Telus Corp (TU) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Telus Corporation second quarter results conference call. (Operator Instructions) I would now like to turn the call over to Mr. John Wheeler, VP of Investor Relations.

Thank you very much and good morning. Thanks for joining us for this conference call and live webcast. Let me introduce the Telus executives online with us today. In Vancouver we have Darren Entwistle, President and CEO; and Bob McFarlane, CFO; and in Toronto we have George Cope, President and CEO of Telus Mobility.

We will start with introductory comments followed by a question and answer session. The news release on the second quarter financial and operating results and detailed supplemental investor information are posted on our website at telus.com For those with access to the internet the slides are there for viewing at telus.com/investorcall. You will be in listen-only mode during the executive comments.

Let me direct your attention to slide 2. Given the forward-looking nature of the presentations, comments and answers to questions, statements made about future events and future financial results are subject to risks and uncertainties. Accordingly, Telus’ actual results could differ materially from statements made today. I ask that you read our legal disclaimer and refer you to the risks outlined in our public disclosures in Canada and the United States. Telus disclaims any obligation to update any forward-looking statements. Now over to Darren.

Good morning and thank you for joining us. Today, I will briefly highlight and comment on our second quarter results and update you on our progress against our strategic priorities for 2003.

Turning to slide 4 and our second quarter results, we are seeing the benefits of the strategy we commenced three years ago and the operational execution underpinning it at both Telus Communications and Telus Mobility.

This execution is translating into strong growth and earnings at all levels of our income statement, and strong cash flow growth that is increasingly being reflected on Telus’ balance sheet. The strong performance at Telus Mobility when combined with our operational efficiency cost reduction program, generated 16 percent growth at the consolidated EBITDA level, and a margin improvement of 5 points from 36 percent to 41 percent. In fact, this EBITDA growth rate actually understates the progress we have realized in respect of our cost reduction efforts, as I will illustrate in just a moment.

At the bottom line, Telus delivered a four-fold increase in EPS to 21 cents this quarter, which is in excess of all analysts street estimates that we are aware of. Of interest to both equity and debt investors is our continued progress in generating cash flow. Particularly noteworthy is the contribution by not only our traditional wire line cash generator at Telus Communications, but now the significant contribution of Telus Mobility.

Taking EBITDA less capex, as a simple but indicative measure of cash contribution, we have Telus Mobility now providing 30 percent of the simple cash flow at Telus Consolidated in the second quarter. Furthermore, our cash generation combined with EBITDA growth has allowed us to achieve our full year net debt to EBITDA target of 3X only six months into 2003. Telus has every intention of continuing these positive trends into the future, and therefore we are announcing today material improvements to most of our full year 2003 consolidated guidance measures.

This includes a higher range for EBITDA; a 20 cents to 30 cents increase in EPS; and importantly, a 60 percent or greater increase to our free cash flow outlook. By extension, this results in a lower forecasted net debt to EBITDA ratio of 2.8X or less, by year end 2003.

Turning to slide 5, I mentioned that the strong results this quarter are actually understating the strengths of our operating cash flow. This is due in part to a significant non-recurring benefit of $40m in investment tax credits which we reported in the second quarter of last year. When we normalize for this event, you can see that our underlying EBITDA growth would have been 800 basis points higher at 24 percent this quarter. This 24 percent growth rate does not normalize for price gaps nor the non-cash pension expense impacts.

The next slide 6 lists four of Telus’ 2003 priorities that I wanted to briefly update you on today. These 2003 priorities were outlined publicly in my annual letter to investors, and emanate from our six strategic imperatives set back in 2000. We believe that making progress in these key areas, best drives value for both our equity and debt holders.

Turning to slide 7, let me highlight the appreciable progress Telus Communications is making in delivery on our efficiency improvement objectives. With $349m in cumulative savings at the midpoint of 2003, we are 78 percent of the way towards our year-end goal of $450m.

Regarding our net reduction in staff positions over 2002 and 2003. We’ve reduced our staffing levels by 6,050 people. This equates to 93 percent of the target of 6,500 we set one year ago. Similarly, Telus Mobility is doing an exceptional job of driving wireless performance. Telus Mobility’s half-year results reflect top quartile operating metrics that in turn are driving profitability and cash flow considerably ahead of plan. This is evidenced by 69 percent EBITDA growth and an astounding 11 point margin increase to 35 percent this quarter.

On slide 8 we highlight our priorities that are of interest to many investors. Specifically, our efforts to improve the economic fundamentals of our business expansion Into central Canada. This quarter we delivered a seventh consecutive quarter of improved EBITDA, posting an EBITDA dilution of $6m. With reduced offset costs, and capital expenditures reduced in half to about $100m this year, Telus is on track for much improved EBITDA and cash flow performance this year and next. In fact, today we updated our guidance and now expect that the EBITDA loss will be half of what we originally anticipated for the non-ILAC business in 2003. This bodes well for our goal of delivering positive EBITDA in 2004 and beyond.

Turning to slide 9 and our task of reaching a new collective agreement with our unionized employees. The federal conciliators, Telus and the TWU agreed in July to end the current review process and to commence the final conciliation process beginning on November 14th. Telus was supportive of this process and timeline set out by the conciliators. In November, each party will table a comprehensive written document to focus negotiations. If the issues are not resolved at the conclusion of the 60-day conciliation window, a mandatory 21-day cooling off period will follow before any legal work disruption can legally take place.

Therefore this new process in aggregate will not conclude until early February 2004. Let me reiterate that Telus is committed to reaching a new collective agreement that meets the needs of our team members, customers and shareholders while accounting for the highly competitive landscape of the Canadian telecommunications industry. Personally, I am optimistic that this new collective agreement can be realized without the need for work action.

Intent of our 2003 priorities is to focus Telus on what will continue to build value for our investors. I trust you will agree that we are doing exactly what we originally set out to do, and that is solid progress continues to be made against our strategy as reflected in Telus’ performance year to date.

My final two slides serve to highlight why this focused approach is driving increased value for our shareholders. Slide 10 shows that Telus states an updated guidance provided today, is expecting 2003 EBITDA growth on average of 11 percent, using the mid-point of the revised guidance range. This puts us in the top echelon of North American telecom companies.

Finally in slide 11 we show that the growth in EBITDA, coupled with our reduced capital expenditures, drives increasing cash flow in 2003. This projected cash flow increase is almost 90 percent, again on average. Again, this places Telus at the forefront of North American telecom companies.

Our ongoing results and updated guidance for the year reflect the efficacy of the strategy we embarked on back in 2000. The investments we have been making over the last three years in our core business in Canada with a disciplined focus on data, wireless and national expansion, are continuing to drive growth and value at Telus for equity and debt holders. Over to you, George.

Thanks, Darren. I am now onto slide 13, and I am obviously pleased to report on the Telus Mobility results this morning. Slide 13 begins with our net adds for the quarter, and as you can see our net adds were roughly flat with last year’s Q202, although up 50 percent over Q1 and I would say above our expectations and I believe generally above the street’s expectations.

I’m also pleased with the mix of the prepaid/post-paid where approximately 80 percent of the net adds were post-paid and at the same time our prepaid business continues to grow nicely and profitably, as we continue to enjoy an ARPU in the mid-20’s and we are no longer subsidizing product, generally, in the prepaid category.

