Telus Corp (TU) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the TELUS Q3 earnings conference call. I'd like to introduce your chairperson, Mr. John Wheeler, Vice President of TELUS Investor Relations.

Good morning, and thank you very much. Let me introduce the TELUS executives online with us today. In Vancouver with me is Bob McFarlane, Chief Financial Officer, and in Toronto, we have Darren Entwistle, President and CEO, and George Cope, President and CEO of TELUS Mobility. We'll start with introductory comments followed by a question-and-answer session.

A news release on the third quarter financial and operating results, and detailed supplemental investor information, are posted on our web site at TELUS.com. For those with access to the internet, the slides are there for viewing at TELUS.com, investor call. You'll be in a listen-only mode during executive comments.

Turning to slide two, the forward-looking nature of the presentation, answers to questions, and statements about future financial results, are subject to risks and uncertainties. Accordingly, TELUS' actual results could differ materially from statements made today. I ask that you read our legal disclaimer and refer you to the risks outlined in our public discloser in Canada and the United States. TELUS also disclaims any obligation to update any forward-looking statements.

Now I'll turn things over to Darren, starting on slide three.

Good morning, and thank you for joining us today. Let me begin by noting this is a particularly satisfying quarter upon which the TELUS leadership team has the opportunity to report. In addition to excellent results, today we are announcing a series of shareholder value-enhancing initiatives.

At the consolidated level, third quarter results were very strong, with an 8% growth in revenue, a 9% increase in EBITDA, a significant 37% increase in net income, and the generation of $503 million of free cash flow. Once again, investors are reaping the benefit of the strategic direction that we set four years ago, our commitment to our plan, and our ability to execute upon it.

Industry results from TELUS Mobility on all financial and operating metrics is the most significant driver of our strong performance.

Turning to slide four, TELUS Communications had a positive quarter as well, and in the first time in two-and-a-half years, enjoyed quarter-over-quarter revenue growth. This was driven by an 8% percent increase in data revenue, an improvement in non-ILEC results in central Canada, and an only modest 2% decrease in long distance revenue.

This latter result reflected different strategy to long distance pricing from TELUS relative to some of our competitors. Indeed, all of our pricing decisions, whether they be with respect to long instance rates, a potential acquisition, or a sponsorship opportunity, will be supported by rigorous diligence, a disciplined focus on economics, and a strong sense of responsibility to our investors. The non-ILEC operations continue to experience a ramp up effect with the implementation of various large multi-year contracts.

For example, revenue from the TV contract more than doubled to $2.6 million this quarter. The implementation of the TD managed data network is going well, with almost 1,000 of the 1,200 sites converted to TELUS.

Importantly, for investors, the long term recurring benefit of this contract is not yet reflected in our non-ILEC EBITDA result.

To date, including the Q3 EBITDA result, the upfront OPX to implement network has caused a dilution to EBITDA, but this is now expected to become slightly accretive in Q4 and growing thereafter. While this reflects well in our national wireline strategy, we continue to remain cautious given the sustained softness inherent in the global wireline industry.

Now let's turn to slide five. I'd like to share with you a vision of the potential value creation that we foresee at TELUS over the next three to four years.

First, consider the bright industry outlook for wireless penetration in Canada. Analysts expect us to move from 45% penetration today to a 55 to 60% range by the end of 2007, representing over a million new subscribers per year, for the industry. As one of three major operators in Canada, TELUS Mobility will continue to benefit from this increased penetration. This is even more meaningful when you consider the magnitude of wireless revenue in proportion to the total TELUS revenue profile. Wireless revenue was 39% of TELUS revenue this quarter, up from 36% in the second quarter, and is expected to continue growing in significance.

In a moment, George will take you through the details of our North American leading performance at TELUS Mobility, including 21% revenue growth, and 32% EBITDA growth.

Second, consider the $3.5 billion of debt maturing in 2006 and 2007. Based on our free cash flow outlook, these events should appear more as repayment events, than as major refinancing events, unlocking bottom line earnings expansion and acting as a catalyst for equity value creation. When you combine these outlook considerations, I believe it is a realistic goal for TELUS to aspire to lead telecom operators around the globe in respect of four key investor value metrics: Revenue growth, EBITDA growth, EPS growth, and cash flow growth. Indeed, our continued strong performance points to our leadership in these areas.

On slide six, you can see that our expected revenue growth at 5.5%, puts us in a leadership position amongst our peers.

On slide 7, we have projected 2004 growth in EBITDA at 8%, TELUS leads the global telecom performance for the second year in a row.

On slide eight, with a projected 12% growth in simple cash flow, defined at EBITDA less capital expenditures, TELUS again remains at the forefront for the second consecutive year.

The next slide shows that TELUS also compares well against our peers based on projected EPS growth at 58% in 2004.

The strategy TELUS has executed upon for the past four years, and will continue to execute upon going forward, is clearly reaping industry-leading results.

Moving to slide 10, I'm pleased to report to investors, that based on our third-quarter performance and positive future outlook, the board of directors of TELUS has approved four shareholder value creating initiatives.

First, we are increasing the quarterly dividend by 33%, to 20 cents per share.

Second, in order to give investors increased clarity in respect of our dividend growth model, we are now seeing a forward-looking dividend payout target. TELUS is now targeting a dividend payout ratio in the range of 45 to 55% of net earnings.

Third, we have announced board approval for a normal course issuer bid to purchase up to 25.5 million TELUS shares, subject to obtaining regulatory approval. At today's share prices, this would equate to over $700 million.

Fourth, we are pursuing various initiatives to avoid share dilution by restricting the issuance of shares from treasure. Instead, we will fulfill share issuance requirements by pursuing open market purchases.

Hopefully, these initiatives will be welcomed by our equity investors and are entirely consistent with our long-standing goal of balancing the interests of both shareholders and debt holders. Let me assure debt holders that while we've achieved certain of our long-term debt targets, we'll continue to focus on debt repayment and the achievement of higher investment grade ratings over time.

Finally, let me also assure all investors that the TELUS team will continue to work hard in delivering against all of our priorities and our financial targets. We appreciate and value your continued support.

Now, let me turn it over to George and Bob to recap the quarterly highlights.

