Telus Corp (TU) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TELUS Q2 earnings conference call. I would like to introduce your Chairperson, Mr. Robert Mitchell, Director of TELUS Investor Relations.

Good morning everyone and welcome to TELUS' second quarter 2004 results conference call and webcast. Joining us today in Vancouver, we have Darren Entwistle, President and CEO, and Robert McFarlane, Chief Financial Officer. In Toronto we have George Cope, President and CEO of TELUS Mobility. We will begin today's call with some prepared remarks from Darren and Bob and then we will open up the lines for your questions which may be directed at Darren, Bob or George.

The news release containing our second-quarter financial and operating results was issued earlier this morning. This as well as detailed supplemental information and accompanying slides for the call today are available on the Investor Relations section of our website.

Let me now direct your attention to slide 2. Given the forward-looking nature of the presentations, commented 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. We ask that you read this and refer to the risks outlined in our public disclosure filed in both Canada and the U.S. TELUS also disclaims any obligation to update forward-looking statements.

With that, I will turn the call over to Darren.

Thanks, Robert. Good morning and thank you for joining us today. Let me begin by noting that the solid 5 percent growth in second-quarter revenue and 9.5 percent increase in EBITDA and a significant increase in net income are the product of our national growth strategy focused on data and wireless expansion.

Investors in TELUS are reaping the benefit of the strategic direction and investments made 4 years ago and of course the follow through in respect of operational execution. Also noteworthy is a continued generation of record amounts of cashflow allowing us to continue paying down debt and to achieve our 2004 year-end net debt to EBITDA leveraged target well ahead of plan.

At the same time, 2 areas of continuing management focus our high-speed Internet and non ILEC operations. While softer, high-speed net additions could be attributed to some end of school seasonality or slower growth across the industry, the fact of the matter is TELUS had good gross additions. Frankly I expect TELUS to manage customer turn better and thereby post higher net additions as we go forward.

A second area of underperformance is our non ILEC operations in Central Canada. While I am disappointed in the short-term results, it is important to understand that we are successfully executing on our objective to migrate away from our dependency on the non-recurring CPE (ph) business to focus on increasing the proportion of revenues derived from quality recurring income available from winning large, multiyear contracts.

As shown on slide 5, recurring revenues are up 17 percent in the second quarter 2004 versus the second quarter 2003. Moreover, recurring revenues now represent approximately 3 quarters of the total non-ILEC revenues. The short-term impact is higher startup costs in CapEx which come in front of building revenues and this is reflected in our non-ILEC results thus far this year.

We're executing on a series of major wins that we have announced like the TV Bank and cooperators and a number of significant national managed data contracts that we cannot announce publicly, unfortunately. Let me assure you we're remaining disciplined and focused on selling managed data solutions and exploiting our two-year lead-time over our major competitors on our existing IP based Next Generation network and IP applications.

I am pleased by what I see in the sales pipeline with the Central Canada leadership team and the new contract implementation being accomplished by our organization.

Let me now comment on our progress on 2 of the strategic imperatives set out for 2004, starting on slide 6. In an increasingly competitive market it is important to ensure we have not only good customer service but superior levels of customer service that can differentiate us in the marketplace. In 2003, TELUS encountered a number of internal and external events within a short period of time that impaired our ability to deliver the desired levels of service to our customer base in Western Canada. A focused effort was put in place to exceed all historical levels of service and sustained these improvements on a permanent basis.

With his effort, TELUS has far exceeded industry standards relating to accessing our customer care contact centers and repair bureaus. TELUS has sustained it's superior level of service for more than 8 straight months. In addition TELUS has continued to provide consistently high levels of access to its operator services throughout 2003 and 2004.

TELUS has also focused on improving its ability to meet customer repair appointments and to restore telephone outages within 24 hours within both urban and rural locations. I am pleased to say that we have met or exceeded industry standards relating to these measures, as indicated again on slide 6.

On July 6, TELUS received a strong acknowledgment from the CRTC relating to our progress, commending us for the actions taken and the strong results generated in customer service. Accordingly, we are well on track to deliver on our 2004 corporate objective of growing brand value through superior customer service.

Slide 7 highlights an area of frustration for this organization, namely our impasse with TWU and more recently with the various delays on outstanding applications with the Canadian Industrial Relations Board. We are appealing to the Federal court, the automatic sweeping into the TWU of the TELUS mobility nonunionized employees in Eastern Canada without a representational vote. We're pleased that we have received an expedient Federal court date in early October.

Most important for us is to realize progress on reaching a collective agreement for our unionized team members. And the need for the CIRB to issue its decision on our reconsideration appeal of its arbitration decision. While TELUS believes that the return to collective bargaining is desirable and warranted, we are also very well prepared for moving forward on binding arbitration if necessary. We are optimistic that the CIRB will act soon and we can move forward on this 2004 corporate priority.

We remained committed to reaching a reasonable agreement for all parties involved; employees, customers, and investors that allows TELUS to compete more effectively within the changing environment in which we operate.

Turning to slide 8, a final highlight is the strong performance at TELUS Mobility this quarter. Once again this validates our strategic investments over the last 4 years to become a leading national wireless player. With 20 percent revenue growth this quarter, 42 percent EBITDA growth, a 69 percent increase in cash flow as measured simply by EBITDA less CapEx, a 3 dollar increase in ARPU and a low churn rate of 1.3 percent, we are once again a leading wireless operator in North America and indeed around the globe.

Clearly our outstanding bid to require to acquire Microcell is consistent with our natural growth strategy in wireless and has the benefit making TELUS Mobility more competitive with the other major players in the Quebec and Ontario markets.

In closing, I am pleased to report to investors that based on our second-quarter performance, we are able to revise upwards our full-year guidance both at TELUS Mobility and at the consolidated level for TELUS Corporation, including EBITDA, EPS, and free cashflow.

