events archive
events archive
Q3 2005 investor conference call - Q & A transcript
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Q1.(a) Thank you. I was glad to see the dividend increase coming to effect in the quarter as promised, despite the labor disruptions, so congratulations on that. But I do have a couple of questions on the use of cash. First, will the dividend review be an annual event and can we assume it stays at 45% to 55% and is that of normalized earnings? (Peter MacDonald – GMP Securities)
Darren Entwistle: Thanks, Peter, I'll answer that question on behalf of the TELUS Board. In terms of the dividend payout ration range, you would be correct to assume that that is in fact our guideline and that is a policy within TELUS corporation, so you should expect stability in respect to that policy and you should expect us to adhere to that policy to the extent which we have surplus cash and our desirous of returning it to shareholders. Number two in terms of presuming whether the dividend increase is an annual event, the answer would be a soft yes. The yes would relate to the fact we have postulated a dividend growth model which means we are forecasting, if you will, successive increases in the dividend consistent with our dividend payout ratio range should we have surplus cash that we would be desirous of returning to shareholders. The reason that I say it's a soft yes, the fact that the dividend decision remains the providence of the TELUS Board of Directors and subject to change at their discretion along the way. So importantly to take away, I think you can count on the 45-55% dividend payout ratio range and the policy going forward, and the fact we've been quite explicit postulating a dividend growth model means that we are looking to deliver successive increases to the dividend insofar as we have surplus cash consistent with our dividend payout ratio range but that is subject to change and at the discretion of the TELUS Board of Directors from time to time.
Q1.(b)Thanks and then secondly, you lowered your Debt to EBITDA target to 1.5 to 2 times so maybe you can expand on that rationale behind that and what your comfort level would be in increasing that ratio in the case of required added Capex or acquisition opportunities and maybe as a follow-up on that, Darren, can you also talk as you have in the past with Allstream, if you can run through an explanation on ManitobaTel and why that may or may not make sense. (Peter MacDonald – GMP Securities)
Robert McFarlane: Thanks, Peter. It's Bob McFarlane. I'll take the front end of your multipart question which as I recall was related to the Debt to EBITDA target. You referenced the change, if you will in terms of establishing a new long-term range of 1.5 to 2.0 on a Net Debt to EBITDA basis. The rationale for that is essentially we perform periodically here in my treasury team a cost of capital analysis and we analyze where we believe the tradeoff between leverage and dilution is and it's our belief that for the characteristics of our business and the credit rating agencies criteria , et cetera, that a 1.5 to 2 times range as we define that, the ratio would be consistent with achieving our targeted credit ratings of BBB high to A low. In fact, we are at BBB high or plus in respect to three of the four agencies already and we are at 1.8 times Net Debt to EBITDA as of September 30 so essentially our theory is proved correct and you'll note that which our debt trades is very attractive relative to competitors and certainly at the narrowest spreads in many years and that bodes well for our ability to fund operations at a low cost and expand earnings through reduced interest expense on a go forward basis. In terms of funding say Capex programs we have given consistent guidance in that regard in terms of a consolidated basis being in the mid to high teens as expressing Capex divided by sales. And of course from time to time one is going to have troughs or peaks. Having said that, we in this past quarter clearly had deferral Capex as it relates to constrained resources due to labor disruption so one would naturally expect a shifting of Capex into next year so I'm not about to give guidance for next year, I would suggest we continue to expect around mid-to high teens in Capex intensity on a normal basis, however, certainly if we do have a resolution to the labor disruption this quarter, hopefully we'll have an acceleration in Capex in the first part of next year reflecting a shift in activities from this year. Having said all that, the leverage target is a long-term target so the point is that you should be acting consistent with that in a strategic fashion not to say that you cannot deviate from it in the short-term. Having said that, I'll hand it over to Darren to address the second part of the question.
Darren Entwistle: Thanks, Bob. Obviously Peter I'd believe that you'd agree the interest of shareholders are not best served by discussing strategic business development opportunities in a public form. I think it is important to note that TELUS has all the assets that we need to execute effectively and organically on our national growth strategy with a focus on wireless and data services. So any business development opportunity on the acquisition front would be complimentary to the core asset base that we have now which is completely capable of fulfilling our strategy sticking to an organic growth plan. Also, as I have said previously and I think this guidance sometimes has been helpful, is that when we evaluate business development opportunities we have a very set and very transparent set of criteria. Number one, that would have to be a solid strategic fit so what would that particular acquisition do to accelerate our focus on wireless and data growth on a national basis. Two, what is the commercial differentiation that we achieve through the acquisition that allows us to improve our sustainable points of competitive advantage. Three, the economics are all important which essentially boils down to price. And then lastly, what is the digestive capability of the TELUS organization i.e. do we feel confident we can deliver on the post acquisition integration and deal up the return to shareholders that they would expect and of course we need to make sure at TELUS that we are a balanced organization and we can only digest a finite number of activities on our plate at a given point in time. So we need to be very cognizant in respect to the bandwidth of this management team.
