Telus Corp (TU) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen, welcome to the TELUS Q1 earnings conference call. I'd like to introduce your chairperson, Mr. John Wheeler, Vice President of TELUS Investor Relations.

Welcome. Thank you very much for joining us for our first quarter conference call and web cast. Let me introduce the TELUS executives online with us today. In Toronto, we have Darren Entwistle, President and CEO; and Bob McFarlane, Chief Financial Officer. In San Francisco, we have George Cope, President and CEO of TELUS Mobility. We'll start with introductory comments followed by a question and answer session. Our news release on the first quarter financial and operating results and detailed supplemental investor information are posted on our Web site at www.telus.com. For those who with access to the Internet, the slides are there for viewing at www.telus.com investor call. You'll be in listen-only mode during the executive comments and let me also now direct your attention to slide two. Given the forward-looking nature of the presentations, comments and answers to questions, statements made of about future events and future financial results that are subject to risks and uncertainties. Accordingly, TELUS' actual results could differ materially from statements today. I ask that you read our legal disclaimer and refer to the risks outlined in our public disclosure in Canada and the United States. TELUS also disclaims any obligation to update any forward-looking statements. Now, over to Bob on slide three.

Thanks John and good morning everyone. Following on my presentation yesterday at our Annual General Meeting, I'll try to briefly summarize our first quarter results and in particular I'll try to add some color rather than repetition to my presentation yesterday. Turning to slide four, it illustrates the various highlights at a summary level from the first quarter. TELUS Mobility was perhaps the highlight of the quarter as it again demonstrated excellent performance with outstanding results for the quarter. In fact, we enjoyed a record $100m annual increase in network revenue, as well our Mobility segment again demonstrated continued customer satisfaction with top quartile churn of 1.5%, in fact it was 1.49%, if you look at the second decimal for that's worth, and a low cost of acquisition which was down 10% year-over-year. Our TELUS Communications wireline segment faced a tough operating environment in the first quarter, 2004 and that negatively impacted our revenue and our EBITDA in that segment. However, strong point for communications in the quarter was the high-speed Internet growth, which generated 44,000 net additions and that's up 36% year-over-year. Notably, we once again, exceeded the net additions of our primary cable competitor. At the consolidated level, yesterday, we announced a $0.05 increase to our EPS guidance for the year to $1.10 to $1.30, due primarily to a favorable settlement concerning interest owed to TELUS related to last year's large tax settlement. And we are continuing to target significant 2004 free cash flow of more than $1.01b. Turning to slide five, highlights the consolidated results for the quarter. So, briefly, revenue is up 3.6% year-over-year, our reported EBITDA is up 8.6%, net income up 13%, earnings per share up 7.7%, and our free cash flow increased by two-thirds to $443m.

Now, let's try to analyze some of the less obvious aspects of our results, starting with slide number five titled revenue normalization and what we can see in this slide is due to asset divestitures, which occurred in 2003, we need to normalize, if you will, for the $10.8m of revenue that was generated by those assets that is no longer in our results in the first quarter of 2004, but were embedded in the results in the same quarter a year ago. Now these divestitures related to some small operations in our communication segment specifically in our non-ILEC area and from a product perspective are reported in our data line. Accordingly, if one adjusts for the $10.8m, you can see on a consolidated level the annual growth rate increases slightly to 4.3%. On a segment basis, Communications growth rate improves to a negative 2.2% as compared to 2.9%; on a product basis, our data, which is a subset of our Communications revenue improved from a negative reported growth rate of 0.9% to a more reflective apple-to-apple growth rate of 2.3%. And lastly, of course, since the divestitures were in the Communication segment, there is no adjustment necessary to Mobility's 19% reported revenue growth.

Now turning to slide six, consolidated EPS continuity, if we look back to our earnings per share for a moment, we can see the EPS measure for the first quarter 2004 and 2003 normalize for certain one-time items. After backing out the impacts of share-based compensation, which of course is a new Canadian GAAP charge with respect to expensing of options as well as, in our case, restricted share units, as well as higher restructuring and work force reduction costs incurred in the first quarter of this year as compared to last year, and the impacts of the settlement of prior years tax matters, which you can see was a $0.15 positive impact to our first quarter in 2003 whereas a new settlement was $0.04 positive impact to our first quarter in 2004. Taking all these anormalization adjustments into account, you can see that our normalized consolidated EPS was really up 133% year-over-year.

Turning to the next slide, slide eight, consolidated underlying EBITDA growth, we make the same adjustments to show the impact on the consolidated EBITDA normalized amount. So, we can see here that the reported EBITDA growth of 8.6% when normalized for the share-based compensation and the restructuring work force reduction cost increases to 10.9%. Now, I just met various investors who either want or don't want pension expense to be normalized, I'll show it here. So, depending on your preference, you can concentrate on the line which you feel is most relevant, in particular, our most notable comparable firm reports the pension expense below the EBITDA line, and so from that facet, perhaps adjusting this is useful certainly to facilitate some apple-to-apple comparisons. In any event, we have reduced the pension expense in 2004, so that would bring the normalized EBITDA amount to 9.5%.

