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Q2 2005 investor conference call - Robert McFarlane presentation

Great, thanks George, and congratulations on a solid quarter. Let's begin my comments with the recap of Mobility's outstanding results referring to slide 16.

As you've just heard from George, TELUS mobility reported best in class results in the North American wireless industry. Mobility continues to deliver impressive double digit revenue, earnings and cash flow growth. While TELUS Mobility's subscriber base is the third largest in Canada, its revenue growth at 19 percent and notably its EBITDA of $367 million and cash flow of $252 million, led the Canadian industry. The strong results are not only characteristic of the healthy growing industry but also reflect the superior execution of TELUS mobility's strategy in maximizing profitable growth.

TELUS mobility's operational excellence is evident on slide 17. Net additions were up 15 percent to a second quarter record for us of 131,000. Churn increased slightly while at the same time the cost of acquisition per gross add decreased 10 percent to $342, both led the Canadian industry. This is important as it means our record subscriber growth was achieved along with considerable marketing efficiency. Clearly with increasing ARPU, decreasing COA, TELUS Mobility is generating profitable growth that is creating tremendous shareholder value.

Turning to slide 18, as mentioned, second quarter net adds were up 15 percent versus the second quarter of 2004 with continued strong post paid additions and increased pre paid additions. Our total subscriber base has also increased by 15 percent year over year with post paid representing 82 percent of our over 4.1 million subscribers.

Turning to slide 19, given the strong year to date net add results up 11 percent over last year, if we have another successful second half of the year similar to that in 2004, we will be headed for increased net adds in 2005. Accordingly, we are increasing our full-year 2005 guidance for wireless net additions to greater than 525,000 net additions.

Turning now to our wireline segment results in slide 20, TELUS Communications recorded its fourth straight quarter of year over year revenue growth with revenues up 2.3 percent. The revenue breakdown is shown here and three items really stand out. One, we were pleased to keep local revenues flat given the competitive nature of the marketplace. Second, and most notably is long distance. As we were able to hold LD revenue flat, a sharp contrast with the industry trend, given our differentiated strategy which Darren referred to earlier. The third highlight is the strong data revenue growth up 10 percent on a reported basis. Underlying organic data growth is approximately 9 percent when excluding the impact of regulatory decisions and acquisitions made in the past year. We continue to execute our data focus strategy in both our incumbent and non-incumbent markets.

Slide 21 shows the rest of financial results for the wire line segment. EBITDA remained flat at $499 million this quarter, normalized for restructuring, acquisitions and regulatory decisions, EBITDA increased by just under 2 percent which is in line with revenue growth. Simple cash flow declined this quarter due to higher Capex, but remains 15 percent higher than last year on a year to date basis.

Turning to slide 22, another area of strength for TELUS in the second quarter was our non-incumbent operations in central Canada. Our focus on quality recurring revenues is continuing to pay off. Revenue of $156 million was up 19 percent and we generated our third straight quarter of positive EBITDA. We remained on track to achieve our annual guidance for non-incumbent EBITDA which we increased last quarter to a range of $15 to $20 million for all 2005.

Let's go to slide 23 to look at high-speed Internet results. In the seasonally low second quarter, TELUS added 17,000 high speed Internet subscribers down slightly from last year's second quarter. Including 261,000 dialup subscribers, TELUS' Internet subscriber base now totals 990,000 with 74 percent being high-speed.

Slide 24 highlights our network access line or NAL performance. TELUS had 1.8 percent fewer network access lines this quarter than a year ago. Part of this result is due to the loss of one large wholesale business account representing 13,000 lines as well as removal of temporary lines following the BC provincial election. Without this wholesale account loss, total NALs would have declined by one and a half percent. Regardless, TELUS experienced increased residential line losses reflecting increased competitive activity from resellers, VoIP competitors including the introduction of cable telephone in Calgary and Edmonton, as well as ongoing wireless substitution. While we expect improved business NAL results in the future, increasing competition in a residential segment is expected to result in future line losses to be greater than our historical experience.