Thank you, Darren. Good morning, everyone. I am pleased to report that TELUS Mobility once again had an excellent quarter.

Turning to slide 12, one can see that TELUS Mobility net adds increased 35% year-over-year to 136,000 in the quarter, versus 101, 000 last year. More importantly though, post paid increased 51% from 76,000 last year to 115,000 in Q3 '04. The resulting mix was a healthy 85% post fade, 15% prepaid split, and better than our overall mix of 83%, 17%.

And as a result of the strong net ads, we have increased guidance for year-end, which Bob McFarlane will take you through in a few moments.

Turning to slide 13, I am pleased to report that all key performance metrics improved nicely. Blended ARPU increased for the seventh consecutive quarter as minutes-of-use, data revenue, and roaming revenue continued to grow.

Post paid ARPU in fact increased to $70 and was up $3 year-over-year. And of note, if we exclude Mike from our post paid ARPU, it was an industry-leading $69.

Churn was reduced to 1.3% from 1.4%. Importantly, post paid was reduced from 105 to -- from to 105 from 1.14%, while retention spending of $28 million, or 4.1% of network revenue, was under our target of 5% for this year.

Cost of acquisition was reduced $32. As a result, our cost of acquisition over lifetime revenue remained under 10%, and actually hit an historical low of 8% for the quarter, despite the increased net adds.

Turning to slide 14, which provides a summary of our strong financial performance, EBITDA grew 32%, as 71% of incremental network revenue flowed through to the EBITDA line. Our record high margin of 47.2%, with 36% growth in net adds is a tremendous achievement as we continue to manage our cost-for-subscriber down on a year-over-year basis.

CapEx was 13.8% of revenue, down from 15% one year ago, and will be under 13% this year, as planned.

Finally, our free cash flow growth of 46% in the quarter, and 57% year-to-date provides for tremendous value and enhancement opportunities for TELUS stakeholders.

Now over to Bob McFarlane, our CFO, to give you a more indepth look at TELUS's quarter results. Bob, over to you.

Great, thanks, George, and good morning, everybody. Let's begin on slide 16, which recaps the highlights from the third quarter, and there were many. TELUS Mobility, as George just outlined, again reported outstanding operational and financial results across the board this quarter. Strong subscriber additions and retention, combined with increased ARPU and cost efficiency, generated the excellent financial results. Meanwhile, TELUS Communications, our wireline segment, performed very well in the quarter with positive revenue growth, based on improved performance in both our incumbent and non-incumbent operations.

At the consolidated level, an area of interest is that normalized EPS is even higher than our basic EPS, which I'll detail for you shortly.

The next slide highlights the significant consolidated growth across all third quarter financial metrics. Revenue growth year-over-year was 8%, significantly higher than the 5% growth generated in the second quarter. EBITDA growth was 9%. And net income grew to $157 million in the quarter, up 37%. Reported EPS of 44 cents is up 38% year-over-year, reflecting the excellent improvement in consolidated profitability in the past year.

Particularly noteworthy is that TELUS produced a sizable $503 million of free cash flow, and after three quarters we have produced 1.2 billion of cash flow, already hitting our year-end guidance.

All of these results are well ahead of consensus street expectations.

Turning to side 18, and taking a closer look at EPS, we can see the EPS growth rate for the third quarter normalized for certain items. Interest related to favorable tax settlements contributed approximately 5 cents per share last year. Also normalizing for the 1 cent impact for the share base compensation not recorded last year and adjusting for restructuring and workforce reduction cost of 3 cents, EPS is up 77%.

According to our tracking, consensus street expectations were 38 cents for the third quarter, so any way you measure it, TELUS produced excellent bottom line earnings.

Now let's look at a recap of TELUS Mobility's across-the-board results in slide 19. Revenue was up 21%, due to increased ARPU combined with very strong subscriber loading and retention results. Excellent top line growth combined with continued cost containment and lower cost of acquisition, per gross addition, especially in light of the 21% increase in gross subscriber loading and operating economies of scale led to an impressive 32% increase in EBITDA.

While Capex was up slightly mainly due to timing, capital intensity declined by one point, to 14%. Mobility generated a record $220 million in simple cash flow, representing a 46% increase.

Turning to slide 20, and as George pointed out, TELUS Mobility enjoyed a very strong quarter of subscriber net additions. We're particularly pleased with the 51% increase in net new post paid subscribers, bringing our post paid subscribers to 83% of our total base. Given the strength of our subscriber loading in the first three quarters of the year, we are raising guidance for 2004 net additions by 50,000, to a new range of 425 to 475,000.

Now, turning to a recap of TELUS Communications results in slide 21. Wireline posted positive revenue growth for the first time since the first quarter of 2002. Reported EBITDA, which is after restructuring costs, totaled 494 million, a 2.4% decline. However, we incurred restructuring costs this quarter of $16 million, largely to do with the business solutions consolidation. Excluding these costs, EBITDA was flat year-over-year 511 million. CapEx increased marginally year-over-year largely due to non-ILEC investments related to implementing new large complex IT contracts and continued ILEC investments to strengthen customer service, and network reliability.

Turning to slide 22, relative to the general industry trend of declining traditional revenues, the communications segment performed well in the quarter with positive 1.1% growth. Voice long distance revenue continued to decrease, but the rate of decline in the third quarter, at 2.1%, was the lowest since the first quarter of 2001. This was primarily as a result of increased wholesale revenues. While we're pleased with this performance, price competition remains fierce, and substitution to alternative technologies is expected to continue.

Data service revenues increased by $26 million, or 7.9%, driven by higher Internet and enhanced data service revenues, and by a $7.5 million increase in data equipment sales.

As Darren indicated, we are pleased with this result, but remain cautious about projecting similar results into the future, given general industry softness and expected future competitive activity.

Turning to slide 23, driving towards leadership in high speed Internet is one of our top corporate priorities. On this slide you can see that TELUS added 31,000 high-speed internet subscribers in the quarter, bringing the year-to-date total to 93,000. We remain on track for the 125,000 net additions target for the full year. We estimate that we continue to capture the majority of the market's high speed net additions in our incumbent areas. TELUS' high-speed subscriber base up 655,000, is up 27% year-over-year, and represents almost 70% of our total Internet base.

