Q3 2005 investor conference call - Q & A transcript

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Q5.Thanks for taking the question. Wanted to just quickly follow up on the strike related costs and thinking about once the strike is over, how long do you expect to keep on the temporary workers and what?s the additional costs in terns of double costs with your own workers returning to work and additional temporary workers on board. In terms of the disconnects and in terms of line loss you mentioned that there are some gross adds you were not able to take advantage of also on the residential side and I wonder if you could quantify any more detail in terms of losses and delayed gross additions on the residential line side. (Marje Soova ? Goldman Sachs)

Q6.(a) Thanks. Looking at your guidance, it?s $1.90 to $2 in earnings for the year and you?ve done $1.74 so far so that suggests there?s 16-cents to 26-cents and you?ve got another 7-cents of one timers next quarter. But that's down a lot. Just wonder if you have comments on that? (John Henderson - Scotia Capital)

Q6.(b) Could I have a follow-up on the Mobility side. Just wondering to what extent you're seeing the impact of high end customers moving to GSM for the global roaming capability. You addressed that with the new Motorola world phone. Have you been seeing that and is that therefore, the response this way? (John Henderson - Scotia Capital)

Q7.(a) Question on your growth strategies. Wireless had a super quarter. Margin at 51%, first time I've ever seen a wireless company in North America report north of 50% which obviously leads to concerns about how you continue this rate of growth and in particular in terms of margin improvement. I?m wondering you could comment about that and in particular, how local number portability may be a factor both in terms of a challenge as well as an opportunity to perhaps increase penetration on the business base and on the TV side in terms of your growth strategy, pricing and differentiation will be two key elements going forward in terms of penetration, I assume your pricing will be quite conservative as Shaw?s is on the telephony side. Can you confirm that and also what sort of differentiation are you offering today and over time? (Dvai Ghose - CIBC World Markets)

Q7.(b) In page 13 of the MD&A it says strike $65 million, you say $68million in the presentation, what?s the difference? $68million is the impact on expenses to Communications. 65 is the consolidated impact and therefore, a net savings and ability as the cost of the strike savings of people not working. (Dvai Ghose - CIBC World Markets)

Q8. The move to IP was viewed as a rare window for service providers to win new accounts. However, it seems more of a window for the customer to win a re-price with their current or existing service provider. Can you address your own balance on the two factors and perhaps from the industry dynamics on IP wins versus re-price? (Rob Goff ? Haywood Securities )

Q9. Could you comment on the likelihood of returning to the Board to possibly expand the buyback operation next month and how do you think about the relative merits of buying back stock versus upping the dividend? Thanks. (Vance Edelson - Morgan Stanley)

Q10. Thank you very much. Just a quick question on the progress on the search for a new Mobility CEO. I know Darren you've assumed an interim role for that but can you update us on that? Thanks. (Jeffrey Fan ? UBS Securities)

Q5.Thanks for taking the question. Wanted to just quickly follow up on the strike related costs and thinking about once the strike is over, how long do you expect to keep on the temporary workers and what?s the additional costs in terns of double costs with your own workers returning to work and additional temporary workers on board. In terms of the disconnects and in terms of line loss you mentioned that there are some gross adds you were not able to take advantage of also on the residential side and I wonder if you could quantify any more detail in terms of losses and delayed gross additions on the residential line side. (Marje Soova ? Goldman Sachs)