TELUS consolidated results are shown in slide 25. Consolidated revenue was up 8 percent driven by revenue growth in both wireless and wireline as I noted earlier. EBITDA grew 10 percent due to both continued expense control and significant growth at Mobility.

Capital expenditures were up this quarter by 18 percent and while Capex was up this quarter in both our segments, as you can see in slide 26, on a year to date basis, capital intensity calculated as Capex divide by total revenue has declined in both Communications and TELUS Consolidated. The exception is in TELUS mobility where investments in network capacity and EBDO deployment have increased our capital intensity by a modest amount to 11 percent year to date. Given the labor disruption, we expect capital expenditures to be lower in the second half of the year so we're leaving guidance unchanged.

Let me briefly update you on our attempts to reduce share dilution. During the second quarter, our effort to redeem 150 million of convertible debentures in June became a large conversion event as our non-voting share price surpassed the conversion price of $39.73. As a result, 88 percent of the debentures elected to convert into 3.3 million non-voting shares. Only 17.9 million were redeemed for cash. The difference between the redemption value and the 17 million book value was treated as an expense and resulted in a pre-tax charge of approximately $900,000. The continued share price increases also led to auction and warrant exercises with 2.2 million shares being issued. However, we remained active on the normal course issuer bid and repurchased 6.5 million shares in the second quarter. So an aggregate, these events resulted in a 1 million net reduction in the total number of shares outstanding in the second quarter.

Slide 28 gives you further details in regard to our share buyback program. Under this program, TELUS is permitted to repurchase up to 25.5 million shares over a one-year period ending in late December. In the second quarter of this year, we were active in the market purchasing 6.5 million shares for $272 million at an average price of $41.76. We have now repurchased a total of 12.8 million shares representing 50 percent of the authorized program. TELUS continues to believe that these share repurchases constitute an attractive investment opportunity and a desirable use of TELUS' substantial cash position that enhances the value of remaining shares.

Let me focus for a minute on bottom line EPS on slide 29. While reported EPS was up 10 percent this quarter it was net of 17.5 million pre-tax provision for an unfavorable court of appeal decision related to the early redemption of some BC TEL bonds back in 1997. This provision, plus the expense related to the convertible debenture redemption equated to a 3 percent share reduction in EPS this quarter. In addition, last year there was a 13 cent favorable impact for the settlement of tax matters, so taking this all into consideration, you can see on the slides that the underlying normalized EPS was up 21 cents or a healthy 60 percent.

Slide 30 shows how the 208 million in reported free cash flow was generated this quarter. TELUS makes its semi annual interest payments for the TELUS Corp. bonds in the second and fourth quarters. Looking below the free cash flow line, cash dividends paid to shareholders were $144 million in the second quarter. Now before our yield investors get too excited, I should point out that this represented two dividend payments as remittance of the first quarter dividend occurred on April 1st and remittance of the second quarter dividend occurred on June 30th, both in the second quarter technically. After factoring in nonpublic share issuance and changes to working capital, TELUS had $181 million in cash available for debt reduction and share repurchases. As mentioned, we used $272 million to repurchase shares and paid almost $18 million to redeem convertible debentures which was offset slightly by an increase in capital leases. So overall, TELUS ended the quarter with $1.1 billion in cash, down only slightly by $106 million during the quarter.

Finally, as you can see in this last slide, we're maintaining our consolidated guidance despite the current TWU strike. Operating results were ahead of plan in the first six months of 2005 and we're encouraged with the successful implementation of our emergency operations plan in response to the TWU strike. As well as the significant and increasing numbers of bargaining unit members in Alberta who are working and so we believe that the existing financial guidance remains achievable although actual results will be influenced by the duration of the current labor disruption.

Now, George, Darren and I would be happy to take your questions, so I'll turn the call back to John Wheeler to moderate. Thank you.

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Q1 2005 investor conference call - presentations

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