As shown chart 9, TELUS remains the global leader amongst our telecom peers in projected growth 2004 EBITDA at 7 percent. We're tracking well against this measure on a year-to-date basis, delivering 9 percent growth in the first half of the year.

On slide 10, you can also see that in terms of growth in respect to simple cashflow projected in 2004, TELUS at 10 percent again remains at the forefront of global telecom companies. Moreover at 24 percent, TELUS' cashflow yield for the first half of 2004 is in the top quartile of TSX (ph) 300 companies which have reported to date.

The next slide shows that we have also compared very well against our peers based on projected EPS growth. Let me assure shareholders and debtholders alike that the TELUS team continues to work hard on delivering against all our priorities and financial targets and as always we appreciate your support.

Now over to Bob to recap the quarter.

Thanks, Darren and good morning, everyone. Let me begin on slide 13, which recaps some of the highlights in the second quarter. TELUS Mobility, our wireless segment, again reported outstanding operational and financial results across the board. Strong subscriber additions and retention combined with increased ARPU and cost efficiency generated the excellent financial results.

Meanwhile TELUS Communications, our wireline segment, exhibited continued revenue softness in the second quarter, consistent with a trend of the sector. At the consolidated level, TELUS reported strong EBITDA, EPS, and free cashflow growth.

The next slide highlights the significant consolidated growth reflected in the Q2 results. Revenue growth was 5.2 percent and EBITDA growth was 9.5 percent. In the case of revenue and EBITDA, the driving engine behind the growth has been TELUS Mobility's excellent results. Of particular note, second-quarter profits grew to $172 million in the quarter, which was aided in part by favorable tax and related interest settlements of $45 million. It is also noteworthy to observe that TELUS generated a sizable $230 million of free cash flow, which is about 3.5 times that generated in Q2, 2003. Notably all of these results are well ahead of consensus street expectations.

Taking a closer look at EPS on the next slide, we can see that EPS for the second quarter of 2004 normalized for certain items. Favorable tax settlements and related interest contributed approximately 13 cents per share this quarter. After normalizing for the positive tax settlements and an approximate 1 cent impact from the share base compensation not recorded last year, EPS is up 71 percent. And after adjusting for restructuring and workforce reduction costs, normalized EPS was up 14 cents or a 64 percent. According to our tracking, consensus street expectations were 31 cents for Q2, so any way you measure it, TELUS produced excellent earnings growth, which exceeded expectations.

Now let me turn to TELUS Mobility, which was the driving operational force behind the strong results reported today. On slide 16 you can see that Mobility continues to perform well across the board. Total revenue was up 20 percent from a year ago due to increased ARPU, combined with strong subscriber loading and retention results. Excellent topline growth combined with continued cost containment and enhanced operating economies of scale lead to an impressive 42 percent EBITDA growth rate. With flat CapEx year-over-year, a tremendous $85 million increase in cash flow was generated.

Mobility enjoyed a strong quarter subscriber growth with an industry-leading 114,000 net additions, an 11 percent increase over the same period last year. With over 100,000 postpaid net additions in the quarter, postpaid growth was particularly strong, up 28 percent year-over-year; and postpaid subscribers at June 30 represented 82 percent of the total subscriber base. While typically 60 percent of annual wireless industry subscriber loading is in the back half of the year, given that TELUS' midyear subscriber growth is ahead of last year's pace, we appear to be on track to meet our 2004 guidance of 375 to 425,000 net additions.

This next slide depicts TELUS Mobility's strong performance in wireless churn. TELUS' churn rate was 3.8 percent, flat compared to the same period last year. This continued excellent churn performance reflects the high-levels of client satisfaction with our network and service experience and indicates we're providing a future friendly experience for our clients.

Slide 19 illustrates the fact that TELUS Mobility continues to be the undisputed Canadian industry leader in terms of ARPU by a significant margin of $9.00 or roughly 18 percent. As a result of an overall 14 percent increase in average minutes of use per subscriber, an increase in roaming revenue as well as an increased acceptance of data, Internet based products including picture messaging, ARPU increased to a Canadian industry-leading $59 in the second quarter of 2004 as compared with $56 in 2003. This reflects the advantages of our innovative marketing, strong brand presence, differentiated product focus and effective distribution.

The next slide demonstrates an important facet of our Mobility business. The increased economies of scale that we're generating as the business continues to quickly grow. In the second quarter, 86 percent of the incremental $99 million in network revenue flowed to the EBITDA line, a tremendous achievement and a true indicator of the financial, operating health of our strong Mobility business.

Now turning to TELUS Communications, on slide 21 you can see a summary of financial results for the wireline segment. Second-quarter results are consistent with a continued industry-wide softness in wireless demand. While reported revenue is down 1.7 percent year-over-year, it is interesting to note that communications revenue of 1.189 billion was the best quarterly results in the year and we did experience improved trends through local and LD revenues.

Expenses were down 0.6 percent as OEP related savings of 27 million were partially offset by other expense increases. A revenue decline lead to lower EBITDA of 499 million, a 3.2 percent decline.

CapEx increased 18 percent year-over-year, largely due to increased ILEC network investments to improve customer service and reliability as well as non ILEC investments related to implementing new, large complex IP contract. As a result, cashflow as measured by EBITDA less CapEx declined 20 percent to $231 million.

Driving toward leadership in high-speed Internet is one of our top corporate priorities. On slide 22 you can see that despite TELUS only adding 19,000 high-speed Internet subscribers in Q2, year-to-date total of 63,000 is ahead of last year's pace. And so we remain on track for the 125,000 net edition target for the full year. We have also captured an estimated majority of the market's high-speed organic net additions in our incumbent areas. However as Darren mentioned, we were disappointed with the churn experienced in the second-quarter and through focused effort we should be able to improve on future results.

At June 30, TELUS' total high-speed Internet subscriber base now totals 624,000, which is a 33 percent increase year-over-year and represents over two-thirds of our total Internet base.

