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Q3 2006 investor conference call - Q & A transcript
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John Wheeler: Just before I turn the call over to Ron to conduct the Q&A session, can I ask your cooperation for one question at a time please. Ron, please proceed.
Operator: [OPERATOR INSTRUCTIONS] The first question will be from Marje Soova from Goldman Sachs. Go ahead please.
Q1. Thank you. You haven't discussed plans for dividends and share repurchases for next year. I was wondering if you could also just address your views in terms of leverage targets going forward and if you would be open to increases in leverage in order to enhance returns to equity shareholders? Thank you. (Marje Soova - Goldman Sachs - Analyst)
Robert McFarlane: Thanks Marje. In regards to leverage, we have an established and well known leverage policy as it relates to both debt to EBITDA being in that ratio of 1.5 to 2, as well as net debt to capitalization. At this time we're making no change to our leverage policy and it is in the past been viewed in the corporate structure as the optimal range for our organization.
I know that there was discussion in the contemplation of an income trust scenario, wherein due to the lack of tax deductibility of interest, and therefore the higher cost of capital associated with debt in an income trust structure, that there is logic to perhaps having a lower leverage than otherwise. Obviously, in a corporate structure scenario that would not be applicable and therefore for the time being we are maintaining our existing leverage policy.
John Wheeler: Okay, Ron, next question please.
Operator: Thank you. Next question is Vince Valentini from TD Newcrest. Go ahead please.
Q2. Thanks very much. Bob, could you give us an updated estimate, assuming you're not a trust, what type of cash tax payments you'd expect to make in 2007 and 2008? (Vince Valentini - TD Newcrest - Analyst)
Robert McFarlane: In regards to income taxes, they would be negligible as they would pertain to foreign income that we earned and therefore from a materiality perspective cash income taxes would commence in 2008.
John Wheeler: Okay, Ron, next question.
Operator: The next question is from Jonathan Allen from RBC Capital Markets. Go ahead please.
Q3. Thanks very much. As part of the income trust conversion in September, you had also announced a collapse of the dual class share structure. Even though the income trust consideration is now being reconsidered, is there any change in your view on collapsing the dual class shares? (Jonathan Allen - RBC Capital Markets - Analyst)
Robert McFarlane: Jonathan, in terms of the two classes of shares, we've had a structure in the corporate structure that has worked well for ourselves. Clearly, as you referenced, in the income trust conversion scenario we intended to collapse into one class of units because you can't have multiple classes in the trust structure.
Having said that, we have always reminded anyone when we have had the opportunity that the dual share cost structure at TELUS is solely to facilitate compliance with foreign ownership restrictions that govern the telecom sector, while at the same time allowing unfettered access to global capital markets and the unfettered ability for non-resident investors to invest at will in TELUS. Having said that, we have also emphasized that if legislation changes such that TELUS is no longer subject to foreign ownership restrictions, then the articles of the company provide for an automatic conversion of the non-voting shares into the voting class.
Therefore, I certainly have not understood a rational for differential pricing between the two classes when they enjoy the same dividend and participation in economics. Having said all of that, we are familiar that certain hedge funds like to take positions and play one way or the other and that's really not in our interest to facilitate one direction or the other. All I would suggest is when it came to an important vote, such as the vote that would occur in order to decide whether the company would convert into a trust, you will notice that the non-voting shares, perhaps misnamed, actually have a vote as a class.
So I would just remind investors that there are significant shareholder rights for perhaps the misnamed non-voting share class at TELUS and we have no intentions at this stage to publicly announce regarding a conversion of the two classes, but again I remind that I think the rights are virtually identical between the two and I certainly don't understand the rationale for differential pricing.
John Wheeler: Okay, Ron, next question please.
Operator: The next question is Dvai Ghose from Genuity Capital Markets. Go ahead please.
Q4. Yes, thanks very much. I just want to come back on those two points that were made earlier Bob. First of all, on the voting, non-voting side, you were going to collapse them on the trust. I don't think there's anything magical about a trust vis-a-vis foreign ownership, so why wouldn't you do it as a common equity? And second, it's great to see a quick response to the trust debacle of Tuesday, with a 36% increase in the divvy, but even on a fully tax basis, looking at your $1.6 billion or so of free cash flow and taxing it, there's only a 47% pay out. You were prepared for something like an 80% pay out as a trust. Is there any reason why it shouldn't be that much as a common equity on a fully tax basis? (Dvai Ghose - Genuity Capital Markets - Analyst)
Robert McFarlane: Well, in regards to the first part of your illegal two-part question, I don't. So there will have to be a fine levied from John on you, Dvai. Although, I must say you're improving from your normal five-part questions. The dual share class structure has worked well for the company in the past and the difference in a trust structure is you cannot have two classes of units in a trust. So it's not a possible structure that could be facilitated in the trust structure. So we've come up with a structure that would facilitate compliance with foreign ownership, but essentially collapse to one unit class.