Turning to slide 14, reporting on the ARPU. It is nice to report that for the second quarter in a row we have seen a year over year increase in ARPU as we report an ARPU this quarter of $56. Continuing to be industry leading in Canada.

Also important to us across all categories our ARPU was up on our prepaid, on our post-paid PCS base and on our MIC client base. We’ve also seen an increase in our minutes of use, as we believe wireless services continue to be growing so much across the population. We continue to see an expansion in the monthly minutes of use on our client base, up 17 percent year over year.

Turning to slide 15, clearly driving our net adds, not just from a sales perspective, also came from the reduction in our churn. Our churn rates continue to come down at 1.3 percent this quarter, obviously industry leading on almost anyway you look at a North American, and in some cases, worldwide basis. We continue to invest heavily in reducing our churn rate. I would caution analysts, I think a 1.5 number is still probably appropriate. In that quarter we had less contract renewals than we may see at other times, but we think we are quite confident in 1.5 and then hopefully we will continue to do better, but I wouldn’t model better than that.

We continue to invest significantly in retention, approximately $25m in the quarter. We continue to believe being the only carrier offering three-year contracts is helping us in terms of our retention costs going forward as we are only required to renew our clients – we take three-year contracts, clearly the ones that take those only every three years, our competitors only offer one and two year contracts.

The benefits on slide 16 of our lower churn rate and our higher ARPU over the quarter a year ago can be seen in the lifetime revenue value of our subscribers, which has increased to $4,300 from $2,800 a year ago. I believe would stand the test against any North American carrier.

You can also see the benefit in that our cost of actually acquiring clients as a percent of our expected revenue has come down 33 percent year over year, so the efficiencies we are driving through churn reduction and ARPU improvements clearly lower our costs of growth.

Slide 17 clearly also a benefit for the profitability of Telus Mobility has been the EBITDA growth. EBITDA growth is 69 percent, clearly a tremendous achievement. I believe in all likelihood will be leading in North America amongst wireless carriers. I think most important has been the margin expansion to be hitting 38 percent of network revenue. I mentioned on the last call that I am hopeful over the next 24 months that we will get to the 40 percent EBITDA level, something I hadn’t in the past thought was possible. I clearly believe we can get the organization generating 40 percent of network revenue EBITDA into the future over the next couple of years, and clearly at 38 percent we are getting there a little quicker than I would have expected.

Turning to slide 18, the other thing I want investors to understand is this isn’t only coming from revenue growth, there is also relentless focus on cost at Telus Mobility as well as at Telus Communications. We had a reduction in our expenses year over year. Our head count is down to approximately 200 people year over year, despite the fact that our revenue is up $77m and our subscriber base is up approximately 400,000 subscribers on a year over year basis.

So we are benefiting from both cost reduction and revenue growth, that’s at 113 percent on every dollar of revenue in the quarter flow to the EBITDA line on a year over year basis.

Turn to slide 19, the other benefactor clearly for investors that our capex continues to come down, and at the same time our EBITDA is growing. Capex intensity at 14 percent in the quarter, is obviously dramatically lower than last year, 29 percent and Bob will update you in a few minutes on a revised guidance for Mobility, which is a reduction in our original outlook.

Turning to slide 20, most importantly as Darren had mentioned is we are now contributing free cash flow to Telus, an improvement over the year of $145m year over year, and achieving $123m in the quarter.

Turning to slide 21, you can start to see the cash flow yield off the wireless business. As I had mentioned earlier, we are targeting to get the EBITDA margins of 40 percent, you can see the 38 percent here on slide 21. We can get capital intensities anywhere from the 14 percent to 16 percent range, the end target for us will be to try to generate 25 percent cash flow yields off of this business. We will be relentless in our focus to try to get to those numbers over the next two years.

In summary on slide 22, I have had the opportunity to report on 36 quarters as a wireless CEO, none as easy as this reporting. All metrics have created value for Telus and for the shareholders. Net additions are up year over year, churn is down, ARPU is up, EBITDA growth of 69 percent, EBITDA margin expansion, capital expenditures are down and free cash flow growth in a dramatic fashion which we think we will continue to do. At that rate, those rates will be tough but clearly we are focused, as I mentioned, on getting to the 40 percent margin and 25 percent free cash flow margin as we go forward over the next couple of years.

With that, Bob, I will turn it over to you.

Great, thanks, George, and congratulations on the quarter. Turning to slide 24, I will begin my comments with a brief review of our consolidated operating results for the quarter before discussing some recent developments in the review of our guidance.

Consolidated operating revenue increased 1.4 percent for the second quarter of 2003, when compared to the same period last year. Of particular note, consolidated EBITDA excluding restructuring and workforce reduction costs, increased a significant 16 percent due to the dramatic cost structure improvements in our communications segment, and tremendous EBITDA growth in our Mobility segment.

Overall, second quarter profits grew over 300 percent to total $75m for the quarter, and EPS were up 16 cents to 21 cents for the quarter.

Now to slide 25. We continue to deliver disciplined expenditures this quarter, as capex of $306m in the second quarter was down 44 percent from a year ago. As a result, capex intensity as measured by the ratio of capex to sales, decreased by 14 points year over year to 17 percent.

The reduced capital expenditures in combination with the increased EBITDA, drove a dramatic $331m improvement in quarterly free cash flow generation.

Slide 26 provides an overview of our free cash position for the second quarter and for the first six months of this year. As previously defined, free cash flow of $69m was achieved this quarter. This is a very meaningful improvement over negative $262m for the same period last year, particularly given semi-annual interest payments of $258m in the second quarter. Comparing the first six months in 2003 to the same period last year, a $445m for the first six months of 2003 compared to over negative $161m last year.

In addition, although only at the half year point, we are already in the middle of our original target range of $300m to $600m initially set out last December for the full year. After taking into account the impacts of working capital and other share issuance pursuant to our employee share participation and dividend and reinvestment plans, as well as past restructuring costs, you can see on slide 26 that Telus generated $157m in the first quarter and $352m for the first half of 2003 in cash available for debt reduction.

Slide 27 attempts to provide some further colour on the underlying EBITDA improvements we are making in our communications business for the quarter. On a reported basis, our communications EBITDA increased by 3 percent, however normalizing for the $40m in ITCs that Derek referenced, that we received in the second quarter last year, EBITDA growth totalled 12 percent, normalizing for the $25m in negative impacts from the price cap decision, our underlying EBITDA growth rate would have improved a further 5.5 percent.

If we normalize further for the increase in pension expense in 2003, we can see that the underlying EBITDA growth rate, driven largely by the operational efficiency plan, was actually 20 percent. This translates to a 9 point normalized EBITDA margin improvement from 36 percent last year to 45 percent in the second quarter this year, when looking at progress in the underlying run rate of the business. While we recognize the reported results are what shareholders will realize, it is still meaningful to understand what the underlying operational improvement that occurred in Telus in the past year.

Slide 28 emphasizes one of our key priorities, delivering operational efficiency. At the end of the second quarter of this year, we had reduced 6,050 positions, or 93 percent of our 6,500 target through our voluntary and early departure programs, without resorting to layoffs. This included a further 250 departures this quarter.

During the quarter, we achieved an incremental $104m in savings, bringing our total expense improvements for the year to $199m, and $349 million since the beginning of the operational efficiency program.

