a sustainable competitive advantage in the market place. MTS Data Centre With the majority of MTS Data Centre construction completed, an official opening is scheduled for September 2015. - 2 -
Wireless double cohort On May 19, 2015, the Federal Court of Appeal dismissed the challenge of a consortium of wireless service providers, including MTS, that the Canadian Radio-television and Telecommunications Commission did not have the authority to apply the provisions of the Wireless Code to contracts that were already in place before the Code took effect. As a result of this decision, as of June 3, 2015, a large cohort of MTS customers were eligible to exit out of their wireless contracts. On this date MTS post-paid customers without contracts increased significantly, which will likely create a period of heightened competition through the balance of 2015. This change in our market place will likely lead to increased churn and increase our deferred wireless costs until the Company re-signs these customers and adds new subscribers. The Company is taking action to mitigate this possible churn issue going forward by leveraging our differentiators, such as MyBundle, MyPlan, our new Total Internet offering and our strong relationships with Manitoba business customers. The Company has plans in place which should increase our percentage of customers on contract, while managing impacts on our deferred wireless costs, leveraging both two-year contract renewals with device subsidy and one-year contract extensions with no device subsidy. Also as a result of this decision, the Company has fully amortized any outstanding deferred wireless costs related to the now invalid three-year contracts. With this accelerated amortization the Company recognized $9.9 million of additional expense in this quarter, of which $8.4 million would have otherwise been expensed in Q3 and Q4 2015, with the remaining $1.5 million expensed in 2016. See our Q2 2015 Supplemental for additional discussion on the wireless double cohort impact. EXECUTIVE LEADERSHIP CHANGES On June 29, 2015, as part of the ongoing re-alignment at MTS Allstream, the Company announced the impending retirement of Kelvin Shepherd, President of MTS and the departure of Wayne Demkey, Chief Financial Officer. With the retirement of Kelvin Shepherd later this year, Chief Executive Officer, Jay Forbes, will assume the MTS president responsibilities in addition to his CEO role. Effective August 1, 2015, Paul Cadieux will assume the role of Chief Financial Officer. Paul joined the Company 18 years ago and has been a key contributor to MTS Allstream operations, most recently as Vice President Finance, Procurement and Real Estate. Also in the quarter, Marvin Boakye was hired as Chief Human Resources Officer. With more than 20 years of experience in leading organization design and change, growing organizational capabilities, and positioning human resources groups as a key performance enabler, Marvin will support the talent development efforts at MTS Allstream. To view more leadership team information, please visit www.mtsallstream.com/leadershipteam. - 3 -
SECOND-QUARTER 2015 RESULTS Consolidated financial results ($ millions, except EPS) Q2 2015 Q2 2014 % variance Revenues 398.3 403.3 (1.2) Operations expense 256.8 260.8 1.5 EBITDA before restructuring costs 141.5 142.5 (0.7) Restructuring costs 19.6 n.a.* EBITDA 1 121.9 142.5 (14.5) EPS 2 $0.13 $0.37 (64.9) EPS excluding restructuring costs $0.31 $0.37 (16.2) Capital expenditures 62.1 78.2 20.6 Free cash flow 3 45.4 32.2 41.0 1 EBITDA is earnings before interest, taxes, depreciation and amortization and other income (expense) 2 Earnings per share ("EPS") is based on weighted average shares outstanding of 78.6 million for the three months ended June 30, 2015, 77.4 million for the three months ended June 30, 2014 3 Free cash flow includes cash flows from operating activities less investing activities and excludes changes in working capital, pension solvency funding and lawsuit payments, spectrum auction costs, restructuring costs, the acquisition of TTC and non-cash taxes * not applicable Free cash flow In Q2 2015, consolidated free cash flow increased $13.2 million from Q2 2014, mainly due to our recent efforts to improve both the intensity and effectiveness of our capital investment decision-making within both organizations ($16.1 million after adjusting for 2014 Scientific Research and Experimental Development Investment Tax Credits), partially offset by increased deferred wireless costs ($5.6 million). The following provides further insight into the operating results variances for the quarter: Revenues: MTS saw a $0.5 million increase in revenues from Q2 2014, as strong growth in Internet, IPTV, and wireless data revenues were partly offset by decreases in wireless voice, as well as local and long distance revenues. Allstream s revenues decreased by $7.1 million compared to Q2 2014 due to declines in local, long distance and other data revenues, partly offset by strong growth in converged IP revenues which were up by $6.6 million or 10.3%. Operations expense: Consolidated operations expense was down 1.5% in Q2 2015 as Allstream's cost reduction activities took hold; Allstream operations expense decreased by $8.7 million in Q2 2015 compared to Q2 2014 mainly due to savings from headcount reductions, lower cost of goods sold and other cost reduction initiatives. MTS (including other) operations expense increased by $3.1 million in quarter mainly the result of increased cost of goods sold (driven by higher equipment sales of $1.7 million) and pension expense ($2.0 million). Restructuring costs: Restructuring costs mainly represent costs associated with Allstream's workforce reduction. The workforce reduction has contributed $3.7 million in salaries and benefits cost savings year to date representing an annualized cost savings of approximately $24 million. EBITDA before restructuring costs: During the second quarter 2015, MTS (including other) EBITDA before restructuring costs was down 2.2% due mainly to an increase in cost of goods sold and pension expense. For the full year, the Company expects MTS (including other) EBITDA before restructuring to be higher than the prior year. Allstream's EBITDA before restructuring costs increased by $1.6 million or 6.5% due to the early impacts from restructuring activities. - 4 -
