events archive
events archive
Q2 2004 investor conference call - Q & A transcript
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Q1.(a) Good morning. Congratulations on the wireless results. You've obviously shown and we've seen across the industry a big increase in the overall EBITDA margins for the business. I wondered if George could give us a sense on where you think that margin is likely to go. I know in the past, you've cautioned us to not get too carried away, but clearly we're seeing these strong numbers. The industry continues to grow while the capex intensity comes down. I would appreciate your thoughts on longer-term sustainable EBITDA margin. (Richard Talbot, RBC Capital Markets)
George Cope: Thanks, Richard. Thanks for the comments. Yes, clearly we've seen the margin expand beyond our expectations of a little over a year ago where I had indicated that getting the industry to see margins in excess of 40% would take, you know, pricing discipline in industry, et cetera, and of course we've seen some of that. People are focused on subscriber growth and profitability. From our perspective, a number of things are driving our margins higher than we had expected. I think one of the key ones for us has been to see our churn level come down, such that is mentioned in the release. This year our post-paid churn now go to 1%. And one of the key drivers for us had been that we'd often said that we thought 1.5% on a blended basis would drive the margins into, you know, the 40% level. Clearly, we're seeing that churn can be under 1.5 and that's driving it. So without giving guidance, I think it's clear, Richard, that, you know, I was light at 40% and our focus will be to try to maintain the margins that you're seeing now as we continue to grow the business as profitable as we can and again, continue to balance subscriber growth with our profit growth.
I think the other really positive, though, for investors has been our ability to maintain the capex level such that the free cash flow generation is obviously now going up, because we can, we believe, maintain the business and that 12-14% of capex to revenue and those things obviously bode well for the future of the Mobility business and therefore TELUS.
Q1.(b) If I can just follow up, I know you announced earlier in the year a number of price increases that were kicked-in in July 1st. I believe you've implemented those. I just wondered if you could comment on the potential for continuing to have modest further price increases to go forward. (Richard Talbot, RBC Capital Markets)
George Cope: Well, we continue to try to balance the growth with the profitability and our pricing in instruments in the marketplace. We did implement some price increases at the beginning of July and we'll continue to try to monitor the market and what we can do in terms of balancing subscriber growth with profitability. So those price increases have gone through. We have no other announcements this morning. We'll now be focusing on the important part of the last half of the year, which drives a lot of subscriber growth for the industry.
Q2.(a) The question is on the non-ILEC strategy. You indicated, Darren, that you're not happy with the results that you're seeing in terms of concerns, I guess, a little bit, the press release noted on wholesale pricing and equipment sales. I'm wondering though aside from that, maybe on a larger strategic issue, given Bell's focus on its CLEC strategy in the West, is that indicating that you should be -- are you thinking that you should be looking at changing to be more aggressive, I guess, your strategy in the East and would that potentially have implications on capital and operating investments? (Greg MacDonald, National Bank Financial)
Darren Entwistle: Thanks, Greg, for the question. To be very direct in responding, I think you can expect us to be considered and prudent in the East and certainly disciplined going forward and you should not expect us to be overtly aggressive. We believe fervently that we have the absolute right strategy in Eastern Canada. We've got the right leadership team under Joe Natale in Eastern Canada. We've got a very, very healthy sales pipeline that's burgeoning and I think we also have a technology leadership advantage over the competition that is resonating very well with our target customer base that we're going after.
I think it's important to point out that we have had an explicit policy to migrate away from non-recurring revenues to higher quality recurring revenue streams. I think you got a sense of that in my comments this morning. If you look at the first half of 2004 in totality versus the first half of 2003, recurring revenues were actually up 19% and over the last six quarters, recurring revenues have gone from accounting for about 58% of our revenue composite in the non-ILEC business to 75% today, so I think that's a reflection of the success of that strategy.
The other thing, of course, that is impacting us is that typically when we secure a non-recurring piece of revenue, particularly from something like a CPE outright sale, that particular piece of business, as we secure that revenue from the CPE outright sale is going to be EBITDA-accretive in the financial year; whereas typically when we secure a wide area network piece of business which is recurring over three, five or a seven-year term, it is typically going to be EBITDA-dilutive in the year and I think that's some of the pressure that you can see now manifesting itself in the profit and loss statement for our non-ILEC business.
The other thing, Greg, that I think is hitting us - and clearly, this is a management rather than a market issue - is that we're now moving out of Greenfield mode, and for the first time in the history of our non-ILEC business, some of the contracts that we put in place back in 2000 and 2001 are coming up for renewal and for the first time we're actually experiencing the pressures of re-price as we renew those contracts and experiencing the pressures and the responsibilities of churn management. And that has also caused a hiccough in our results and that's something for management to come to grips with.