Turning to slide nine, Communications underlying EBITDA growth, this is the first of three slides or so on our Communications segment and we show the same adjustments with respect to the Communications segment itself. So, the reported EBITDA negative 2.5%

for Communications when normalized for the share-based compensation and restructuring and work force reduction cost actually increases to a slight positive growth rate of 0.5%. Of course, if you want to adjust for the pension expense, it will bring it back to a slight negative growth rate of 0.8%.

Turning to slide number ten, on high-speed Internet subscriber growth, we highlight our strong execution as one of our priorities to drive towards leadership in high-speed Internet. Telus's high-speed Internet net additions of $44,000 are up by 36% and compared with the $32,000 net adds in the first quarter last year, total high-speed Internet subscribers now total 605,000, which is a 37% increase year-over-year. High-speed Internet subs, as I mentioned in yesterday's AGM presentation now represent over two-thirds of Telus's total Internet subscriber base, and this is in stark contrast to just over two years ago when two-thirds of our base consisted of lower revenue generating dial-up subscribers.

Turning to slide 11, Non-ILEC normalized revenue and EBITDA, we show the performance of our Non-ILEC operation in central Canada were normalized for the sale of certain assets last year that I had mentioned in my normalizing adjustments earlier in my comments. Clearly we are somewhat disappointed with this performance, but we attribute the performance to a continued soft market, plus a focus on recurring revenue sources and larger long-term contract, plus reliance on non-recurring Customer Premise Equipment sales. This approach in sales of higher electronic spends and capital on the launches of contracts such as the Toronto Dominion Bank, and as announced yesterday the new $66m six-year deal at the Cooperators Group. This latter deal involves wide area network and local area network data and IP applications for over 600 branches across Canada. As one can see on this slide, the revenue year-over-year were normalized for the divestitures was down slightly by $2m, whereas the profitability improved by $10m or over 50% annually.

Turning to slide 12, Mobility's share of Canadian wireless industry and this slide shows the significant EBITDA growth on the right hand side of the slide of the wireless industry for the quarter ended March 31st, and in particular this enormous share of profitability that TELUS is reaping of the industry total as compared to a share of subscriber growth. So, in the first quarter, we estimate based on announced results that we have captured approximately 31% of the total industry subscriber growth in the first quarter or as on an EBITDA basis, we captured 42%. That's been a consistent trend for our company and remains a remarkable result and certainly a shareholder friendly one.

Turning to slide 13, this next slide illustrates the fact that TELUS Mobility continues to be the industry leader in terms of ARPU by a significant margin of $10 or roughly 20%. As shown here, there are four national wireless providers in Canada, all of which -- the three national operators were up year-over-year; however Microcell in the far right, I noticed was the only company that actually went down.

Turning to slide number 14, this slide highlights firstly the tremendous revenue expansion that Mobility is benefiting from as measured at the network revenue line. This is the relevant revenue line in Mobility's standpoint evaluation because it's the recurring revenue or profits flow from and we had a remarkable $100m year-over-year increase in our network revenues. With EBITDA increasing $69m, obviously the percentage of revenues that flow through the EBITDA was a very healthy 69%. That reflects the economies of scale that were reaping in our Mobility segment as almost $0.70 of every incremental dollar of network revenue is falling through the profit line.

Turning to slide 15, this slide shows Mobility's significant contribution to TELUS's consolidated results for both EBITDA and EBITDA-less Capex year-over-year. Mobility's 39% increase in EBITDA in the first quarter of 2004 means that this growing segment comprised 34% of 2003 consolidated EBITDA. Combined with Mobility's seasonally low Capex over the same period, its EBITDA-less Capex contribution also increased to a remarkable 48% of consolidated cash flow in the first quarter of this year. This is notable given that only two years ago in the first quarter of 2002, the Mobility segment achieved EBITDA-less Capex break even for the first time. I believe this has important valuation implications, a high growth Mobility business is now also generating meaningful cash flow after Capex since it represents such a high increasing proportion of our overall business, this logically attract higher valuation multiple for TELUS relative to other telecom stocks.

Turning to slide 16, we'll show you an analysis of EBITDA margins, both at the business segments and at the consolidated level. You can see in our communication segment, while we reap tremendous productivity gains in the 2002 and 2003 period from the operational efficiency plan, we continue to improve productivity in that segment with a one-point improvement in the communications EBITDA margin in the first quarter of 2004. The tremendous profitability expansion and the mobility, as mentioned, through the significant ratio of revenue flow through the EBITDA is reflected in the tremendous expansion in EBITDA margin and the mobility segment by six points to 39% in the first quarter of 2004. On a consolidated level, we've a healthy two-point improvement to a 40% overall EBITDA margin.