Peter MacDonald: Thank you.
Q2.(a) Yes, thanks very much. During the quarter you made an announcement about installing Nokia DSLAMs for ADSL 2+ capability and now you've announced the launch of TV. Can you talk a little bit about what your capabilities are in terms of delivering bandwidth sufficient for TV across your foot print and how you plan to grow that? (Glen Campbell - Merrill Lynch)
Darren Entwistle: Glen, yes. We are indeed adding Nokia as a manufacturer within our network to compliment some of the moves we have made in the past with Lucent, Alcatel and Cisco so that we get the correct data speeds to be able to deliver not just high speed internet access into the household, but on top of that, security applications and as well today with the announcement of the launch of entertainment services, an innovative, digital TV service. In respect of the bandwidths that we are looking at right now, I won't speak about the foot print because I think that's competitively sensitive information. I'm not going to forecast as to which markets we'll be targeting geographically in the near term. I don't think that advantages our shareholders. But in respect to bandwidths, we are achieving bandwidths of circa 8 megabits per second which is sufficient to deliver a payload of high speed Internet access, security applications and as well TV. For those customers that are closer to our central office where we have a shorter loop length we can get payloads of up to 10 megabits per second. We are at the present point in time also in the process of delivering, and this is of course part of the Nokia development that you referred to, ADSL 2+ which will take over 12 months or bandwidth within said geography from 8 megabits per second up to 15 megabits per second which will facilitate the integration of things like high definition TV. We are also exploring the route of going ADSL 2+ bonded essentially making use of multiple pairs within the home which can allow us to double the bandwidth in respect of ADSL 2+ from 15 megabits per second to 30 megabits per second. Over the next two years to three years we will be significantly upgrading our access infrastructure pushing five or deeper into our access layer to the curb side cabinet within neighborhoods and then going with what we would call TPON solution which would be a combination of optical topology with an ethernet connection into the household to allow us to deliver 100 megabits per second. I think the important for shareholders is that TELUS is taking a prudent and judicious economic approach to upgrading our access infrastructure. Our desire is to sweat our assets. We've already made a billion dollar investment in rolling out ADSL in the first place so to sweat that asset, maximize our ability to deliver applications over given levels of bandwidth, leverage compression technology to maximize the bandwidth and deliver the best return on investment to investors possible, while simultaneously making sure that we can differentiate ourselves from the competition in a meaningful way as a result of the applications that ride on that bandwidth.
Q2.(b) Thanks very much for that detailed answer. I know you don't want to give Capex guidance now, but can you give us a sense of you know, referencing that normal range of low to mid teens of Capex intensity. The program you are describing over the next two to three years, how much would that boost capital spending or to put in another way would it take you outside the normal range? Can you give us any sort of parameters to help model that? (Glen Campbell - Merrill Lynch)
Darren Entwistle: Two comments to make Glen, we, of course, have been investing in our access infrastructure over the past 18 months to facilitate the introduction of TELUS TV and that's going to need to continue. In respect of forward looking guidance, insofar as the Capex is required to support the TV initiative and beyond the TV initiative you should look to the guidance that we will be providing as per usual in December for 2006 where we will set out our Capex intensity target for TELUS Corporation , for TELUS Communications and for TELUS Mobility at that particular juncture.
Glen Campbell: Okay. Thanks very much.