A couple of other, I guess, concluding comments that are perhaps worth noting: we have secured a number of large managed data network deals on a national basis, some of which we have communicated publicly in the form of the TD and the Co-operators deals. There have been several other large significant managed national network contracts that we've secured, but we have not been given leave by the customer to disclose the identity of those deals. And the totality of the revenue and the EBITDA associated with these deals is not yet reflected in our profit and loss statement. And perhaps just to give you some empirical evidence to substantiate that comment, the full annualized billing rate for the Toronto Dominion Bank is between $24 and $27 million on an annual basis. Thus far this year, the first half of 2004, we've only billed $1.4 million. And the other deals that we've secured beyond TD are not yet reflected at all within either our revenue or our EBITDA numbers, so clearly, we are expecting a benefit from those particular contracts as we bring them to fruition and begin to enjoy the full annualized billing cycle.
I guess the last issue which is again a criticism that I would point at the management of this organization is that I think all of the factors that I'm articulating are understandable. I think they're very much consistent with our strategy and again, you can expect a disciplined focus from us going forward. I think we have been less than adept at forecasting accurately the financial performance of the non-ILEC business going forward and factoring holistically the dilutive EBITDA effects of moving from a non-recurring revenue base to one that's much more predicated upon recurring revenues. And clearly, that's an area for improvement going forward from this management team.
Q2.(b) Thanks, Darren. Just a quick one-word follow-up. Is there anything in the recurring revenue line in terms of business segments that worries you where -- either on volume or pricing? (Greg MacDonald, National Bank Financial)
Darren Entwistle: No, there's nothing that gives me undue concern. I'd say, you know, as always, to the extent to which in a non-recurring -- or rather, recurring wide area network revenue stream, you've got long distance in there, which is a minor percentage actually, because our focus has been very much on data, but to the extent to which we do have long distance contracts, and we also, you know, have to be very mindful that that's the area that's most susceptible to churn, that's the area that's most susceptible to re-price, so in terms of the way that we manage the customer experience and customer retention, we have to be mindful of that. But again, long distance is a small fraction of our recurring revenue base because we've had a very disciplined and prudent strategy to focus on managed data network solutions, which have a much greater degree of stickiness.
Q3.(a) Hi George. My question is given that your operating expenses have only grown by 10%, given your -- and your capex has been flat, given your MOUs are up 28%, and, you know, these MOUs being up because of the more aggressive plans that you're offering like the 700 minutes for 45 bucks, would you -- if Microcell disappears from the market, would you consider keeping those plans in the market, given their profitability? (David Lambert, TD Newcrest)
George Cope: Well, first let me – I'll answer the back part of your question and then come back to the beginning. No comment at all on how we're going to price in the marketplace our products till we get to that point in the marketplace, so there's no comments at all on the Microcell transaction in terms of what we'll do with the business until we are successful in this transaction or not, depending on the outcome.
In terms of our own strategy, the 700 EW, we've never offered that -- very, very short period of time. It has literally no impact at all on our MOU. That was a retention program we used, not offered -- primarily in helping us a little bit on the City Fido, but quite frankly, it's been immaterial.
The MOU expansion we're seeing is the usage of just wireless has clearly become more and more commonplace and we're seeing people using the services and the functionality and the continual move towards people subscribing for evening and weekend rate plans, as well, people using the phone just more and more often; not necessarily a pricing strategy by us in terms of driving somehow, you know, larger and larger buckets like we've seen in the U.S. And so, no, the 700 EWs had no impact at all.
Q3.(b) Okay. When would you give out some numbers on what you think your integration impact is going to be with Microcell? (David Lambert, TD Newcrest)
George Cope: Well, as people know, TELUS Mobility and TELUS, we've tried to be very transparent in our disclosures on all of our business in the Mobility area, probably disclosed as much as any pure public wireless company and so if we were -- as the Microcell transaction, if we were to come to the conclusion consistent with the management style here, we would be very forthright and open with our plans there. But obviously, that's not appropriate at this time.
David Lambert: So not until the transaction closes.
George Cope: It would be inappropriate to talk before that.
Q4.(a) Yes. Thanks very much. I want to focus on capital spending. It was up in the wireline segment and if I understand the commentary, it was up for quality of service issues and some product development. And I'm just wondering to what extent is that -- it's not a spike, but increase in capex one-time in nature, i.e., you had to regain your momentum on the quality of service, et cetera, and so on and to what extent is it are you coming up to a new plateau in terms of capital spending in the medium term? I'm thinking two years out, three years out. Thank you. (Peter Rhamey, BMO Nesbitt Burns)
Bob McFarlane: Well, Peter, I think – I wouldn't say it's one-time in nature in the sense that we have adjusted our guidance for the full year, so what we've experienced the first six months I wouldn't call one-time. We've given the guidance for now for the full year and it's higher than the original guidance.