Turning to slide 23, we show the performance of our non ILEC business in Central Canada normalized for the sale of certain assets last year. As Darren mentioned, the recent profitability declines are believed to be short-term in nature and a byproduct of our transition to higher quality recurring revenue services, which often entails significant expense in CapEx recorded prior to the ramp up in meaningful longer-term recurring revenue is when implementing large, complex contracts. As shown later, we are revising down the 2004 non ILEC items.

The margins from both business segments are depicted on this next slide. On slide 24, as you can see the strong 6.6 EBITDA margin improvement in our Mobility business has driven the consolidated EBITDA margin of 42 percent, a 2 point improvement from last year. This marks the sixth consecutive quarter of increased year-over-year consolidated margin improvements.

Slide 25 illustrates Mobility's increasing contribution to TELUS' consolidated results for both EBITDA and cashflow, measured by EBITDA less CapEx. Mobility's 42 percent increase in EBITDA this quarter means that this segments now comprises 36 percent of consolidated EBITDA. Combined with Mobility's flat CapEx over the same period, it's EBITDA less CapEx contribution also increased almost half of TELUS' consolidated cashflow.

Consider that it was only two years ago that our Mobility segment achieved a breakeven cash flow. I continued to believe this has important valuation implications. The high-growth TELUS Mobility business now generating meaningful cashflow should logically attract a higher valuation multiple for TELUS relative to other telcos stocks.

This next slide shows free cashflow generation for the second quarter of 2004 and 2003. Notably we had a positive $81 million impact from net cash tax recoveries in the quarter, which combined with higher EBITDA less CapEx, lower cash restructuring payments and lower cash interest resulted in an impressive $164 million increase in free cash flow with TELUS generating about $230 million this quarter. TELUS also utilized $36 million of cash to redeem approximately half of its preference and preferred shares during the second quarter, with the balance to be paid out in July and August.

After factoring in the impacts of changes in working capital and other and the net change in long-term debt, TELUS increased its cash position by $84 million in the second quarter.

As you can see on slide 27, TELUS is well ahead of plan on deleveraging, having reduced net debt by $933 million over the past 12 months. Our net debt EBITDA ratio now stands at 2.4 times, which is below our original 2004 year-end target of 2.5 times or less. As a result, we're providing new guidance for December, 2004 net debt EBITDA of 2.3 times or less, which of course for now does not assume the potential impact of our Microcell bid. Clearly TELUS is demonstrating strong financial performance to our debt investors and rating agencies.

I will now briefly comment on the status of our outstanding bid for all the outstanding public securities of Microcell Communications. At the end of June we entered a confidentiality agreement and subsequently met with Microcell's management. We've extended the offers twice with our bid currently set to expire on August 20. We are working constructively with regulators whose reviews are well underway.

You may recall that our bid represented a 37 percent premium to the pre-offer trading price. As such it is clearly a fair and reasonable offer. In this context, given that TELUS' bid has now been outstanding for almost 3 months and is still no competing offer has emerged, it is therefore irrational for the trading price of Microcell Securities to trade above the offered price. It seems it is taking some time for the market to be efficient in pricing Microcell's Securities in the context of our offer. In any event, we will be looking with interest at the second-quarter results of Microcell scheduled for August 10.

On the next few slides, we provide you with updates to our annual 2004 guidance based on our outlook for the rest of the year. We are pleased to be able to revise upward our mobility guidance for revenue by $25 million and for EBITDA for $50 million. This is in addition to the raised guidance made last quarter. Of course this guidance excludes any potential impact from a possible Microcell acquisition.

Turning to slide 30, you can see the updates to our communications guidance for 2004. Although we're making downward adjustments to the guidance for our non ILEC operations, for reasons discussed earlier we believe our revenue in EBITDA guidance for our overall communications segment remains appropriate. Meanwhile we are now expecting CapEx to be approximately 950 million.

The consolidated updated '04 guidance appears in slide 31. It is important to note that this guidance does not take into account any prospective acquisition of Microcell. While the outlook for revenue remains unchanged, we have increased our annual EBITDA guidance by $25 million reflecting further improvements in our Mobility operations. The EPS outlook is being adjusted upwards to $1.30 to $1.50 from $1.10 to $1.30 due to the tax settlement received this quarter plus our improved EBITDA outlook.

While overall consolidated CapEx should edge up to about 1.3 billion, free cashflow is nevertheless expected to increase by 20 million to a new range of 1.15 to 1.2 5 billion. Overall, these guidance revisions reflect continued strong financial performance at TELUS this quarter and an improved positive outlook for the balance of 2004.

On that note, let me hand the call back to Robert to open the lines up for your questions for Darren, George, myself.

Thanks, Bob. Before we start the Q&A portion of our call, we would like to remind questionnaires to please limit themselves to 1 question and a follow-up question related to the question where appropriate. Operator, over to you to open the line for questions.

(OPERATOR INSTRUCTIONS) Richard Talbot, RBC Capital Markets.

Good morning. Congratulations on the wireless results. You have obviously shown and we have seen across the industry big increase in the overall EBITDA margins for the business. I wondered if George could give us is some sense of where you think that margin is likely to go? I know in the past you cautioned us to not get too carried away but clearly we're seeing these strong numbers in the industry continues to grow while the CapEx seems to be coming down. I would appreciate your thoughts on the longer-term sustainable EBITDA margins.

Thanks for the comments. Clearly we have seen the margin expand beyond our expectations. A little over a year ago where I had indicated getting the industry to see margins in excess of 40 percent would take pricing discipline in the industry etc. and of course we've seen some of that. People are focused on subscriber growth and profitability. From our perspective, a number of things are driving our margins higher than we had expected. I think one of the key ones for us has been to see our churn level come down such that is mentioned in the release to see our post pay churn now go to 1 percent.