Robert McFarlane: In terms of how long it would take, in terms of transitioning, I attempted to answer that previously but suffice to say, if we had a ratification vote that went positive at the end of next week we would be at a more business as usual expense level at the start of December. In terms of additional cost we will not provide specific disclosure in that at this juncture. We?ve given what the costs are for the third quarter and we?ve also provide an estimate of revenue and EBITDA and restructuring costs for the year. Therefore, defacto given a range for the fourth quarter, I think that should suffice from our perspective from now and then in terms of NALs, there are really a number of factors going in different opposite directions certainly as you eluded to in your question we were constrained in terms of our ability to do new installations, for example, a new house formation and the like. There have been some backlogs, particularly in British Columbia, in terms of those additions so there is a deferral of line loss additions consequently. We've also faced increased competitive activity, for example cable telephony from Shaw, as they have expanded their geographic markets and been aggressive in the marketplace. However, at the same time on the residential side we have been constrained not only on installing for ourselves, but in terms of porting to some of the resellers on a wholesale basis so that would be a factor in the opposite direction. And then of course on the business side we have lines both in our incumbent area which is directly affected by the strike as well as lines in our non-incumbent areas which are not so affected. In terms of incumbent areas I think we have been fairly resilient in that regard so overall in terms of if we had no labor disruption where would we have been? It's hard to say. We need to see this play out a bit. If we look at line losses elsewhere by Telco?s in Canada, certainly ours appears to be favorable in that regard even though the loss rate has increased. We need to see how in a post-disruption market the extent to which a backlog remains or is extinguished versus competitive activities see how it trends out. But fair to say, as per prior comments we have been making, we have been anticipating an increase in our line loss rate and that in fact has happened. Although the exact number on a normalized basis is difficult to calculate.

Q6.(a) Thanks. Looking at your guidance, it?s $1.90 to $2 in earnings for the year and you?ve done $1.74 so far so that suggests there?s 16-cents to 26-cents and you?ve got another 7-cents of one timers next quarter. But that's down a lot. Just wonder if you have comments on that? (John Henderson - Scotia Capital)

Robert McFarlane: Well, I guess firstly when you say down a lot, it's consistent, in fact just a narrowing of the range in terms of the prior guidance. But you know, Mobility is a significant component of TELUS? consolidated results and the fourth quarter is when you have the seasonally high rounded 40% of industry additions tend to occur in the fourth quarter of the calendar year and the expensing upfront of the cost of the acquisition expenses related to those additions always drives down Mobility earnings and therefore that effects our consolidated EPS and so I think that would be probably the factor that is driving the result you're observing.

Q6.(b) Could I have a follow-up on the Mobility side. Just wondering to what extent you're seeing the impact of high end customers moving to GSM for the global roaming capability. You addressed that with the new Motorola world phone. Have you been seeing that and is that therefore, the response this way? (John Henderson - Scotia Capital)

Robert McFarlane: John, it's a small segment. An attractive segment because these are people who travel internationally and tend to generate high ARPUs but they are a narrow segment, particularly in the Canadian context. As you probably noticed in our disclosure today we have introduced products and capabilities for GSM/CDMA Roaming on an international basis so that gives us the ammunition, if you will, for the first time to address that segment. Having said that, to say that because we haven't participated in that area it's impacted our ARPU, I guess I look on the positive side and say there's a high ARPU segment we aren?t addressing and we?re 20% above the competitors over the past number of years so there presents an opportunity for us but I would say it's a relative niche segment and therefore doesn't have materiality for the consolidated ARPU result.

Q7.(a) Question on your growth strategies. Wireless had a super quarter. Margin at 51%, first time I've ever seen a wireless company in North America report north of 50% which obviously leads to concerns about how you continue this rate of growth and in particular in terms of margin improvement. I?m wondering you could comment about that and in particular, how local number portability may be a factor both in terms of a challenge as well as an opportunity to perhaps increase penetration on the business base and on the TV side in terms of your growth strategy, pricing and differentiation will be two key elements going forward in terms of penetration, I assume your pricing will be quite conservative as Shaw?s is on the telephony side. Can you confirm that and also what sort of differentiation are you offering today and over time? (Dvai Ghose - CIBC World Markets)

Darren Entwistle: Thanks for your multipart question.

