events archive
events archive
Q3 2004 investor conference call - Q & A transcript
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Q1.Thanks very much, and good morning. Congratulations on excellent results across the board. My question has to do with the longer term deployment of free cash flow. As you indicated, Bob, the 2.2 times long-term ratio has now essentially been met. Your EBITDA is growing in the eight to 10% a year range, and clearly you can pay down a significant amount of debt. And I guess what that raises for me is a question of where you would see future deployment of free cash flow going. Obviously lots of room to increase the dividend and buy the stock back. I'm wondering, are there also opportunities for you to invest in your existing business, or if you could provide some guidance to how low you think that debt to EBITDA ratio would likely go, before you start having to take more extreme measures to pay cash back to equity investors. (Richard Talbot, RBC Capital Markets)
Robert McFarlane: Great. Thanks, Richard. In terms of applying free cash flow, essentially there are two broad categories investing in the business. --- is the first, and second is returns or cash distributions, either in the form of dividends or share re-purchases to our shareholders. The third, I guess is, of course, debt reduction. Until this point in time, our distinct priority has been to de-lever the balance sheet, and for that reason, we gave very specific long-term targets for debt to capital 45 to 50% as well as the debt to EBITDA of 2.2 times or less.
As you know, and I've remarked in our comments today, we have achieved both those targets. I think that's notable because that's 15 months ahead of original plans. So with that precedent being accomplished, then that's what's given rise to the flexibility to go down the list of priorities, and say now is an opportune time to take a more balanced approach and return some capital to shareholders, both in the form of dividends and share repurchases. Many of our institutional shareholders have commented to us over the past while, some preferring a dividend increase, some preferring a share repurchases be commenced. And again, I think, in the style of our company, we've reflected on that input, done our own internal analysis, and concluded that a balanced approach of both dividend increase and share repurchases are appropriate.
However, I think an important thing to understand when one looks at the results today, I think it's indisputable that this company has an attractive growth opportunity ahead of it. And that means the use of cash to invest in internal operations continues to have a very distinct and high return for us. So we're in really, Richard, a virtuous situation in that because of the strength of our free cash flow generation, and the growth potential, and our confidence in that, we don't have to make discreet choices between investing in the business, reducing debt, or returning capital to shareholders. In fact, we can accomplish all three. That's truly a virtuous situation.
So in terms of ultimately where we go on the leverage, I think it's consistent with the fact, for example, on a long-term debt to capitalization ratio of 45 to 50%, does that mean we have to be at 45.1 to 49.9 or something at all times? No, but you should be acting in a long-term manner to be consistent with that. And I think that in terms of our comments today, our remarks concerning that we continue to target a credit rating improvement, I think it would be an appropriate expectation to see our debt levels continue to reduce moderately over time. 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.
Q2.Hi. Thanks very much. On the dividend payout target, I was intrigued that you're using EP -- ah, earnings as opposed to free cash flow as the metric. Given there's a pretty big gap between your current Capex and your depreciation amortization of about 300 million, it works out to about 80 cents a share. I was wondering if you could comment on that, and maybe in relation to that, your time frame for cash taxes, which I assume comes in to play in these dividend thoughts given your profits have accelerated faster than you may have thought. Can you give us an update on when you start to pay cash taxes, in your opinion. (Vince Valentini, TD Newcrest)
Robert McFarlane: Okay, thanks, Vince. I think first of all, I think certainly in our sector it is conventional to have an earnings-based payout ratio target. Secondly, in terms of TELUS, it is more appropriate than on a free cash flow basis, and that's really related to the second part of your question, you astutely reference taxes. We've been in the situation for the past while where taxes are a source of cash flow for the company, and we would expect to become taxable in 2006, and therefore paying cash taxes in arrears in 2007.
So typically with convention by paying based on the current or prior years, you pay in the prior year, you're going to have double taxes in 2007 on a cash basis. So the advantage of earnings, is earnings assumes a fully taxed P&L. So it's a smoothed-out measure, and therefore more appropriate, as a gauge of medium to long-term measure to base a dividend payout ratio on.
Vince Valentini: Can I just clarify; you expect your shelters to be done by the end of '05, so you're taxable for all of 2006, or some, sometime in the middle?
