events archive
events archive
Q1 2002 investor conference call - Q & A transcript
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1. I'd like to ask questions on your union relationships and how they have responded to your lawsuit, first question, and then second question is on any kind of ambitions/intentions toward AT&T Canada. ((John Henderson, Scotia Capital Markets))
Darren Entwistle: Thanks, John, I'll handle this one. Given that we have a lawsuit under way, I don't think it is appropriate that I comment on it. I guess I could give you some overarching perspective as to what the rationale was behind originating the lawsuit. I can tell you categorically it was not our preferred course of action but I think when you have a situation where a union is making remarks in the marketplace, i.e. in a very public manner regarding the quality of your service or the quality and integrity of your accounting, then I think you are obligated as an organization to move to thwart that type of behavior which is clearly not in the best interest of shareholders.
In so far as the union situation is concerned, from a labor relation's perspective, as I indicated in my remarks, we expect the conciliation process to go into the autumn of this year. I am hopeful that we can reach a settlement, as I indicated in my remarks, that does work for TELUS, our employees and our shareholders. I do believe that the employees of the organization do appreciate the rationale for change that is very evident within today's competitive environment.
The other thing that is, I think, worth noting is that a lot of people look at this situation from a negative perspective; I would ask that perhaps people look at it from a different orientation in that when we achieve the changes that are required within the collective agreement to improve our competitiveness, I do believe that that will release a material productivity gain into this organization that is not yet reflected in our financial results. So when you look at the situation with the union and the risks, I ask that you also look at the return from driving the change that is necessary.
Your second question was in respect of AT&T Canada. Our position has not changed on AT&T Canada, this is not an active file within the TELUS organization; we have stated that previously. I see no need to further update the market in that regard.
2. I understand it is a relatively easy comp based on the timing of per minutes billing last year, but I wonder, given your top line guidance for wireless for the year, I'm calculating something like assumed 11% growth, I wonder if you might comment on what concerns you have in the industry right now in not increasing the guidance given the fact that you seem to imply that ARPU stability is to be expected throughout the rest of the year. So I wonder if you just might comment on what the risks are and what it might take for the company to look at increasing revenue guidance for wireless going forward? (Greg MacDonald, National Bank Financial)
George Cope: Okay, thank you for the question. I think probably, the guidance, I guess, I'm most focused on, is the EBITDA to be cleared in the investing community. Seeing an ARPU increase, I mentioned, is the first time in 18 years I remember seeing it, so I think it would be imprudent of me to ask the investment community, or even for our management, to plan for that sort of continual ARPU increase throughout the year until we see something that's a more solid there, I guess would be my answer.
I think, secondly, as Bob has mentioned, given that we've reduced our guidance on subscribers, but generally kept our revenue guidance and haven't changed it, (Greg), you can see if you model that in, obviously we're implying that our ARPU's going to be a little better than we thought it would be, otherwise we would've been forced to reduce our revenue guidance.
So those would be the two answers in terms of what concerns me in the industry, I think as I mentioned on the call before, it's that we continue to see reasonable penetration growth and that as penetration has declined over last year, that all of us, including TELUS, have a discipline to not spend so much money trying to chase a pie that's growing but not at the same rate it was. Another way to think about it is it's very clear to us that the 12 million clients that the industry has today are more valuable than the next million clients we're going to add, and therefore it's not intelligent to re-price the 12 million base trying to chase the 1 million.
And that is very much the discipline at TELUS Mobility is trying to leave with, and I am very encouraged by developments from our other two major competitors. One is in Roger's leadership of the change of the (EW) clock and secondly is the very quick response by Bell in saying that they will also follow that. So there are signs that we are all finding the balance between subscriber growth and EBITDA growth and free cash flow growth to the benefit of all investors, yet our pricing in Canada is still aggressive enough to attract, you know, a million new clients a year.
3. George, just as a quick add-on, the re-emergence of the third competitor, with 51,000 plans out there, does that indicate any concern for you going forward?(Greg MacDonald, National Bank Financial)
George Cope: Well it would be the fourth, first of all, and so the other two keep me up. Yeah, I think like any sort of pricing that's off the page, quite frankly, is something we have to watch. But it hasn't forced us to change our outlook here in terms of EBITDA. I think we obviously recognize that they're a competitor, but we're competing, we think, pretty strong against them at the moment. Those sort of pricing things can have a detrimental effect but so far seem -- we seem to be able to market against them.