In so far as WLNP is concerned, be that it is a double end sword, but I believe if you look at the characteristics of TELUS, one edge is sharper than the other and that edge is in our favor. I think a lot of the fear mongering that proceeded the implementation of local number portability in the U.S. has proven to be unfounded and we did not see a high level of volatility that ensued in respect of customer churn. On the number portability front, following up from John Henderson's question, a significant opportunity for further growth within TELUS lies in better penetrating the corporate market where at present we are under penetrated. If you look at the heritage of our organization, TELUS Mobility as the Incumbent in the west, had a very strong relationship with the corporations in western Canada. But when we made the acquisition of Clearnet and absorbed the foot print, we absorbed the business that was more bias toward consumer and smaller bids and not as profound a presence within the Canadian corporate market and of course as you are well aware the marketplace is skewed toward having more corporations in central Canada. I think it would be fair to say that one of the impediments that we have experienced in trying to better penetrate the corporate market in Canada is the lack of number portability. So we believe that with portability coming to fruition at some juncture in 2007, still waiting to get that worked through with the CRTC, this will provide an advantage for us to better penetrate the corporate market and that's a pretty interesting opportunity. If you look at our characteristics as an organization within the wireless company, I think we've got the characteristics that would be attractive for corporates. Number one, one of the other impediments we've experienced in terms of lack of global roaming has just been dealt up as Bob explained, so that's gone along with number portability being eradicated in 2007. If you look at the TELUS brand, I think the TELUS brand traditionally plays well with large corporates. In addition to that, I think the 1.33% churn rate that we have delivered evidences how strong our customer care is, which is a key component when corporates are making a decision, and then as well on top of that, if you look at our network coverage which is top drawer and the fact that our network performance from dropped call to call latency is also best in class in North America , I think we have a strong proposition that we can deliver to corporates to compliment the wireline conversations we are having with them in the key urban conurbations in Ontario and Quebec.

And as well, to the extent which we can focus on that market and pursue judiciously that opportunity, it would be fair to say that we drive the competitive dynamic down to two and three players versus the multiplicity of players in the wireless industry that are focused on consumer now with the launch of new distribution channels like MB&O. So to the extend we can have more concentrated competition amongst fewer players, I like that particular dynamic because it allows for continued valued expansion from this organization and we are well placed to capitalize on it because of our business capability and characteristics with the advent of number portability so I would consider that on a net basis to be a positive development for this organization. On the TV side you are quite right in terms of our pricing. It will be conservative. We will not be implementing a discount price model or discount price approach to the launch of TELUS TV in Alberta, and there after in British Columbia. In fact, to the extend which we can provide significant strength of differentiation versus the incumbent you may even see us pricing at a premium because we will be focused on aspects of differentiation other than price that I've spoken of in previous calls. Our TV service will be all digital. Viewers will be able to customize the channel lineup to their viewing preferences. Our IPTV solution will be a solution that will evolve from something that?s delivered to a set-top box to something that is capable of being delivered to a TV set and to a computer. On top of that, we will be bringing Video On Demand where people can rent their movies at any time they would like rather than on a fixed half hour allocation. And of course they can enjoy full VCR control with the rental of those movies where they can fast forward them, reverse them or pause them. I won't go too much further than that, but that is indicative of the type of differentiation we?re focused on and what we are interested in insofar as both telephony and entertainment is concerned is to have smart competition, judicious competition, in terms of the underlying economics and as well to differentiate ourselves focused on innovation as it relates to the commercial service rather than price.

Q7.(b) In page 13 of the MD&A it says strike $65 million, you say $68million in the presentation, what?s the difference? $68million is the impact on expenses to Communications. 65 is the consolidated impact and therefore, a net savings and ability as the cost of the strike savings of people not working. (Dvai Ghose - CIBC World Markets)

Robert McFarlane: $68 million is the impact on expenses to Communications, $65 is the consolidated impact and therefore, there was a net savings in Mobility of $3 million as the costs of the strike were less than the savings from the people not working.