Turning to slide 17, let's look at our free cashflow components and I'll comment on some of the major changes. Firstly, obviously we've had healthy operating profitability improvement as our EBITDA improved from $664m last year to $721m in the first quarter. We had increased CAPEX of approximately $102m on a consolidated level, but despite that, we had free cashflow, which increased to $443m. The reason for the increase aside from the improved EBITDA was significantly lower cash restructuring payments, which were well in excess of expenses and you can see that there was approximately $90m reduced outflow of restructuring payments principally related to severance on our operational efficiency plan from the past two years. Meanwhile, net cash interest was reduced $9m or noncash share-based compensation was a new expense as mentioned, but it was a noncash one and therefore we adjust for it here in the slide, and then of course, in terms of a cash tax recovery, we received approximately $88m of cash taxes in the first quarter of 2004 related to last year's tax settlement, which was booked on an accrued basis. So, the $0.15 per share improvement last year in the first quarter was reflective of the tax settlement, where the proceeds of which were not received until the first quarter of this year. So therefore, it improves the free cashflow in the first quarter of 2004 and the earnings per share improvement, which we received $0.04 per share in the first quarter relates to accrued interest which the revenue agency has agreed that they owe us relating to that settlement, which were therefore blocked and improved our earnings in this quarter by $0.04; yet the actual cash from that settlement will be received in a future and time period. Moving down below the free cashflow line, you can see the share issuances, the cash dividends roughly comparable to last year. I think the notable line item is the accounts receivable securitization program, wherein we applied surplus cashflow generated to repay $150m on that program, so that our outstanding amounts were $150m at quarter-end. All in all, we generated approximately $274m of cash that either went to pay down debt or increase our cash balances on top of the $150m to pay down the receivable line. So all told, that means we generated approximately $424m of cash to pay down debt or receivable lines or increase our cash position.

Turning to slide 18, yesterday I announced that we are in a final documentation phase for renewed bank credit facilities for $1.6m, and these will replace the old ones, which were going to expire later this month. New credit facilities will include a 364-day standby bank facility for $800m with a one-year term out

per year $800m credit facility expiring in 2008. While our strong free cash flow generation and consequent leverage reduction has meant that we were currently not borrowing in our bank facilities. Yesterday's announcement is another positive development. The new facilities provide improvements such as longer dated term facility, improved pricing, and more flexible reporting in other covenants. In short, we are demonstrating the strong support that we received from financial community and like to acknowledge the 18 financial institutions, who have helped us yet again and renewed our credit facilities. Now turning to sliding 19, we can see on this slide updates to our guidance that we announced yesterday. Firstly at our wireline Communication Segment, we've revised our revenue and EBITDA guidance ranges down slightly to reflect the tough operating environment that I've outlined earlier in my comments. However, that's largely offset by better than expected Mobility performance, where we increased the EBITDA guidance. On a consolidated basis, I am pleased to say that we are announcing an increase in our EPS by $0.05 to a new range of $1.10 to $1.30 per share, largely as a result of the favorable tax settlement in the quarter. As you can see on slide 20, where we summarized our updated consolidated guidance and we do expect TELUS to perform extremely well in 2004. We are expecting revenue to increase by 4% to 6%, EBITDA to be up by 5% to 8%, earnings per share to increase by 20% to 40%, and free cash flow of over $1.1b. So, that concludes my presentation this morning. I am going to turn it back to John and then we will open the lines up for questions.

Hi, thank you very much Bob. I will just turn it quickly now over to the operator to give instructions and we will take the first question.

Thank you. Ladies and gentlemen, if you have a question, please press one in your touch-tone keypad. If you are calling from a speakerphone, if possible pick up your handset first before pressing one. If you wish to leave the question queue, press the number sign. When I announce your name, please ask your question and our first question comes from Glen Campbell with Merrill Lynch. Please proceed with your question.

Thanks. I have one question for George. And I was wondering George, if you could confirm whether in BC, where you have seen more competition than in other markets, whether topline service revenue growth is still in double digits?

Yes. Hi Glen. We don't segment out our results and therefore won't directly, I can answer your question. I will say that, - - all of our competitor strategies appeared to have been working. Our churn is down across the country. Bob indicated our overall churn in the quarter roughly flat with last year, but it is worth noting that our postpaid churn was down from 1.33 to 1.17 and frankly that's even continued in the April worth of the first time ever, our postpaid churns with under 1%. So, I think our strategies in the competitor arena are working well.

Thanks. May be just one follow-up on wireless. With the change in foreign exchange rates, could you remind us whether your handset purchase are priced in Canadian or US, whether you expect any impact there?

Yes. Actually, Glen we buy literally all the handsets in US dollars and so, - - we were helped last year by the dollar strengthening. It's obviously been somewhat flatter, a little weaker this year. It has been small enough that it really isn't materially flowing through to us and our results

dollar was, - - somewhat weaker than it is even now, but that does have some impact on us, but it doesn't cause us to change guidance.

Okay. Thanks very much.

George, I would add that in addition, and also note that in our notes to our financial statement, we disclosed that we did enter hedging contracts with respect to $50m of purchases related to the mobility segment and of course, those would be our handsets.

Thanks Bob.

Thank you. Our next question comes from Vince Valentini with TD Newcrest. Please proceed with your question.

Thanks very much. Bob, can you talk about the impact of some of the new contract wins in the non-ILEC business? Have you seen any revenue recognized yet from the TD contract or any of the others you have announced, and also have you seen any material increasing costs as you built up for those contracts?