We are clearly tracking to achieve our 2003 year-end target of $450m, with $349m, or 78 percent of the target saved so far. By 2004, we’re intent on achieving the $500m in ongoing savings resulting from our efficiency improvement efforts.

Slide 29 shows our progress in our central Canadian non-incumbent business. For the second quarter, our non-ILEC operations generated $139m in revenue, a 13 percent year-over-year improvement. More importantly, you can see that Telus has now reported seven consecutive quarters of improving non-ILEC EBITDA trending from the trough of negative $38m in the third quarter of 2001 to negative $6m in the second quarter of this year.

The sequential non-ILEC EBITDA improvement from negative $15m in the first quarter of this year, to negative $6 million in this quarter benefited from some one-time items totalling approximately $4m. So negative EBITDA of about $10m for the second quarter would be a better reflection of the underlying run rate. Regardless, the continuing trend of improving profitability is impressive and bodes well for becoming EBITDA positive by early 2004.

Turning to slide 30, year-over-year network access line, or NAL for short, losses have been decreasing over the past 12 months. For the second quarter, year-over-year losses were only half a percent, less than half of the amount experienced for the fourth quarter of 2002 at negative 1.1 percent.

Slide 31, shows Telus added 27,000 new Telus Velocity Internet subscribers in the second quarter, bringing the total base to approximately 469,000, a 44 percent increase over the same period last year, at 326,000. Lower net additions as compared to the same quarter last year, reflects slower industry growth observed in our service territories and across Canada.

The results represent an estimated slightly better than 50-50 split of market growth with our major cable competitors in Q2-03. Note that the net addition account for the second quarter was impacted by a reduction of approximately 1,600 high-speed Internet subs as a result of an ongoing subscriber audit following the third quarter 2002 Internet billing system conversion. So actual in-period net adds were slightly higher than reported.

As George has already explained, and as you can see in slide 32, Telus Mobility continues to perform exceptionally well across the board. Network revenue is up 16 percent from a year ago, due to a combination of strong subscriber growth and an increase in ARPU. EBITDA was up a dramatic 69 percent year over year to $201m, due to strong ARPU, coupled with the lower churn as well as cost containment and operating economies of scale.

Mobility capex decreased by 45 percent year over year, due to factors such as the completion of the OneX network, as well as continued operationalization of roaming resale agreements. The combination of strong revenue growth and significantly reduced capex, resulted in the capex intensity decreasing by a notable 15 points. So Mobility clearly achieved both outstanding growth and significant cash generation, as reflected by the EBITDA less capex being positive $123m in the quarter, up $145m year over year.

Slide 33 shows a strong margin expansion that’s evident across both our communications and mobility segments. In communications, our ongoing operational efficiency program has boosted margins to 42 percent from 39 percent a year ago, despite negative regulatory and pension impacts.

At Mobility, our EBITDA margin and total revenues increased by 11 points to 35 percent, benefiting from strong revenue growth coupled with the disciplined cost containment. So on a consolidated basis, our solid operational execution has enabled a 5 point boost in EBITDA margins from 36 percent in the same period last year to 41 percent this quarter.

Slide 34 depicts the six-month year-to-date cash flow improvement in both our mobility and communications segments. As you can see, Telus enjoyed dramatic cap growth in cash flow, as measured by EBITDA less capex of approximately $244m at Mobility and approximately $378m in communications. So Telus is generating impressive cash flow from both of its operating segments.

Now, I’ll comment briefly on some recent developments and our 2003 outlook. Turning to slide 36 you can see that free cash flow generation along with the equity issue and debt repurchases over the past 12 months led to a reduction of the net debt to EBITDA ratio from 3.6X at Q2 2002, to 3.0X at Q2 2003. We’ve now achieved our previously mentioned target of 3.0X six months ahead of schedule. Given expectations for increased EBITDA and free cash flow in the future, we are expecting a significant drop in our leverage going forward.

In fact, we are now revising our 2003 target to be less than or equal to 2.8X. Unbelievably, It was only a year ago that many observers were sceptical about Telus’ ability to achieve it’s 3.0X debt to EBITDA target by December of 2003.

Slide 37 shows the incredible story as it plots the market value of our publicly traded notes over the past 15 months. Following credit rating downgrades in July 2002, that apparently were in part based on discounting the future execution of our business plan, our public debt lost half its value and traded into the 50’s. As we continued to deliver on our objectives through the latter half of 2002 and into 2003, we’ve enjoyed healthy price appreciation and contracting spread levels.

Notably, our public debt is now trading at a significant premium to par as the market recognizes the credit enhancement that has transpired at Telus. Our credit spreads are also generally inside of original issuance levels, which were predicated on mid to high triple B credit rating levels.

Slide 38 illustrates rating activity. As you can see, three of four rating agencies changed their outlook to stable from negative, reflecting improving sentiment amongst the agencies. However, it is difficult for me to reconcile these ratings, particularly the Moody’s non-investment grade and S&P negative outlook ratings with the financial strength, results or prospects for Telus.

As for the prospects of Telus, let’s look at today’s revised guidance. Turning to slide 39, management has updated its 2003 guidance to reflect our year-to-date results and our outlook for the rest of the year. The 2003 revenue outlook has been decreased to $7.1b to $7.2b, due to slight softness in our wire line markets, partially offset by stronger growth in our Mobility segment.

However, we have increased our annual EBITDA guidance from $2.7b to $2.8b to $2.75b to $2.85b, reflecting further improvements in our Mobility operations and non-ILAC business. The EPS outlook is being adjusted upwards to 80 to 90 cents, from a range of 50 to 70 cents. Reflective of further efficiency savings and tapering of our large capital programs, capex has been reduced by $200m to $300m to a range of $1.2b to $1.3b. This all leads to an upward revision in our targeted free cash flow to a range of $800m to $1b, which I will detail further on the next slide.

As mentioned previously, we are also improving our net debt to EBITDA guidance to less than or equal to 2.8X from the prior 3.0X former target. Slide 40 provides an updated view of our 2003 free cash flow outlook of approximately $800m to $1b, based on expectations for EBITDA, capex, interest, cash, taxes and dividends. After taking into account working capital changes, proceeds from share issuances associated with the dividend reinvestment plan and employee plans and cash restructuring costs paid out during 2003, Telus’ 2003 free cash flow outlook is improved at $300m to $400m.

Even before counting the first quarter settlement with tax authorities, this is still very significantly above the $300m to $600m range initially contemplated. As you can see on the bottom part of the slide, we will have $800m to $1b available for debt reduction in 2003.

Slide 41 provides a look back at our outlook for 2003, provided in July of last year, compared to what we have discussed today. As evidenced by the data, significant progress has been made on these targets. In fact, we have surpassed all three by a substantial margin and have executed well ahead of plan.

Turning to slide 42, you will see the revisions to our communications guidance for 2003. The revenue outlook is decreased to $4.85b to $4.9b, including non-ILAC revenue of $575m unchanged for the year. This reflects slightly softer than expected demand, albeit to a smaller extent, we’ve also made a slight downward adjustment to our annual EBITDA guidance for communications from $2.075b to $2.15b to a range of $2.0b to $2.075b.

