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Q1 2007 investor conference call - Q & A transcript

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John Wheeler: Thanks, Bob. Just before I turn the conference call operator to start the question period, I once again ask for your cooperation in asking one question at a time, please.

Q1. Thank you. We've seen a pretty big divergence in the wireless results between yourself and Rogers compared to Bell over the last couple of quarters, and I guess we can highlight a number of challenges at Bell that can explain their troubles. But their losses haven't really translated into proportionately higher results for you and Rogers. And I guess what I'm wondering is, should we be concerned about the slowing of subscriber penetration in the Canadian market? And second, if you're actually managing your growth within the quarters, what are the profitability implications when Bell reestablishes its proportionate market share? Thanks. (Peter MacDonald - GMP Securities - Analyst)

Q2. Yeah, thanks very much. A question on, I guess, your balance sheet and free cash flow deployment. I've certainly heard your strategy in the past, and it makes sense, and I know you've returned good value to shareholders. But I'm wondering if--in this environment, you're scared at all that given the company's widely held, there's no multiple voting structure a la Rogers or something, that if you maintain debt leverage where--you may think it's comfortable, 1.5 to 2, but a lot of the equity market these days thinks that's too low. Do you think you're going to become somewhat vulnerable to pressure from activist shareholders, or private equity interest? Do you think there's any need to think about pre-empting that with a more aggressive use of your balance sheet, or at this time, do you think status quo is good? (Vince Valentini - TD Newcrest - Analyst)

Q3. Yes, thanks very much. A detail question--the deferral account drawdown in local revenues--you gave a good explanation on the impact on the organic growth rate. Can you talk about how long that's likely to continue, and what we might expect in terms of the quarterly run rate there, going forward?(Glen Campbell - Merrill Lynch Canada - Analyst)

Q4. Thanks very much, and good afternoon, guys. I wanted to ask you a quick question on the wireline EBITDA trends. I know you've essentially reiterated all of your guidance that you set out a few months ago, but when we look at your wireline guidance, it looks like you're implying a--there's still a decline of about 1% to 3.5% on EBITDA. On Q1, when we look at the ex option settlement impact, it looks like you generated growth of about 1.5%, so my question is, were there any one-time items on the cost side that helped this quarter? And looking forward, are there any reasons for more costs to be coming in, and as a result, see the trend kind of going to the negatives in the next three quarters? (Jeffrey Fan - UBS Securities Canada - Analyst )

Q5. Thank you for taking my call. I know this is going to be a hard question to answer, but I've got to ask it anyway. There's been a tremendous amount of chatter in the press about what your thoughts may or may not be with regards to M&A and consolidation. So if I could just throw out a couple, and see if you can just put them on the table for us. The first thing is, are you interested in joining a group to make a bid for BCE? Secondly, have you been approached by either private equity or any other investors to make an acquisition in yourself, and has the board gotten together, whether formally or informally, to review what the firm's strategic alternatives are? Thanks. (Robert Schiffman - Credit Suisse Securities - Analyst )

Q6. Yes, thanks very much. I guess, three of the wireless developments you didn't refer to in your prepared remarks were the winning of the federal contract, which obviously--Bell even this morning suggested you gave away, in terms of margin, the launch of Amp'd and the heavy advertising that we've seen, and the Spectrum white paper. I'm just wondering, on the federal contract, could you give us some idea as to why you bid what you did? On the Amp'd, could you tell us whether there was any impact on the quarter expense, or--I've seen revenues relatively low. And what your views are on the Spectrum auctions. (Dvai Ghose - Genuity Capital Markets - Analyst)

Robert McFarlane: Well, thanks, Peter, for the question. In terms of the overall aggregate market growth, I think the first quarter is a very unusual quarter, because it--most of it preceded the March 14 launch of local number portability. So I think we can certainly say with hindsight there was some purchase deferral trends going on in the marketplace, particularly, I think, in the post paid space, where it was quite competitive.

So I think we really need to see, if you will, to normalize the market for having LNP being about there and in place for a period of time. And I think we really won't see that normalized trend, really, to Q3 and Q4, because Q2 is really a substantive quarter of the initiation of LNP.