Vince it's Daren, I will answer that question. I think it's fair to say that when we embark upon pursuing a large deal of the nature of TD or the Cooperators, there is quite a significant sales cycle, perhaps to just put this into perspective for you when we -- if you go back to the time when we embarked upon discussions with the TD for the solution that we eventually provided them to the point in the future, where we will add a full run rate in terms of billing that will be a period of four years. That will be the delta between initiating discussions and actually being up to a $4b run rate. If you look at the TD deal, it's a $160m deal over seven years, the full run rate for the billing cycle will be $24m. We are actually only going to bill this year $8m and in the first quarter results, there was only $250,000 pertaining to TD in the ILEC revenue number. And it would also be fair to say that the first year of many of these deals, they are EBITDA dilutive because of the upfront investment in both OPEX and Capex required to implement the solution. Similarly in respect of Cooperators, that's a six-year $66m deal, we will able to recognize that revenue a little bit earlier potentially, because we will acting as an agent for the customer and inserting ourselves to manage the network which is only provided by the incumbent, and then of course we will seek to displace them over the time as they migrate the sites away from the incumbent over the Telus organization, but I think TD is an excellent example when you look at a full run rate of $24m and think that will only actually billed $8m this year and there is only $250,000 in Q1. I think it's a good example of the time it takes to get up to the full run rate on billing and fully recognize the revenue, meanwhile you are fully recognizing the cost.

And just to follow-up, can you share with us what the Q1 impact would have been on your EBITDA from that startup?

I think getting down to a level, where we are giving you EBITDA information on a per contract basis is a level of granularity that would not be appropriate, and it's also a type of information that our competitors would like to know. So, I think I will just draw the line there, Vince.

Okay. Fair enough.

Thank you. Next question please.

Thank you. Our next question comes from Robert Barry with Goldman Sachs. Please proceed with your question.

Hi guys, thanks for taking the question. I was wondering if you could give us a little bit more color into what is driving the weak operating environment on the communication side. It looks like long distance was especially weak. So, if you can give us a little more color, one what's driving it and two what is your outlook for that business? It seems like it has been continuing to deteriorate, and of course with VoIP on the horizon the outlook doesn't look that great. So, I was just wondering if you could give a little bit more color there? Thanks.

Okay Robert. I would say there are several factors that of course are impacting the performance within the communications business. Our focus is essentially on the ILEC, we also made a couple of comments pertaining to the Non-ILEC business. Obviously you have hit the nail on the head on the long distance front, clearly that's a major factor for us. What we are seeing of course is substitution, substitution in the form of people using e-mail rather than long distance voice services or substitution from a fixed wireless substitution perspective or even second line substitution for high-speed Internet access, and all of those things are having an impact on long distance. I think it would be fair to say that the silver lining for us if we focus on a drill in on fixed wireless substitution is that it's actually net positive for us on a national basis. It's a net negative for us in Alberta and in DC. We mitigate that to a certain extent as a result of our strong mobility position in those two provinces, but when you expand it nationally, it's net positive, because of course we have no consumer wireline business to cannibalize in Antonio, Quebec, but the extent to which that migration transpires it's a positive for the organization. And I think that -- relates to another point I think is worth making it; it speaks of the efficacy of having a national wireless business in the first place. The fact that we have made such an investment in wireless over the last four years and it now accounts for one-third of our revenue composite, I think it puts us in a position to expose the organization to significant wireless growth in terms of revenue EBITDA and cash flow which helps to mitigate some of the softness that's transpired on the wireline side of the business, most other impacts that were seen are from competitor's intrusion from the likes of Bellwest. We have a highly competitive environment we are

, and of course the advent of voice over IP disrupted technology provided us by PRIMUS and Monash is also putting pressure on the wire line side of our business. On non

side which was a disappointment for us in the first quarter, we have been very purposeful in trying to de-emphasis non-recurring revenues coming from out right sales. That has been a big part of our business as a result of the Williams acquisition that we have effected back in May of 2001,which was essentially an out right sales of CPE business, and we have been seeking to drive the migration from non-recurring to recurring revenues streams emphasizing manage data solutions and the like. The other thing of course has been the focus on the larger deals which have a longer lead time to realization, so we are not reflecting a lot the revenue that will eventually accrued to us if we continue to be successful in securing deals with the nature of GD and the cooperator.

In terms of what we have doing about it - Robert there are number of initiative that we under way and we have a slate of products that will be launched over the next twelve months with in the consumer area of our business that I think are very compelling, and hopefully we have a lot of resonance in the market place. Essentially what we are going to try and do is put together a very strong bundle that will contain voice services for consumers, data services for consumers and application services for consumers and use that bundle to try and protect our long distance business and mitigate to a certain extend the erosion. What else we are doing? Well, I think our persuade large national deals is the right way to go forward and the extend to which we remain disciplined on our focus on data, when we implement those national data WAN solutions, that infrastructure is ready to carry Voice in the future. So, that will be the next step that we take in relationship likes GD, to say, okay, we have now deployed the next generation network in support of that solution, and now lets go after the voice business which is another significant growth opportunity for us.

