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2006 Targets Conference Call - Q & A transcript
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Q1: Thanks very much. Bob, we were kind of expecting today to hear something about the cost-cutting plan coming out of the new labour agreement you have. Obviously, it would be embedded in your numbers, but there has been no specific mention of it. Is that something that we may hear about in the future, or is your intention to sort of bury on-going productivity gains within your numbers and not really talk about a specific cost reduction plan? (Vince Valentini, TD Newcrest)
Robert McFarlane: Yes, Vince, it's the latter. We really have made a major landmark progression in transforming TELUS with entering into the new collective agreement with the TWU, and we believe it's a win-win for everybody. And so really as you point out, the benefits at least as it relates to next year are embedded in the overall numbers. And I think it would be inappropriate to try to distill down a specific number and point out -- and at risk of being interpreted, this was a win/lose type of arrangement when in fact we think it's a win-win not only for our company and shareholders, but for our employees who are part of that collective agreement.
So at the end of the day, it's reflected in the numbers, so it's incorporated in that. But I have to be honest with you -- it's not the type of -- many of the benefits are not the type that lend themselves to easy spreadsheet calculation. And what I am referring to is the fact that we have significantly reformed the nature of flexibility as provided by the collective agreement, such that it really transforms our workplace environment for the better. It's very difficult to quantify what are the impacts from having streamlined grievance procedures to having variable pay for all your collective employees, to having promotional promotions and postings based upon competencies and not merely on seniority, and so on and so on. And so those items are obviously positive. They should lead to superior customer service for the benefit of our customers. They will lead to productivity improvements, I agree. But I think what I'm trying to point out here is, while the analyst community in Bay Street loves to fill in a spreadsheet column with a specific number, and yes, we can -- we do have internal estimates and the like -- the reality is that the potential is going to be a function of the ability for our management and our employees to take advantage of the new collective agreement. And I think we have a tremendous opportunity ahead of us in that regard.
Vince Valentini Follow-up on that would be, there were some specific items I think in terms of outsourcing that you now have flexibility to do. Would those type of things flow through in '06, or would it take a little longer to achieve those gains and to maybe see more of that in '07?
Robert McFarlane: The collective agreement specifically referenced I think two categories of things. One was there was a certain set of non-core activities these have been long defined and the discussions or negotiations for the TWU. Examples to that are things like coin sorting and janitorial service and the like, and there are others. And we are not talking a lot of people here. That would be somewhere less than 500 people in total. And so obviously, that is an outsourcing that has been explicitly agreed to between the companies, reflecting really want are jobs that really relate to Telecom, what are not.
There is a second set of explicitly agreed-to changes involving the closure of some smaller call center or a consolidation of some functions. And so in that regard, they're pre-negotiated and those attract restructuring costs related to severance as well.
Now in the case of the outsourcing, there's a bit of an indeterminate aspect of, take janitorial service or what have you, because we're not necessarily giving severance packages to people if they -- if there is opportunities for them elsewhere in the company. To the extent that they are a surplus and there are not opportunities within TELUS for them, then we are giving them best-in-class severance packages.
So in both cases when you are doing severance and you know precedence out there, you're into now the circa 18-month kind of payback time frames. And then when that actually occurs, it's also a function then of when they leave. And these exclusively defined items I just mentioned in the contract, those are ones that will take place or are expected to take place in the first quarter of 2006.
There are obviously other restructuring opportunities, some of which are we had begun primary work, others we're midstream that really were delayed during the labour disruption that occurred and we're sort of gearing those of began. There's another set of new opportunities in the future as well. But typically, if we're dealing with labour severance here into 18 month plus timeframes and a payback; if you are dealing with the consolidations and the closure of leases, it also goes to -- it really changes depending on the remaining term of -- to expiring of the lease, and that varies considerably by location. In all cases, there's strong NPV's. And so I guess from a modeling perspective, obviously we have a bit of flow through in 2006 related to some of the activities we did in late 2004, early 2005, but if you recollect, there was not a lot then. So really, we would see the activities we're talking about today, including the ramp-up in this quarter and in the projected $100 million for 2006 to really have a flow through effect of some meaning in 2007 and beyond.
