events archive
events archive
2006 Targets Conference Call - Q & A transcript
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Q6: Thank you very much Bob. Very robust guidance. Clearly you're beating your peer group in terms of growth. I think the concern for shareholders are twofold outside of your numbers. Number one, management issues, and number two, Allstream MTS. You've sort of talked about the latter, but on the management changes, I'm wondering if you can give us a sense of comfort that George Cope's surprising and very disappointing departure will not be met with further management departures. I certainly was disappointed that Wade Oosterman left the company as of yesterday. I can't understand why a successful marketing guy like Oosterman doesn't have a role at a marketing company like TELUS, perhaps you can explain, and what your retention strategies are going forward. And on the MTS, I don't want to flog a dead horse, but I'm wondering if the extension of your tax shield and the fact that Allstream seems to be losing major contracts, including TD Bank and others, have any role in your view of the company? (Dvai Ghose, CIBC World Markets)
Robert McFarlane: Okay, Merry Christmas Dvai.
Dvai Ghose: Merry Christmas.
Robert McFarlane: Well, in terms of management, I think what I can say in my role as CFO is that we truly have an outstanding team. And Wade Oosterman is a fantastic individual, made a very strong contribution to TELUS and has had a remarkable career of achievement, as has George Cope. So I don't want to take anything away from those two individuals. Having -- and we I think the changes that you have observed have occurred on a very professional basis and I think that that reflects well on all concerned.
Having said that, it's very difficult in terms of when you are merging the wireless and wireline operation, there is just not the same number of senior executive positions that there formerly was. So we've clearly had a reduction in direct reports to Darren, and I think it's a complicated situation in terms of Wade Oosterman that would not be appropriate for me really to comment on and in a public forum, other than to say he has made a great accomplishment to TELUS. It is certainly -- we wish him the best and I'm sure he's going to be extremely successful in whatever he chooses to do in the future.
As it relates to Allstream MTS, which is, you can tell there's a lot of hedges around in a certain stock when within days of negative releases, it's about to be acquired. Having said that, I find it really a broken record from my perspective. And in times of commenting on the operational difficulties of a competitor, I think we have always been straightforward in saying what we think is required for success. And you look at our non-incumbent strategy, which did not focus on the consumer market, which did not focus on the commoditized long distance voice market, which did focus upon differentiation through technological expertise leadership, provide value-added situations which did focus upon building a recurring business of revenues, the quality revenues which did focus upon providing superior service so that people want to renew their business with us and so on and so forth. And you say okay well that's what TELUS is doing and that's exactly what we're accomplishing in the marketplace. And then you look at certain other situations which have been acquired in the market in the so-called long distance arena over the past couple of years and you say, gee, are those really aligned with the strategy that Bob just annunciated? And I would suggest that they have significant deficiencies. So there should not be a surprise, certainly for someone in the telecom industry. The reason we have the strategy we do is we think that's the one that's optimal. And so there's certain other strategies that have been pursue the marketplace which clearly don't have the same advantages and I think we're seeing that take place in the market.
Dvai Ghose: So Bob as a follow-up, I think that was a great was a great answer on the MTS and to Johnathan's question as well. But on the management issue, is there anything that can give me a sense of comfort that people are staying in the Company's or there are financial incentives? You're one of the key individuals I'm talking about, for example. And you've all been close to George in the past here. Could give me a sense of comfort here?
Robert McFarlane: I think I can give you a sense of comfort. It's my belief -- I cannot speak for individuals, I can certainly speak that not only do we have an outstanding team, I think we have a committed team. And I think that through the wireless/wireline merger that's taking place, we have expanded responsibilities for many of these executives so whether it's consumer or business, they now have combined wireless and wireline responsibilities. And so the challenge, the scope for change, the scope for making an impact in the market is broader than it was. And I think that people are enthused about that challenge and I think people are fully behind Darren and his leadership. And if you look at the track record that we have had, you look at the projections here today, there's a positive situation with a lot of momentum. But you know what, we are people who like challenges and there is a lot of challenges in this industry and we're taking them on. And I think it's pretty exciting and so I really am confident that you will find this leadership team execute in the marketplace in the next number of years.