Turning to slide 24, we show the improving performance of our non-incumbent business in central Canada. Revenue increased 5%, while EBITDA improved to negative 3 million. More importantly, this is a significant improvement from the negative 14 million reported last quarter.

We continue to transition our non-ILEC business to higher quality, recurring revenue sources. This often entails significant expense in upfront CapEx prior to the ramp up of meaningful long term recurring revenues when implementing large, complex solutions.

Turning to slide 25, we show that the performance of our non-incumbent business in central Canada for the last 11 quarters. Please note that our updated and improved 2004 guidance range for non-ILEC EBITDA indicates that we expect at the top end of the range a similar result for the fourth quarter, and not another large uptick similar to the one we enjoyed this quarter.

Turning to slide 26, we also continue to focus on our corporate priority to deliver operational efficiency. With respect to our 2001 to 2003 operational efficiency program, we are tracking to achieve year-end cumulative annual savings of 530 to 535 million.

Looking at our current initiatives, this quarter we incurred $16 million in restructuring costs, bringing the year-to-date total to $33 million. And estimate that we'll incur 50 million in 2004. This is up from our previous guidance of 30 million.

The additional restructuring charges relate to a number of activities, including the consolidation of our business and client solutions teams into one customer-facing business unit, under the leadership of Joe Natale. This integration should enhance both the operating efficiency and effectiveness of this group.

During 2004, we have also reorganized our information technology resources area, consolidating from 15 locations to two primary locations to enable greater efficiencies of scale and effectiveness in IT program delivery. We view the successful implementation of the OEP over the past three years as a platform for further necessary cost improvements at TELUS Communications. To this end, we expect to have restructuring costs next year in excess of those this year in our continuing efforts to maintain strong wireline margins.

On the next slide, we show how our free cash flow is being generated. TELUS' higher EBITDA and lower cash restructuring payment more than offset a slight increase in CapEx. Higher net cash interest and lower cash tax recoveries, resulting in a 14% increase in free cash flow to 503 million this quarter. After factoring in shares issued, deducting cash dividends, and changes in working capital, TELUS had $513 million in cash available. In the quarter, TELUS used approximately 210 million to redeem maturing debt, and used 37 million of cash to redeem the remainder of our preference and preferred shares. Notably, TELUS' cash position increased by $265 million to total $622 million at the end of the quarter.

As you can see on the next slide, TELUS has achieved two of its long-term deleveraging targets, 15 months ahead of plan, including our net debt to total capitalization target of 45% to 50%. In addition, our net debt to EBITDA ratio now stands at 2.2 times, which is below our revised 2004 year-end target of 2.3 times or less, and in line with our long-term policy objective.

With TELUS' deleveraging clearly well ahead of plan, we are demonstrating strong financial performance to our debt investors, and the rating agencies, and as a result, we are now in a position to consider other uses of our strong free cash flow.

Given this situation, with reference to slide 29, TELUS is maintaining our board-approved long-term financial policy targets. This means continuing to pay down debt to improve our ratios in order to achieve our third long-term target, which is a debt ratings in the range of triple B plus to A minus. In addition, given the very positive strides that have been made with respect to our debt holders, we can now also focus on the interest of our shareholders and take a balanced approach to both stakeholders. To that end, today we are pleased to announce four shareholder value enhancing initiatives.

The first announcement is an increase to our quarterly dividend of 5 cents, representing a 33% increase. This dividend increase will move TELUS into the top quartile among dividend-paying companies on the S&P, TSX Index, in terms of both dividend yield and payout ratio.

Second, TELUS is also establishing a going-forward public dividend guideline, targeting a dividend payout ratio of 45% to 55% of net earnings. This is designed to provide clarity to investors of our intention to consider future dividend increases as appropriate.

Turning to slide 31, we're also announcing the intention to repurchase up to 10% of the public float to TELUS shares though a normal course issuer bid subject to regulatory approval. For TELUS, 10% of the float represents about 25.5 million shares, or 14 million common shares and 11.5 million non-voting shares. Under a normal course issuer bid, the maximum amount of shares that can be re-purchased over a rolling 30 day period is 2% of the outstanding shares. It's important to note that if this repurchase is completed, we still expect to delever as a result of TELUS' continuing strong free cash flow generation.

This third initiative of a normal course issuer bid can be an effective step in decreasing shareholder dilution and maximizing shareholder returns.

Turning to slide 32, in another step to limit dilution, TELUS will be amending the dividend reinvestment plan. The drip will be amended to allow for the purchases of shares in the open market, as opposed to solely re-issuing shares through treasury. Effective January 1, 2005, all shares under the drip are expected to be purchased in the open market. In addition, the current 3% discount on the drip will be discontinued, as TELUS has been the only North American telco offering such a discount. This brings TELUS in line with our North American peers. Clearly all four new initiatives are very focused on enhancing the return, in creation of value, for our shareholders.

Turning to slide 33, and to wrap up, let me 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 provide upward our mobility guidance for revenue due to strong subscriber growth year-to-date, and robust ARPU trends. We now expect revenue of up to $2.8 billion. Our guidance for EBITDA is now 1.1 to 1.125 billion, our third upward revision this year. Our guidance for net additions has increased by 50,000 as mentioned earlier.

Turning to slide 34, you can see the updates to our communications guidance for 2004. Our revenue guidance has been narrowed to a range of up to 4.775 billion. We're lowering slightly the top end of the EBITDA guidance range to 1.95 billion, primarily as a result of 20 million in additional restructuring and workforce reduction costs.

The outlook for profitability in our non-ILEC operations has improved, and we now expect non-ILEC EBITDA to be in the negative $30 to $35 million range.

The TELUS consolidated updated 2004 guidance is shown on slide 35. Almost all items are improving. The outlook for revenue has increased to a new range of 7.5 to 7.575 billion. We have increased the lower end of our annual EBITDA guidance to be in the range of 3.025 to 3.075 billion. As a result, the EPS outlook is being adjusted upwards for the third time this year, to a higher end of our most recent range. The new outlook of $1.40 to $1.50 includes 17 cents of favorable impacts from the settlement of tax related matters earlier in the year.