Conversely, we are increasing our non-ILAC EBITDA guidance to approximately negative $30m from approximately, negative $60m, reflecting continued profitability improvement in central Canada. Capex is expected to come in at $850m to $900m, and that is down from approximately $1.05b.

Velocity ADSL net adds are being revised downward to approximately 125,000 for the year, from 150,000 to 175,000 consistent with slower than expected industry growth.

Turning to slide 43, we revise our Mobility guidance to reflect continued strong operations. The revenue outlook has been increased to $2.25b to $2.3b, previously $2.2b to $2.25b. We have correspondingly increased our annual EBITDA guidance from $675m to $700m, to a new range of $750m to $775m.

Capex is expected to come in at $350m to $400m, down from approximately $450m. Wireless net adds are being revised upwards to a range of 350,000 to 375,000 for the year.

To wrap up on slide 44, Telus has continued to deliver on its operational execution through Telus Communications improving its efficiencies to offset revenue softness and negative regulatory impacts. Telus Mobility delivering its excellent results. Significant profitability increases. Significant improvements in capex intensity and significant cash flow generation which has enabled us to reduce debt and leverage, enabling us to meet our 2003 year end de-leveraging target six months early.

Our continued operational execution has led to an improved 2003 cash flow and earnings outlook as evidenced by our positive revisions to guidance for the rest year. In summary, Telus is delivering on its strategy.

Thanks very much, Bob, George and Darren. We will open it up to the usual Q&A session. Again I will make my usual reminder to limit yourself to one question, and a related supplemental if necessary so we can get to all of the people that have questions on the line. I will turn it over to you, operator, to run the session.

(Operator instructions) Our first question comes from the line of Mr. Richard Talbot, RBC Capital Markets. Please go ahead.

Thank you very much. If I can stretch the rules a little bit, I was hoping to ask a question of clarification and then one of strategy. The clarification one is on a capex guidance. When we compare the new guidance for capex, the new guidance for revenue, I think that would imply a capex to sales ratio of about 19 to 21 percent for the second half. I think in the NDMA it talks about a range of 15 to 18 percent, so I just wondered if that could be clarified, please.

Richard, the 15 to 18 would reflect a full 12-month ratio. I don’t think that one can, you know, read into say a quarter or six months as a systemic or annualized rate, really trying to say a four year, 15 to 18 percent, and our depreciation of capex is at about an 18 percent level, so what we’re really saying is we’re in the zone, although trending to slightly underneath the historic capex intensity ratio.

Okay, thank you. The second question is for Darren. Darren, as you look at the improvements in the business, which we’ve had formidable evidence of today, and if you look at the business in central Canada becoming EBITDA positive, at what point do you believe you need to step up the magnitude of your business in eastern Canada, and do you feel you can do that efficiently on an organic basis? And I would note that the revenue sequentially did trend lower, so if you could comment on that, I would appreciate it. Thank you.

Okay, Richard, well, I think actually if you have a look at both the revenue and the EBITDA performance in the second quarter of this year for our non-ILEC business, both are up. The revenue’s up about 13 percent and, of course, as a result of the $6m EBITDA dilution, that number is up about 80 percent, so I would say that that is a good indicator of the economic improvement that we’re looking to drive in Ontario and in Quebec.

I think what we’ve experienced in the past is that when we try to accomplish too much too quickly in respect of our investment, sometimes we don’t always have the best operational execution, nor deliver the best ROI for investors, so as I said at the outset of this year, we’re going to take a much more considered approach to growing our business. We are very focused in that approach. We’re not trying to address all the markets, just some sub-segments, with a particular focus on creating an organization that really is a data operations organization, and if you look at our retail revenue that we’re generating, postulating to generate, the 575 this year, if you strip out the wholesale element from that, about two-thirds of the retail business is coming from data network services and data applications. I think that’s the type of reputation that we want to build in central Canada.

In respect to the investment that we have made to date, I think right now, we have all the infrastructure, the resources, and the capabilities that we need to develop that business going forward, so it’s efficient on the organic front, which means any acquisition opportunity will be judged on the increment. It’s not a need to have, but it’s a nice to have, and we will be very circumspect about the economics, the challenges in respect of post-acquisition integration, and the complexity of post-acquisition integration, and actually, the quality of the business, the customer base, and the revenue stream that we will be absorbing. Right now, we’ve got a very pure asset in Ontario and Quebec with newly deployed technology, and we think that’s the exact right platform to build off of.

I think the last thing to point out is that we don’t need to be in a rush in Ontario and Quebec. We’ve got a very strong platform in terms of our ILEC business in the west that can support a very patient and disciplined approach, a very differentiated approach to penetrating the market in Ontario and Quebec.

Thanks very much, and great quarter.

Thank you.

Thank you. Our next question comes from the line of Greg McDonnell, National Bank Financial. Please go ahead.

Thanks, and good morning, guys. The question has to do with the capex revision. The $200m to $300m revision in capex, that’s about -- let’s say 15 to 20 percent of your previous budget -- is a pretty big number. I wonder if you might describe where the expected savings are and include that, is there a delay, is there a component of your capex that’s being delayed into previous years? I wonder if you might comment on those two issues? And then also, with respect to central Canada, your spending in central Canada, is that a big portion of the decrease in guidance for capex for ’03?

Greg, I guess related to the initial question on this call, the implied capex span in the second half of the year is actually greater than that in the first half of the year, so while you’re correct that the full year has a downward revision from the original plan, it actually reflects an acceleration of capex in the back-half of the year as compared to the front-half of the year, so I think you can just look at capex levels in the front half of the year as a reflection of really the trough for Telus.

In terms of non-ILEC, is that a material component of the reduction, the answer would be no. It is -- there would be a decline in capex in that area certainly, but I think if you look at the capex, whether it be for mobility on a segment basis or communication, capex reductions have been spread out throughout the organization.

Bob, if I could have a follow-up. I guess the original question I was asking is, your previous guidance was $1.5b. Now you’re $200m to $300m lower than that. What has changed between last quarter and this quarter in terms of decreasing the overall expectation for 2003? Are there particular areas that you’re seeing significant cost savings, for example? What’s the major impact there? Because that is a big number.

I’m really not prepared to go into detail, suffice to say that it’s across all areas of the business.

Okay, thanks.

Thank you. Our next question comes from the line of Rob Goff, from Haywood. Please go ahead.

Good morning. My question will be for George. The movements on the per minute and the buckets have clearly helped the ARPU and the churn. Do you think that we could see another pricing initiative for this fall period, a period of heavy churn for the sector? Or do we need to await 2004?

You mean pricing initiative in the fall, you mean in terms of something that would make the turn go up in the industry?

No, to the extent that you’re raising the bar on pricing, impacting, as you know, as a churn reduction. Do you think that we could see a pricing initiative ahead of the fall that would act as a further churn retardant?

From Telus Mobility’s perspective, the move to permit and matching some of the industry moves on the EW clock, those timings of those and the quarter they’ve been done, we think have timed [inaudible] than necessarily into the fourth quarter. I don’t want to give our pricing plans, but the fourth quarter becomes, the fall becomes such an important selling season. We wouldn’t want to confuse the market, but something -- those sort of levels aren’t the sort of thing you may see as on the fringe, there’s been a number of other small price increases that Telus Mobility has been looking and frankly have been putting through over the last 90 days, all which has helped the edge on pennies, but you know, pennies quickly add up to a dollar, and that’s what’s been important here for us, but I won’t comment on future pricing. It would just be unusual for me to see something in the fourth quarter. If anything, that tends to be more aggressive.