4a. Bob, could you address the provision taken for any retroactive salary change on the labor force? (Rob Goff, Haywood Securities)
Bob McFarlane: I think essentially your question would be in regard to the potential settlements, is that correct? (Rob: "Yes")
Well, of course, we've been prudent in accruing for anticipated settlement in regards to the labor negotiation; the actual outcome of that labor negotiation is indeterminate, but we feel we've made appropriate and sufficient accruals to date in terms of income statement impact.
4b. And that's been made against the entire employee base applicable, or not? (Rob Goff, Haywood Securities)
Bob McFarlane: Yes, of course this only really applies to the collective bargaining element of our workforce in Alberta and BC, that's approximately 17,000 individuals. As you may know, the contracts, they're multiple contracts, that governed those bargaining units, they're being collapsed into one negotiation now, but the TWU represent those people on an aggregate basis. And those contracts did expire toward the end of 2000, so we're into our third year of no new contract and throughout that entire period, we've been making the appropriate accruals. I don't think it's in shareholder's interest for me to go much further than that given that we're currently under negotiations with the contract.
Darren Entwistle: Bob, there's just one thing to add that, I think, might be important for your understanding of this situation in terms of the severance packages that were put in place for the voluntary and early retirement programs. There is no legal requirement for us to make a retroactive payment to those bargaining unit employees who have departed the organization.
5a. If I've got these numbers right, and I may not, but none the less, you've reduced costs
around $56 million in Communications quarter on quarter and a little bit of that came
from cost reduction understand that you took recorded $95 million of your operational efficiency program
savings on the comparable basis, so it looks like you're achieving 70% of the benefit of
the operational efficiency programs benefiting you right now.
And I look at the year that Darren talks about $550 million cumulative benefit, that's
$300 million incremental, does that mean that as we see the quarters progress here, can
you talk about the pattern of cost reduction on the quarter on quarter basis and what
that might look like? It looks like it'll be a decelerating trend or am I missing something
here?(Peter Rhamey, BMO Nesbitt Burns)
Bob McFarlane: I think it's fair to say there's a decelerating trend from the standpoint, if you think of it from this fashion, the bulk of the OEP departures transpired in the latter part of 2002, and therefore wasn't until the fourth quarter that we had, you know, a sizeable savings that occurred directly from OEP. Now we continue to have reductions, as you know, targeting approximately 1300 additional reductions for the entire 2003 calendar year.
In the first quarter of 2003 we have disclosed that 600 of these have already left on a net basis, so therefore 600 of 1300 is approximately 40% of the annual total has occurred in the first quarter alone and therefore, we're sort of locking in if you will, an accelerated recovery of labor cost savings. And so, therefore, will decelerate over time as each quarter represents a higher and higher proportion of the total run rate savings that we achieved upon the departure of all 6500 individuals.
5b. Right and that does help. So in the Q1, the 600, you didn't get the full impact obviously. (Peter Rhamey, BMO Nesbitt Burns)
Bob McFarlane: That's correct, I mean they did transpire over the course of the quarter, but I would say fairly equally over the quarter.
5c. None the less, when we look at the hopefully you do disclose the operation efficiency program savings is, basically, it'll add up to $300 million incremental as we look at the numbers going forward? (Peter Rhamey, BMO Nesbitt Burns)
Bob McFarlane: That's right, so we will continue to report on that, (Peter), that's a good point. And at this juncture, we're sticking to our annual $300 million number and essentially how one manages this program, it's not so much on a net basis, although we do disclose on a net basis, we know our gross departures, because it's a voluntary and early retirement settlement program. And then we monitor our customer service levels and we will hire back in staff as necessary to maintain a sufficient customer service levels. And accordingly that is, somewhat of a variable, and we manage that very intensively at TELUS.
And accordingly we believe that based on what we believe will be sufficient to maintain levels that the net reductions therefore will end up being 1300 for the year. Obviously we'll manage that line, it could be 1100, or it could be 1500, it depends upon what's necessary to maintain service levels. At this juncture we believe we're sticking to our original expectation of 1300 net and that would translate, given the math, of the people who've already left plus the 1300, to about $300 million of savings this calendar year.