Free cash flow, is now expected to exceed our previous guidance, and we're now forecasting 1.25 to $1.3 billion. Clearly, we see continued strong financial performance at TELUS, and it is this performance that has made possible the series of share value-enhancing initiatives announced today. On that note, let me hand the call back to John to open the lines up for your questions for Darren, George or myself. John, over to you.

Thank you, Bob. Just before I turn the call over to Cindy to conduct the Q&A session, can I ask your cooperation for one question at a time, please? However, if you need a follow-up question related to the answer to your first question, that is appropriate, and you can always get back in the queue for a second question. So with that note, I'll turn it over to Cindy to please proceed with the Q&A session. [Begin Q-And-A]

Thank you. Ladies and gentlemen, if you have a question, please press the numbers zero-one, on your touch tone key pad. If you are calling from a speaker phone, if possible, pick up your handset before pressing the numbers zero-one. If you wish to leave the question queue, press the number sign, and when I announce your name, please ask your question. Our first question comes from Richard Talbot with RBC Capital Markets. Please proceed with your question.

Thanks very much, and good morning. Congratulations on excellent results across the board. My question has to do with the longer term deployment of free cash flow. As you indicated, Bob, the 2.2 times long-term ratio has now essentially been met. Your EBITDA is growing in the 8 to 10% a year rang, and clearly you can pay down a significant amount of debt. And I guess what that raises for me is a question of where you would see future deployment of free cash flow going. Obviously lots of room to increase the dividend and buy the stock back. But I'm wondering, are there also opportunities for you to invest in your existing business, or if you could provide some guidance to how low you think that debt to EBITDA ratio would likely go, before you start having to take more extreme measures to pay cash back to equity investors.

Great. Thanks, Richard. In terms of applying free cash flow, essentially there are two broad categories investing in the business and I is the first, and second is returns or cash distributions, either in the form of dividends or share re-purchases to our shareholders. The third, I guess is, of course, debt reduction. Until this point in time, our distinct priority has been to de-lever the balance sheet, and for that reason, we gave very specific long-term targets for debt to capital 45 to 50% as well as the debt to EBITDA of 2.2 times.

As you know, and I've remarked in our comments today, we have achieved both those targets. I think that's notable because that is 15 months ahead of original plans. So with that precedent being accomplished, then that's what's given rise to the flexibility to go down that list of priorities, and say now is an opportune time to take a more balanced approach and return some capital to shareholders, both in the form of dividends and share repurchases. Many of our institutional shareholders have commented to us over the past while, some preferring a dividend increase, some preferring a share repurchases be commenced. And again, I think, in the style of our company, we've reflected on that input, done our own internal analysis, and concluded that a balanced approach of both dividend increase and share repurchases are appropriate.

However, I think an important thing to understand when one looks at the results today, I think it's indisputable that this company has an attractive growth opportunity ahead of it. And that means the use of cash to invest in internal operations continues to have a very distinct and high return for us. So we're in really, Richard, a virtuous situation in that because of the strength of our free cash flow generation, and the growth potential, and our confidence in that, we don't have to make discreet choices between investing in the business, reducing debt, or returning capital to shareholders. In fact, we can accomplish all three. That's truly a virtuous situation.

So in terms of ultimately where we go on the leverage, I think it's consistent with the fact, for example, on a long-term debt to capitalization ratio of 45 to 50%, does that mean we have to be at 45.1 to 49.9 or something at all times? No, but you should be acting in a long-term manner to be consistent with that. And I think that in terms of our comments today, our remarks concerning that we continue to target a credit rating improvement, I think it would be an appropriate expectation to see our debt levels continue to reduce moderately overtime.

Okay. Thank you very much.

Next question, Cindy?

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

Hi. Thanks very much. On the dividend payout target, I was intrigued that you're using EP -- ah, earnings as opposed to free cash flow as the metric. Given there's a pretty big gap between your current CapEx and your depreciation amortization of about 300 million, it works out to about 80 cents a share. I was wondering if you could comment on that, and maybe in relation to that, your time frame for cash taxes, which I assume comes in to play in these dividend thoughts given your profits have accelerated faster than you may have thought. Can you give us an update on when you start to pay cash taxes, in your opinion?

Okay, thanks, Vince. I think first of all, I think certainly in our sector it is conventional to have an earnings-based payout ratio target. Secondly, in terms of TELUS, it is more appropriate than on a free cash flow basis, and that's really related to the second part of your question, you astutely reference taxes. We've been in the situation for the past while where taxes are a source of cash flow for the company, and we would expect to become taxable in 2006, and therefore paying cash taxes in arrears in 2007.

So typically with convention by paying based on the current or prior years, you pay in the prior year, you're going to have double taxes in 2007 on a cash basis. So the advantage of earnings, is earnings assumes a fully taxed P&L. So it's a smoothed-out measure, and therefore more appropriate, as a gauge of medium to long-term measure to base a dividend payout ratio on.

Can I just clarify; you expect your shelters to be done by the end of '05, so you're taxable for all of 2006, or some, sometime in the middle?

I actually didn't say either. I said in 2006, as I recollect.

That's what I mean, so you won’t add any more specifics, just some time in 2006?

That's correct.

Thanks.

Next question, Cindy, please?

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

Yeah, thanks very much. Congratulations on the excellent results and the really good announcements regarding return of cash. I am almost sort of trying to find something to challenge you on here. But I'm just wondering where the union situation lies, where the TV strategy lies, and also shareholders have expressed some concern about Verizon's sale of non-core assets. I'm wondering if you could update us vis-a-vis your equity relationship with Verizon?

Darren, it's John. Do you want to take that in Toronto?

Yeah, I'll field that one, John. Thank you. Thanks for the question, Dvai. In terms of our labor strategy, you're probably aware that we are still pursuing legal recourse with the CIRB so that we can be alleviated from both binding arbitration and the communications ban. That's the course that we're going to pursue to its logical outcome. If we are alleviated from binding arbitration, then we believe that will allow us to pursue a strategy with the union and the unionized employees that allow us to put forward an offer that I think would be quite persuasive for employees and quite beneficial for shareholders. I think that's all I'll say on that particular matter for the time being.