One of the key drivers for us had been that we would often said we had thought 1.5 percent on a blended basis would drive the margins in that 40 percent level. Clearly we're seeing that churn can be under 1.5 and that is driving it. So without giving guidance I think it is clear, Richard, that I was light at 40 percent and our focus will be to try to maintain the margins that your seeing now as we continue to grow the business as profitably as we can. And again continue to balance subscriber growth with our profit growth.

Again, really positive though for investors have been our ability to maintain the CapEx level such that the free cash flow generation is obviously now going out because we can we believe maintain the business in that 12 to 14 percent of CapEx to revenue and those things obviously bode well for the future of the Mobility business and therefore, TELUS.

If I can just follow-up -- I know you announced earlier in the year a number of price increases that would kick in in effect July 1. I believe you have implemented those, and I just wondered if you can comment on with your continued to have further pricing increases as we go forward?

We continue to try to balance the growth of the profitability and our pricing initiatives in the marketplace. We did implement some price increases at the beginning of July and we will continue to try to monitor the market and what we can do in terms of balancing subscriber growth with profitability, so those price increases have gone through. We have no other announcements this morning. We will now be focusing on the important part of the last half of the year, which drives a lot of subscriber growth for the industry.

Thanks very much.

Greg MacDonald, National Bank Financial.

Thanks and good morning. The question is on the non ILEC strategy. You indicated, Darren that you're not happy with the results that you're seeing in terms of concerns -- a little bit the press release noted on wholesale pricing and equipment sales. I am wondering though aside from that, maybe on a larger strategic issue given Bell's focus on its CLEC strategy in the West, is that indicating that you should -- are you thinking that you should be looking at changing to be more aggressive -- your strategy in the East and would that potentially have implications on capital and operating investments?

Thanks, Greg, for the question. To be very direct in responding I think you can expect us to be considered and prudent in the East and certainly disciplined going forward and you should not expect us to be overtly aggressive. We believe fervently that we have the absolute right strategy in Eastern Canada. We've got the right leadership team under Joan Italia (ph) in Eastern Canada. We've got a very, very healthy sales pipeline that is burgeoning and I think we also have a technology leadership advantage over the competition that is resonating very well with our target customer base that we're going after.

I think is important point out we that we have had an explicit policy to migrate away from non-recurring revenues to higher quality recurring revenue streams. I think you got a sense of that in my comments this morning. If you look at the first half of 2004 in totality versus the first of 2003, recurring revenues were actually up 19 percent and over the last 6 quarters, recurring revenues have gone from accounting for about 58 percent of our revenue composite in the non ILEC business to 75 percent today. So I think that is a reflection of the success of that strategy.

The other thing of course that is impacting us is that typically when we secure a non-recurring piece of revenue particularly, something like a CPE (ph) outright sale, that particular piece of business as we secure that revenue from the CPE outright sale is going to be EBITDA accretive in the financial year. Whereas typically when we secure a wide area network piece of business which is recurring over 3, 5, or 7 year term, it is typically going to be EBITDA dilutive in the year, and I think that is some of the pressure you can see now manifesting itself in the profit and loss statement for non ILEC business.

The other thing that I think is hitting us and clearly this is a management rather than a market issue is that we're now moving out of Greenfield (ph) mode. And for the first time in a history of our non ILEC business, some of the contracts that we put in place back in 2000 and 2001 are coming up for renewal. And for the first time we are actually experiencing the pressures of reprice as we renew those contracts and experiencing the pressures in the responsibilities of churn management, and that has also caused by hiccup in our results and that is something for management to come to grips with.

A couple of other concluding comments that are perhaps worth noting, we have secured a number of large managed data network deals on a national basis, some of which we have communicated publicly in the form of the TD and the cooperators (ph) deals. There have been several other large, significant managed national network contracts that we secured but we have not been given leave by the customer to disclose the identity of those deals. And the totality of the revenue and the EBITDA associated with these deals is not yet reflected in our profit and loss statement and perhaps just to give you some empirical evidence to substantiate that comment, the full annualized billing rate for the Toronto Dominion Bank is between 24 and $27 million on an annual basis.

Thus far this year, at the first half of 2004, we have only billed 1.4 million. And the other deals that we have secured beyond TD are not yet reflected at all within either our revenue or our EBITDA numbers. So clearly we are expecting a benefit from those particular contracts as we bring them to fruition and begin to enjoy the full annualized billing cycle.

I guess the last issue which is again a criticism that I would point to the management of this organization is that I think all of the factors that I am articulating are understandable. I think they are very much consistent with our strategy and again you can expect a disciplined focus from us going forward. I think we have been less than adept at forecasting accurately the financial performance of the non ILEC business going forward. In fact, holistically, the dilutive EBITDA effects of moving from a non-recurring revenue base to one that is much more predicated upon recurring revenues, and clearly that is an area for improvement going forward from this management team.

Just a quick one word follow-up. Is there anything in the recurring revenue line in terms of business segments that worries you where either on volume or pricing?

No, there is nothing that gives me undo concern. I would say as always to the extent to which in a non-recurring or rather recurring wide area network revenue stream we've got long distance in there, which is a minor percentage actually because our focus has been very much on data. But to the extent what we do have long distance contracts and we also have to be very mindful that that is the area that is most susceptible to churn. That the area that most susceptible to reprice, so in terms of the way that we manage the customer experience and customer retention, we have to be mindful of that. But again, long distance is a small fraction of our recurring revenue base because we've had a very disciplined and prudent strategy to focus on managed data network solutions, which have a much greater degree of stickiness.

Okay, thanks very much.

David Lambert, TD Newcrest.

Hi, George. My question is -- given that your operating expenses have only grown by 10 percent, given that your -- and your CapEx has been flat -- given your MOUs (ph) are up 28 percent -- and suggested these MOUs being up because of the more aggressive plans that you are offering like the 700 minutes for $45. Would you -- if Microcell disappears from the market, would consider keeping those plans in the market, given their profitability?