In related, to what extent is the churn reduction related to some of these pricing initiatives?

We’ve seen it across the industry. Some of our competitors have been reporting lower churn. I think at Telus Mobility, we’re seeing other benefits. We have a -- very much a relentless focus on the clients we have, you know, the three million or so we have, as I mentioned on the last call, are going to be obviously [inaudible] much more valuable than the next 400,000 we’re getting, and so we have a real focus internally, a lot of money being spent in that area, a lot of money in the quality of our network investment, and we think we’re really seeing the benefit of that in some of these numbers that we’re able to achieve.

I mean, we’re getting to the point where clients who are experiencing some drop calls, some of our higher end clients, are actually being proactively called from us, that we know they had a drop call and are making sure that we understand where the issue was and that we’re on it, and those sort of things we just weren’t in the position to do a couple of years ago.

Rob, it’s Darren Entwistle here. Just to add to what George had to say, in terms of the EW clock and the benefits from grandfathering the base in respect of churn, that was only introduced during the course of June, so that would not yet have had a lot of traction in the overall Q2 results.

Okay. Thank you very much.

Our next question comes from the line of Peter Raimi, BMO Nesbitt Burns. Please go ahead.

Good morning, and thank you. What really impressed me in the quarter, and I’m sure you as an organization are pretty happy with, is the OEP and the success you’ve had there. You’ve almost achieved, or you achieved a large portion of what you set out to achieve this year.

My question is, is this an advancement of savings that you would have normally taken in 2004 into 2003? Or if we look at the OEP being significantly ahead of plan in that, in ’04 you’d still be targeting $100m incremental savings? I guess my point is you really didn’t update any guidance on that, and perhaps that’s for disclosure purposes as opposed to what you’re really thinking as a management team. Thank you.

Peter, thanks for the question and the compliment. The OEP certainly has been well-executed, and to your point that we’re really closing in on the tail-end, if you will, of the annual targets, I don’t think that necessarily means that the annual targets are understated, per se, and in effect, we know the gross number of staff that are leaving voluntarily or on the early departure plans because those are scheduled, but we also aim to maintain and improve on our customer service levels, and so that entails the hiring of new fresh people into our organization, and so obviously, there’s a balancing act there as we work towards the appropriate equilibrium, and therefore I think it would be premature for us to say just because we’re well on our way to closing out on the annual targets, we’re necessarily going to have further net reductions. While that’s possible, it will be a function of how we see our customer service levels over the ensuing six months.

That brings me to my follow-up question then on the customer service level. Can you talk a little bit about the trend there, and I assume from what you said, Bob, that some of the people that you hired into the organization to augment customer service were actually only partially expensed a quarter because they might have arrived midpoint, or actually later. Is that what you’re trying to say here?

That’s not really the key point, Peter. I think, as you may know, when we quote the staff reductions, that’s a net number as opposed to a gross number, because we’re obviously hiring back people at the same time, et cetera. Having said that, the addition of new people to the organization has been occurring throughout the past year-and-a-half, so it’s not a function of we’re just doing it now. Having said that, what I’m really saying though is that the margin, when your last person in your target leaves, that’s when you find out what the marginal impact is. If we can have more net exits than currently contemplated and improve on customer service levels, well, then we’ll do that. If, however, we need to hire back a certain number of people and therefore, and at close to our existing targets in order to improve our service levels, then we’ll do that as well, so it remains to be seen where that ends up.

And just on a customer service level, how’s that trending right now in the last quarter relative to Q1?

Holistically, overall against a number of transactional customer services measures that we track overall, service levels are stable, actually slightly improved from where they were about two years ago. That’s not to say that we don’t have our customer service challenges. We do. Anytime you go through a downsizing of this nature, you’re going to have pressure points on customer service, but holistically, we’re holding the line, which was the original intent, actually, when we embarked upon the OEP in the first place.

I guess to underscore the comment that Bob was making, we feel very confident in respect of our OEP execution. We do appreciate the progress we’re achieving right now which affords us that certain headroom. I think that helps us with our operations, to the extent to which we can go above the targets and continue to improve customer service, we’ll explore that eventuality that presents itself. If we’re going to suffer at the service level, then we’re be more judicious about the head count reductions.

The important point to think for the street to take away is that we feel very confident that we’re going to hit our target staff reductions of 6500 people and we feel very confident that the annualized impact that we’re expecting to realize in 2004 of a $550m improvement to our operating efficiency is indeed going to come to fruition. If we can do better, we’ll update you on that in future quarters. I think right now, we’re satisfied with the progress that we’re realizing.

Thanks very much, Darren and Bob.

Our next question comes from the line of Vince Valentini, TD Newcrest. Please go ahead.

Thanks very much. A two-pronged question on sources of free cash. If my read is correct, you’ve used $196m for working capital in the first half of the year, but your chart shows $220m as a source for the full year. I’m wondering if you can just clarify that in terms of what the big components of that big swing will be in the second half of the year, because it is a big component of your cash available for debt reduction. And following that would be your debt 2.8 times or lower at the end of this year, I’m assuming you’re targeted to get it even lower into ’04. At what point is your debt at a comfortable level where you start to consider other uses for that free cash flow? And could you give us some sort of sense of what you might be thinking those other uses might be at this point?

Okay, Vince, well, in my experience, slide 26, which I refer to as fairly unusual disclosure for a public company, to not only go to a very defined free cash flow level after dividends, but also to get down and reconcile to cash available for debt reduction, I understand your question. You now want to splice one of those lines of working cash even further, and I welcome the investigation. If you’ll permit me, perhaps I can refer to my numbers in detail and get back to you after the call on that. But it does include working capital, things like change in cash, by memory, which is around $9m, and some other -- we’ll help reconcile that for you, but the first point I would like to make to the street is we’re already in, shall we say, 99th percentile free cash flow reconciliation.

The second point is, given that we’re generating significant cash flow, what are the potential applications for those funds. We have a stated policy of de-leveraging our balance sheet, so clearly we’re focused reducing the debt levels in the company and improving upon our leverage. And to that end, that’s what we’re focused on, and I think to think beyond that time frame at this juncture would be premature.

Thanks. Could I just clarify? In terms of the working capital, would there be some sort of big increase in the [inaudible] potentially, and also on pension. Most companies are having to top up their pensions in the back half of this year. I’m just wondering if that’s in your plan as well as to the use of cash.

Well, Vince, in terms of securitization, there was a change. We always have a change in the flows, if you will, of that program, and so the receivables in the balance sheet have decreased in part due to securitization. That is disclosed, by memory, in our MDNA. I know it’s very long, haven’t had the opportunity, but we’re help you find that in there. It’s also due to, I would say efficiencies or sales outstanding just generally across the board, whether it’s the receivables we sell off or not, which are still substantial, has improved markedly, as well as, I would say, our payables side. So you know, we don’t talk about it a lot, but one of the elements of our operational efficiency program is capital efficiency, not merely on capex but in terms of working capital, things that drive return on investment, and I think we’re seeing that across all fronts.

Okay, thanks.