Dvai Ghose: Thanks, that's very important to me. I appreciate it.
Q7: Thank you very much. It's very impressive to see an implied ARPU lift of 3% when you look at the revenue growth of 15 to 16% and the sub growth at roughly 12.2%. Could you go into the influences of data, new subscribers and existing subscribers on that ARPU assumption? Thank you. (Robert Goff, Haywood Securities)
Robert McFarlane: I guess one thing to keep in mind, Rob, is that the subscribers you add in a calendar year are not a one-to-one match with your revenues that are generated in that calendar year. So for example, very important to our ARPU in 2006 is the people that we add in the fourth quarter of '05, some of which are opening Christmas presents and really are generating next to no ARPU in calendar 2005 but obviously are going to be generating recurring ARPUs in '06. So there is a bit of deferral lag in that regard. But I don't want to take away from your point. I guess what I'm saying is I don't want to necessarily say that absolutely we're conveying our ARPU to go up, but more or less that remaining stable would be a fair statement.
In terms of the factors, I touched on a couple of them. I think the strongest one is that we're seeing data ARPU increases exceed voice erosion. Secondly, we're seeing continued increase in usage and you're seeing that in the MOU statistics. We're also seeing increased subscription, whether you call it data or there's actually another category which is features that may not be data, for example, increased subscription for those generating some revenue.
At the same time, this is an unbelievably competitive segment. My weekly competitive update goes for pages in terms of promotion changes by our competitors and changes that we're doing. We have -- Rogers is giving away Razor phones for free in the marketplace -- for free, as opposed to -- it's the most differentiated value-added product and the markets are giving it away for free. I'm not saying Rogers is being irrational or not well-run, but I'm giving you a tangible example of the difficulty. And then you say, well how should we respond to that without bringing down the market, and that has been a perennial challenge.
So often in the past when we talk pretty openly about these real management challenges, tactical issues we face in the marketplace and people get scared and say oh my gosh I guess wireless is suddenly more competitive than it was. It is and remains intensely competitive. Having said that, we have seen in our case our ARPUs actually increase the past couple of years. And I think as a base case as I have always said, we are going to strive, we're going to build a cost structure for our ARPU to stabilize and be stable, but we're going to work to have it increase. And if it comes through, then great, it's going to the bottom line. If it doesn't happen, we will still hit our budget.
Robert Goff: Thank you. As your MOUs move more towards the U.S. levels and presumably buckets get bigger, is there an exposure there in terms of out-of-bucket minute billing currently?
Robert McFarlane: A dynamic, and it partly goes to -- that is why it's so important when you look at these unlimited minute plans for, say, evening weekends, when the clock starts or on Friday when it ends on a Monday, is really important from that perspective. So generally speaking, one of the factors that has led to a challenge on the ARPU front, notwithstanding the increase the industry has seen, is the increased prevalence of all you can eat type of plans.
The U.S. went to it in a much more dramatic way. I think if you go back a number of years ago, because of the very fragmented nature of spectrum allocation and therefore you did not have really many effective national carriers, now the industry has been consolidating to create national players in the U.S., but the heritage of the big bucket plans in the U.S. was largely I think a competitive weapon by the quasi-national players to create significant advantage and financial pressures from the differential roaming impacts on the more regional players and so almost create a factor in their favor on the consolidation. In the Canadian market as you know, because of the national issuance of a license to CanTel way back in the mid-80s and the effect of national operation through the telcos operating on a cooperative basis and then subsequently through the issuance of national PCS licenses, in Canada we have never had domestic roaming charges. And so consequently a big bucket plan on a national basis does not have the same competitive rationale as it has had in the U.S.
And so a couple of things. one is, you haven't had the same prevalence or extend of big bucket plans. And the second point goes to, you have not had what has occurred in the U.S., and that is a significant erosion of roaming revenues which used to be basically exorbitant. But if you're a carrier that used to be charging roaming fees from someone who is now consolidated and you become national and now it doesn't need to roam on your network and you are seeing reduced roaming revenues, I think that has been a significant element of ARPU challenge in the United States over the last number of years, and that hasn't existed in our Canadian marketplace.