Given that the government's announcement was unexpected, at least by TELUS, and this is Friday and it was only on Tuesday, late Tuesday, that the government made the announcement, I think any expectation that we would have a model to collapse a share structure that had been existence for the past six years and worked well is a little bit accelerated. So certainly we have no intentions, again, to remind -- to do so. As always, we'll always give consideration to good suggestions from our shareholders, but this structure has worked well for us in the past and therefore to proceed on that default basis shouldn't be controversial.
In terms of the second part of the question, which relates to the dividends, as I emphasized in our presentation, a combination of return of capital in the form of dividends and share repurchases, just keeping share repurchases at the existing run rate, experienced this year, into next year would lead to a combined approximate $3.85 return of capital per share. Given our different classes of shareholders, some taxable, some non-taxable, we have in the past received considerable feedback as to preference for either dividends or share repurchases and that is not a unique preference amongst all investors.
So we chose in the past to have a dual track initiative in returning capital to shareholders. We've been widely applauded by all shareholders for that approach. What we're doing today is reminding the investment community that in the event that we do not pursue an income trust conversion, we will revert to our traditional approach to return a significant amount of capital to our shareholders, both in the form of dividends and share repurchases, and that, as I've illustrated, the aggregate amount of that, just continuing with our existing share repurchase program run rate, in combination with the new higher dividend, would lead to a combined return on capital that approaches the same distribution of capital that had been contemplated in an income trust conversion scenario.
John Wheeler: Next question.
Operator: The next question come from Glen Campbell from Merrill Lynch. Go ahead please.
Q5. Yes, thanks very much. A question on employee head count. I noticed that it rose about 10% year over year in the wireless segment, roughly in line with subscriber growth. Clearly we're looking for opportunities for operating leverage going forward, can you talk about what might have driven that and also how it might change going forward, whether we might look for, say, slower growth relative to subscriber growth in the future? Thanks. (Glen Campbell - Merrill Lynch - Analyst)
Robert McFarlane: I guess we're getting into the micro now. In terms of the staffing on the wireless side, I would point out that revenues grew at a 17% clip and subscriber growth grew at a 10% clip. So that is a healthy ratio, I would suggest. The EBITDA margin the organization at 45.5% also, that by the way total revenues, not merely of network revenues, is also industry leading. So we have a high margin level, high productivity level in the organization.
Obviously we are investing to maintain superior levels of customer service. You can see in the churn rate, that is maintaining industry leading low level, that is having and continuing to have, a positive effect. We are also investing in adding expertise in the area of wireless data. That's probably the biggest growth area outside of the operations area and the consumer operation. And obviously with significant growth in wireless data, that is also paying dividends. I have no specific guidance in relation to staffing levels on a go forward basis for the wireless operation.
Operator: And the next question is from Jeffrey Fan from UBS Securities. Go ahead please.
Q6. Thanks very much. My question is on your wireless ARPU. When we look at the data growth in ARPU is certainly strong, but when we subtract that out, looking at voice and other ARPU, it looks like it's down a little bit year on year. Can you talk about maybe how you would plan to grow that side of the ARPU, not the data, but the non-data? It looks like your minute of use is also flat. Is minute of use something that you could use to drive further growth, or maybe there are other levers that you could use? Thanks. (Jeffrey Fan - UBS Securities - Analyst)
Robert McFarlane: Jeffrey, in terms of wireless ARPU, I think your question is a good one and it may help clear up a misconception that seems to be out there. As you know, and as we emphasized in our presentation, we have experienced great wireless ARPU growth, up a couple bucks to the $5.11 territory. Having said that, we have experienced the traditional repricing downward in the voice services area. I don't really see the price per minute trend of a decreasing price per minute for voice changing. That's a function of the very competitive aspect of the Canadian wireless industry.
What we're really experiencing here is that the introduction of new wireless data services and a tremendous accelerated adoption of those services, facilitated by new high speed EVDO handsets, EVDO investment, in our case, at least, that we have made in our network, et cetera, has led to a rapid acceleration of data that has exceeded the revenue decline on a per subscriber basis. So that's a trend that I would say, based on past experience, would expect to continue in the future. So the great aspect of this industry is even though it is becoming less and less expensive for consumers to enjoy the benefits of voice wireless services, from a carrier perspective, we are introducing new services that obviously are being enjoyed, as they are receiving rapid take up, and the net result is accretive to our overall ARPU.
John Wheeler: Ron, next question.
Operator: And the next question is from Michael Rollins from Citigroup. Go ahead please.
John 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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