Robert McFarlane: Actually didn't say either. I said in 2006, as I recollect.
Vince Valentini: That's what I mean, so you add any more specifics, just some time in 2006?
Robert McFarlane: That's correct.
Q3.Yeah, thanks very much. Congratulations on the excellent results and the really good announcements regarding the return of cash. I am almost sort of trying to find something to challenge you on here. But I'm just wondering where the union situation lies, where the TV strategy lies, and also shareholders have expressed some concern of Verizon's sale of non-core assets. I'm wondering if you could update us vis-a-vis your equity relationship with Verizon? (Dvai Ghose, CIBC World Markets)
John Wheeler: Darren, it's John. Do you want to take that in Toronto?
Darren Entwistle: Yeah, I'll field that one, John. Thank you. Thanks for the question, Dvai. In terms of our labour strategy, you're probably aware that we are still pursuing legal recourse with the CIRB so that we can be alleviated from both binding arbitration and the communications ban. That's the course that we're going to pursue to its logical outcome. If we are alleviated from binding arbitration, then we believe that will allow us to pursue a strategy with the union and the unionized employees that allow us to put forward an offer that I think would be quite persuasive for employees and quite beneficial for shareholders. I think that's all I'll say on that particular matter for the time being.
Dvai Ghose: Any expectation on timing, Darren?
Darren Entwistle: Hard for me to make a comment on timing when the decision, Dvai, rests with the CIRB.
Dvai Ghose: Understood.
Darren Entwistle: Number two, in terms of our strategy on the TV front, I'm going to bore you with my answer, because it hasn't changed from previously -- from previous quarter reports. We are still working through our TV strategy, and we are still focused on the three prerequisites that need to be met prior to launch. We want to make sure that the economics are accretive, we want to make sure that the technology is robust right from the network solution to the quality of the picture, so that we positively differentiate ourselves from the incumbent, and we want to have a value proposition that has a range of differentiating factors, none of which is a solution predicated upon on price because we do not want to enter a new market and amortize value for all concerned. We don't think that that would be logical nor consistent with the pricing discipline that you expect from the TELUS organization.
In terms of the Verizon situation, obviously, I cannot speak for Verizon, nor am I aware that they have disclosed anything publicly in this regard. From our perspective, from my personal perspective and that of the TELUS board, we have a positive relationship with Verizon that goes back actually about 50 years, when you think about the incarnation of BC Tel and GTE. I think it's important to point out, though, from where we started a long time ago, between BC Tel and GTE, things have changed markedly, and the modern TELUS is not just self-sufficient, but quite independent, and I think we now pursue initiatives with Verizon where there are mutual benefits, and I think one such case in point is the and cross-border wireless roaming agreement between TELUS Mobility and Verizon Wireless, where benefits accrue to both the Verizon and the TELUS organizations. So there's symmetry there in that regard.
I think it's also important for people to recognize that if Verizon had a desire to sell, it's not entirely within their control. In fact, the control rests with the TELUS organization, with the TELUS board, and with the independent directors on our board. They would have to give their permission to Verizon for Verizon to sell down below 19.9%. That is the equity floor that is set out in the long term shareholders agreement between TELUS and the Verizon organization. So I think that's a bit of flavor, if you will, insofar as the Verizon situation is concerned. Again, I think it's important to point out I cannot speak directly for the Verizon organization and how their strategies evolving going forward.
Dvai Ghose: And no doubt they're enjoying your appreciating stock price. Thank you very much, Darren, and congratulations again.
Q4.Thank you very much. My question would be on the residential side. Ahead of the full introduction of Voiceover IP, could you give us the current picture for your bundled status with the residential base, and what plans you may have there? (Rob Goff, Haywood Securities)
Darren Entwistle: Okay. Let's talk about a few things, then, Rob, in that regard. One of the things I think is a hallmark of the TELUS organization is our pricing discipline. You heard my remarks this morning. That discipline is pervasive across our operations. It pertains to everything from LD rates right through to the way you can expect us to behave in evaluating a potential acquisition or indeed a sponsorship opportunity.