Robert Goff: Very good. Thank you.
Q8: Thank you very much. On the question of pensions I see the higher expense figure. In 2005, the cash flow statement shows roughly a $100 million contribution over and above what is on the income statement. And I wonder if you can tell us whether that will continue to be the case in '06 and beyond? (Glen Campbell, Merrill Lynch)
Robert McFarlane: Well, you know what, off the top of my head I don't have the answer to that one, Glen, but a couple of comments. We have had a good year in terms of returns. We will see like everyone what happens in the last couple of weeks of the year, but the change in expense relates to next year is substantially because of the discount rate change. And last year, we were expensing less than we were contributing, and obviously we're increasing the expense by about $40 million. I think by memory, and I will just give rough guidance because this is more top of the mind. I think our total pension related cash contributions next year are somewhere in the area of $200 million or so. And I think that the increase in a cash basis would be approximately the same as it is on an accounting basis, the $40 million. So I think that would be roughly a good approach for you to take.
Glen Campbell: That would imply that there's roughly the same delta; in other words, roughly the same funding in excess of what is on the income statement?
Robert McFarlane: Comparing what to what?
Glen Campbell: Looking at '05, it looks like it will be ballpark $100 million worth of funding over and above what you're expensing. And so if the increase in funding and the increase in expense is the same, then I just want to make sure I'm right in assuming it should therefore be a similar kind of number in '06.
Robert McFarlane: I think on 2005, and I think this comes -- well, you don't have the full year, you have nine months -- I think that the difference between the total pension expense and our cash contribution would be greater than that one you just referenced. And we can, if you call back, we can sort of point you to some note disclosure that should help you out. And then you just -- it's not much of a change from the fourth quarter, so you can kind of just extrapolate because the discount rate you pick is set for the year. That is why we give the guidance today is because that 5.25%, it's set; that's what it will be for next year. And then you just make an assumption on returns, which is public disclosure on that, and then you make an adjustment at the end of the year depending on what your actual return is. I think what we're finding is, given the magnitude of the discount rate change, even though we have healthy investment returns, it's largely irrelevant.
I know your questions are focused on income and cash flow statements, but perhaps I should just take the opportunity to remind those that are listening that we're virtually fully funded. We're in sort of the circa 99% funded status. So from a balance sheet perspective or a contingent liability perspective, it's really, that's a non-issue for us. And I think the level of funding that we have, at least in corporate Canada I'm familiar with, is one of the best situations that people are going to find.
Glen Campbell: A quick follow-up if I might on the new labour contract. You've given us good information in the past on the wage increases that are promised, plus the incentive pay so we can estimate sort of how much wage inflation there is on the base. With the exception of the Alberta employees who I understand are entitled to a catch-up. And so I'm wondering if you can give us just a rough sense of how much that will increment the rate of labour inflation over the life of the contract, say, beyond the headline rate that's in that contract?
Robert McFarlane: Well, the --- you're right that there is a different impact depending on whether you're Alberta or B.C. For example, I think part of the variance goes to variable pay, so one would have to assume you're paying out at target. It could be more than target, it could be less than target. And in the case of B.C. where there had been no historic variable pay, there is a 3% eligibility out of the box and that will ramp up by the 2 with another percent each year until we get to the 5% level. In Alberta, they're already at 3%, so they will get increases in years two and three to take them to the 4 and 5% level to match B.C. The rate of an increase of 2, 2.5% really on the base varies by job category, et cetera. And so roughly speaking, you can take something like a 2.5% sort of factor in the base and then you can assume your multiple and add to that.
Glen Campbell: So there isn't an extra level of wage increases that's being given to the Alberta workers to get parity that would sort of bump the aggregate rate above what you're describing?
Robert McFarlane: There are adjustments to be made to various categories of workers to harmonize in terms of creating, shall we say, equitable wage scales on similar job classifications. And I guess, is your question, what is the impact of that to what an implied overall wage increase is?
