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Q2 2007 investor conference call - Darren Entwistle presentation
Darren Entwistle: Good morning and thank you for joining us today. As you now know, TELUS' second quarter of 2007 was a challenging one, and our results fell decidedly short of my expectations.
TELUS' results this quarter, on the face of it, do not reflect the excellence in execution that our Company normally achieves. Notwithstanding the fact that certain material events occurred that were either one-time in nature or not expected to have the same level of impact going forward, we cannot deny or excuse the less-than-satisfactory results. Importantly, let me assure investors however that TELUS is standing by its full-year 2007 guidance.
Before we cover TELUS' Q2 results in detail, let me comment on the unprecedented industry events last quarter as BCE progressed towards the acceptance of an offer to be acquired by a private equity investor group.
TELUS pursued the acquisition of BCE, given the compelling strategic and financial opportunity for both TELUS and BCE investors. The benefits for investors included the prospect of significant operating synergies and the use of TELUS shares as a partial consideration to reduce debt, whilst allowing BCE shareholders to participate in a largely tax-free rollover.
In addition, BCE shareholders could have retained an investment in a Canadian public company with a growing dividend. Moreover, the resulting enlarged organization would have been investment grade and well positioned for ongoing investments in new technology and services.
In the past months, we have completed a careful and thorough assessment of the opportunity. We have taken into consideration the following including the challenge to TELUS of having to come from behind, given the disadvantageous nature of the auction process for an industry bidder.
We've taken into account the diminishing economics to TELUS given the substantive price offered by the private equity consortium, including the significant break fee to overcome.
We've also taken into the account the deteriorating debt market conditions and our view of the positive benefits of not bidding, but instead competing against the highly-leveraged entity.
But most particularly, we have focused on the lack of congruence between the accelerated timeline adopted by BCE and the protracted timeline and uncertain outcome required to obtain requisite competition-bureau approval.
Given the significant reverse break fee already established that we would need to emulate, and the lack of any regulatory certainty, the risk that we need to be shouldered by TELUS shareholders would have been significant, and ultimately unacceptable.
Based on all these factors, we are confirming today that TELUS does not intend to submit a competing offer to acquire BCE.
As much as we think it would have been in the best interests of our Company, our industry and our country, to combine TELUS with BCE, given the significant impediments, we believe that this is a prudent and disciplined decision that is the right one for TELUS investors.
While TELUS was positioned to and capable of marshalling a superior price, we were precluded by the process and the inability to secure a sufficient degree of regulatory certainty within a relevant timeframe. This is unfortunate for shareholders who will not have the right to opine either positively or negatively on the merits of our proposal, both in an absolute sense and a relative one.
We also believe that TELUS on a stand-alone basis, executing our proven strategies with a strong growth-oriented asset mix and investment-grade financial policies and strengths; can continue to create significant future value for investors.
Based on this approach, in the last two and a half years, we have delivered three successive double-digit dividend increases that have increased the dividends by 150%, and as well, we have repurchased and cancelled C$2.1 billion worth of shares, reducing our shares outstanding by 7.5%.
One final insight is that the Morgan Stanley Global Telecom Index shows an average for Telco’s on net debt to EBITDA of 1.8 times, indicating the importance related to the capital intent of the telecom industry of a strong balance sheet. This allows organizations to withstand unforeseen events in areas of technology change, regulatory developments, competitive dynamics and as we've seen today, capital market cycles. TELUS remains well-positioned in this regard.
Let me now turn back to TELUS' quarterly results and the wireline business in particular on slide five. TELUS' revenue performance continued to demonstrate resilience in the competitive wireline market. Notably, data revenue continued to be strong, up 8% this quarter across an array of services. At the same time, TELUS experienced only moderate network access line losses at 3%.
The implementation of a major IT initiative by TELUS in Alberta that consolidates multiple order entry and billing systems down to one customer care platform, impacted significantly and negatively TELUS' second-quarter results.