Any expectation on timing, Darren?

Hard for me to make a comment on timing when the decision, Dvai, rests with the CIRB.

Understood.

Number two, in terms of our strategy on the TV front, I'm going to bore you with my answer, because it hasn't changed from previously -- from previous quarter reports. We are still working through our TV strategy, and we are still focused on the three prerequisites that need to be met prior to launch. We want to make sure that the economics are accretive, we want to make sure that the technology is robust right from the network solution to the quality of the picture, so that we positively differentiate ourselves from the incumbent. And we want to have a value proposition that has a range of differentiating factors, none of which is a solution predicated upon on price because we do not want to enter a new market and amortize value for all concerned. We don't think that that would be logical nor consistent with the pricing discipline that you expect from the TELUS organization.

In terms of the Verizon situation, obviously, I cannot speak for Verizon, nor am I aware that they have disclosed anything publicly in this regard. From our perspective, from my perspective and that of the TELUS board, we have a positive relationship with Verizon that goes back actually about 50 years, when you think about the incarnation of BC Tel and GTE. I think it's important to point out, though, from where we started a long time ago, between BC Tel and GTE, things have changed markedly. And the modern TELUS is not just self-sufficient, but quite independent. And I think we now pursue initiatives with Verizon where there are mutual benefits, and I think one such cast in point is the and cross-border wireless roaming agreement between TELUS Mobility and Verizon Wireless, where benefits accrue to both the Verizon and TELUS organizations. So there's symmetry there in that regard.

I think it's also important for people to realize that if Verizon had a desire to sell, it's not entirely within their control. In fact, the control rests with the TELUS organization, with the TELUS board, and with the independent directors on our board. They would have to give their permission to Verizon for Verizon to sell down below 19.9%. That is the equity floor that is set out in the long term shareholders agreement between TELUS and the Verizon organization. So I think that's a bit of flavor, if you will, insofar as the Verizon situation is concerned. Again, I think it's important to point out I cannot speak directly for the Verizon organization and how their strategy is evolving going forward.

And no doubt they're enjoying your appreciating stock price. Thank you very much, Darren, and congratulations again.

Thank you, Dvai.

Next question.

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

Thank you very much. My question would be on the residential side. Ahead of the full introduction of Voiceover IP, could you give us the current picture for your bundled status with the residential base, and what plans you may have there?

Okay. Let's talk about a few things, then, Rob, in that regard. One of the things I think is a hallmark of the TELUS organization is our pricing discipline. You heard my remarks this morning. That discipline is pervasive across our operations. It pertains to everything from LD rates right through to the way you can expect us to behave in evaluating a potential acquisition or indeed a sponsorship opportunity.

In terms of the tradeoff between pricing and market share gain, we are only interested in economic market share gain. A 100 percent market share of a zero value market, I don't think is a particularly astute marketing strategy. I think also you can expect us to avoid pricing strategies that cause the repricing within our existing customer base and destroy value as a result.

I think another thing you can expect from us in terms of our bundling strategy going forward, is that we are going to construct our bundles to preserve the margins on those services, yielding the highest economic profits for our investors. I think that's an important consideration for you to muse upon, I guess would be a way of describing it.

Next, in terms of our future friendly home or digital home strategy, essentially what we want to do is take our voice based local and long distance, build upon it with ADSL and you'll note our subscriber base over the last 12 months is up 26.9% is up in that regard. Build applications on the back of ADSL in terms of the bundle, and then add onto that a wireless capability. Leveraging the strengths of TELUS Mobility and what we can do in that regard within our consumer wireline base.

Add on top of that, home networking solution, so take that wireless LAN concept that prevalent in hotspots and businesses and drive that solution into the household so people can enjoy the benefits of mobility and the ability to network their equipment within the home.

On the back of that ADSL and home networking base, we are poised to launch at the beginning of November, our Home Sitter product which will include wireless cameras in the household, where people will be able to observe remotely what's going on in their home to give them peace of mind, security, to be able to monitor everyone from children to elderly parents.

And then finally, of course, we are seriously evaluating and doing trials in respect of delivering an entertainment solution -- a differentiated entertainment solution into the household.

So I think the way you can describe it is essentially us pursuing a quadruple play, where we are going to deliver voice, data, video, and wireless services as part of the bundle. And again, the way that we construct the bundle will be focusing on non-price differentiating factors. And we are of course going to be sensitive to preserving margins on those services that deliver the highest economic return for this organization.

Lastly, I think, in terms of Voiceover IP, it's important for us to practice what we preach. Pressure on LD from a price perspective and a margin perspective is inevitable, whether that comes from competitive intrusion or technology substitution, or as a result of things like wireless and e-mail.

So we have to take IP technology and drive it into our own business to take out costs on a continued basis. Whether that's having our long distance traffic migrate off the stentor network, and now be entirely on our NGN network, and I think you can note that within the press release that all calls within Alberta and BC that originate from western Canada and are headed for either Ontario and Quebec, are now carried on our next generation network. That is taking costs out of our business. That is leveraging IP technology.

So that is something that we need to drive, continually drive to take costs out of the business. To mitigate the margin pressure that we experience as a result of competition or technology substitution.

And as well, we need to compliment that with initiatives like the operational efficiency program, which has now kicked into its fourth phase. Bob talked to you about the first three, and the $519 million that we've enjoyed to date in terms of OpEx reduction. We're now into the fourth phase pursuing things like the combination of business and client solutions, leveraging a more consolidated approach to IT going forward, and also harvesting the post acquisition integration synergies that we have not yet realized in terms of the integration of Quebec Tel, a deal that we did back in 2000, but one where we have not yet fully harvested the synergies in terms of better network consolidation and alignment, better IT consolidation and alignment, and also the consolidation of corporate-shared services, including legal, regulatory and finance. So those are things again that are important for us to help mitigate some of the margin pressure.

Thank you.

Next question, Cindy, please

Thank you. Next question comes from Peter Rhamey with BMO Nesbitt Burns. Please proceed with your question.