Glen Campbell: Exactly.
Robert McFarlane: I would say it's 3% or less on an overall basis.
Glen Campbell: Okay, great. Thanks very much.
Q9: Thanks, good afternoon. Quick question on the wireline business. You're guiding some pretty stable wireline revenues where I would have expected a little bit more weakness on that line. I can appreciate that some of the DSL business has been delayed through to 2006 from the strike. And you do have a solid non-ILEC business. I wondered if you might comment on the areas that I would have assumed a little bit more weakness -- LD -- if can give us a sense, Bob, of what your assumptions are on pricing and volume there and on local access lines, what your assumptions are on what is happening with respect to erosion in access? (Greg MacDonald, National Bank Financial)
Robert McFarlane: Okay. So I guess the long distance and local access lines here are two areas of competitive challenge. I think what you have seen in our case on the long distance front is, while we have had reduced long distance revenues, our strategy of protecting the base and I would say not emphasizing future growth to be reliant upon long distance has resulted in us reporting significantly better results than the rest of the market. I don't have a specific growth rate factor or erosion rate factor for 2006 to convey to you today. What I would say is our strategy remains the same, the challenges remain the same. And so we'll have to see what transpires.
In terms of access lines, I made some comments on the third quarter about the difficulty in extrapolating, given the impact of our labour disruption. A rate in the 2.2% level or thereabouts as an erosion factor in access lines, it's difficult to say what the real normalized rate was because on the one hand, our capacity to port numbers was constrained because of the disruption. On the other hand, we have a backlog for processing our own that was obviously inhibited. And yet, the quality of your backlog is difficult to interpret when you have some orders that are a number of months old. So we've been obviously going through those. I think until we get through the next quarter or two, we really won't see what the real underlying rate is. And I guess what I'm saying is that the 2.2% could have been higher, could have been lower. I'm not really sure. What is fair to say, and Greg as you know in the industry, characteristically because of increased VoIP, cable telephony competition, the conversion of second lines to primary lines as we expand our own ADSL as opposed to dial-up connections as there has been wireless for wireline substitution occurring, all of those factors combined with quite readily one of the big challenges we have from a reporting perspective is, as we are converting our clients' IP technology in the business front, they affect the number of lines has become almost an irrelevant measure because we are collapsing the number of lines by the way the technology works, yet it doesn't necessarily correlate to a change in revenue.
So for all of those reasons, I think it's fair to say the plain vanilla reported access line erosion factor is likely to increase. It seems to be higher for our competitors. So directionally, with increased competitive activity, I would expect it to increase. But interestingly if I understand correctly, you look at the recent MTS Allstream results where they had an increase, a positive increase in access lines but an erosion in revenues, I think that just shows you the lack of correlation increasingly between the reported statistic of access lines and modeling revenue. So I know that gives the analysts challenges in their models. All I can really say directionally is I think it's fair to say we expect it to go to a higher level than the existing low 2% erosion rate. But I can't really give much more precise guidance on that.
Greg MacDonald: I can appreciate that last comment you made with respect to also the long distance pricing rationality. That's the strategy that seems to be working well. Just as a quick follow-up, I wondered if you might comment on whether you're assuming any increase in competition on the business side, as opposed to the consumer side.
Robert McFarlane: Yes. I think the business -- sorry -- the consumer, is pretty obvious. Shaw telephony is going to roll out right in the rest of B.C., mainland and the like, so we all know both VoIP on the consumer side. So I think that's pretty identifiable. On the business front, I think the number of entrants or competitors isn't going to change like it is on the consumer front, if you will, but the competitive rivalry is intense. But that intensity is really a function of product offering.
So if someone is out there quoting like the Government of Canada on plain vanilla long distance, I have been very pleased with our own bid governance process and TELUS to see, well, guess what, we're not even bidding on that contract because we cannot make money on it, which says something. And yet, it gets awarded to some other carriers. So I think that type of discipline in our case we're trying is I think helpful for the market at-large.