Q3.(a) Good morning. First just a follow-up question, Darren, on your comments about the five strategic criteria. I'm interested, first of all, in what would be the greatest weighting that you would apply to it. You mentioned strategic fit on increasing wireless and data. Is that the overriding criteria or would you evaluate an opportunity that presented perhaps more just a one-time financial opportunity. And perhaps even a follow-up question for Bob, looking at the tax. You'll be using up the tax losses in 2006 and begin paying some fairly significant cash taxes in 2007. How big of a priority is it within your organization to manage that upcoming tax bill and in the absence of actually doing an opportunistic acquisition, what can you do to minimize some of that tax bill? (Jonathan Allen - RBC Capital Markets)
Darren Entwistle: Thank you, Jonathan. A couple of things are important to say. In respect to the four criteria that we set out to use as a template to evaluate strategic business opportunities for the sake of clarity, they were a strategic fit, commercial differentiation, underlying economic and post acquisition integration considerations. In respect to the waiting suffice to say for people on the phone that we think those criteria are mutually inclusive so we look at them holistically rather than one individual parameter being weighted over and above the rest. One thing I can say in terms of guidance, however, is that the overriding view from a sequence perspective is that first we have to evaluate the strategic fit so looking at the economics in isolation is not something that we with do. We would first, of course, evaluate what is the strategic fit. And if we came to the conclusion there was a good strategic fit we would then look at economic considerations and ancillary economic considerations such as tax avoidance but we would not do the reverse. Where the strategic fit was absent we would not be necessarily persuaded to undertake an acquisition purely for the sake of advantageous economics or the opportunity to capture ancillary economic benefits such as tax avoidance. It's important to point out these are mutually inclusive and we look at them on an inclusive basis but the starting point for this organization is always going to be what is the strategic fit, what does it do to advance the strategy and what does it do to deliver for us commercial differentiation. At that particular juncture then we review pricing considerations and ancillary elements of the underlying economics.
Robert McFarlane: And in regards to tax, paying tax isn't such a bad thing, it means generating profits, having said that, in terms of would we make an acquisition to shelter tax, I think Darren has really addressed the criteria at which we would evaluate such an opportunity and you are correct in terms of base assumption that we would become, you exhaust the current shelter that we have in 2006 and therefore, begin remitting tax on a one-year delayed basis i.e. starting in 2007 so that's the base scenario.
Q3.(b) If I could follow up on one last question to what you referred to earlier Bob, looking at some of the debt re-financing opportunities, you've done the 2006 issue. When we look at 2007 and 2011 you've got 7.5 and 8.5% coupon debt and you'll probably be able to re-finance that below 5% currently. Is there anything that would prevent you from re-financing the debt now in terms of the FX hedges etcetera or is this an opportunity that you've looked at? (Jonathan Allen - RBC Capital Markets)
Robert McFarlane: Firstly, I note you put in the past tense the re-financing in 2006, it's December 1st so we have a couple weeks to go before that's done and that's what I'm currently focused on. But I think your question is well taken in the sense that one should look at the various re-financing opportunities in a holistic manner which we certainly do from a TELUS Treasury perspective and we will evaluate and are evaluating our alternatives with respect to other forms of debt and the redemption formulas are set and clear in those notes so it isn't as simple as you hire a debt and then re-finance at lower rates because there are redemption penalties therefore and as you eluded to various swaps that need to be unwound and so we're going to evaluate that and I'll provide more color in respect of our longer term financing plan on the December 16th call.
Jonathan Allen: Thanks very much.
Q4.(a) Question is on the strike-related cost indicated there, roughly $68 million Bob mentioned. Other than timing, are there any significant changes in the run rate of those strike related cost impacts in Q4 and also, were there any strike related impacts on revenue and what I'm referring to are potential deferred sale impacts, potentially re-allocating sales staff, things like that or inability to install access lines for DSL, anything like that. There wasn't a mention but I'm wondering if that might have had an impact that you might be able to define? (Greg MacDonald - National Bank Financial)
Robert McFarlane: Okay, Greg. You're right. The number is $68 million respective in the third quarter. If you recall the strike commenced on July 21. So, it wasn't a full quarter in terms of strike but also keep in mind that there were rotating work stoppages that were going on for proceeding the start of third quarter and we had already invoked our emergency operations plan in order to address those situations so we were incurring costs for the full quarter. Fair to say not the entire emergency operation plan cost for the entire quarter so there's that aspect as it relates to run rate. Having said that, you typically as we did have more up front loaded costs in terms of training, so on and so forth as it relates to the labor disruption and that therefore bodes well in terms of a run rate going forward. And in terms of the fourth quarter, I won't give specific guidance on those line items but what we tried to do was provide updated guidance which takes into account either the assumption that the vote which is currently underway is a positive outcome and therefore the agreement is ratified later this month or not so it provides the book ends and clearly it effects the expense line not so much the revenue line and therefore that's why we have the wider range at EBITDA level than we do at the revenue side. Now, if the ratification vote underway goes positive -- then we are obligates to have a return to work notice procedures within 72 hours and typically given the magnitude of the 14 odd thousand people involved that we have a return to work process that would see Bargaining Unit members return to work and managers re-assigned back to business as usual roles over a 7 day period. So, what I'm saying is simplistically, if we had a yes vote think of return to business as usual by the end of this month so we have one month of call it normal expense levels. However, we are into the Christmas season which has its own seasonalities as well. All of that has been taken into account to the best of our ability in terms of the guidance we've given. On the revenue side we haven't disclosed a number per say. I just wanted from my perspective, to mention that yes, there has been revenue impacts. We can make internal estimates but we didn't feel comfortable from a true MD&A perspective to say the fact revenue impact has been this or it's been that and rather I think in terms of steering it in the right direction, the revenues have been resilient on the wireline and outstanding on the wireless side so we've done well regardless. Clearly we could have done a little better, but we've taken a more conservative disclosure approach in terms of pointing out the expense impact. Darren, did you want to add any comments as it relates to the labor impact?