Our next question comes from the line of [Devy Gosh], CIBC World Markets. Please go ahead. I lost him. Just one moment please, and we’ll go ahead and place him back through. One moment please.

Hello, can you hear me?

I can hear you, Devy. It sounds like something happened. I hope you’re okay.

I’m absolutely fine. The operator, I think something happened, but okay.

Devy, it took us a long time, actually, to train that operator to actually drop the call when you came on.

-- Laughter

It’s nice to see the technology’s working for us.

-- Laughter

Now, a question on the wireless side. Vince asked my question on free cash, but on the wireless side, George, clearly I think, you know, a lot of up-side surprise on every sort of matrix number, but if I can hone in on the net additions. Really very strong. It would appear as if you’re winning market share away from your competitors. I’m wondering if you could comment on that, and in particular, Microsell. There’s been a fear they’re coming out of bankruptcy protection and they’re going to be more aggressive. It doesn’t seem to have hurt your numbers or Rogers numbers. I’m wondering what you’re seeing from them. And also, lastly, just to tie it into your own residential access lines, you did see a 0.7 percent year over year decline. To what extent is that because of wireless substitution, do you think?

Okay, sure. Devy, to start with, some of our net additions were higher than we had initially expected based on first quarter and fourth quarter trends. I think one of the real benefactors to us may be less of a market share swing has been the fact that our churn has come down so dramatically, so that if our gross number were even flat -- it’s not, but if it were, our net is improved because of the churn. So in total industry numbers for sure, we’re taking a larger share of net additions, but it’s being helped by not just marketing but also by our retention levels, and I think one of our competitors reported a good -- the only other one who’s reported had a good second quarter as well, which I think bodes well for the industry.

In terms of Microsell, clearly they’re more aggressive now in the market than they were over the previous six months. We’ve always, as I said in the call, viewed the industry as having four competitors in some markets and now three in others, and clearly we’re monitoring what they do in the marketplace and working harder than ever on making sure we keep the clients we have through retention. I think that’s probably helped things more than anything with a competitive thread, in terms of maintaining our share.

In terms of wireless, substitution on wire line, there’s clearly, as minutes of use go up on wireless, people using a product more and more, and clearly Telus is a benefactor of that on a national basis, where we clearly have the landline business in the west. We have a national franchise on the wireless side, so net net, we’re a winner anyway you look through that.

The pricing rational and disciplines in Canada, though, relative to the U.S., I think, have helped find that balance for us in wireless substitution in the wire line, such as the movement in the EW clock and the wireless industry, helps us on ARPU and in one sense probably is different than in the U.S. where they have 4,000 and 5,000 minute buffers, which we haven’t had yet in Canada.

But just as a quick follow-up, George, if wireless minutes of use are set to continue in terms of trajectory, can capex levels be maintained as low as they are at the moment on the wireless face?

I’m fairly confident that we passed the peak on capex last year. The reason I’m as confident is, you know, the 1X network we deployed on CDMA doubled our capacity, and so we’re seeing that benefit better than we had thought, and that is part of the reason for our capital coming down, effecting on the [MIC] network, the iDEN technology we’ll be putting in six to one [vocoder] and that will double the capacity there. And of course, we have the unique roaming agreement with one of our competitors, which has limited our requirements for capital in eastern Canada on the PCS side, so I think we can keep capex down, and we’ll talk more about that as we get into next year.

Thanks very much. Congratulations again.

Thank you.

Thank you. Our next question comes from the line of Robert Hastings, Raymond James & Associates. Please go ahead.

Yes, first a clarification, if I could. Bob, I think you said that the OEP was sort of tracking ahead, but you wouldn’t move into the numbers up for the year. You haven’t moved anything from 2004 into 2003, so the increase in earnings estimates or guidance don’t have anything to do with the OEP program?

That’s correct, in that we are tracking to our public guidance for savings. I think what it’s really saying is given, you know, we’re hitting across the 90 percent mark this quarter in terms of achieving the full program targeted staff reductions, that I would say that we had a very high probability, therefore, on achieving the four-year results. And since the majority of those people have already exited the business, the ability to project what the run-rate savings is going to be is a fairly exact calculation, and therefore we have a high confidence level, as opposed to saying we expect to be ahead of the game.

The second comment I made though was that there may be an opportunity to have net exits beyond that which we’ve targeted. We can’t count on that. We’re not planning on that per se. It’s really a function of whether the requirements to maintain desired service levels, and therein lies the caveat to the potential to exceed our targets.

Thank you very much for that. And my question then is we see at some major drop in long distance, and we’ve seen the DSL, or the velocity product being priced down. Is competition heating -- or competitive pricing heating up in any other areas and how far do you go on that? Is this sort of a new wave of that?

Okay, it’s Darren, Bob. I’ll cover off both of those issues. I think it would be fair to say, as Bob indicated in his remarks on the DSL, and as well we had a comparable performance to our main competitor in that particular area. And you have to remember that in terms of our net adds, they are all high speed. We do not offer a light product. So in making any comparisons, I think you need to factor that into your thinking.

Despite that, I would say that overall I am disappointed with the performance of the Telus organization on the ADSL front. It is clear that the call centre consolidation program as part of the operational efficiency initiatives has hurt our distribution capacity on ADSL as we’ve had to shift outbound people to inbound. Again, that has impacted our sales power, our distribution capacity in respect to that product.

Additionally, you have to remember we closed 38 stores. Thirty-eight Telus stores, and have been shifting our distribution to Telus Mobility stores, London Drugs, Future Shop, and the like. It takes a while for that to get going again.

So I would say overall, as we have driven the operational efficiency program, we have hurt our outbound sales capabilities and our third party distribution is also taking time to transition. I would say as well that during the OEP, the amount of activity that went on on the ADSL front in respect of product development, new bundles, advertising and promotion, so on and so forth, was deferred because we did not want to be doing that work while we were exiting 5,200 employees last year. So we deferred it. Again, that had an impact in terms of reducing the momentum that we had established on ADSL in the first half.

So all in all, I would say a disappointing performance from this organization. It is not all bad, but I would look for us to see an improved performance despite the maturation of the market in the second half as we get our distribution channels back up to full capacity as we see the OEP program through to conclusion.

So are you using the LD front?

Again, that is an issue that I would say is on our radar screen. Overall, the softness in the wire line revenue growth is in our radar screen. A couple of factors at play there. We’ve seen some LD pressure on both business and residential for two different reasons. On the business front, clearly the demise of Stantor had an impact on the LD minutes and revenues for the Telus organization.

As eastern-based corporates move their LD business in its entirety to Bell post the Stantor demise, that particular shift had actually occurred about eight months ago and we’ve seen a lot of stability since that time.

On the residential front, a bit of a different issue. The overall market in terms of minutes is down. I think that relates to the fact that we’ve seen second line erosion supplanted by DSL and cable modems. So LD revenues generated by second lines has dissipated.

Also, we’re seeing some wire line wireless substitution. The fact that people are using their wireless phones more as George indicated means that they are making some LD calls, whereas in the past they might have made those LD calls on the wire line network.

I think it is important to point out two factors here. One, it is good to have a Mobility business, because what we lose on the wire line front in respect to LD in our ILAC territory, the majority of that goes to Telus Mobility. In Ontario and Quebec where we have no consumer market, in expect of wire lines of wireless migration for LD minutes, again that would go on the Telus Mobility network and we’ve got no consumer wire line business de-cannibalized there.