In other areas of business where it's not really price that people are buying, they're buying the flexibility and capability of IP technology, the security, the reliability associated with that, the credibility of your team you are offering and the solution you are creating and all of those factors. It's like, God forbid, investment banking, sometimes it's interesting how the fees seem to stay up, but businesses are rewarded or should be rewarded on ideas and the like. Similarly, there is that opportunity in the telecom space and to the extent you can successfully execute on that basis, then you can insulate yourself from some of the competitive intensity that otherwise exists.
And I think therefore the answer is, it really depends what segment of the market, what type of business is being quoted and the more complex, the more IP-related it is, the more it requires significant capabilities and leadership and ideas. The better suited we are for that, the more it is plain vanilla commoditized then the less the advantage that we have.
Greg MacDonald: Great, thanks very much Bob.
Q10: Thanks Bob. Question on -- I guess two. One is on deferral account and whether you have any assumed or expected, further draw downs in your deferral account in '06. And then a second is just on mobile TV. I guess your advertisements seem to be very focused on that area and I'm wondering if you can give us any kind of color on subscriber success and how that rollout is going and obviously that might help some ARPU growth for next year too. (John Henderson, Scotia Capital Inc.)
Robert McFarlane: Okay John. I think in terms of deferral account, maybe the simplest thing I can say is that the base case that we're just assuming is it's income statement neutral. So hopefully that helps you in that front. There are rulings that are expected to come down, who knows when, sometime soon. I guess they are overdue. But we have to, here we are at December 16th, we have to make a projection and I think the most reasonable approach is to assume status quo. And given where we are on the deferral count, and I think it's going to be income statement neutral is a very reasonable assumption.
In terms of advertising, hopefully it reflects your impressive competitive intelligence of what is being advertised in Alberta as opposed to downtown Toronto in terms of TELUS TV, because TELUS TV is what we really have branded our Future Friendly home initiative. You may also be referring to the mobile TV feature that we have advertised on our cell phones. Perhaps maybe you could clarify which it is you are referring to?
John Henderson: Sorry, I meant mobile TV.
Robert McFarlane: That's fine. Maybe there is an example where we can have one brand in the future from integration. Anyways, I will pass on that lead to my colleagues.
In terms of mobile TV, I think what we're seeing is that it's a category awareness item. It's a brand-enhancing point. And remember that it's only some of the new handsets that have the capability to subscribe, and therefore you could use that service and not your existing base and not all of the new handsets you're selling. So it's -- so therefore at this juncture, it's not a meaningful item in its own in terms of revenue creation. It's definitely an opportunity for the future. And I think one of the strategic dilemmas for a number of firms, including our own, was if you are going to be deploying 3G technology, in our case, EVDO and the obvious higher speeds that that entails, that will facilitate a high-quality experience on applications such as video. On the other hand, 1X, you can still watch TV and it's usable. It's not nearly as good as it would be with EVDO, but it's usable. So do you just wait for EVDO or do you get out and try to get positioning in a new category, and that is what we chose to do. I think from a financial perspective, it would become more meaningful post a number of EVDO handsets being out there in the subscriber base. So I think specific to that application, the revenues are a minor item as it relates to the overall ARPU we're projecting.
John Henderson: Fair enough. I had just one quick follow-up. I wondered, do you have an expected --- when the Razor phone might come out in your area on your network?
Robert McFarlane: Well, as you know, GSM's had the Razor for a long time, I don't know better part of the past year anyway, and it's a great product. On the CDMA front, it has -- I believe it is in the marketplace just recently with certain of the U.S. carriers. And I don't want to pre-launch a product for my marketing people or I'll get slapped on my wrist for that. But suffice to say, it is not going to be a factor for this Christmas selling season.
John Henderson: Thanks a lot Bob.
Robert McFarlane: John, over to you.
John Wheeler: Okay, Aggie, that's it for questions. Thank you very much, everybody. We've had a full hour of questions now, and I'd just like to thank you for taking the time to join us today. We obviously appreciate your interest and the continued support of TELUS and really an excellent set of questions for Bob. So Bob and I and the investor relations team wish you a happy holiday break and of course a prosperous 2006. Thanks a lot for joining us.
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