Thanks, nice to see the improvement on both areas of your business. Wireless has been the story in the past, and certainly communications looks a lot better. I just need from Bob two finance questions. First of all, a point of clarification. You've given the guidance range on your payout ratio and you talked about target leverage ratios in the past as being indicative of longer term. I'm wondering, if your payout ratio is indicative as well, and as well, how prospective is it? It looks like you're looking down the pipe to 2005 earnings and establishing your dividend policy as opposed to what you have in the hand, which would be 2004. And I'll ask the second question once I get the answer to that one.

Okay. Yes, it is indicative. In other words, it would be reflective of our forward-looking expectations. So we want to first of all, from a dividend policy perspective, the board makes the decision quarterly. What we've now done is try to communicate to the street the framework that we use to make that decision on a go-forward basis. So the 45 to 55% of earnings would be not binding per se, but we would generally try to comply with being in that range, based on our expectations of future profits.

Great. And second part, Bob, would be, you've got some debt terming out in the not too distant future, I'm wondering if there's any advantage to you in refinancing that and getting benefits in extending the term of any facilities you might have, and as well any interest costs savings, and if you could give us an indication of where you might be able to refinance that, that would be terrific.

That's right, Peter. We -- In 2006 we have significant maturity of some of our Canadian notes. Of course, there are no material maturities until that point in time. So from a repayment perspective, in contrast to the fact we paid off about $200 million of longer term debt this quarter, we have no more long-term debt that comes due until the spring of 2006.

I think in terms of the refinancing decision based on the cash flow that's being generated from this organization, and not withstanding the dividend decision and possible share repurchases, we have significant cash to refinance those notes. The extent to which we decide to refinance a portion of those notes or not has not been made. I think, though, we have strong balance sheet flexibility to take advantage of what we feel will be the appropriate situation at that time.

In terms of repaying early, given the terms and conditions of those notes, it wouldn't appear to be economically advantageous. So an early refinancing repayment would likely be only in conjunction with some form of a term extension or refinancing as opposed to an early repayment.

Right. So I'm not sure whether there is an opportunity here to lower your interest cost by looking at that situation. What I read from your comments is, not necessarily?

Well, certainly when it comes time to -- when they come due, and if yield curves remain where they are, given the credit spread we have, we have a material opportunity to reduce our cost to debt. I think the extent to which we want to refinance that debt or repay that debt remains to be seen. And we do have that flexibility given the strong cash generation in the organization. We already have 600 million -- $620 million sitting in our balance sheet. And this repayment decision is still 18 months away.

Great. Thanks very much, Bob.

Next question.

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

Thank you. I'm going to try a follow-up on the union. If you can't predict the timeline for completion, is there a timeline where you have to decide to rely on arbitration for a solution, and specifically with the changing competitive environment, and with Shaw's approaching launch of telephone, does a lack of settlement put you in a disadvantage in preparing you for that competition?

Thanks for the question, Peter. No, I don't feel that there's a timeline that's going to force my hand to go into binding arbitration. I think binding arbitration is the second best solution for shareholders and that's who I'm paid to represent. I believe a negotiated solution will give us the magnitude that we need to be successful and competitive as an organization going forward. It will allow us to release a significant efficiency and productivity gains that are inherent in the new collective agreement that we have drafted and are looking to operationalize.

So we are looking very hard to make our case with the CIRB and to expedite a ruling from the CIRB so that we can be alleviated from binding arbitration, and we can be alleviated from the communications ban, because I am very desirous of getting the full magnitude of change that we believe is necessary to enhance the competitive profile of the TELUS organization and to release significant efficiency and productivity gains.

I think it's important to point out, given your question on competitiveness, under the existing collective agreement where there was quite a few doubts in the past insofar as our ability to deliver upon the operational efficiency programs, phases one through three, we've actually delivered in full on those programs. I talked about the $519 million OpEx reduction delivered thus far, and we're already now into OEP phase four.

So I would say even under the legacy environment we have proven as an organization that we can harvest efficiency gains for the benefits of our shareholders. From a competitiveness perspective, two things, one, you can see clearly the competitiveness being demonstrated by TELUS Mobility, but I think I would also point out that even in the past where we have seen softness on the wireline side of the business, our wireline operations relative to the wireline operations of our peers from a financial and operational perspective, compare very favorably.

In addition to that, and the question that I answered for Rob Goff, I talked about what we're going to do in terms of the competitiveness on the consumer front, and what our bundled solution looked like in terms of the quadruple play. Driving that quadruple play into the consumer market does not have any impediments associated with it that are union-related.

I think in terms of one element of our competitiveness for the purposes of being illustrative, vis-a-vis the incumbent on the ADSL and entertainment front, we can deliver under the legacy collective agreement environment on our complete digital home strategy, and I think that's the most important thing for competitiveness and for value creation for this organization going forward.

Thank you.

Next question, please.

Thank you. Next question comes from Greg McDonald with National Bank Financial. Please proceed with your question.

Thanks, good afternoon. Question is about data services. I have to congratulate you on that one. It looks like you're bucking trends there, and I have to imagine that there's still a lot of pressure, at least on the bandwidth side of the business. Darren, I know you did express some caution there. I wonder if you might just comment why that is the case. I would imagine that some of this is one-time-ish in nature, but in terms of the uptick, and maybe you're not looking for recurring to the same extent. But if you'd give us a little more detail, that'd be helpful. And also, on the EBITDA, even if you take out the restructuring costs, you're still kind of flat on EBITDA for the wireline business, and that's lower than what you're seeing in growth. Is that just all accounted for by upstart costs, or is it the case that some of the contracts that you're signing there are lower than average margin? Thanks.

I'll answer that question for you, just to kick it off. You have to remember that within the P&L of our commons business, it is absorbing the dilution impacts of things like the expensing of share options, which was not in our trend base in the past. Bob can give you a little bit more color on that if you want to take it offline.

Additionally, there is the EBITDA dilution that is accruing as a result of J curve investments. The implementation of some of the large national contracts that we have secured over the last 18 months. In the first 12 to 18 months of those contracts, typically they are EBITDA diluted. I gave you one point to illustrate in my comments, related to the implementation of the TD deal.

