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Q4 2006 investor conference call - Q & A transcript
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John Wheeler: Thanks, Bob and Darren. 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] Peter MacDonald, GMP Securities.
Q1. My question is on the wireline margins. If I exclude restructuring and non-ILEC my back of the envelope calculation shows that your traditional wireline margins were down somewhere around 300 to 400 basis points sequentially. Now obviously you met the high end of the guidance range, but maybe you can just discuss what the trends are in there. Was there something earlier in the year that doesn't transpire into Q4 or were there any onetime items for example? And that's it. Thanks. (Peter MacDonald - GMP Securities - Analyst)
Robert McFarlane: Yes, there were a number of I guess what you'd call onetime, hopefully onetime if you count weather as onetime, but who knows these days? But certainly in the fourth quarter this year in the west we experienced some highly unusual weather patterns that led to significant overtime in our field force to maintain quality of service. So that was an impact this year. If we go back to last year there was, as I recall, circa $7 million of credits on CDNS which were reaped by our TELUS Quebec incumbent territory. And so that was in the results a year ago.
There were rate reductions in CDNS that affected our ILEC territory to the negative side throughout most of 2006 and certainly for the full quarter of the fourth quarter. And I think the other two things to note are in our incumbent areas we are rolling out TELUS TV service and there is -- and we also have significant work going on on the network and there's an element that's capitalized, but there's a significant element that is not capitalized. So there is an opex ramp up associated with deployment of those new services and that's reflected in the numbers; it was relatively negligible a year ago.
So those are the big things. Generically typically, as we all know, and it's been a permanent trend, $1.00 of data carries a smaller margin than $1.00 of voice conventionally, so that would be more of a macro point.
Operator: Peter Rhamey, BMO Capital Markets.
Q2. Actually just as a follow-up to that question real quick, Bob, typically do you expense about 15% of capex? And my real question is on data growth 8.8%, how much of that is organic? Is there any equipment revenue in there and if so what would be the adjusted number?(Peter Rhamey - BMO Nesbitt Burns - Analyst)
Robert McFarlane: Peter, could you just reask the question? You said we expense 15% of capex.
Peter Rhamey: Typically for every rule of thumb that I've been using, and I could be wrong, is 15% of capex gets expensed typically and I was wondering if that's kind of what we could apply for your broadband build because I understand it's about $200 million a year, just for us to get some sense of the numbers.
Robert McFarlane: Yes, that's not an approach I'm really familiar with looking at it. You typically if you look at labor expense, a certain portion is capitalized versus expense depending on what they're working on. And for example, when you are working on repairing weather-related damage, etc., that's not a capitalizable expense because you're just repairing to the original state. And we certainly had a high level of that occurring which drives actually a compounded cost because you're running into overtime as well as, not just the fact that it's work that is expensed rather than being capitalized.
So I don't have the exact number in that regard, but absolutely, that was a definite trend in the fourth quarter. I know most of you are on Bay Street, but if you were living out here on the West Coast and we had an all-time record amount of rain and an all-time record amount of snow and it was in the same month of November, right in the middle of the fourth quarter. So needless to say, that was a challenge for maintaining our network. The second part of your -- sorry, you asked a question about equipment, Peter. Just rephrase that.
Peter Rhamey: Yes, organic data revenue growth, I assume it includes some equipment sales which are lower margin. I was wondering if you could help us out with that 8.8% number and adjust it for equipment sales and give us a service revenue growth rate.
Robert McFarlane: I don't know that top of mind, but I think the conclusion would be whether you're looking at the revenue or the equipment side it would be similarly positive. There's no big differential that I'm familiar with.
Operator: Vance Edelson, Morgan Stanley.
Q3. My question is on wireless data. Can you provide us an update on the status of the EVDO rollout; maybe give us a feel for what percent of the footprint is covered? And the fact that wireless capex was down year-over-year, is that an indication that major markets are now covered and there is not much more planned, or should we expect considerable wireless capex going forward to expand the reach of 3G? (Vance Edelson - Morgan Stanley - Analyst)
Robert McFarlane: In terms of EVDO, we have concentrated mostly on urban deployments. So whether it is our capex or that of Bell's collectively through a network sharing arrangement, all of the major urban areas have been covered. We are continuing to push that footprint out into rural areas, for example, in Alberta. So there continues to be expenditures in that regard.
We have also begun predeploying for DOrA, if you will, the RevA of EVDO, and that is also reflected in our projected capex guidance for wireless in 2007. So we are definitely going down that path as well. We have been incurring EVDO expenditures for two years. We're definitely past the peak, but it remains an element. We are not providing specific guidance as to the amount being expended, but suffice to say we do have deployment not only for concluding the EVDO but also to commence DOrA in 2007.
Operator: Jonathan Allen, RBC Capital Markets.
Q4. Thanks very much. Wireless data was very impressive in the quarter. And Stan pulled up the overall ARPU for wireless, but looking at the underlying voice trend, Bob, it seems to be flat for the last couple of quarters and then seems to be down about 1.5%, 2% this quarter with minutes of usage also flat to declining. The question for you is, one, is this at all a concern for you with the trend that we're seeing in voice ARPU? Second of all, is there a way or is there a need to simulate to minutes of usage in any way? (Jonathan Allen - RBC Capital Markets - Analyst)
Robert McFarlane: Firstly, it would be incorrect to conclude that voice ARPU started to decline in the fourth quarter and not in the previous quarters. We have been running for some period of time year-over-year decreases in our voice ARPU. That is not a new fourth-quarter phenomenon. I just chose maybe to emphasize it more. I think there is a misconception out there in the general public that pricing is going up in wireless when, in fact -- because of ARPUs going up when, in fact, pricing continues to go down on a net basis on voice. But it is the significant adoption of new data services as well as roaming revenues for some carriers contributing to an overall aggregate increase in ARPU.