Other things that we are looking to do to mitigate the impact on the wire line side of the business is obviously to continue to take cost out of that operation, and that's the focus for our IT roadmap. And of course as I have said respectively we want to use IP in next generation network technology to enjoy an economy of scale with in our network operations to collapse

voice data and video networks down to a single infrastructure to enjoy the cost savings as a result. And finally I think what we really trying to do is to say is, okay, this is the equation and this really does reflect the concept of how we manage the business. What we want to say ourselves is that we had negative impacts on the wire line side and are related to harsh regulatory environment, negative impacts related to competitive intrusion, negative impact as a result of new technology that is being deployed, negative impact from sociological considerations like fixed wireless substitutions. We want to mitigate all of those things with the positive that I have articulated, and if we can make that a zero some game at worse, then we fully expose the organization at a consolidated level to the significant upside performance that we were enjoying in our wireless business. That's really, what we are trying to achieve.

Okay thank you, just a quick follow-up. I noticed in the mention of the bundle there was no mention of video. Care to comment on that? Is that a possibility at some point going forward, I know you talked about color TV etc?

Actually, I did mention it. But it was generic. That was within the applications component. I talked about voice, data and application solutions for consumers. And by applications, that could very well mean in the future video. I think I have talked quite frequently as to the conditions upon which we would launch that particular service. So, I won't bore you with that information again. But I mentioned applications that could indeed include video.

That's right. Thanks Darren.

Thank you. Our next question comes from Richard Talbot with RBC Capital. Please proceed with your question.

Thanks very much. My question is to do with the enterprise market. I wondered if you could comment on what you are seeing terms of the funnel of the new business coming in? Obviously, some recent announcements, but just looking out further given that there is a long cycle of time. If you could add any comment on the business that you are seeing out there. And to a certain extent you're

incur a CAPEX and OPEX of front to extend the reach of non

network. Would you have any matrix in terms of filler facilities or buildings that have been connected that would indicate the -- I guess the increased reach of your opportunity and with point some guidance, I guess, in terms of the marketing that we start to see coming in future quarters?

One thing that you could do is take up my AGM presentation from last year, which talks about building national capabilities and take it from this year, and you will see a delta on a number of areas in terms of the fiber transport capacity, going from 10,000 kilometers to 13,600 kilometers this year. And you will be able to see deltas in terms of the customer pops, which are now at 223. You'll see some deltas as well on the

front. So, I mean if you just juxtapose the two AGM presentations and look at the delta, you'll see the investment that we've been making which of course would increase the addressable market for us. The other thing I think is probably worth pointing for you Richard is that the

as a measure of coverage is not as relevant now as what it was before as a result of the CDNA ruling. The most profound impact over the last 12 months in terms of increasing our addressable market has been the CDNA ruling by the CRTC. Perhaps to give you another little bit of flavor. If you look at our CAPEX in Q1 '03 versus CAPEX Q1 '04 for the non-ILEC business, it's more than double, and the non-CAPEX I think reflects the implementation of some of the large national deals that we secured. To talk explicitly in terms of how the pipeline is going. I'd say the pipeline is healthy. I think you'll see us announce going forward other deals of the ILEC of the cooperators. It's really important for me to convey this point; we will be extremely patient with our non-ILEC business. This is the business that I've never had more confidence in, because I believe the quality of the business that we are securing is improving appreciably. The network is performing very well for us in Ontario and Quebec. We really have raised the bar in terms of the quality of the leadership team within the province of Ontario in particular, and I think that would drive a lot of high performance going forward. And the thing that is important for people to take away in respect of our patience is that we are not going to come off strategy. If we wanted to we could pump the revenue by selling LD voice into a lot of customers in Ontario. That is not the type of reputation that we want to build in Ontario and I think that is not a viable long-term strategy. What we are going to do is remain focused on data, we want to build the reputation for excellence in providing managed data network solutions and applications and we want to sell voice as a data application. The extent to which we can take our NGN and add ADSLs and access mechanism toward our IP1 as an access mechanism to it and provide that managed data network solution. That is the platform once established that we can use to go after the voice business in that account and we would have huge economies of scope, advantages over other players, because we've already deployed the infrastructure in support of the data solution, but that next generation infrastructure is capable of supporting voice as well and that's the strategy for this organization and there is a significant legacy voice and data networks services based out there for us to displace with our technology leadership on NGN.

If I could just follow-up Daren on the CAPEX as you pointed out, it has doubled versus last year. I wondered if you could comment on how the percentage of excess based CAPEX changed over those

?

Well, I kind of intimated the point to you that the deals that we are securing require obviously not just OPEX but CAPEX to implement. Of course that is variable in nature continued upon securing those deals. So I think I'll draw the line there for you, Richard okay, and we have given guidance in that regard.

It's helpful. Thank you.

Thank you. Our next question comes from John Grandy with Orion Securities. Please proceed with your question.

Thanks very much. Maybe look on the brighter side for a moment. If I -- let's take the midpoint of your revised guidance, your dividend payout ratio is down to 50%, and I would think based on '05 consensus well below that level. So my question is at what point do you become sufficiently comfortable in your free cash flow profile that you consider raising that dividend?