Net income and EPS: In Q2 2015, net income and EPS were down $18.4 million or $0.24, respectively, due largely to increased restructuring costs and increased depreciation and amortization expense which was accelerated in Q2 to reflect the change in government policy on three-year wireless contracts. Capital expenditures: Late Q1 2015 efforts at Allstream, coupled with more recent changes at MTS, saw capital expenditures decline significantly $16.1 million or 20.6% from Q2 2014. The following table provides further free cash flow disclosure. ($ millions) Q2 2015 Q2 2014 % variance EBITDA before restructuring costs 141.5 142.5 (0.7) Add back (deduct): Deferred wireless costs (20.6) (15.0) (37.3) Finance costs (15.7) (17.5) 10.3 Current cash income tax expense (0.1) n.a.* Pension funding and net pension expense 4.5 0.2 n.a. Other operating activities, net 0.4 2.6 (84.6) Other income 3.1 (1.6) n.a. Gain on revaluation of TTC (5.6) n.a. Loss on disposal of assets 0.3 1.0 (70.0) Total 107.8 112.2 (3.9) Investing activities 1 (62.4) (80.0) 22.0 Free cash flow for the period 45.4 32.2 41.0 1 Excludes spectrum auction costs and the acquisition of TTC * not applicable DIVIDEND The Company s Board of Directors declared a quarterly cash dividend of $0.325 per share for the third quarter of 2015, payable on October 15, 2015 to shareholders of record at the close of business on September 15, 2015. The third-quarter dividend is designated an eligible dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable. Investment community conference call and webcast MTS will hold its second-quarter 2015 earnings results conference call with the investment community on Thursday, July 30, 2015 at 8:30 a.m. (Eastern time). Participants include Jay Forbes, Chief Executive Officer and Wayne Demkey, Chief Financial Officer. To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until August 6, 2015 by dialing 1-855-859-2056 and entering passcode 69209121. Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on the Company s website www.mtsallstream.com/investors or by entering www.mtsallstream.com/investors/q22015results. A replay of the conference call will be available on the Company s website for one year. - 5 -
Forward-looking statements disclaimer This news release includes forward-looking statements and information (collectively, statements ) including, but not limited to, statements pertaining to the Company s corporate direction, business opportunities, operations, financial objectives, future financial results and performance, sale of Allstream, pension plans funding including assumptions about future interest rates, the declaration of any future dividends and the amount thereof, the intention that surplus cash would be used for such things as share repurchases, the expectation of not having to pay cash income taxes until 2023, ability to reduce capital spending and operating expenses, future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts. Examples of statements that constitute forward-looking information may be identified by words such as believe, expect, project, should, anticipate, could, target, forecast, intend, plan, outlook, see, set, pending, eliminate and other similar terms. All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation. Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them. Please note that forward-looking statements in this news release reflect Management s expectations as at July 30, 2015, and thus are subject to change thereafter. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. This news release and the financial information contained herein have been reviewed by the Company s Audit Committee and approved by the Company s Board of Directors. Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, matters identified in the Risks and uncertainties section and elsewhere in the Company s 2014 annual MD&A, which is available on the Company s website at www.mtsallstream.com/investors and at www.sedar.com. About Manitoba Telecom Services Inc. (MTS Allstream) MTS Allstream (trading symbol: MBT) is one of Canada s leading communications solutions companies. We provide full-service telecommunications support for residential and business customers in Manitoba through MTS, and IP communications through Allstream, the only national provider focused exclusively on the business telecommunications market. We are proud to be widely recognized for our leadership in corporate social responsibility and governance practices. For more information about the MTS Allstream group of companies, visit: www.mtsallstream.com. For further information, please contact: - 30 - Investors: Media: Paul Peters, Investor Relations 204-941-6178 investor.relations@mtsallstream.com Melanie McKague, Corporate Communications 204-941-8576 media.relations@mtsallstream.com - 6 -