In terms of the tradeoff between pricing and market share gain, we are only interested in economic market share gain. A hundred percent market share of a zero value market, I don't think is a particularly astute marketing strategy. I think also you can expect us to avoid pricing strategies that cause the repricing within our existing customer base and destroy value as a result.
I think another thing you can expect from us in terms of our bundling strategy going forward, is that we are going to construct our bundles to preserve the margins on those services, yielding the highest economic profits for our investors. I think that's an important consideration for you to muse upon, I guess would be a way of describing it.
Next, in terms of our future friendly home or digital home strategy, essentially what we want to do is take our voice base both local and long long distance, build upon it with ADSL and you'll note our subscriber base over the last 12 months is up 26.9% in that regard. Build applications on the back of ADSL in terms of the bundle, and then add onto that a wireless capability. Leveraging the strengths of TELUS Mobility and what we can do in that regard within our consumer wireline base.
Add on top of that, home networking solutions, so take the wireless LAN concept that's prevalent in hotspots and businesses and drive that solution into the household so people can enjoy the benefits of mobility and the ability to network their equipment within the home.
On the back of that ADSL and home networking base, we are poised to launch at the beginning of November, our Home Sitter product which will include wireless cameras in the household, where people will be able to observe remotely what's going on in their home to give them peace of mind, security, to be able to monitor everyone from children to elderly parents.
And then finally, of course, we are seriously evaluating and doing trials in respect of delivering an entertainment solution -- a differentiated entertainment solution into the household.
So I think the way you can describe it is essentially us pursuing a quadruple play, where we are going to deliver voice, data, video, and wireless services as part of the bundle. And again, the way that we construct the bundle will be focusing on non-price differentiating factors. And of course we're going to be sensitive to preserving margins on those services that deliver the highest economic return for this organization.
Lastly, I think, in terms of Voiceover IP, it's important for us to practice what we preach. Pressure on LD from a price perspective and a margin perspective is inevitable, whether that comes from competitive intrusion or technology substitution, or as a result of things like wireless and e-mail.
So we have to take IP technology and drive it into our own business to take out costs on a continued basis. Whether that's having our long distance traffic migrate off the stentor network, and now be entirely on our NGN network, and I think you can note that within the press release that all calls within Alberta and BC that originate from western Canada are headed for either Ontario and Quebec, are now carried on our next generation network. That is taking costs out of our business. That is leveraging IP technology.
So that is something that we need to drive, continually drive to take costs out of the business, to mitigate the margin pressure that we experience as a result of competition or technology substitution.
And as well, we need to compliment that with initiatives like the operational efficiency program, which has now kicked into its fourth phase. Bob talked to you about the first three, and the $519 million that we've enjoyed to date in terms of Opex reduction. We're now into the fourth phase pursuing things like the combination of business and client solutions, leveraging a more consolidated approach to IT going forward, and also harvesting the post acquisition integration synergies that we have not yet realized in terms of the integration of Quebec Tel, a deal that we did back in 2000, but one where we have not yet fully harvested the synergies in terms of better network consolidation and alignment, better IT consolidation and alignment, and also the consolidation of corporate-shared services, including legal, regulatory and finance. So those are things again that are important for us to help mitigate some of the margin pressure.
Q5. (a) Thanks, nice to see the improvement on both areas of your business. Wireless has been the story in the past, and certainly communications looks a lot better. I just need from Bob two finance questions. First of all, a point of clarification. You've given the guidance range on your payout ratio and you talked about target leverage ratios in the past as being indicative of longer term. I'm wondering, if your payout ratio is indicative as well, and if as well , how prospective is it. It looks like you're looking down the pipe to 2005 earnings and establishing your dividend policy as opposed to what you have in the hand, which would be 2004. And I'll ask the second question once I get the answer to that one. (Peter Rhamey, BMO Nesbitt Burns)
Robert McFarlane: Okay. Yes, it is indicative. In other words, it would be reflective of our forward-looking expectations. So we want to first of all, from a dividend policy perspective, the board makes the decision quarterly. What we've now done is tried to communicate to the street the framework that we use to make that decision on a go-forward basis. So the 45 to 55% of earnings would be not binding per se, but we would generally try to comply with being in that range, based on our expectations of future profits.