First I'll answer the back part of your question then come back to the beginning. No comment at all on to how we're going to price in the marketplace our products till we get to that point in the marketplace. SO no comments at all on the Microcell transaction, in terms of what we will do with the business until we are successful in this transaction or not, depending the outcome.

In terms of our own strategy, the 700 EW, we never offered that. Very, very short period of time -- in fact that has had literally no impact at all on our MOU. That was a retention program we used, not offered primarily in helping us a little bit on the (indiscernible) but quite frankly, it has been immaterial.

The MOU expansion we're seeing is the usage of just wireless has clearly become more and more commonplace. We're seeing people using the services and the functionality and the continual move toward people subscribing for evening in weekend rate plans as well. People using the phone more and more often, not necessarily a pricing strategy change by us in terms of driving somehow larger and larger buckets like we've seen in the U.S., and so the 700 EWs had no impact at all.

When would you give out some numbers on where you think your integration impact is going to be with Microcell?

As people know, TELUS Mobility and TELUS -- we've been very -- tried to be very transparent in our disclosures on all of our business in the Mobility area probably disclosed as much as any peer public wireless company, and so as the Microcell transaction if it were to come to conclusion consistent with the management style here, we would be very forthright and open with our plans there, but obviously that is not appropriate at this time.

So not until the transaction closes?

It would be inappropriate to talk before that.

Great, thanks.

Peter Rhamey, BMO Nesbitt Burns.

Thanks very much. A lot of focus on capital spending was up in the wireline segment and if I understand commentary was up for quality of service issues and some product development. I'm wondering to what extent is that -- not a spike but an increase in CapEx -- one time in nature, i.e. you had to regain your momentum on the quality of service etc. and so on. To what extent is it -- are you coming up to a new plateau in terms of capital spending and a medium term I'm thinking 2 years out, 3 years out?

Peter, I would not say it is one-time in nature in the sense that we have adjusted our guidance for the full year. So what we have experienced the first 6 months I wouldn't call one time. We have given the guidance now for the full year and it is higher than the original guidance. Having said that, I think that we have always contemplated in the past couple of years on a go forward basis to operate in the 15 to 20 percent consolidated CapEx intensity range and more particularly in the neighborhood of 16 to 18 percent. And that is really what we're seeing, as I think there is a band in terms of the range or ballpark which we're going to bounce around in and in any given period we will be at the higher end or the lower and that range, and I think that what the results say in go forward guidance are really consistent with maintaining within that range.

Follow-up question if I may. On DSL, I think you made some commentary with respect to spending $35 million to expand there. It is mostly allocated or driven by subscriber growth. How much for footprint expansion?

Footprint expansion was definitely was a significant element of that CapEx as well as upgrades in terms of shortening some of the loop links in existing urban areas in our ILEC territories. I'm not in a position to really provide the precise breakdown between both but both activities transpired in the quarter.

Thanks very much, Bob.

Dvai Ghose with CIBC World Markets.

Thanks very much. Congratulations on the good results, but I am sure you share my disappointment about the stock price, even with its recent rally. With that backdrop, I'm wondering if you could comment about the appropriateness and perhaps timing of share buybacks, dividend increases, a reconsideration of a wireless IPO and perhaps another round of employee downsizing or early retirement?

Wow. Okay. Let's just run through this perhaps in reverse order. In terms of employee downsizing, I think you can expect to see 3 thrusts coming out of the wireline side of the business to revitalize the financial performance of that particular segment of our business. Number 1 is going to be a push on the digital home initiative, which is a suite of products that range from wireless home networking to home security right through to potentially TELUS TV. And I think that will provide us with new and attractive profitable revenue streams that we can enjoy within our ILEC base.

I think you can expect an uplift in the performance of the non ILEC business in Ontario and Quebec for the reasons I have cited in my previous answer and I think you can expect something of the ilk of the operational efficiency programs that we have invoked over the last couple of years in a series of phases from Phase I right through the Phase III to be institutionalized behavior and discipline for the wireline business going forward.

So to be quite blunt, yes, we will be looking at achieving further efficiency and productivity improvements of a material nature from the wireline side of this business. Of course our goal on the wireline side of the business is to try and drive increased revenues from things like non ILEC expansion or the digital home initiative, compliment that with cost reduction such that we can offset the negative impact of regulatory decisions, competitive intrusion, and technology substitution.

If we can do that, I think at a corporate level, we fully expose ourselves to the significant contribution that TELUS Mobility is now making to topline revenue growth, to EBITDA, to EPS, and of course to the free cash flow of this organization. So that is very much the mentality for us on a go forward basis.

In terms of a wireless IPO, I remain fairly consistent on this comment. That is not something that is on strategy for this organization. I do not believe that our customers are looking for TELUS to take a segmented approach to the marketplace. Quite the reverse, they're looking for us to take an integrated approach and I think over the longer-term that is the best way to grow shareholder value.

On the share buybacks front, that is not something that is presently being contemplated by this organization. In respect of dividend increases again, I think our answer on a particular point is pretty clear in terms of the cash that we are generating as an organization. The first priority is to deliver against our publicly stated deleveraging or credit targets. I think we are well on course to do that. Of course the second use of the cash will be to fund on strategy initiatives within the Canadian marketplace that give us and our shareholders and our debtholders an attractive ROI.

Thirdly, should we have surplus cash having exhausted those investment opportunities, then this management team will not go off strategy in terms of the way that we expend that cash, but rather we will look at the most tax efficient mechanisms possible for returning it to our shareholders on a sustained basis I might point out.

Again increases to the dividend remain the providence of the Board and I think once we have achieved what we have set out to achieve in terms of the first two objectives, then that can be a subject for more interesting discussion at that juncture and perhaps that is not too distance into the future.

If I could follow up, Darren on the TELUS TV, we are now sitting in early August and you still are not publicly committing to pursuing the strategy. Can I ask why?