Great, thanks John. It is Bob McFarlane here. With regards to the dividend, I think whether you look at it on a payout basis or on a free cash flow basis, where given we are going to be generating over billion dollars free cash flow, clearly we've got a healthy and improving financial picture. We are consistent with our strategy of implying that surplus cash flow to deliver the balance sheet in accordance with our financial targets, and to that end we have established the public long-term debt EBITDA ratio to $2.20 and a long-term debt-to-total capitalization of 45% to 50%, and of course, we've had as you know the interim deleveraging targets which we've been hitting or exceeding along the way. So, clearly we're coming closer to a point wherein we can both satisfy the deleveraging targets and have flexibility to consider other opportunities such as dividend increase, but I think suffice to say that we want to continue on and meet the targets this year, and then it will be Board's decision as to review on a quarterly basis as to when or if and when its appropriate to increase the dividend, but obviously I would concur with you we have increased flexibility in that regard.

So a decision could come at any quarter, it's not an annual decision?

No, the decision is made by the Board. It's a purview of the Board, and it's made on a quarterly basis, John.

Thanks, very much.

from a policy perspective as well for the people on the phone. It's important to point out to the extent to which we have met our credit objectives, and we have exhausted core business development opportunities, and we have surplus cash. We will not go off strategy. We will return that cash to shareholders in the most tax efficient mechanism as possible.

Thanks.

Thank you. Our next question comes from Dvai Ghose with CIBC World Markets. Please proceed with your question.

Thanks very much. George quick question. You know, tremendous results from your

and Rogers Wireless very lackluster results from Microcell. You removed some of your retaliation against Microcell in the West during the quarter. I'm wondering why, is it because basically they are not getting the traction that they where in Q4, or there are other reasons behind it, and how do you see the Microcell threat as it is today?

Thanks, Dvai. As I guess, I said really earlier our strategies that we're deploying, appear to be working as people have called it's not hat they do change literally every month. Telus is depending on where our competitive pressures are and with the results we've reported and the indication I've given on our churn numbers, I think our current strategies would reflect that execution, and that's probably enough set based on results reported yesterday in the marketplace.

Fair enough, maybe I can have a quick add on then to Daren. Could you give us a quick idea Daren as to what you see the timetable for potential new collective bargaining agreement, and would you tie a dividend increase going back to the previous question with the new collective bargaining agreement, are they really two separate issues in your mind?

Thanks for that question Dvai, I was hoping that I'll be able to escape from this conference call without giving labor relations questions, so Dvai I'll be coming over to your offices at the conclusion of this call. Talk this matter with you face-to-face.

I guess, I got six hours to run away but anyway carry on.

Couple of things, I think it's important for people to note that the mindset of this management team is that the given the current context within which we are operating, its imperative that we get the full magnitude of change that we need to ensure the future welfare and competitiveness of this company, and with the owner as regulatory environment the significant changes in respect of the competitive dynamics and the increasing requirements for customers that necessitates a high degree of flexibility within the workforce. It's imperative for us not to get changed in a piecemeal fashion, or not to get changed in terms of half measures, but to realize the change necessary and full, and which of course is what is driving our thinking. I think I stated clearly yesterday that our preferred course of action was to proceed with the request for reconsideration with the CIRB, and as a result of that will allow us to pursue our original strategy from the labor relations perspective, and if that of course is unsuccessful and we find ourselves in binding arbitration then we will make the best of that particular process. It does have an upside in the extent to which we are locked in binding arbitration there is no possibility of the strike through that process, so it does provide certainty for the street and I think that's a good thing. Of course the risk for us in binding arbitration is that we do not get the full magnitude of change that we're seeking which as I've just stated is the goal that we are adamantly adhering to. I also now to recalibrate the collective agreement that we had previously

. We have most of the conditions that we're actually aspiring to within the province of DC.

thing that I think is important to mention that continually gets overlooked is that whether we go binding arbitration or whether we're successful in our request for reconsideration, we will get significant change within the collective agreement which will release productivity, efficiency and service improvement gains for us by reducing holiday time, by increasing or introducing variable pay. By increasing or introducing mandatory overtime from the outsourcing of non-core functions which will all be very positive for us. In terms of the timeline on this, its very difficult for me to respond because as I said what we want to do first is to see what the outcome of the request for reconsideration of the CIRB is and I don't control the timeline, the CIRB controls the timeline. At any time if you are dealing with

things can take longer than what you would aspire to. So, we're working at and we're hopeful that we can get this matter quick to bad over the course of 2004 and release those productivity efficiency and service gains that I've just alluded to. In terms of link to the dividend, I would consider those things to be independent, we of course will factor into consideration in our labor relations strategy, what we would intend to do on the dividend going forward, but I think just like to say that they are independent matters, of course, right now from the holistic perspective. And as you know well, why we've been extremely responsible in our accounting treatment in dealing with the eventual outcome and what it means from the P&L perspective related to a new collective agreement being put in place.

Thanks very much. Best of luck in the union negotiations.

Thanks a lot, any advice would be gratefully received.

Thank you. Our next question comes from John Henderson with Scotia Capital. Please proceed with you question.

Good morning. Great results there. Just have a question on your latest comments on your interest in Allstream and sort of how you would expect to react to the MTS-Allstream proposed merger.

I guess that's to me, John could you just clarify what you mean about our comments - I'm not, whether we made any comments on the

in respect to MTS and Allstream.