Additionally, in terms of those of you who made comparisons amongst our peers, it is important to point out that the numbers that we post are purely wire line LD numbers. We do not take Telus Mobility LD and include it in our overall LD calculations that we report to you.

The other thing that I think is worth pointing out is that despite the pricing pressure that we’ve been experiencing across both business and residential, market shares are now post the demise of Stantor have effectively stabilized around the 78 percent zone, which has been supported by stable market shares in the local front around 96 percent.

What are we doing about it? We’ve got a number of marketing plans that for competitive reasons I don’t want to disclose on this call, that are working to slow price erosion to hold up the ARPM and to try and stimulate minutes on both the business front and on the residential front.

Other things to point out, two further things I think are of interest. One is our non-ILAC wire line strategy. As you know, we don’t want to be an LD company, or known to be an LD company in Ontario and Quebec. Our focus is data. In fact, we don’t pay any commission to our sales people if they sale naked long distance.

What we want to do is sell data solutions and then add voices and applications onto those data solutions. So we are not really seeing, if you will, an offset in Ontario and Quebec to mitigate some of the erosion we’ve experienced in Alberta and B.C.

Finally, we are leveraging technology. I think you are well aware of the NGS, the voice-over IP network that we are now deploying. I guess the efficacy behind our thinking in respect of LD is that where you’ve got a commoditized service, yes it is important to try and slow price erosion. Yes, it is important to try and stimulate minutes. But it is equally important to try and take out cost from your business so that you can preserve margins on services like long distance.

Our NGN initiative is one such approach to try and improve our cost base to improve LD margins, despite the pricing pressure. So that is the list we are doing on the LD and ADSL front. I hope it gives you some feeling as to the depth of our thinking in these areas.

Very thorough. Thank you.

Our next question comes from the line of Glenn Campbell, Merrill Lynch. Please go ahead.

Thanks very much. I wonder first if you could clarify the $7m data. It looked like revenues lost through the sale in the quarter in the $4m one-time items at the EBITDA line. Then my follow up was, Darren, if you could just comment generally on competitive conditions in the enterprise market in Western Canada.

Okay. Well the $7m relates to the fact that within the Telus Enterprise Solutions business, the former ISMDC business, a division within that business provided Mobility billing. We’ve provided Mobility billing to a number of clients across Canada. I’m not going to name those clients, because I don’t think it’s appropriate. Suffice to say they are ILEC in the west and in eastern Canada I think you could probably deduce from that.

We did not feel that the long-term growth prospects for obvious reasons for that business were particularly healthy. So as a part of strategic imperative number three, which was to explore divestitures of non-core businesses, we put that business on the block well over a year ago. We pushed it as a corporate development initiative and we consummated the disposition of that business very recently, and that is the $7m impact, absolutely the right thing for us to do in respect to that business, not only was it not a growth business but we expected the revenue to deteriorate.

Thanks, then there’s $4m of one-timers, apparently, in central Canada?

Yes, Glen, in terms of -- what I’m really suggesting is to really normalize, is to understand the run-rate, it was closer to $10m i.e. as opposed to $6m. And the $4m differential would primarily relate to timing matters, that I think if you look at the six months, we have a very accurate description, but to look at the second quarter, I think it in part reflects some items that I think are more appropriately viewed as six month recognitions.

So it’s not that it was sort of one time to the quarter, it was one time to the half, or it was normal for the half, not the quarter, rather?

I think that’s fair to say.

Okay, thanks, and then that’s, I guess to Darren, I had the general question on the enterprise market conditions in region.

Yes, I think we’ve seen a slow-down in the appetite of corporate holistically across western Canada. I’m not going to bore you with the story, but it’s somewhat different between Alberta and B.C. Alberta has I think a good wind in the sail would be a good way to describe it, while B.C. is confronted with some challenges that are unique to the NDP legacy that was left here. So as a result of that, we’ve seen some reduction of purchasing. In terms of competitive intrusion, beyond the LD comment that I made earlier in respect to the demise of Stantor, we’ve been pretty darn resilient to competitive intrusion at the corporate end of the market. We would like to see a pick up in spending. That would be good for our ILEC business. We’re not really seeing any pickup in spending as of yet, but we’re hopeful that some improvement will transpire in the second half of the year and beyond.

It looked like, I mean, it’s hard to be certain, but it looked like from the MTS results that Bell West grew its revenues from Q1 to Q2 by about $15m, which would suggest that they got some serious traction. I mean, is that consistent with what you’re seeing in the market?

That is not consistent with what we’re seeing in the market. I can’t speak to that reporting and the delta, and could be as a result of the Government of Alberta contract, where more [Centrec fines] are coming on board for Bell, but that would be a highly speculative assumption, and not really my place to say. I would suggest that you take that up with them. But in terms of competitive intrusion or erosion of corporate business across Alberta and B.C., I’m not saying that there are no instances of that transpiring, but it has not been material to date, and we have been pretty darn resilient.

Thanks very much.

Thank you. Our next question comes from the line of John Henderson, Scotia Capital Markets. Please go ahead.

Thank you. I had a question I wanted to jump back to capex for a minute. Looking out, what is the sustainability of this sort of level of capex that 17 or 18 percent of revenues, and related to that, what would be your DSL coverage today, percentage of homes past, which can get it and where would you like to take that?

Okay, John, in terms of capex, our -- as I was referencing earlier, our depreciation to sales ratio is about 18 -- I think it was 18.2 percent, by memory, so that obviously, the depreciation reflects a little bit of current period, but more obviously of the historical fixed asset base run-off, so that’s really what the long-term historical trend has been, and I think we see the outlook as being consistent with that, somewhere in the 15 to 20 percent ranges, where we would expect to see our capex to sales being over the long-term. I’m not going to today give specific guidance for 2004.

We’ll leave that to our traditional call later in the year, but suffice to say that the existing, you know, if you look at 2003 in its entirety, it’s touching that range but it’s somehow lower-end in that range, and I think that’s -- and you know, if you step back for a minute, notwithstanding the guidance revision, it shouldn’t be that surprising in the sense that we clearly were well above that range for the past few years, investing in national expansion, DSL, analog to digital wireless conversion, and payments to Verizon, our major shareholder, all of which have matured or trended down to much lower levels.

So I think that as we’ve seen the recent regulations come through in the price cap, at the margin, the need to invest in facilities in central Canada are less than it was before. On the wireless front, we think that we’re into a sustained period of capex levels being lower than what we have envisioned previously.

So I think that it bodes well for being in that 15 to 20 percent range, and hopefully at the lower end of that range.

Yes, that’s great. And the DSL?

DSL on the consumer front, overall our coverage by the end of 2003 will be between 80 and 85 percent. On the business front, it will be plus 90 percent across Alberta and B.C. I don’t have the statistics in respect of Telus Quebec, ILEC, but I think it’s important to point out that the $700m plus that we’ve spent over the last few years to support the DSL coverage program really will be coming to a conclusion by the end of 2003, and thereafter, it’s feature development and maintenance to support that capital base, John.