Q8. The move to IP was viewed as a rare window for service providers to win new accounts. However, it seems more of a window for the customer to win a re-price with their current or existing service provider. Can you address your own balance on the two factors and perhaps from the industry dynamics on IP wins versus re-price? (Rob Goff ? Haywood Securities )

Darren Entwistle: I think that's down to marketing, not technology from our perspective. Just because you can deliver voice in a packet format does not mean you need to crush the economics in terms of your overall pricing associated with that service. Fair to say when we introduce a voice over IP service within the consumer market in western Canada and in through Quebec, we will look to differentiate that service not on price, but on functionality leveraging things like computer telephony integration and the way that we can integrate voice, data, e-mail and the like, that is what is going to drive our marketing proposition and the underlying pricing philosophy associated with it. And as well I think there is no better evidence of what you can expect from us on the Voice Over IP front than the fact that Voice Over IP and the IP technology is a big upside opportunity for us to leverage the technology advantage that we have in our national wireline infrastructure as we seek to pursue opportunities with business customers in Ontario and Quebec. And insofar as those customers are concerned, we have been focused on IP differentiation, on factors other than price where we can impart the customer's greater functionality than what they enjoyed under the legacy services, greater pricing flexibility that what they could enjoy under previously tariffed services, greater opportunities for new applications such as security, and a situation where they can enjoy better control over their corporate networks and the underlying cost base associated with those corporate networks. That's very much our philosophy in terms of how we are taking IP technology in a meaningful way into the business market of Ontario and Quebec. i.e. what can we do to introduce new functionality that can help customers grow their revenue, leverage IP technology to impart greater flexibility and control to customers so they can de-risk their business operations and I think that's an attractive proposition and that same mentality you can expect to be imbued in respect of our marketing philosophies that we will deliver to support Voice Over IP as an introduction to the consumer market in western Canada.

Q9. Could you comment on the likelihood of returning to the Board to possibly expand the buyback operation next month and how do you think about the relative merits of buying back stock versus upping the dividend? Thanks. (Vance Edelson - Morgan Stanley)

Robert McFarlane: Thanks for that question, Vance. Essentially, we look at dividends and share repurchases as two forms of returning capital to shareholders and from that standpoint, when going back a little over a year when we canvassed some of our major institutional shareholders we found that there was a desire by some for either a dividend increase or others for prioritizing share repurchases so we devised a program which did both. Since we have sufficient cash flow to not only raise the dividend, but repurchase shares we?ve been doing that. So from that standpoint, I think the guidance today in respect of the Net Debt to EBITDA provides a useful framework for you we?re in the near the middle of that zone and therefore we think we can continue to improve our credit rating while increasing the dividend today and hopefully as earnings improve in the future consistent with the 45-50% payout ratio of net earnings, continue to have dividend growth potential as Darren outlined earlier while at the same time having share repurchases. In terms of the quantum of share repurchases, that is something we are looking at and reviewing with our Board later this year and I hope to be in a position in our December guidance call to give more color on that.

Q10. Thank you very much. Just a quick question on the progress on the search for a new Mobility CEO. I know Darren you've assumed an interim role for that but can you update us on that? Thanks. (Jeffrey Fan ? UBS Securities)

Darren Entwistle: Thanks for question, Jeff. I think it would be fair to say that we are going through a structure process to review the options for progressing forward on the wireless side of the business and ensuring that we?ve got the strength of leadership in that regard to continue the excellent performance we've seen in from that part of our business thus far. At the present point in time I'm not capable of disclosing anything further than that, beyond saying that we are cognizant of what we need to achieve from a leadership perspective both the wireless and wireline side of the business. We are pursuing a structured process to deliver an outcome in a reasonable time frame and when we have something more substantive to report we will proceed with the disclosure of that.

Jeffrey Fan: Any timing target you are looking at?

Darren Entwistle: It would be fair to say that a process insofar as ensuring that you?ve got the leadership in place to take a business forward is difficult to time as it is not perfectly within your control. Suffice to say for the present point in time, we will look to get this done as expediently as possible and we?re hopeful we can get it done within a reasonable time frame.

John Wheeler: Thank you very much for joining us today. Darren, just a final closing comment.

Darren Entwistle: Thanks for the investors for joining us and the quality questions put forward. As I?ve said previously we do appreciate your interest and continued support of TELUS as we move through the fourth quarter this year we hope once again to deliver strong results in 2006. Thank you very much.

Q3 2005 investor conference call - presentations

John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
Robert McFarlane, executive vice-president and chief financial officer
Question period
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