I wasn't aware either.

Okay. Well, I'm not going to comment on that deal in terms of the efficacy of the deal, I think, it would be appropriate for me to do so. In terms of an emerging competitor for us on a national basis within the wire line market, I think we're exceedingly well-prepared to deal with that eventuality, I can tell you categorically that the technology leadership that we've in respect of our next generation network plays very well against the legacy infrastructure that's in place within the Allstream organization. So, I think, from the competition perspective, we'll pursue our strategy and the focus on data and I think we'll do very well as a result of the investments that we've made over last four years on the technology front. In terms of comment on the M&A front, no change in view there and clearly this is not the forum where would exclusively discuss our aspirations from a corporate development perspective as it appertains to purchase and acquisitions.

Okay. Thank you. You've said in the past sort of maybe a year ago that you had really no interest in Allstream as a company in term of an M&A opportunity, would you stand by that today? Or would you just say no comments?

I think what I said is that our view hasn't changed and so I indicated John on a number of conference calls that that was not a target, that was on our radar screen; it was a cold fire within our organization. I think I was quite explicit about that and so in terms my comments here, I don't think the view of this organization is changed.

That's great. Thanks very much.

Thank you. Our next question comes from Peter MacDonald with GMP Securities. Please proceed with your question.

Thank you. In the release, you note that Supernet contributed some of your line losses in the quarter. Is this simply due to the migration of the government Centrex lines on to their network or you're seeing greater competition there?

No, it is exactly that, entirely that.

Okay. And just a follow up on the non-ILEC, should we expect that successes they will result in increased EBITDA declines in the near term similar to what you saw in the wireless business in the early days?

Well, I think if you look at our EBITDA in Q1, which was minus $9m and you look at our guidance for the full year which is minus $20m to minus $30m, I think going forward as an organization, you're not going to see an EBITDA result that's going to increase significantly beyond that minus $9m. We would hopefully like to at least pass the cost on EBITDA positive during the quarter this year. So that's our aspiration but as we have been more successful, some of the larger deals that's putting cost pressure on our OPEX line which is dilutive to our EBITDA. So, I think, if you look at minus 9 versus a full-year minus 20 to minus 30, you can do the mathematics. So, I don't think we're forecasting further deterioration. If there is pressure that comes on the EBITDA line, frankly that pressure is going to come from business success, in terms of securing some large deals. So, I think that maybe a good boundary in response to your question. Did that cover it off for you?

Yes. Just, if I can just follow-up, would you try and manage where you are now with your EBITDA loss within that business or would you grow as quickly as you could regardless of the impact on EBITDA on the near-term?

I think, and don't take this at the extreme because I think that would be irresponsible. But for example, if we had a series of on-strategy contract opportunities that we could secure and by on-strategy, I mean, managed data network solutions where those contracts were

positive for this organization, whereby consummating those contracts would cause us to take the EBITDA beyond minus 30. I would take the EBITDA beyond minus 30 and consummate those contracts because that's the right thing to do for the business and for long-term value duration.

Okay. Thank you.

Hi, operator, we'll take two more questions, given we're coming up on the hour.

Certainly. Our next question comes from Rob Goff with Haywood Securities. Please proceed with your question.

Thank you and good morning. Do you feel that

move to launch residential Voice over IP into your market requires a competitive response, and sort of along that scene, do you feel that we will see other ILEC's offering Voice over IP at origin? Thank you.

Rob, I don't think it merits a competitive response right now. Launching wireline services in Saskatoon is not on strategy for this organization. Clearly, however, we always have to maintain some degree of discipline in the market in terms of the behavior of our competitors, but for the present point in time, I think we would continue with our view that our focus in terms of wireline expansion is in the Ontario and Quebec markets. And the market segments that we're focused on is, of course, the business segment. The other thing that I have to say is that, I don't believe a standalone Voice over IP solution is going to carry the day in the consumer market. So, when you're up against an incumbent that can provide local and long distance voice services, call management services with a high degree of functionality, ADSL services with a raft of applications on the back of those ADSL services, a wireless component due to bundle, a home security solution, a managed 80211wireless LAN solution, which we just announced the launch of, yesterday, and potentially a video solution, then I think a standalone cheaper than voice solution, does not have a long life expectancy in terms of broad-based market success. I think, you may always find some niche players where you can enjoy some success, but I don't think that that would be a compelling offering. And it may be under

, if we were to look at the Ontario and Quebec market, at the present point in time, I don't think you would ever see Telus going in there with a cheaper voice solution as a single product offering into the Ontario and Quebec consumer market. I think, if you are ever going into that market, we'd have to say, all right, we have to have a sufficient or significant degree of product capabilities such that we can differentiate ourselves from the incumbent and build a meaningful long-term business. A cheaper than voice product as a singular solution, I don't think has a long-term capability of being highly successful on a broad-based perspective, may be, a few niche applications, that's it. So, if we're going to go into a market of someone like Bell Canada, we'd want to make sure that we're locked and loaded on the voice front, locked and loaded on the data front and locked and loaded on the application front, so that we could compete successfully and build a long-term, sustainable, high-quality business.

Thank you very much, John.