Vince Valentini Thank you.
Q2: Thanks very much, good morning. Question, Bob. In your 2006 priorities, you highlighted advancing TELUS' business and wholesale markets as a key priority. I'm just wondering how important scale is to the non-ILEC business, and whether you prefer to grow that business organically, or would say a strategic acquisition of Allstream make sense within the context of those strategic priorities or acquisition metrics you have used in the past? (Jonathan Allen, RBC Capital Markets.)
Robert McFarlane: I guess the first comment is, Darren did comment at some length on sort of generic acquisition or M&A strategic criteria that we employ at TELUS, and that's certainly consistent with our very forthright, explicit strategy for everyone to read. Allstream, gosh, is this a question back from, what four years ago, or this a question from now? Certainly, there has been no shortage of opportunity for TELUS to acquire a firm such as Allstream, or if you want it now refer to it as MTS Allstream. So to me, that is a broken record.
I think there's been some recent analyst reports on the street speculating that to presume the benefit of Allstream shareholders. To think that our organization is contemplating a major acquisition at the time we're bringing back 10,000 people to work, we are merging our wireless and wireline operations and we're reporting tremendous organic growth rates, I think only shows that the analysts have more time on their hands than we do here at TELUS. So I think that's how I would comment.
As for the non-ILEC business, I think if you look at the results, certainly we have been delivering upon our -- the objectives that we've set out about a year and a half ago where we said we're going to transition from a focus on revenue growth to a focus on quality recurring revenues that are on strategy, meaning recurring quality data revenues. And the impact of that of course is an expanding profitability. And we have seen that in both the results for the past year and a half or so, as well as in today's guidance for next year. So we certainly don't need to make an acquisition to be successful from a strategic prospective. Having said that, Darren outlined generic criteria which would apply to smaller acquisitions as well.
Jonathan Allen: If I could just follow-up and clarify. It's good to hear you being consistent with this, but I'm just curious whether or not, first of all, it just doesn't generally meet the strategic criteria as opposed to TELUS just having their hands full at moment, or whether or not you would be price-sensitive to the assets and whether or not a lower price would change your mind?
Robert McFarlane: Well, I'm not sure -- the last time I checked, it wasn't trading for a few cents per share. So I think in theory, obviously if you can buy anything, if we could buy Verizon at a cheap price, maybe we'd change our strategy. But I think that's not really relevant to the conversation, so I'm not going to go there.
In terms of the answer, I've given a reference, two things. One is that our organic strategy does not require acquisitions to succeed. Having said that, there may be acquisitions in time which are on strategy. And we've been making those acquisitions in the past two years. It's just that because they're not public companies, no one really cares because it's not driving someone else's return.
Secondly, in terms of whether it's on strategy or not, we have laid out the criteria and I don't think it would be tremendously prudent to go and walk through those 10 dimensions in every single public entity that someone can put in front of me.
Jonathan Allen: I appreciate the clarification. Thanks, Bob.
Q3: Hi, thank you very much. Bob, I just wanted to follow up on the previous question regarding flexibility on the collective agreement. I guess when we look back, going into 2005, you had budgeted about $100 million in restructuring activities. Ended up with $50 million this year because of the work stoppage. But as we go into 2006 with the new agreement, we are still only looking at $100 million sort of in-line with what you had in mind going into '05. Can you just give me maybe a little bit more color in how you would take advantage of this flexibility, especially given the payback of 18 months? Why not be a little bit more aggressive? Is it just because of management resources -- you just want to maybe control the process a little bit? Can you just help us with that please? Thanks. (Jeff Fan, UBS Securities Canada)
Robert McFarlane: Sure. I think the first thing I would say is that, it's a little difficult to be precise with an estimate such as a restructuring of workforce reduction cost. Part of it relates to the timing of when you can recognize. If you recall going back a couple of years ago under the prior GAAP regime, you would take a charge for -- related to the entirety of a defined plan up front, even though the actual expenditures related to the restructuring charge could be over an ensuing number of years. And then about two years ago as I recollect, Canadian GAAP at least changed wherein restructuring charges are closer to a cash concept. And so they are not totally cash, but I would say within a quarter typically. And so even though you may have a plan, there's a sequencing and a timeframe and you get into of course annual guidance with the cutoff in December versus January.