You're correct, we did not want to have people, you know, factoring in 8% or double digit growth on data going forward. We want to be more cautious and temper people's enthusiasm in that regard. One component of that is, yes, there is a non-recurring element, but that is not the entirety of the data growth story. In fact, it is only a percentage of the data growth story. I think there are some other contributing factors that you're seeing being reflected in the data results that we are generating.

Number one, when we talk about the large contracts that we have secured, some we are at privy to disclose. Some, the customers have not given us the right to disclose the identity of the customer. But I can talk generically about the contracts. That whilst they are dilutive in the early phases, over a 12- to 18-month period, they start to make a contribution to EBITDA.

The other thing that is important to characterize, almost all of the large national contracts that we've taken have been within the data area. They are large, national, and they are managed data contracts. So the stickiness with the customer is significant. And of course, they are recurring in nature, because they are managed network solutions.

I think another thing to point out is that we are differentiated in terms of our strategy in Ontario and Quebec, our non-ILEC strategy. That is a strategy predicated entirely upon a focus on data. In fact, if you look at our revenue composite for our non-ILEC business, 145 million that we did, up 5% over the third quarter in 2003, a significant component of that, almost 60% is related to data services, and it will go well above 60% if you backed out the wholesale business, and looked just at retail. Wholesale is the area where we do allow a focus on voice because of the economics of that business for us. So we have a very strong focus on data, in fact, our sales people on the retail side cannot earn commission on long distance services, on voice services, unless they sell it as part of a data solution. At the end of the day we're trying to build an identity and a brand for our wireline business in Ontario and Quebec. We are known as the experts in implementing, designing and implementing, data solutions.

We talked about the non-recurring element. That's related to data CP sales. The other area that's important to note, of course, is on the ADSL front and the digital home or future friendly home solutions that we are driving forward. Our ADSL base is now getting quite substantive, up 27% over the last 12 months. So that's making a tidy contribution to the data growth for our organization as well.

I think, over time, what you'll see Greg, as well as voice migrates to data, and voice is but a data application, you're going to see a data migration of revenue from voice into data services as they make the shift into the IP packet base world.

Darren, I didn't see a reference to the magnitude of the data CP non-recurring. Did I miss that or are you prepared to disclose that?

I'm not going to disclose that, Greg.

Bob, do you want to take over at this point?

Sure. Quickly, Greg, in terms on the data side, as you point out, it's quite a strong quarter at 7.9% year-over-year growth. If one excludes divestitures and the deferral count change impact, that would bring it down to 7%, and if you wanted to isolate for data CP contracts, which were untypically large in the quarter, the growth rate would come down to 4.7%. So I'm not saying data CP isn't something that we may get, it's just it's unpredictable in terms of its lumpiness. But if you want to back that away, we'd be just under 5%. So, pretty well any way your but it, it was a great quarter. Would the run rate necessarily be 7.9%? Don't think so. But even if you excluded the large data CP contracts we're still at close to a 5% growth rate. So I think that's pretty good.

In terms of your EBITDA, that question, Darren did mention correctly the sharebase compensation, and then of course restructuring costs. If you normalize those two items on a year-over-year basis, the reported EBITDA of negative 2.4, changes to positive 1.5.

Greg, just one point of clarification that on the data revenue growth, if you exclude or normalize for the asset dispositions, the growth is actually 8.9%.

Thanks, guys.

Okay. Next question, please.

Thank you. Next question comes from Daniel Enrique with Goldman Sachs & Company. Please proceed with your question.

Hi, thank you. My question is about your wireless strategy. You just had another great quarter. When you look forward to the next 12, 18 months, you may have on top of you're already doing well, a window of opportunity as Microcell and Rogers come together, and maybe some disruption there. How do you look at this potential window of opportunity in the next 12, 18 months. Do you think it's something that is worth changing a little bit, your strategy a little bit to becoming more aggressive or not? If you can talk a little bit about that. And also, Darren, I think you mentioned you tried to replicate Microcell post database organically, about 700,000 post paid subscribers. Can you talk a little bit about time frame or would that include maybe some, again, become a little bit more aggressive. How should we think about that? Thank you.

Thank you. I'll take a shot at that in terms of the question. Our approach in the marketplace is always to be competitive and balanced profitable growth against the competitive marketplace. The wireless market we think continues and will continue to be highly competitive. Having said that, our focus on profitable growth and subscriber growth won't change as a result of industry structure change.

We do anticipate that we can see further improvements in the organization in its execution as the structure may evolve over time. But clearly we're not going to share tactical things we may do in the future in the market place. But let me just caveat one thing: We are very aggressive in the marketplace in our approach, but it's a balance and that balanced approach won't change. I wouldn't be looking for something dramatic from TELUS because of the balance.

In terms of organic subscriber growth, I think the investor community has seen the power of that this year in execution, and as Darren mentioned, there is avery positive horizon based on the analysts covering Canada in terms of the outlook for increased penetration still. And our goal, of course, would be to recapture our fair share of that growth going forward. And I think maybe we should leave the estimate how long it will take us to get 700,000 net ads. But you can see, it's a track we're on that's not far away in a reasonable few calendar periods. So maybe enough there said, other than I want everyone to understand our strategy doesn't change as a result of the structural change that may take place in the industry.

Thank you.

Thank you. Our next question comes from Jeffrey Fan with UBS. Please proceed with your question.

Thank you. A quick question on the wireless side for George again. Again, strong subscribers in this quarter. Based on your market intelligence, do you think that's more due to a share gain or did the Canadian markets strengthening in the last few months? Thanks.

It's hard to know for sure. We've had three of the four major players report. And I think those three numbers combined would be up year-over-year. Those three carriers, if you were to add of three of us together, are up year-over-year. I think we've seen market growth. There is a lot of evidence, and many of the global investors on the phone will know that, that when you break the 40% penetration, there's a lot of evidence of accelerated penetration. We have seen that this year in Canada and that's been enjoyed generally across the board. It's hard to know otherwise until other competitors report. Having said that, our strategy is not one to lead in net ads, as everyone knows, our strategy is to lead in EBITDA and free cash flow growth, some quarters we're first, some we'll be third. But we what want to be first for, is value creation for our shareholders. We're pleased with our results, but quite frankly, we're indifferent whether or not we're first, second or third in net ads.