Q5. (b) Great. And second part, Bob, would be, you've got some debt terming out in the not too distant future, I'm wondering if there's any advantage to you refinancing that and getting some benefits in extending the term of any facilities you might have, and as well any interest costs savings, and if you could give us an indication of where you might be able to refinance that, that would be terrific. (Peter Rhamey, BMO Nesbitt Burns)
Robert McFarlane: That's right, Peter. We -- In 2006 we have a significant maturity of some of our Canadian notes. Of course, there are no material maturities until that point in time. So from a repayment perspective, in contrast to the fact we paid off about $200 million of longer term debt this quarter, we have no more long-term debt that comes due until the spring of 2006.
I think in terms of the refinancing decision based on the cash flow that's being generated from this organization, and not withstanding the dividend decision and possible share repurchases, we have significant cash to refinance those notes. The extent to which we decide to refinance a portion of those notes or not, has not been made. I think, though, we have strong balance sheet flexibility to take advantage of what we feel will be the appropriate situation at that time.
In terms of repaying early, given the terms and conditions of those notes, it wouldn't appear to be economically advantageous. So an early refinancing repayment would likely be only in conjunction with some form of a term extension or refinancing as opposed to an early repayment.
Peter Rhamey: Right. So I'm not sure whether there is an opportunity here to lower your interest cost by looking at that situation. What I read from your comments is, not necessarily?
Robert McFarlane: Well, certainly when it comes time to -- when they come due, and if yield curves remain where they are, given the credit spread we have, we have a material opportunity to reduce our cost to debt. I think the extent to which we want to refinance that debt or repay that debt remains to be seen. And we do have that flexibility given the strong cash generation in the organization. We already have 600 million -- $620 million sitting in our balance sheet. And this repayment decision is still 18 months away.
Q6.Thank you. I'm going to try a follow-up on the union. If you can't predict the timeline for completion, is there a timeline where you have to decide to rely on arbitration for a solution, and specifically with the changing competitive environment, and with Shaw's approaching launch of telephony, does a lack of settlement put you in a disadvantage in preparing you for that competition? (Peter McDonald, GMP Securities)
Darren Entwistle: Thanks for the question, Peter. No, I don't feel that there's a timeline that's going to force my hand to go into binding arbitration. I think binding arbitration is the second best solution for shareholders, and that's who I'm paid to represent. I believe a negotiated solution will give this the magnitude of the change that we need to be successful and competitive as an organization going forward. It will allow us to release a significant efficiency and productivity gains that are inherent in the new collective agreement that we have drafted and are looking to operationalize.
So we are working very hard to make our case with the CIRB and to expedite a ruling from the CIRB so that we can be alleviated from binding arbitration, and we can be alleviated from the communications ban, because I am very desirous of getting the full magnitude of change that we believe is necessary to enhance the competitive profile of the TELUS organization and to release significant efficiency in productivity gains.
I think it's important to point out, given your question on competitiveness, under the existing collective agreement where there was quite a few doubts in the past insofar as our ability to deliver upon the operational efficiency programs, phases one through three, we've actually delivered in full on those programs. I talked about the $519 million Opex reduction delivered thus far, and we're already now into OEP phase four.
So I would say even under the legacy environment we have proven as an organization that we can harvest efficiency gains for the benefits of our shareholders. From a competitiveness perspective, two things, you can see clearly the competitiveness being demonstrated by TELUS Mobility, but I think I would also point out that even in the past where we have seen softness on the wireline side of the business, our wireline operations relative to the wireline operations of our peers from a financial and operational perspective, compare very favorably.
In addition to that, and the question that I answered for Rob Goff, I talked about what we're going to do in terms of the competitiveness on the consumer front, and what our bundled solution looked like in terms of the quadruple play. Driving that quadruple play into the consumer market does not have any impediments associated with it that are union-related.
I think this terms of one element of our competitiveness for the purposes of being illustrative, vis-a-vis the incumbent on the ADSL and entertainment front, we can deliver under the legacy collective agreement environment on our complete digital home strategy, and I think that's the most important thing for competitiveness and for value creation for this organization going forward.
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
Question period
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