So an example of that challenge here, we're talking about $50 million. Well for us to do the $50 million in 2005, we have to plow through $30 million this month. So it means $30 million of the $50 million this year will really transpire in the month of December. And so even there, guess what, there is the chance that maybe 20 or maybe 35 or something. And that is why we do use the word approximately, not because we're trying to be intentionally vague, but that's just the reality reflecting the preciseness that we can have with these things.
As you go forward into 2006, same concept, obviously now you're 12 months forward. So we underline the word approximately. That does not mean that we wouldn't strive to have -- pursue opportunities that would have it beyond $100 million. But I think at this juncture when we sort of lay out the logistics and the sequencing of various things that are in front of us, and remember that my job isn't just to go and pursue things willy-nilly, but we have a very stringent governance process based on NPV assessment business cases and the like, and not everything gets approved. So basically we are saying it's in the ballpark $100 million in calendar year 2006. I'm not implying that we're intentionally lowering. It could be, $80 million could be $120. We're going to strive to do as much as we can that meets our NPV cutoff. And yes, there is the potential to do more. I would expect restructuring costs to continue into 2007. Really it's maybe not that order of magnitude, but restructuring cost of some size I think are going to be an almost perennial feature, particularly related to our wireline business. Why? Because the wireline business is very competitive. There's top-line pressure certainly in incumbent areas, so it is incumbent upon us to have productivity improvements.
And so in that sense, if we do $80 million or so this year, we're going to have a higher -- in 2006, we'll probably have a higher number in 2007 and we can accelerate some of that and we might have a higher number in 2006. So there's that aspect.
And a final point I would make is that the wireline / wireless merger that we announced only a couple of weeks ago, that merger activity is at its very early stages and we're just scoping out. And while it's primarily effectiveness and coordination orientated to facilitate our strategy offering integrated solutions, there are efficiency aspects as well. And quite frankly, we haven't finished mapping out those items yet. And so I thought the best approach, and I think it really implies the level of accuracy that we have, is to say approximately $100 million for next year.
Jeff Fan: And just a quick follow-up. You made a comment regarding the cash tax payment being deferred from '07 to '08. Can you just quickly walk us through, how you reach that conclusion?
Robert McFarlane: I guess in our tax planning area, we have been having an ongoing assessment of how we can optimize our tax efficiencies. And I think we have on our most recent updated analysis would conclude that despite the earnings, we believe that we will not be in a position where we will have to pay substantive income taxes in 2007. Remember, we go -- previously we were saying base case was we go payable, in other words because the earnings and using up payable in '06, but we didn't have to remit them. Therefore, the cash flow wasn't going to be '07. And so what we're now concluding upon analysis is despite the earnings growth we have, from a cash perspective, we do not believe that we will begin having to remit taxes until 2008. So we've really have an effective one-year deferral of cash tax payments from what our previous expectations were. Obviously, that creates nice or better balance sheet flexibility and will help our cash flow, particularly in 2007.
Jeff Fan: Okay, great. Thank you.
Q4: Great. Actually just a quick follow-up on that last question. Bob, is that a deferral, or do you actually owe taxes in '06 and it is deferring payment to '08, or do you actually just start accruing for taxes in '07? (Peter Rhamey, BMO Nesbitt Burns)
Robert McFarlane: I think in the area of tax, I think it's in my best interest just to keep my comments at the shorter end. I think it's a great question, Peter, but suffice to say I think the point that I want to convey is that -- two things I could say maybe to help you. In terms of GAAP, use the 35% tax-free assumption to model after-tax earnings. But from a cash flow perspective, other than capital taxes, don't expect any meaningful cash income taxes to be paid until 2008.