I think we will announce our entry into the entertainment distribution market if that indeed is something that is going to come into affect on the day there we operationalize it. I do not think that shareholders or debtholders benefit from us preannouncing a date in terms of our entry into that particular market if we choose to do so. I think that only leaks competitive intelligence in the marketplace. At the end of the day, it only benefits the competition and I see very little to be gained by the TELUS organization for preannouncing. So if we do go forward, you will hear about it on the day that we choose to operationalize it. And I think that is the right type of behavior from this organization from a competitive standpoint.

I think that makes sense. Thanks very much.

Robert Barry, Goldman Sachs & Co.

Thank you. My question broadly is about bundling. I was wondering if you could speak a little bit about your strategy for bundling. I feel like we hear less from TELUS on bundling then from Dell or a lot of the other telcos. And in particular I was wondering if you could comment on long distance pricing. We saw Dell recently during the quarter become much more aggressive on LD pricing and I think part of their strategy was that they are willing to sacrifice margin there because net-net the impact on bundling creates much greater value.

So I was wondering if you could just speak generally about bundling but also specifically about LD and the relevance of LD in the bundle and whether you might consider a similar aggressive pricing on LD or something else on bundles?

I would have to say I'm a bit surprised by the comment and the reason for that and I am sure all the investors and the analysts on the call will perhaps appreciate this comment, when we launched TELUS' strategy back in 2000 and we consistently communicated that strategy since that juncture, we set out 6 strategic imperatives that we measure the performance of the organization against. And again they have been consistent over the last 4 years and we refer frequently to them at analyst calls and at AGM's. The number 1 strategic imperative for this organization is to offer integrated solutions, i.e. bundles that differentiate us from the competition in the marketplace. We introduced that concept back in 2000.

I conceive from the industry and from our competitors that that is very much in vogue over the last 12 to 18 months, but that is a pace that we have been on consistently over the last 4 years. And I guess if you take a cut at both the business and the consumer market, on the business market front, again as we have communicated to investors on several occasions, our desire is to offer integrated solution that is a combination of a network solution or a wide area network solution, a local area network solution, so in premise equipment if you would, on a managed basis and of course IP applications that ride on that local area network and indeed are transmitted over the wider area network. The way that we weave that all together is very much the thesis of our customer strategy on the business front.

On the consumer front, it is the exact same ideology. What we want to do is take basic voice services including local and LD, add on top of that call management services, add on top of that network connectivity in terms of ADSL, add on top of that, the wireless solution, and of course add on top of that or digital phone product suite, which includes everything from IP telephony to 802-11 home solution on the wireless home networking front, our home security situation. And as I indicated earlier potentially TELUS TV, should that come to fruition.

Of course we want to weave that all together into something that is very compelling for the consumer and something that actually gives them better value and enhances their lifestyle, and that is why we make reference to things like the digital home solution, because that is very much an integrated solution at the end of the day.

I would have to say in terms of LD, we have a bit of a different philosophy within the TELUS organization, without making a broader comment. Our goal here is to preserve long distance margins. Long distance margins are attractive and I would say what we would like to do is inculcate LD within a digital home bundle to try and preserve or minimize the erosion on long distance so that we can benefit P&L and shareholder value creation. And if we have to be aggressive on a particular instrument, I would say we will be aggressive on something like ADSL within a particular bundle. Because A, it can help us protect long distance, and B, it is the type of connectivity that facilitates future applications such as IP telephony, home security, home networking, and potentially TELUS TV.

I think that is a more appropriate economic instrument going forward if we're going to get the right type of profitability from our customer base.

The last thing I think probably that is worth pointing out on a long distance front is that the second quarter while I am less than satisfied with the wireline performance, clearly we did not too bad on the ILEC front and the disappointment is more a proportion to what we have done on the non ILEC business and in respect to LD in particular, we enjoyed one of our strongest quarters in terms of minimizing LD erosion over the last 18 to 24 months. This is one of the better quarters that we have enjoyed thus far.

I guess just in follow-up -- would you be able to provide as any information about what the progress has been in terms of bundles, how many customers are on and how many products do they take?

We have not chosen to disclose that on a public basis. That for us is (indiscernible) information. Clearly I recognize that that is a template that some of our peers have set out. It is not a template in terms of reporting that this organization has chosen to it adhere to. I would say, Robert, our disclosure has been pretty comprehensive and pretty fulsome. So I think going beyond that is not necessarily appropriate nor does it advantage this organization nor its shareholders or debtholders.

Okay, that's fair. Thanks.

Glen Campbell, Merrill Lynch, Canada Inc.

Thanks very much. You talked about perhaps going to the next level of efficiency on the wireline business by institutionalizing the OEP concept. Could you talk a little bit about the billing and back office systems in the wireline business, where they stand today and what changes or systems replacements would need to happen to get to that next level?

Yes, my comment was pertaining to the fact and of course investors will recognize the we're gone through 3 phases of 0AP and of course that pertains a fourth one that is likely to ensue and that is exactly what I was alluding to. On the IT front, I think investors who have heard me comment before will know that that is an area where I have been less than satisfied with the progress that we have realized. Clearly for us over the next 2 to 3 years a good portion of the capital on the wireline side of the business is going to be spent on IT systems to try and support greater efficiency.

We have a myriad of legacy systems across customer relationship management, order processing and provisioning and of course billing, and we will be looking over the next 2 to 3 years to significantly rationalize those systems down to a single customer care platform that can A, let us take costs out of the business; B, deliver more effective integrated solutions given that we're now down to a single customer care platform from customer relationship management through to order provisioning right through to billing. And it can also allow us to more expediently launch new products into the marketplace. So that is going to be very much a focus of our attention.

Under Kevin Salvadori, our new CIO, we have pretty well specified roadmap over the next 24 to 36 months that will see us move to best-in-class type systems and enjoy the efficiencies of driving through on the rationalization front. But that is not an area where over the last 4 years we've covered ourselves in glory. In fact, it is the antithesis of what we have achieved on the network front, where things have gone very well for this organization.