Yes, Rob.

Thank you. Our final question comes from Peter Rhamey with BMO Nesbitt Burns. Please proceed with you question.

Yes. Good morning and thanks for fitting me in. A point of clarification, I believe, Daren you gave a pretty good answer to the prior caller on capital spending and the pattern and some of that successfully but I think that pertains more to the non- ILEC business. I was wondering, looking at the pattern, has there been any change in where you're spending your money over, what you previously thought when you originally announced your plans back in December. That will be the first and just on the point to clear, clarification Bob, any interest savings coming from this refinancing and that would be material and does that include in guidance and as well, is there any other further tax benefits expected this year? Thank you.

Peter, I will kick off on the Capex front and then I will hand over to Bob to give you a view as to the interest reductions on the debt as a result of what we did no the tax front. Now first off, I think it's important to point out that 2002, Q1 on the Capex front was -- or 2003 rather than on the Capex front that Q1 was abnormally low and the Capex intensity was about 12% in Q1 2003. I think what that reflects was the fact that we could not process capital because we were going through the throws. We were in the next

if you will of the operational efficiency program. So, that hindered our ability to deploy Capex in a normalized rate. So if you look at the quarter-over-quarter comparisons, they are not entirely accurate. We have been making investments in a number of areas that have strained the capital on the wireline side. We have been putting a significant amount of capital in terms of network improvement to improve the reliability and the functionality of our network so that we can deliver higher levels of service both in the west and on a national basis. So from a sustainment perspective and a network improvement perspective that's consuming a little bit more capital than what would otherwise be the case.

of the other things that is consuming capital for us as well is that while we have done very good job in my estimation over the last few years in terms of investing in telecommunications network technology to get the leadership position that we have realized today, we don't have a similar track record of success in the IT front. So at the present point in time we are working hard to execute our roadmap and rationalize the number of systems and infrastructure within the organization on the IT front and that's consuming non-frugal amounts of capital. Additionally, as you rightly have commented on, we have seen a more than two times increase in the CAPEX in the non-ILEC region that does reflect the upfront investment required consummate the implementation of some of our larger national deals. Of course as well, when I talked about some of the activities that we have underway to mitigate the long distance erosion I spoke about the slate of consumer products that we have coming down the pipe and it is probably the most significant slate of new product introductions in the consumer market that we have had in the 100 year history of this organization and that is taking some capital to bring those things through to fruition. I think that probably to draw line under it 21.7% as a CAPEX intensity rate is not the CAPEX intensity rate that we will be delivering over the medium to longer term for our wireline business and that will be the focus of the management team to drive that down and get below the 18.3% that we delivered last year and 18.1% that we are aspiring to meet this year.

Great. Thank you very much, Daren.

In terms of Peter, I think the second question that you had related to intra

reduced interest or financing expenses related to the debt refinancing in 2004 and the answer to that would be no. While is favorable pricing inherent in the renewed credit facilities. Because we are not currently borrowing on our credit facilities, it really doesn't impact our expense line unless we did borrow which there is not non-occurring need to. Now of course, on the accounts receivable securitization lines we are also been - we have reduced our borrowings, excuse me our lines outstanding on that securitization program and by quarter end and we are currently at the $150m level. And that's the minimum to maintain that program. So while we do expect to generate the cash flow that we could have paid it down further, it's like we will have or just maintained that program at $150m because there is considerable advantages. After it is recorded and setting that up in the continuity advantages probably worth more than the savings of paying it down in full. So having said that, relative to the first quarter where we are in the process of paying down that line, there will be some reduced charges related to the securitization given it is now at $150m lower level than it was at year-end. Now those expenses flow through the other expense line as opposed to the financing charges because legally securitization costs are not interest expense on borrowings. Now, in terms of tax impacts, I think that was the third part of you question, of course as mentioned we have had $0.04 positive impact to our first quarter results this year. There is $0.15 first quarter last year. We have -- you know we always have a number of outstanding matters. So whether they be audits on prior year results, whether they be in relation to the mergers which was last years settlement or ITCs which was another form of settlement last year. It relates to the interest and the fact that we win prior settlements which was the favorable settlement this quarter, and we continue to have a number of negotiations outstanding, but it wouldn't be -- I don't have a basis to say that or would be prudent to say that they are going to turn out to be favorable or not, suffice to say I think one thing that listeners to this call could conclude quite accurately is when a company consistently has changes to its tax line that are favorable, I think that gives a reflection on the basis of the accounting of this organization over an extended period of time. And that should give a further comfort regarding the steadfastness and reliability of the type of numbers that we report.

Okay. Thanks Bob. I will just turn it to Daren to

.

I just want to express our appreciation for you joining us on the call today, and also to recognize that you got a lot of information to digest given the number of players in our industry who announced the results yesterday. So, hopefully this added information will be helpful for you as you process the data the you have been deluged with as a result of the contemporaneous announcements transpiring the telecom industry in Canada. So, thanks a lot for joining us and we appreciate the commitment. Cheers.

Thank you ladies and gentlemen this concludes the TELUS Q1 earnings conference call, we thank you for participating and ask that you please disconnect your lines now. Thank you from TELUS.