Peter Rhamey: Without questioning you're recognizing the situation you can say no comment is in '08, would you have two years of back taxes to pay at that point in time, or is it just the one?
Robert McFarlane: It's fair to say there would be the catch-up in 2008. So you would double in 2008 as opposed to previously we're expecting the double payment to occur in 2007.
Peter Rhamey: That's great. Free cash flow, the $200 million, your labour settlement is supposed to cost you approximately $200 million. I assume that's still a good number. That is not in your free cash flow. Can you confirm that? And as well, looking at your share buyback program, you've been buying the stock in and around the $45 range here. You have a $24 million normal course issuer bid out there. I'm wondering, if I take a look at how many shares you issue if you meet your plan with the new labour agreement in place, what type of potential share dilution do you have as a result of the labour agreement that you have? So I'm just trying to see what the net number is. You're buying back 24, but there might be $12 million of new shares coming in, or 8, or whatever the number is.
Robert McFarlane: Let me go through in sequence. I think the first question related to our oft-mention $200 million accrual. So as people may recall, we went almost five years between the time of our last collective agreement -- agreements when they expired, and the new omnibus agreement with the TWU. So in settling, rather than have an increase in -- retroactively in the base wages, which obviously inflates the base going forward, we paid a lump sum in lieu of annual compensation increases on a retroactive basis in the past almost five years. So that -- those lump sum payments were in lieu of base wage increases along with certain other lump sum payments for buying out a number of personal days off because we're sort of standardizing to a three-day level across Alberta and B.C. so in B.C., there is a much higher number and so we're buying -- depending on people's seniority, we're buying back those days. And so the combination of the payments in lieu of annual base salary increases as well as some lump sum payments for buying out certain benefits in combination aggregate to about $200 million, and that still remains a very relevant number. That $200 million dollars we expect will be nearly fully paid out this month, so that pursuant to the terms of our collective agreement. So as long as people come back to work, then basically the obligation is there to pay them. So you can imagine with the money at stake, basically almost everybody is coming back to work. So that is why it is not really reflected in our '06 numbers because it is a deduction in cash flow in calendar year '05 and specifically expected in the fourth quarter.
And in terms of the second line of questioning, which is on our share buyback. Keep in mind that one of the estimation difficulties in shares outstanding is not only, well, what is the actual amount of NCIB. And I think to that extent, I think our intentions are clear as they were in the past year to substantively execute on our program. But the other side is the net increase -- or net chain -- of shares is a function not only of how many we're repurchasing, but how many options, or in the past also warrants, are being exercised. And so we've had a significant ramp up as you can imagine because a lot of the options are now getting long dated and they are significantly in the money. And so I would expect a significant number of options to continue to be exercised next year. So on a net basis, we're definitely reducing the number of shares outstanding, but that's why we give the guidance today in the call. That range for shares outstanding reflects the net impact, and therefore, it would understate the intention on a gross basis on the NCIB.
Peter Rhamey: That's great. Thanks Bob.
Q5: Thank you. I just wanted to ask on the wireless side, if you could talk a little bit about the implied margin improvement '06 over '05, and especially as it relates to subscriber mix changes going forward and long-term, how do you see wireless margins playing out? Thanks. (Marje Souva (ph), Goldman, Sachs & Co.)
Robert McFarlane: On the wireless side, clearly, we have had a real good story to tell and we're expecting that to continue. And I think it would be fair to say there's a great story for the Canadian wireless industry broadly speaking here, so the good news goes beyond merely TELUS. Having said that, in terms of mix, if we look at our total wireless subscriber base, we are somewhere in the neighborhood of 82% of our total wireless subscribers being postpaid in variety. So obviously, that has a positive implication for our ARPU and is one of the factors in our strong ARPUs that we've reported.