Okay, thanks. A quick follow-up on long distance. The numbers were quite a bit better. Can you give us a little color on what is happening there? Is the improvement mainly on the consumer side, business-size, wholesale, pricing, what is driving that turnaround?

I will let Bob get a comment in edgewise here.

I think it's a combination of things, Glen. He had a 1 dollar increase in the (indiscernible) fee that was instituted in the quarter and certain of the segments I think that contributed to a revenue increase that partially offset the decline. We also experienced increased minutes of use in the business segment as well, which is a nice trend for us, given the industry experience we're observing out there. And lastly, we have had focused efforts in terms internally in terms of arresting the LD decline and so while it is declining I note that it has gone down in terms of percentage by about 1/2 or where it was previously and we seem to be well below the industry experience. So what we're doing seems to have some positive effect in the marketplace.

Okay, thanks a lot.

I think, Glen, just to add to that which is just stating the obvious, but it is having traction for us is the way that we are attempting to preserve LD performance by bundling that element or that product in with a wider solutions suite within the consumer market, and that is enjoying a little bit of traction for us as well.

Okay, thanks very much.

Peter MacDonald of GMP Securities.

On Bell's call they talked about their positioning in the West and in particular they said that 360 asset and the near completion of SuperNet asset positioned them well for growth in the West. So I was hoping to get your perspective on how successful they have been recently and whether or not you believe that the evolving assets positioned them to accelerate their business there?

Thanks, Peter. It is not typically my preference to comment on the behavior or likelihood of success or not of a competitor's stated strategy. A couple of comments. I can tell you right now that it takes more than a network to make you successful in terms of answering customer's requirements and developing a long-term sustainable business, so it is one thing to have network assets. It is another thing to execute successfully with a strong value proposition in the marketplace and build a profitable business that is going to be sustainable for the longer stream.

In respect of the SuperNet piece of business of course, I think that has experienced a few hiccups from an implementation perspective thus far and of course it is important to point out that SuperNet is owned by the Alberta Government and is a facility that is open for any user including TELUS to avail themselves of in delivering application sets to customers and of course as you are well aware that in Western Canada in particular TELUS has a very rich and a wide product portfolio that we can deliver if we so choose over the expanded facilities that SuperNet is going to be providing to gain access to certain rural areas.

At the end of the day, I think we are in a situation from a competitive standpoint where we have facilities in the East; Bell has facilities in the West. I think there are perhaps 2 comments reflect upon. One is the quality of the facilities in terms of the technology that has been deployed, and again I will reiterate the comment that I made previously. As a result of the strategy that we invoked back in 2000 and the focus on IP and Next Generation network, we have an 18 to 24 to 30 month leadtime advantage in terms of technology leadership over our peer group within the Canadian telecoms industry that we can use to very good advantage. And you can see that particular advantage resonating with customers and manifesting itself in the large, significant national managed network deals that we are securing with blue-chip organizations. We are prevented from disclosing some of the names because of what the customer would prefer to see, but suffice to say that they have been very much attracted to the technology advantage that this organization has.

Finally at the end of the day as well, I think if you look at the market opportunity, again this is an old comment but one I think is fairly accurate, the size of the market opportunity in Ontario and Quebec is significantly larger than the size of the business market opportunity in Alberta and BC; so over the longer term, I believe the investments that we have made thus far in terms establishing a network asset base and as well the technology leadership and the strong management team that we're putting in place in Ontario and Quebec will see us enjoy a respectable share of that larger market in Central Canada.

Speaking of the West, can I also ask you a little big about your broadband deployment strategy on the residential side? I'm looking for some details on the what your planning there. Are you using the remote DSLAM strategy? What sort of access speeds do have right now on the network and what are your expectations of the requirement of broadband home over the next few years?

Okay, in terms of the technology roadmap, I think probably the best way for us to communicate this to you, Peter, is the technology roadmap is going to go as follows. We will right now be progressing on the ADSL front and as Bob has indicated through the expanded reach ADSL investment, look to expand our footprint and also increase our ability to deliver higher bandwidth within our existing footprint. And we would be looking within that particular technology envelope to deliver speeds of between 6 and 10 megabits per second. That is more than sufficient to facilitate what we would like to deliver within the digital home initiative, with the product suite that I have already articulated.

You can expect to see TELUS roughly speaking over the next year, 18 months to make the move to ADSL2+. Moving from ADSL2+ will allow us to take the speeds up above 15 mgs. Which will facilitate certain embellishments to the digital home services. After ADSL2+, at that particular juncture, we have a couple of avenues that are open to us, one of which would be VDSL. If we choose to go down that particular path, we would then take the bit rate up between 22 and 25 Mbps.

Of course what we have said repeatedly is that our primary responsibility as an organization is to sweat the asset base. We've invested circa $800 million rolling out our ADSL capability across Alberta and BC. I think it is a responsibility of this management team to avail ourselves of the economy to scope that we can realize by delivering new services down that piece of connectivity and that is exactly what we are trying to do now on the digital home initiative. To the extent to which we are now exhausting that bandwidth, then we will make the technology leap. But we will parcel up the CapEx in a piecemeal fashion all the way along starting this year and of course into 2005 so that we do not have a lumpy capital event and we will only make the transition once we have exhausted the existing bandwidth. And sometimes as a result of advances in things like compression technology we can sweat that asset for longer than what we had originally anticipated. And of course, milk or improve the ROI the we're expecting to get out of the original ADSL investment.

So we will make the move to the next technology but only when it is justified, only when we have exhausted the previous bandwidth and only when we can deliver applications that customers are actually willing to pay for and give us a decent economic rent. It is not going to be a situation where we increase the bandwidth ahead of the applications or we increase the bandwidth to deliver applications that are not going to give us a justifiable economic rent, so that is very much the mindset of our organization in terms of economics, technology advancement, and the speeds associated with that.