The full-scale transition of more than 1 million customers to this new system resulted in initial difficulties that seriously reduced TELUS' ability to process new orders. It is important to note for investors that despite the temporary issues we faced in adding new customers and services, we did not experience any problems getting bills out the door to existing customers in a timely and accurate fashion.
As you may know, this could have long-term negative impacts and I am somewhat comforted to report that our problems have been short term in nature. To manage the situation, TELUS implemented emergency operation plans in order to maintain service levels with additional resources being added within our call centers to assist with the order backlogs.
As a result, wireline operating profit or EBITDA was impacted negatively by some C$29 million, as TELUS experienced unanticipated and elevated operating costs, and as well, a one-time long-distance revenue adjustment.
To make matters worse, given our challenges on fulfillment, TELUS also experienced additional impact of implementing a stop sell on high-speed Internet customer marketing in Alberta during this time. To illustrate, TELUS experienced negative net additions in Alberta on high speed for the second quarter, given these difficulties.
I'm pleased to note that the order backlogs have now been reduced materially and call center operations within Alberta are now finally returning to normal. Despite the temporary difficulties incurred, TELUS remains committed to this new IT platform and the associated benefits of cost efficiencies, differentiated customer service and improved customer retention.
We know from our experience on the wireless side when we rationalized five customer care platforms down to one, that these system consolidation benefits are real and achievable, but in this instance, painful to implement.
Let's now turn to more positive wireline developments this quarter as shown on slide six. I'm pleased to highlight the major competitive contract win with the Department of National Defense, which transpired in June, and significantly advances TELUS' national growth strategy.
Under this agreement, TELUS will provide and manage a portfolio of network services for the Department of National Defense, including all of its national and international locations. The five-year contract is valued at over C$200 million. This competitive win builds on our strong IP technology implementation track record that has included most recently the government of Ontario, with the data network solution that we are implementing at their various sites across the province.
On the regulatory front, on July 25th, the CRTC issued its first decision on local forbearance, eliminating the regulation of residential phone services in Fort McMurray, Alberta, an important market for TELUS. TELUS expects similar deregulation decisions in the coming weeks in most of our large urban markets including Vancouver, Victoria, Calgary and Edmonton.
I believe that the importance of these decisions is being underestimated by investors. I greatly respect the strong and visionary leadership of industry Canada in taking the steps necessary to rely on market forces to the maximum extent possible in liberalizing the regulatory framework for our industry. These steps are providing TELUS with a level playing field and the competitive tools not formally in our repertoire, which will enhance competition and benefit customers and investors significantly.
Turning to slide seven, let's examine TELUS' wireless results for the second quarter of 2007. It's important to note that the March implementation of the wireless number portability in Canada had a significant impact, both positive and negative, on TELUS' second-quarter results along a number of operating parameters, which was not fully anticipated by industry pundits.
First, wireless number portability contributed to the 15 basis point increase we experienced in customer churn, as compared to the same period last year. Second, TELUS achieved higher than normal gross customer additions and strong net additions this quarter, which contributed to a higher cost of acquisition. Third, wireless number portability also contributed to a 32% increase in customer retention costs, which TELUS believes is a prudent investment in the intensely competitive marketplace.
TELUS' management team must however continue to take a hard look at whether this size of increase was fully needed to achieve these results.
Also contributing to the higher COA this quarter was the impact of launching Amp'd Mobile in March, and of course I will discuss this development shortly.
With that background, it is important to note that TELUS achieved an 11% growth in wireless revenue, facilitated by the 18th consecutive quarter of increasing ARPU as well as the 64% increase coming from data revenue.
Combined, these factors are more than offsetting the continued declines that we are experiencing in voice revenue due to competition from the more than 15 wireless brands from which customers can choose from in Canada.
Unfortunately, due to the much higher costs of acquisition and retention this quarter, as just discussed, TELUS only generated a 3% increase in wireless operating profit. I recognize, as does the TELUS leadership team, that this is not the profit growth investors were expecting from TELUS this quarter. We've got something in common.
Given that TELUS is standing by our full-year guidance for 2007, this is not the rate of growth that our Company cares to repeat on a go-forward basis.