Having said that, I think that we have always contemplated in the past couple of years on a go-forward basis to operate in the 15-20% consolidated capex intensity range, and more particularly in the neighbourhood of 16-18%, and that's really what we're seeing. And so I think there's a band in terms of a range or ballpark which we're going to bounce around in and any given period will be at the higher end or the lower end of that range and I think that what the results say in the go-forward guidance are really consistent with maintaining within that range.
Q4.(b) Follow-up question, if I may, Bob, is on DSL, I think you made some commentary with respect to spending $35 million to expand there and it's mostly allocated or driven by subscriber growth. How much was for footprint expansion? (Peter Rhamey, BMO Nesbitt Burns)
Bob McFarlane: Footprint expansion was definitely a significant element of that capex, as well as upgrades in terms of shortening some of the loop lengths in existing urban areas in our ILEC territories. I'm not in a position to really provide the precise breakdown between both, but both activities transpired in the quarter.
Q5.(a) Thanks very much. Darren, congratulations on the good results, but I'm sure you share my disappointment about the stock price, even with its recent rally. With that backdrop, I'm wondering if you could comment about the appropriateness and perhaps timing of share buy-backs, dividend increases, reconsideration of wireless IPO and perhaps another round of employee downsizing through early retirement? (Dvai Ghose, CIBC World Markets)
Darren Entwistle: Wow. Okay. Let's just run through this perhaps, Dvai, in reverse order, if I may. In terms of employee downsizing, I think you can expect to see three thrusts coming out of the wireline side of the business to revitalize the financial performance of that particular segment of our business. Number 1 is going to be a push on the digital home initiative, which is a suite of products that range from wireless home networking to home security, right through to potentially TELUS TV and I think that will provide us with new and attractive profitable revenue streams that we can enjoy within our ILEC base. I think you can expect an uplift in the performance of the non-ILEC business in Ontario and Quebec for the reasons that I've cited in my previous answer. And I think that you can expect something of the ilk of the Operational Efficiency Program that we've invoked over the last couple of years in a series of phases from Phase 1 right through to Phase 3 to be institutionalized behaviour and discipline for the wireline business going forward. So to be quite blunt, yes, we will be looking at achieving further efficiency and productivity improvements of a material nature from the wireline side of this business.
Of course, our goal on the wireline side of the business is to try and drive increased revenues from things like non-ILEC expansion or the digital home initiative, complement that with cost reduction such that we can offset the negative impacts of regulatory decisions, competitive intrusion and technology substitution. If we can do that, then I think at a corporate level, we fully expose ourselves to the significant contribution that TELUS Mobility is now making to top line revenue growth, to EBITDA, to EPS and, of course, to the free cash flow of this organization. So that's very much the mentality for us on a go-forward basis.
In terms of a wireless IPO, I remain fairly consistent on this comment. That is not something that is on strategy for this organization. I don't believe that our customers are looking for TELUS to take a segmented approach to the marketplace. Quite the reverse. They're looking for us to take an integrated approach and I think over the longer term that's the best way to grow shareholder value.
On the share buy-back front, that is not something that is presently being contemplated by this organization. In respect of dividend increases, again I think our answer on that particular point is pretty clear. In terms of the cash that we are generating as an organization, the first priority is to deliver against our publicly-stated deleveraging or credit targets. I think we're well on course to do that. Of course, the second use of the cash will be to fund on-strategy initiatives within the Canadian marketplace that give us and our shareholders and our debt-holders an attractive ROI. And then thirdly, should we have surplus cash, having exhausted those investment opportunities, then this management team will not go off strategy in terms of the way that we expend that cash, but rather will look at the most tax-efficient mechanisms possible for returning it to our shareholders, on a sustained basis, I might point out. Again, increases to the dividend remain the providence of the board and I think once we have achieved what we have set out to achieve in terms of the first two objectives, then that can be a subject for more interesting discussion at that juncture and perhaps that's not too distant into the future.
Q5.(b) If I can quickly follow up, Darren, on the TELUS TV, we're now sitting in early August and you still are not publicly committing to pursuing the strategy. Can I ask why? (Dvai Ghose, CIBC World Markets)
Darren Entwistle: I think we will announce our entry into the entertainment distribution market if that, indeed, is something that is going to come into effect, on the day that we operationalize it. I don't think that shareholders or debt-holders benefit from us pre-announcing a date in terms of our entry into that particular market. If we choose to do so, I think that only leaks competitive intelligence into the marketplace. At the end of the day, it only benefits the competition and I see very little to be gained by the TELUS organization for pre-announcing. So if we do go forward, you'll hear about it on the day that we choose to operationalize it and I think that that's the right type of behaviour from this organization from a competitive standpoint.
Robert Mitchell, director, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
Robert McFarlane, executive vice-president and chief financial officer
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