6a.Thanks very much, two cash flow questions. One just follow up on what (Robb) was asking about accruing the expenses for retroactive pay increase on the union deal; wondering what the cash flow impact is there if you have to payback over the past two or three years. That will be a cash hit, I assume, when the new deal is struck? (Vince Valentini, TD Newcrest)
Bob McFarlane: To the extent that there is a financial cost due to the settlement and therefore there are payments, if that was the case, it would have a cash flow impact.
6b. And is that incorporated in your free cash flow guidance that you've provided or would that be more an '04 event in your opinion? (Vince Valentini, TD Newcrest)
Bob McFarlane: No comment.
7. The second thing is just on the taxes, just to clarify, you say you will get $200 million in total from this settlement, you expect to get $150 million of that this year, but you received none of it in the first quarter, is that right? (Vince Valentini, TD Newcrest)
Bob McFarlane: That's correct with supplemental being that there is a $9 million accrued interest that's also owed to us and that $9 million doesn't show up in the tax line, it shows up in the financing cost line as a credit, if you will, offset and tax effective, that had a $6 million after tax impact.
7a. Okay, the $150 million you receive this year, can you give us any sense of the time there, does that all come in one lump sum soon, or is that sort of spread out over time? (Vince Valentini, TD Newcrest)
Bob McFarlane: It's not definitive but we do expect it to occur either in the third or fourth quarter.
8. You changed your guidance on subscriber additions for this year and raise your EBITDA but, my question is, what do you plan to do with your marketing budgets going forward? It seems like on acquisition for net adds, they're going up quite quickly, so I was wondering if you can comment on things that you can do with your marketing budget here to try and stop that increase? (David Lambert, TD Newcrest)
George Cope: Well in terms of our marketing COA, we're always -- we're frankly all over that constantly trying to drive that down. I guess the we look at it is the cost to get a client is our gross cost and we look at the expected life of that client. And, as I mentioned on the slide 19, if you look, our expected life is $3500 of revenue on a COA of 425; 12% of revenue is, we think, North American, if not world class in terms of our cost.
In terms of trying to drive it down, the sort of things that help are, obviously if the handset prices, and they have continued to come down, that can help us, strengthening currency certainly can help a wireless carrier in Canada because we import our phones. So I'm, quite frankly, never comfortable; we always want the number to be lower but in terms of our investment relative to our return, it's never been better for our organization in terms of our cost of acquisition. We did squeeze pre-paid margins down earlier this year on some of the retail channels, we have our commissioned residuals tied more and more to longer term and churn metrics and so we are seeing some of those things flow through. But that's probably maybe as much color as I can give on it today.
9. Okay, on the other side ARPU's doing quite well and I was wondering if it's possible for you to breakdown, sort of, the ARPU increase that's coming from pricing from changes in subscriber mix and from increased minutes of use. Is there a way&? (David Lambert, TD Newcrest)
George Cope: I don't think I would go to that granular a level, I think, my opinion is that the floor on ARPU became possible because of the move to per minute billing. I think without it you may've seen a decline this year in the industry. I think things helping it move north are things like data revenue starting to grow in the industry and to your point, the minutes of use growing in the industry are helping offset, if you will, the fact that the next incremental subscriber probably spends less than the current client.
The other thing you see as the industry matures, the longer people have their phone the more they begin to use it; it's just a fact we've seen because they start to use more and more of the functionality. So as the client base in the industry matures, and a number of new clients are lower than previous years simply by the math, I think that's the other reason we're seeing a stability in ARPU.
It's also a reason we're seeing a decline of churn in the industry in Canada because the churn rate on clients after the first 6 months drops dramatically and therefore, as your proportion of new clients becomes less you see a churn decline. And many of you will know that I said for years not to model below 2% churn on your models, I definitely think I'm comfortable in, sort of, the 1.6%, 1.7% range now, given what I'm seeing in the industry.
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
George Cope, president and chief executive officer, TELUS Mobility
Robert McFarlane, executive vice-president and chief financial officer