Maybe another just a quick follow-up on that. Bell Mobility is going through a pretty big transition with their billing system. Do you think you benefited from that?

Again, I don't want to comment on our competitor. We've all been billing conversion, and they ca be challenging, for sure. The competitive dynamic in the marketplace, I would say, hasn't looked any less to me over the last 120 days than I've seen as a result, and so I think our position in retention and driving our churn-down, and the enjoyment our clients are getting from our network, that we think is second to none in North American. We think it continues to drive the value creation and word-of-mouth for our organization in growth.

Great. Guess we'll see you next week, thanks.

Cindy, next question, please.

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

Thank you very much. Brief question on the wireless side of the business. I don't think you've quantified data revenue as a percentage of service revenue. Some of your peers have talked about that currently running about 5% and expect it to trend up to about 10%. And as a follow-on to that, I wonder if you could talk about your potential interest in launching an EVDO network. We're seeing a lot of excitement about that south of the border.

Sure. John, in terms -- just on the the data side, we are very pleased with our data growth. You are correct, we're not disclosing that number at this point. We think we are disclosing more wireless information than almost any of our peers in North America at the moment. Investors should feel confident we're catching our fair share. We think it's -- It's in the best interest of our shareholders to do that and grow the business successfully without giving a number that I don't think even in the numbers you've talked about is material to investors, relative to how material it would be to our competitors to know how well we're doing. So at the moment, that's our current approach there. Other than investors should know that we are experiencing the growth that you've heard people across North America talk about in recent results.

In terms of technology evolution, we moved to a 1X network, we're aware of the developments in the U.S. in terms of the next evolution in technology. We will assess those results in the U.S. and share those -- our plans with technology evolution in the future and when we feel it's appropriate to share that. And that won't be today.

Thanks. If I could just have a brief clarification question for Bob. Did I hear you say that you expected your restructuring costs relative to OEP to be greater in 2005 than we were this year?

Yes, John. Couple of things for this year, we expect them to total about 50, so that gives you some clarity in terms of our expectation for Q4 when you subtract year-to-date. In terms of next year, I think we're expecting the cost to be greater than 50.

Okay, and I presume that you'll enlighten us on the savings when you do your 2005 guidance?

That would be my intention, yes.

It's George Cope. One thing I do want to mention, I mentioned it at an investor forum recently, and so everyone is on -- at the same view. We believe as we roll out additional technologies on the wireless side, we can continue to maintain our CapEx to revenue in that 13% range even as we were to rollout something such as a 3G network in the future, over a period of time.

Great.

Hopefully that's help helpful for you.

It is.

Cindy, given the time, we'll take one more question, and then we'll close off.

Thank you. Our final question comes from John Henderson with Scotia Capital Markets. Please proceed with your question.

Oh, How about that? Thanks. Yes, great results. Cap it off with another one of those comments. And, on the terms of IP migration, I wonder if you could comment on how that is progressing, and how -- as you migrate customers to IP, how do you see access lines, business access lines going? Do you see a big migration off of Centrix to IPPBX, or do you see sort of Centrix going to IP Centrix, and revenue impact from this migration type IP?

Thanks, John, for the question. In terms of the traffic on voice carriage making the shift over o the IP-based next generation network that we've deployed nationally, as of September, all calls that have been originated out of Alberta and BC that previously would have gone on the Stentor network if they were destined for Ontario and Quebec, they are now being carried on our NGN. So that's a traffic comment for you. And of course, that will alleviate some of the OPEX that we previously experiencing for that carriage, although there still will be termination charges for that traffic.

Secondly, in terms of access lines, you have a dichotomy in terms of what's transpiring in our IL territory, and of course our approach on the non-ILEC front where we have no access lines to cannibalize. I think it would be fair to say that the combination of our back bone NGN and an access solution, be it 80SO or IPPBX or IP1 type solution, is a significant advantage for us in going after legacy data services and legacy voice services. It is a very advantageous typology of NGN, 80SO or IP1 type combination if Iyou're seeking to supplant a frame network from a competitor, or as a competitor acting as an incumbent, or if you're seeking to supplant a Centrix solution and to have that voice traffic now be carried at a data format.

In terms of the types of migrations that you can experience, I guess it will go in both ways, and it will be slightly contingent how the customer wants to strike a relationship, whether they have excess capital and they want to invoke an outright sale, or whether they would prefer more of a rental/managed type solution. I think the latter will see us migrate customers, let's say Centrix, for example, into an IP Centrix, or what we would call an IP evolution type solution. The former will see us go forward with an IPPBX or IP1 type solution.

So it's really contingent upon the type of relationship that the customer wants to strike with the supplier and really relies upon whether they want to watch the costs through their P&L, or whether they want to invoke a capital investment in the telecoms equipment. The important point is we will be able to take them down both paths. And we'll be able to do it in both our ILEC and non-ILEC region. And there is a significant base out there of both Frame Relay and Centrix customers that is disproportionately biased towards central Canada where we have no incumbent access lines to cannibalize, and that speaks to the upside opportunity of the TELUS organization.

No idea of yet, of preference by those customers as to, you know, Centrix, or IP, PBX?

It's 50/50, John. I tried to be clear in my response. It's contingent upon the path they want to go down and the money that they have available. We've seen them go down both. There's certain -- the IP evolution solution, where you see somebody moving from Centrix, to IP Centrix, there's certain attractive features to that. For example, with the IP evolution solution, they can keep their desktop telephone equipment. So the extent which they can preserve telephone equipment and avoid writing it off so to speak, makes it a little bit more attractive in an economic perspective. That's a nice feature going down that route that would be attractive to some customers. Again, it depends on the age of their telecoms equipment. If they're on some very old PBX service like a North Star service, for example, then they won't want to keep the equipment and they'll want to swap out. So it's a really case-by-case instance. I don't think there's a generality you can draw from it.

I'd like to thank everyone for their questions and interest today. With that, the investor relations department will obviously continue to be available to answer follow-up questions you have and we look forward to working with you over the coming quarter. Thank you very much for joining us.

Thank you.

Ladies and gentlemen, thank you for participating in the TELUS Q3 earnings conference call. On behalf of myself and the rest of my teleconferencing team, thank you for choosing TELUS.