So, in our case, we have always modeled some compression in the voice ARPU. I think that has been the case for quite a while now. So what we are really seeing is that the significant adoption of wireless is more than offsetting that, and that is why the overall ARPU is going up as it is.
Operator: Glen Campbell, Merrill Lynch.
Q5. My question is for Darren. Darren, you mentioned that wireline capex in '07 at $1.2 billion is a cyclical peak. I wonder if you could talk a little bit about whether you see the possibility that TELUS might have to go beyond its plan for ADSL 2+ fiber-to-the-node strategy for the wireline network, just something that might cause capex to either rise after 2007 or remain high for a very long time? Thanks. (Glen Campbell - Merrill Lynch - Analyst)
Darren Entwistle: Thanks for the question, Glen. I think we have been pretty clear from the outset that our approach on the broadband front is one where we are looking to achieve a smooth capex profile on a sustained basis. So when you see us make an announcement about a $600 million broadband built program, that was projecting out for three years. So that is indicative of the smooth profile in respect of providing the necessary technology upgrades that deliver the bandwidth on a per-home basis that we need to be competitive.
We have also indicated that quite explicitly in previous calls what the technology path for this organization looks like. And effectively, what we have said is we're going to take ADSL to ADSL 2+, and then from there to proceed to ADSL 2+ bonding where we are actually multiplexing access lines together to double the bandwidth to around 30 megs. And also simultaneously with that push fiber deeper into the access layer closer to the neighborhood, again to raise the bandwidth.
And that would allow us to deploy technologies like VDSL or GPON where we would have a combination of a fiber deeply deployed within a neighborhood and then an Ethernet connection into the home. So for us, what we would like to do is push fiber deeper into the access layer on a consistent basis rather than a lumpy capex profile, and then have an Ethernet connection into the home. And we think that's the right balance between the necessary bandwidth to be competitive and prudent capital investments that are done on a smooth basis, if you will, over a protracted period; we've indicated three years in this particular instance.
The only area where I think we would be different in terms of our technology deployment and the topology of our technology deployment would be apartment buildings or what we would term to be multiple dwelling units. In those instances we would be looking to bring fiber directly to the suite because it's economical to do so, or in new neighborhoods where we're deploying fiber on a greenfield basis and we have the opportunity to more economically deploy fiber directly into people's homes and bring that type of bandwidth into play.
We've also said that the balance for us is we never want to hit our head on a bandwidth ceiling and become uncompetitive. We want to make sure that we've got a bandwidth envelope that allows us to deliver the type of applications that customers want and whereby we can derive an attractive economic rent from those applications. But also, not to get ahead of ourselves in terms of technology upgrades, to make sure that we sweat each access technology along the way to maximize the return on the investment.
Operator: Dvai Ghose, Genuity Capital.
Q6. If I can ask a question about use of cash. You've set some pretty clear targets, but the ranges are quite big and you're clearly trending to the low-end of your dividend payout as well as your net debt to EBITDA range. On the other hand, you obviously have the commitment to your debt holders to improve credit metrics and so on and you have some refinancings coming up, and to further complicate issues there's speculation about privatization and so on. How do you balance all these things, either Darren or Bob? And as a quick factual question -- Bob, in December you published a free cash flow target of 15.25 to 16.25 for '07 and you've taken it away in your release today; I'm wondering why that is? (Dvai Ghose - Genuity Capital Markets - Analyst)
Robert McFarlane: Firstly, I'm puzzled by the commitment for a credit upgrade. We have a target credit rating policy, it's very clear, for a number of years, BBB high to A low. We're sitting at BBB high for three of the four and the fourth has a rating under review. So I'm not sure we have any pressure in that regard. We just carried through with our long-standing targets. We're sitting in the middle of our 1.5 to 2.0 debt to EBITDA range, so certainly don't seem to be constrained one way or the other. Perhaps we could be at 1.75 and be exactly in the middle and that would satisfy you even more, I'm not sure.
And then in terms of how this all balances, it's pretty straightforward. I don't think now there are many companies with as clear financial policies as we do when we provide both a dividend payout ratio target range on a sustainable go forward basis as well as a leverage policy target. So it's easy to model our business and I think, as I tried to demonstrate in the presentation today, that's led to significant returns in capital, increased dividends, increased share repurchases and I think that's been healthy for our share price.
And I also am not sure that all the analysts have understood the cash settlement program given the absence of any dilution now that will occur from share option issuances. So a share repurchase program in terms of gross repurchases is going to flow right through to net repurchases; it won't be offset as it has been partially in the past.
So I think we've got the right set of policies, we're not looking to revise them. They've worked well. We think that they are aligned with lowering the cost of capital for the organization and we remain committed to that approach.
In terms of a free cash flow target for 2007, I'm not sure why it's not on the slide. I don't know if there's a particular issue; we're not really docking anything, Dvai. There's no conspiracy theory I think working in this regard. So be free to talk to anyone about free cash flow off-line.Operator: Randal Rudniski, Credit Suisse.
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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