So I think that's a factor that sort of clouds it to a certain extent.

Secondly, I guess as it relates to our share and the profitability for the industry, certainly we've been pleased with our results. We've continued to increase our margins overall, and in spite of that, I note today, I guess, we led in terms of total wireless net adds--not that that's necessarily our goal, but certainly we're not getting a disproportionate share of the overall growth. Our share rates remained relatively constant--we certainly have not led the industry in price discounting, that's for sure.

So I think from our perspective, it's steady as she goes. As to what Bell may do and what impacts that may have, I think that's best for them to comment on. But clearly, in respect of our results, we're satisfied.

Robert McFarlane: Vince, I think the first point to make is, this company has had a sterling record of creating value, whether actually through shareholders or for debt holders. In that respect, we certainly enjoy a strong confidence in the marketplace, and our shareholders continue to show that support in all of their comments to us.

So I certainly reject the notion that we're vulnerable, or certainly--we're not scared. That is for sure.

In respect of leverage policies on a go-forward basis, I think the policies that the company has followed to date have benefited the--our shareholders significantly. And we're really in the--right in the midst of unleashing a significant refinance savings for the organization as it relates to refinancing at lower rates, particularly once we refinance the notes, the $1.5 billion notes next month.

Having said that, as you know, every year we review our policies. We're not rigid in stone. But we do look at what our weighted average cost of capital is, and pick a policy that is appropriate with that. And so we're certainly in no need, under no pressure, to be reactionary to any developments that are going on in the marketplace, and in particular, those that relate to balance sheet items.

And to the extent to which we're generating a lot of free cash flow, that just translates into a lot of value for TELUS, and certainly there is the potential to lever the balance sheet. That doesn't mean necessarily that one should do it, but I think the market recognizes the underlying cash flow generation and the financial strength of our balance sheet, and that's creating advantage for us, I think, both competitively and strategically at this time.

Robert McFarlane: Glen, I'd love to help you with the modeling, but the reality is, it's quite uncertain and it is a function of some of the rulings. It's also a function of what we do in terms of capex. Certainly there's some outstanding determinations on qualifying capex, etc., and so unfortunately, I can't give you a trend line.

And I think, given that it's really just from one pot to another, I know you like to know the underlying growth rates. But it's really just in one pot or the other. It doesn't affect our overall growth rates or performance.

So I think from that perspective--keep in mind that it doesn't distort the overall results. Unfortunately, there's no basis for me to give you any clarity on a quarter-to-quarter basis for the particular revenue categories

Robert McFarlane: Jeff, I think a couple of points. Firstly, it is only one quarter--one quarter doesn't a year make. And traditionally, we don't revise guidance after the first quarter, so that's the first point I would make.

Secondly, as it relates to wireline, while seasonality is more of a dynamic or factor with respect to wireless, it's also an important factor with respect to wireline because of the cost of acquisition associated with our broadband activities, which tend to peak in the latter part of the year--certainly, much greater than the first part of the year. So that's a bit of a dynamic there.

But I don't want to get too specific. As you know, we really avoid quarter-to-quarter type of forecasting. We've had a good start to the year, but it doesn't a year make. And we'll relook at our estimates after the second quarter.

Darren Entwistle: Thanks for the question. Let me respond explicitly. This company has not and will not comment on corporate development activities within the public forum. That includes acquisitions, mergers, divestitures, or any form of financial engineering whatsoever.

What I can tell you is that this is an organization that does not need to do anything on the corporate development front to see its strategy through to fruition in full. We've got the entirety of assets that we need to organically see our strategy through to conclusion, whereby we can generate excellent results, and by extension, create value for shareholders and carry on with our current methods of returning cash to shareholders through our dividend growth model, and the continuation of our NCIB program.

Robert McFarlane: Well, Davi--or is that Dvai? In terms of the winning the federal contract, I think that's distinctly a positive event for our organization. It would be misconstrued if it was to be characterized as a contract where we're not going to make money. Most definitely, it is one where we will.