Q4.(b) Just as a quick follow up. On the restructuring cost you mentioned also $18 million year to date, $20-50 million for the year. I think what you're implying is that it depends on whether you get a yes or not. Does that naturally imply also the $50-80 that wasn't impacted for this year that we would have expected will be rolled into '06? (Greg MacDonald - National Bank Financial)
Robert McFarlane: You're correct in that we tried to incorporate a range which encompasses the book ends of a near term ratification next week or no ratification whatsoever for this calendar year and that applies to the restructuring costs as well. In terms of longer term restructuring efforts certainly we do have plans and much in the form of the Capex where we've noticed a deferral Capex, it's a similar characteristic as restructuring charges.
Q4.(c) And finally in the guidance that you're going to be giving us in December., will you be talking about the potential for cost savings as a result of a new labor deal at that date? (Greg MacDonald - National Bank Financial)
Darren Entwistle: Yes, we will. We will refer to what we will be dealing up in terms of workforce restructuring charges we intend to invest in 2006 to realize efficiency gains some of which can be emanating from the freedoms that we enjoy as a result of a new collective agreement. In just in respect of the revenue question you are asking, I'm presuming you are looking for an answer to that question. It would be fair to say that TELUS and the financial results that we have put forward as a result of the third quarter of this particular year demonstrates significant resilience in the face of the work stoppage particularly within the wireless component of our overall operations. It would be fair to say there's a degree of asymmetry where the weighting of the work stoppage impact is more on the expense line than it is on the revenue line. There have been modest revenue impacts. It would be fair to say particularly in British Columbia we have deferred installations and deferred business development opportunities with corporate customers in British Columbia as a result of the work stoppage and wanting to make sure that the politics of our work stoppage do not impact any of our corporate customers here so we have deferred some installs and some business development opportunities. It would be fair to say on the consumer front in both Alberta and BC, our long distance winback activity specifically precipitated out of our call centers, has been mitigated as we've had to re-direct our call center talent towards more high factors like continuous customer care so we have seen a situation in the third quarter where effectively our winback capability on our long distance was absent as we had people focus on basic service. In addition, our installs on the ADSL front were impacted by the work stoppage. Fair to say the impact was skewed. The heaviest impact on ADSL subscriber growth came in July and August and then we started to recover in September as we improved our operational capability which I think bodes reasonably well for some continued momentum to go through into Q4. Ironically our TELUS TV launch was scheduled for the 21st of July in Alberta, the day the strike ensued. So we have seen a 15 week deferment of our TELUS TV launch and I'd say as well the strike has provided a minor distraction to our business in Ontario and Quebec as we have had to draw upon resources to shore up our operational capability here in western Canada. An important point to take away is as a result of the fact we have 59% of the people within the bargaining unit in Alberta now crossing the picket line and the fact that we are complementing with third party contractors, today we are at full operational capability in Alberta and will reach that point in the not-to-distant future in BC, which is allowing us to pursue accelerated ADSL fulfillment and as well the launch of innovative services such as TELUS TV so we feel pleased with that. Finally, the wireless business and the strength of the excellent performance at TELUS Mobility is evident of the resilience from a revenue perspective, but moreover a general financial and economic perspective of the wireless business in the face of the work stoppage. When you look at a business that generates 16% revenue growth and 20% EBITDA growth and 49% cash flow growth, augmented by a $2 increase in ARPU and a 1.33% increase in churn and a record number of subscribers, that's a set of financial and operational parameters that is not necessarily reflective of a significant impact on that business by the work stoppage.
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
Robert McFarlane, executive vice-president and chief financial officer
Question period
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