Turning to slide eight, let me comment on several other wireless developments this quarter. Let's start with the bad news. As you know, in June the start-up business Amp'd Mobile Inc. in the US entered bankruptcy proceedings. Disappointingly, its irreparable financial issues also impacted TELUS and Amp'd’s nascent joint launch and business arrangements in Canada.
As a result, TELUS made the difficult decision to discontinue sales in Canada and write down our small equity venture investment in Amp'd in the US. This, combined with depreciation and operating costs, resulted in an approximate C$19 million impact this quarter on TELUS' P&L.
Turning to more pleasant wireless developments, TELUS' higher wireless capital expenditures this quarter reflect the continued rollout of our high-speed EVDO and EVDO Rev A network upgrades, covering two-thirds of the Canadian population. It is important to note that this investment is driving new wireless solutions for customers and resulting in the significant wireless data growth I mentioned earlier.
By way of example, a notable competitive development for TELUS occurred in June with the release of the Blackberry World Edition. This sleek new device of course integrates high-speed data capabilities with CDMA coverage in North America and adds GSM international coverage to keep our clients connected when they travel around the world.
As a final note, investors will be watching closely the expected advanced wireless services spectrum auction rules for Canada, which are set to be announced this fall, with an auction expected early in 2008. TELUS' position on this front is clear, logical and unassailable.
For a market the size of Canada, having three national network players is clearly sufficient. This is, in fact, what the Competition Bureau determined in 2005 when previously bankrupt Microcell was acquired by the Rogers organization. The Canadian wireless industry is a remarkable success story, given the benign regulatory environment it has enjoyed and it's been marked by over C$20 billion of investment and is well-characterized by large initial cash losses for the facilities-based carriers, but this investment drove innovation, customer choice, light regulation and as well the economic growth that we are now seeing being delivered to investors in this industry.
Now is not the time to provide public handouts to deep-pocketed investors who want to enter the wireless business in Canada. TELUS advocates an open and fair auction, with the same rules applying to all participants.
Clearly, it was a disappointing second quarter for TELUS and a momentous one for the entire industry. Let me conclude on slide nine with four key themes for investors to take away.
First, TELUS is obviously not pleased with their performance in the second quarter. While steps were made to advance TELUS' national growth strategy, they were not executed with the precision that is the hallmark of our organization. The good news is that the deficiencies so clearly evident in the second quarter are due to the underperformance of management of TELUS and thus correctable. Let me assure investors, remedial decisions have been made and actions are underway to better advance our growth strategy for the balance of the year. The leadership team at TELUS remains committed to improving our performance in the second half of 2007.
Second, the primary drivers behind the negative aspects of our second-quarter results are special events that are either one-time in nature or not expected to have the same level of impact going forward.
Third, TELUS remains committed to achieving its original consolidated full-year targets for 2007 -- striving to build upon our excellent track record of achieving, or exceeding, our guidance year in and year out.
Fourth, we continue to execute on our long-standing commitment to balance the interests of debt and equity holders, and to return cash to investors, and we demonstrated this again in the second quarter. TELUS repaid C$1.5 billion of debt, which matured on June 1st and refinanced the debt at considerably lower interest rates, saving TELUS tens of millions of dollars in future interest costs.
For equity holders, we also continued to execute on our third normal course issuer bid, repurchasing C$170 million of TELUS shares. Since 2004, TELUS has repurchased and cancelled nearly 45.6 million shares for C$2.1 billion. We also declared today a C$0.375 quarterly dividend, which represents a year-over-year increase of 36%.
In conclusion, whilst TELUS experienced operating challenges in the second quarter, I am confident the Company is well positioned to advance our growth strategy as to continue generating value for investors in the years ahead. TELUS' consistent winning strategy, superior asset mix, commitment to operational excellence and our track record for creating value and returning cash to shareholders, remains undiminished.
Let me personally apologize for the performance that we generated in the second quarter and also echo my personal commitment to improve upon our performance in the quarters ahead. Let me now turn the call over to Bob to brief you in more detail, on our financial results.
Q2 2007 investor conference call - presentationsJohn Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
Question period
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