Thank you, that's very helpful.

John Grandy, Orion Securities.

Thank you very much. I have got two questions. One is very short, simple. The other one is a little bit more strategic. You had I think it was 10.2 million of onetime revenue in the quarter due to CRTC, both CRTC decisions. Did this flow straight to the bottom line and is this item going to have a material impact on your revenues going forward?

The 10.2 million was if you recall in the deferral account where essentially mandates price increases when you are allowed for eligible expenditures. It is almost a reduction of a previously incurred credit to revenue, and therefore that is where the increased revenue comes, so there is a flowthrough directly to profitability. Having said that, part of it is retro, about half of it. Half of it would be current period. And I would not view it as non-recurring. I think that would be an inappropriate view of the situation, because essentially our financial statements reflected the conservative approach, unlike I am sure you know others, wherein we expense all the deferral account allocations upfront on P&L, so the problem that has happened though is the CRTC has been rather slow in making its determinations as to what are the eligible expenditures etc., qualifying service improvements that can offset what you put in the deferral account. So this is like a first tranche hopefully in terms of some clarity and therefore getting some recovery. So I would fully expect we're going to have future recoveries in the future, the timing of which is going to be dependent on the CRTC clarity on the rulemaking.

Thank you, that's helpful. The other question relates to wireless subscriber growth. Clearly looking at the numbers from yourselves, Bell and Rogers we had another great quarter for wireless. It did not appear that our friends at Microcell are having any material impact on the market in that context; I wonder whether you may not be able to answer this, but I wonder whether you still feel the same compelling needs to acquire them. It would seem to me that the strategic imperative to acquire Microcell seems to be diminishing as they don't really seem to be having much impact.

I think in terms of the acquisition rationale, it was really never predicated on the impact that Microcell was having on tell us, because that has been immaterial for years now and clearly continues to be. We have very strong subscriber results. We have world-class churn rates, sequentially lower churn rates etc. So I take your point and I agree with the fact that the impact is negligible, but that has been a relatively consistent situation, so that the acquisition rationale is really predicated on the following.

There are significant tax shelter resident with that organization. We are in the same business; therefore we can access that, unlike nonindustry players. We also have significant opportunities as it relates to operational and capital synergies through the combination and the integration of the 2 organizations. Again that accrues to only to an industry type of player such as ourselves. And furthermore, I think when one looks at items such as a 1.3 percent churn rate and compares out to churn rates that are more than double that on a historical basis at Microcell, there is an opportunity to take that same asset, i.e. that subscriber, and through converting him to the quality service experience that our clients enjoy on our network, then we have the opportunity for doubling or more the lifespan if you will of that clients. And therefore he is worth more to us than he would be to Microcell.

So having said that, that is the strategic rationale. Of course in terms -- there are factors that can influence valuation to ourselves and we are keen to see the second-quarter results because items such as CapEx and their redundant assets to reduce cash and increase obsolescence as may be related to ourselves, the extent to which the subscriber momentum and base is there or not is an indicator of what distribution channel we would be acquiring. And there are other items as well, so I would not say their results are not relevant. They're very relevant, but the fundamental rationale of the organization was really never predicated on their impact on us, so to that extent, I don't think that is really the germane development.

That is all very helpful. Bell Canada said they had cut back on their marketing and wireless during the quarter. Do you think that has helped you a little bit? Did you see any impact from that?

This is George. We did not recognize any cutback in any market activity and I think would help this, -- I think, John, you can see the flow through -- it is postpaid churn going down to 1 percent that I think has helped the health of the net ads where are gross at growth would be somewhat consistent with one of our other competitors. But we continue to see the market to be very dynamic from a competitive standpoint. It is incredible every day there is some new program or new advertising sector by all of our competitors.

Thanks, George.

George, it's Darren. Is it not accurate to say that whilst our COA went down 11 percent in Q2, Bell's COA went up in terms of putting the contrast on the marketing activity?

I believe that is correct. I would concur Darren that from our perspective we saw some efficiencies in the volume on the COA side continue to flow through for the organization and we continue to try to drive that COA down as the CDMA handsets continue to mature. I'm not yet at the level the GSM handsets but we are working hard at trying to get those costs down, John.

Joseph MacKay with Desjardins Securities.

Good afternoon. Darren, can you remind us if you have a late high-speed Internet offering in the market right now? And also I think currently you are offering a 1-year contract on high-speed Internet at $24.95 a month. Is that an offer that was in the market during the quarter or is that a more recent to stem the churn that you experienced this quarter?

To answer both of your questions directly, yes, we have a higher speed Internet offering in the marketplace. We've had one in the marketplace for the last couple of years. That takes the bit rate up to 2.5 to 3 mgs in terms of the access speed. The answer to the second question is no, clearly as I communicated during the close of my remarks, one of the issues that has frustrated us in the second quarter is despite the fact that we had very strong gross adds, we did not deliver the net add performance that we aspired to as an organization. And that is because we have a blip from a churn management perspective.

One of the main contributors to that was in my estimation and you can lay this again at the table of management, a normally aggressive, ill considered promotional set of schemes at the conclusion of 2003 which of course are now expiring and causing some degree of sticker shock as customer's transition from a discount scheme to the full price. I think the good news for investors is that as these schemes have come to conclusion they are indeed running their course and we would not expect them to manifest themselves in terms of giving us a churn impact over the latter half of the year to the extent to which we experienced in the second quarter.

Thanks.

With that, we would like to thank you for taking the time to join us today. We appreciate your interest and your support and please feel free to direct any follow-up questions may have to the Investor Relations team.

Thank you. Ladies and gentlemen, thank you for participating in the TELUS Q2 earnings conference call. On behalf of myself and the rest of the teleconfercing team, thank you for choosing TELUS.