Thanks very much. I wonder if I could just make a request for some further disclosure, not that your disclosure isn’t very good in its own right. Just on the access line front, breaking out. I know the U.S. [R box] provide a lot more breakdown for primary and secondary access lines, and ILEC versus CLEC, et cetera. I’m wondering if that’s possible in future quarters.

We’ll take it under consideration. We do provide a break-up between ILEC and non-ILEC and to that end, we’ve had a traditional statement of concluding that our non-ILEC gains in the business segment have outweighed our ILEC losses, so I think your comment about primary and secondary lines is something we can take under consideration, and you’re correct, we don’t currently disclose that.

We’ve also indicated, John, that in respect of our percent of second lines, we’ve discussed that percentage in the past, and that relative to our peers, it’s a little bit lower, which again I think is a mitigator to the second line erosion that relates to the rollout of things like cable modems and DSL, which is why we have not been as exposed on that particular front.

Right. I guess I was -- I mean, it’s not just primary, secondary, but it’s also res, bus, and wholesale versus retail. There’s a lot of disclosure that’s provided by some of the [R box].

Right. Well, in our supplemental information, page three, we do provide a break-up between business, residential and total in terms of number of lines in the [MTA]. We do provide a break-up between our non-ILEC and our ILEC. So we’ve sliced and diced it a few ways. I’ll take your comments under consideration, but I think we’ve got a fair bit of disclosure on this topic here already.

I think there’s also a difference, John, in terms of access line erosion when we’ve got, you know, 0.55 percent erosion for this organization in Q2 and the R box in the U.S. are between three and five percent, I think necessarily, you need to provide a little bit more disclosure, because it’s a material impact on their business and has significant future consequences, whereas it’s far less impactful on the Telus organization because of our positioning.

Good point.

Okay, thank you. Our next question comes from the line of [David Lamberg], from T.D. Newcrest. Please go ahead.

Yes, hi, George. One of the key drivers for your wireless numbers was low return. Can you comment on how many of your gross ads are under contracts, and maybe split them up into how many you have under three years, two years, one year? And you also said that you expect sort of 1.5 percent turn this year. Is there a period where there’s a bunch of new contracts that you expect a bulge in contract renewals that you expect this year, or is that pretty smoothed out towards the -- in each quarter?

Okay, let me start with the back-end of it. I didn’t say -- what I really tried to give everyone on the analyst side is, you know, 1.3 percent in one quarter doesn’t make per trend line. That’s more what I was trying to tell people, so I would just think it’s prudent to maybe use 1.5 when people are modeling out the wires business right now.

In terms of the seasonality on contracts, quite frankly, it’s tied to the seasonality of the business. You know, the times when the business has historically been 40 percent first half, 60 percent second half, and so the contracts renew according to that, those sort of timeframes.

In terms of the breakdown of our contract, I won’t give too much detail because it gets into competitive intelligence, other than to say that more of our clients take three years in any other contract and we’re the only one in Canada that offers a three-year contract. And so by definition, our retention costs will end up being lower until our competitors also begin offering three-year contracts, because otherwise you have to touch that client every second year. And the only other comment is the majority of our post base clients take contract today. That’s probably about as much there as I would provide, other than we are proactively in touch with all post-paid, prepaid, but particularly post-paid clients, whether or not they are on contract or not. Is that helpful?

Okay, great, thanks. Yes.

Great. Thanks for the question.

Operator, the time is over an hour and twenty, so we’ll take one more question, and if there is anybody left in the queue, we’ll deal with them after the call. Thank you.

Thank you. Our last question then comes from the line of Michael [Urlocker], from UBS. Please go ahead.

Good morning, thank you. I have a question for George, and then a question for Darren. George, when we talked to some of the dealers in the wireless business, they’ve reported that all the major wireless carriers have in recent months substantially reduced their residual payments to the dealers. I’m wondering if you could help us understand, broadly speaking, what’s changed in terms of these payments and how we might be able to estimate the financial impact of those payments being reduced, more over the long term?

And my question for Darren, our discussions with some of the network equipment suppliers suggest that you guys are increasingly enthusiastic about video over ADSL. It’s been a while since you’ve talked about it. You’ve got a license application into the commission for video undertaking. I’m wondering if you could just describe, qualitatively, whether you think this is a good business and whether it shows some good potential for you.

Okay, why don’t I start -- it’s hard for me to comment, specifically on the residual, other than to, I guess from the best perspective, as we focus more and more on turn rates and the size of the subscriber base, residuals tend to be more and more tied to that, so the residuals aren’t simply for selling a client. What they are, they are now tied to other things, like how often those clients call into our call centre, et cetera. Some dealers can actually end up doing better. Some may not do as well as they would have in the past. That would be specific to Telus Mobility, I guess.

In terms of a modeling unit, I would say not material to the model is what I would really suggest to the question, Michael. It wouldn’t really be material.

And other things we are doing at a lower cost of distribution over the last year-and-a-half or so, we have lowered our margin on prepaid cards to retailers, et cetera, so anytime we can pull a little bit of cost out of the business, we do on the COA side. But again, it wouldn’t change anything that I would give in terms of guidance.

Thank you.

Over to you, Darren.

Thanks, George. Michael, in respect of your question, I would say that this is a nascent business opportunity for the Telus organization, and clearly we’re wanting to explore all business opportunities on the wire line side that can reinvigorate the growth for this organization, so video over IP is something that we are interested in in the access layer. And as you are well aware, in terms of our NGN deployment at the transport layer, that is something that we are definitely progressing to coax voice, data and video -- separate networks down to one network under the NGN.

I think really at the end of the day what is incumbent upon this management team is to improve the economics of ADSL. Anyone who’s had a hard look at ADSL knows that the economics are not salivating. So it’s down to us to explore economies of scale and more particularly, economies of scope opportunities to improve the return on that investment, to better sweat the asset, if you will.

So we’re considering a number of things. One of which, of course, is to the delivery of video entertainment services, but also security applications and the like, and we’re going at this in a very considered fashion because unlike high-speed Internet access, it is not a footrace for verging customers, so there’s no need to move in a hurried fashion. And clearly, there are three areas that we really want to suds out before we give this thing the green light. One is the commercial proposition. And if you’ve gotten the flavour of the way that we market ourselves as an organization, we do not want to take a me-too proposition into the western Canada entertainment market. We want us to be unique and differentiated, so we go in with a value-added solution that adds to consumer lifestyles, rather than walk in and pull the price lever and amortize value for all concerned.

Number two, we want to make sure that the technical efficacy is first-rate, so that it’s as good or better than our competition, and finally, we’re going to be very rigorous in doing our economic modeling to make sure that this indeed does improve the ROI on the $700m plus investment that we have made rolling out ADSL coverage across western Canada. So it’s something that we’re giving serious contemplation to. It’s still at its nascent stage, but it’s consistent with the data strategy that we have set out for this organization, one that we’re pursuing on a national basis across both business and consumer.

Thank you very much.

Okay, Operator, I’ll just conclude the call. I would just like to, in terms of my concluding remarks, indicate that for the year ahead, the Telus organization remains committed to further improving our financial and operating performance driven by a focused execution of our strategy and the 2003 priorities that we have set out for our organization. Sincerely, the entire management team, and in particular, myself, appreciate your continued support. We clearly have faced our challenges over the last few years, but we have been consistent in respect of our strategy and we thank you for your time and your interest in joining us today. Take care.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your line.