Secondly, the prepaid subscribers that we're attracting are generating ARPUs in the mid-$20, which is in the Canadian context very unconventional because reported prepaid ARPUs, our competitors are one-half or less, to the best of my understanding. So I think that reflects that we're not really attracting an occasional use prepaid market or necessarily a credit challenge prepaid market as we are -- it's a different form of payment, a different segment in that respect. But there are people who are using the product. And I think the quality of the handsets, et cetera, the way we go to market on the prepaid reflects all of that and is a little different than what we see with other players in North America.
So that's a contributor and along with obviously in terms of the composite of ARPU, we've continued -- I think this is fairly generic for the industry, but certainly we're seeing it in spades, and that is exponential growth in our wireless data. Activities that is more that in feature subscription if you will is more than offsetting the continued reduction on per-minute pricing on plain vanilla voice traffic. And so consequently, what we have seen over the past three years is our ARPU increasing.
So when you have your subscriber mix being of a healthy quality and growing a lot and your cost acquisition we have seen has been stable to down, while at the same -- your ARPU has actually been increasing and your churn rate in our case has been maintained at near best in class levels, at 1.3, 1.4% level. All that means is that we are able to, even though we have strong loading, the rest of our costs are relatively fixed and we're having a strong flow through north of 60%, flow through of incremental network revenues into our EBITDA line. And so that has led to obviously the overall EBITDA margin expansion. And so I think what we're saying today is we expect to see continued margin expansion. It always gets clouded by seasonality because the fourth quarter with the disproportionate loading that takes place here in the fourth quarter, which is a little more than what is a higher seasonal factor than I understand occurs typically in the U.S. means pull down margins in the fourth quarter. So again, our guidance for next year is reflecting full year EBITDA margins and we are again expecting to have the margins go up by a couple of points, which is great news.
Marje Souva: Great thank you. And as a very quick follow-up, you mentioned the TELUS TV. I was wondering if you could just quickly say what are they implied Capex investments or revenues in the '06 guidance?
Robert McFarlane: Okay. Well with TELUS TV, firstly, we have begun to roll that out commercially on a limited basis, basically getting our feet wet in the marketplace in the markets of Calgary and Edmonton. And then over the course of 2006, based on operational success in those markets on the sort of contained rollouts, we're going to broaden the commercial rollout to more of a mass approach. Part of that timing is hinged upon an ongoing capital program of deploying ADSL2+ technology into our Internet network. And unfortunately during the labour disruption for the most part, certainly in B.C., we lost over four months of deployment timeframe. And so I guess it's fair to say our TELUS TV plans were pushed back by a like timeframe. And in Alberta, we had more resources at our disposal. In fact, we had almost 60% of our bargaining unit working during the strike, so we were able to do more advanced network deployments in Alberta. That's why I think it's a strong, one of the main reasons that we have started the commercial rollout there. And the overall activity is expected to be, no surprise, dilutive in the initial year in 2006. The extent of the dilution is very much a function of how many subscribers one loads. It is like wireless for cost acquisition. And obviously in the early periods for TV, your cost of acquisition is much higher than it will be on a longer-term go forward basis because of the newness of the equipment and the volumes being lighter at the beginning, just as the wireless experience was.
So the point I guess, the best guidance I can give is it is a dilutive impact. The extent of that impact is a function of just how many subscribers. I'm unfortunately not in a position today to go and give you, convey a projection in terms of a targeted subscriber amount. Our cable competitor would love to know that. And in times of Capex, I don't want to throw out a number top of mind. There's no real particular competitive sensitivity. But I would say that it is a major capital program in terms of ADSL2+, and that's not just to enable TELUS TV or other IP applications to the home, it's also to improve the coverage and broadband throughput of our existing Internet network, which should expand the addressable market by effectively filling in some of the holes in the doughnuts in areas otherwise already covered.
Marje Souva: Great, thank you.
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