Remember that we were number three in terms of supply, as a supplier to the federal government, and so from that standpoint, becoming the primary supplier--not the sole supplier, by the way. The primary supplier is an incremental win for our organization, and it really will translate into net additions in the second half of the year, because it's really just getting underway now.

And I guess in relation to local number portability, while maybe not explicit, it certainly was time to coincide with that, so from that standpoint I guess, LNP is looking positive for our organization at the outset.

Really, the government's decision was very transparent. In terms of their procurement approach, they have a quantified approach to criteria on the purchase. I think that's for public consumption, to my knowledge. And if people care to go and look at that, they'll find that quality in the network experience--the coverage, the customer satisfaction, as well as capabilities and services that we can offer. And to the extent they're different than competitors, those are all heavily weighted criteria, more so than price.

So to say that it's a contract that was won solely on price would be inconsistent with even the methodology the government used to award the contract.

In terms of Amp'd, I think that's relatively minor. We launched that in the first quarter, as you know. That's--we do own those customers, and really operate that service in Canada. It's very early days for us, but certainly that is a service, as you know, which--based on U.S. results is a very high ARPU, very targeted offering in the use space, and certainly is very consistent with the value-added differentiated approach to the marketplace.

Dvai Ghose: So on the Amp'd, Bob, there wasn't much expense? Because I must have seen the ad about a thousand times, and I'm ready to shake my junk at the moment, but I'm just wondering how much it cost you.

Robert McFarlane: That must mean you watch the Spike TV channel a lot, Dvai, which may reveal a few things about you. But in any event, I think we're quite comfortable. You know, you're launching a new product and service, so if people don't know about it, they're not going to buy it, so--

Dvai Ghose: But did it have any material impact on the quarter, in terms of expense?

Robert McFarlane: No

Dvai Ghose: Okay. And on the Spectrum auction? Any comments? I guess--you know, it's only a white paper, but--

Darren Entwistle: I think, Dvai, suffice to say that our view is that the Canadian wireless industry right now has a very robust competitive model that's driving significant investment, that's driving significant innovation in terms of new product launches. And if you need an empirical piece of evidence as to the competitive intensity, you only have to look at the voice ARPU diminution to illustrate that there's a degree of pricing pressure out there that's non-trivial, and thankfully, been overcome by what we're doing in terms of data services growth.

Number two, I just got with the program, whereby the federal government was moving towards relying on market forces to the maximum extent feasible, and I think what's good for wireline in that regard is also good for wireless. So I think any Spectrum auction should be done from a level playing field, allowing people to build accordingly, and pursue Spectrum of their own volition, but not certainly on a subsidized basis.

And I don't think subsidized competition, or managed competition from a regulatory perspective, is a sustainable model, and of course, the past is pressing it in that regard, because we have a lot of new entrants that were facilitated by the regulatory model, that did not prove out to be sustainable competitors, because effectively, the competitive model was being subsidized, or was being ordained by a regulator.

I think it's better to let free market forces determine competitive outcomes. And I think there's two very interesting pieces of evidence on the table.

Number one, the competition bureau spent six months adjudicating on the efficacy of the market going from four players to three players, and the robustness of the ensuing competitive dynamic, and they signed off on it.

Number two, the telecom panel review came out and determined that the right way forward for the telecommunications industry in Canada was to pursue deregulation and rely on market forces, and thankfully, that's been embraced by the government and in particular, industry Canada, and the foresight that the minister has had on this particular area, I think, is directly applicable to what happens within the wireless domain.

So I'd say, let's have a free and open competition, and let's let the Spectrum, the bandwidth, follow according to a competitive process. And at the end of the day, I think that's a healthy thing, and if you want to see continued investment within the Canadian wireless industry, in terms of technology and infrastructure and bringing new services to market, which are good for the lifestyles of consumers and the competitiveness of Canadians--Canada's businesses, then I think that's facilitated by a light regulatory touch.

Let's let the market determine the outcomes that are suitable to our industry.

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Q1 2007 investor conference call - presentations

John Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
Back to Q1 overview