Telus Corp (TU) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TELUS Corporation's second quarter conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded Friday, August 5th, 2005.

I would now like to turn the conference over to John Wheeler, Vice President, Investor Relations. Please go ahead, sir.

Thank you very much, Jennifer, and thank you to everybody that's joining us today.

Let me introduce the TELUS executives online with us. In Edmonton we have Darren Entwistle, President and CEO, here with me. In Vancouver we have Bob Mcfarlane, Chief Financial Officer. In Toronto we have George Cope, President and CEO of TELUS Mobility.

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

Let me now direct your attention to slide 2. The forward-looking nature of the presentation, answers to questions, and statements about future financial results are subject to risks and uncertainties. Accordingly, TELUS's actual results could differ materially from statements made today. I ask that you read our legal disclaimers and refer you to the risks outlined in our public disclosure in Canada and the United States. TELUS also disclaims any obligation to update any forward-looking statements.

Now over to Darren on slide 3.

Thanks, John. Good morning and thank you for joining us today.

This is my 20th conference call for quarterly results with the TELUS organization and it would be fair to say it's been an interesting five-year period. Once again this quarter, shareholders are benefiting from the solid execution of our strategy, focused on Wireless and Data growth. Encouragingly, thanks to the efforts of our team members, TELUS has again surpassed Street estimates. This consistent operating performance is being recognized with investor support that is translating into share price appreciation this year such that we have recently hit a six-year high. Let's start by reviewing these excellent second quarter results just released as shown on the next slide.

At a consolidated level, we delivered strong revenue growth at 8% and EBITDA growth of 10% versus the second quarter of last year. With stable depreciation and amortization, we had an excellent increase this quarter in operating income, or EBIT, of 24%. Focusing on the all-important bottom line, net income was up 10%. When adjusted for nonrecurring tax and legal items however, it was up an impressive 60% year-over-year.

Turning to slide 5, it is encouraging that our success is not limited to just the Wireless business segment. Importantly, TELUS Communications is producing industry-leading performance, including four quarters of sequential revenue growth. This achievement was again driven in the second quarter by data growth of 10% and a revenue increase of 19% in our central Canada non-ILEC operations.

Also noteworthy was our stable long distance revenue. Year-over-year, for the second quarter this year, it was stable compared to the same period last year. This achievement was our best performance in six years and a reflection of our differentiated approach to pricing and bundling compared to our peers and competitors.

EBITDA was also stable this quarter at TELUS communications. This comes despite the additional cost TELUS is experiencing due to labor relations activities and emergency operations procedures.

TELUS Mobility continues to exceed expectations by delivering value-added services to our customers. The second quarter was again indicative of the strength of our Wireless operations, with a record level of revenue and EBITDA being generated. The strong growth being produced is evident in the 131,000 customer additions which helped drive an increase in Wireless revenue of 18% an and increase in EBITDA of 28%.

Based on the strong result that TELUS Mobility and TELUS Communications and notwithstanding the current labor situation, we are continuing to provide annual guidance. Indeed, we are raising our Wireless net additions target for 2005 and reconfirming our 2005 guidance in all of the other 14 financial and operating metrics at TELUS Corporation.

Turning to slide 6, let me recap for investors the labor-related events in recent months. After more than four and a half years, we are determined to bring our collective bargaining process to a positive conclusion in a reasonable time frame. In February, the Canadian Industrial Relations Board rendered a decision to return the parties to the collective bargaining process. This development has allowed us to move forward decisively on this key corporate priority by bringing pressure to bear to expedite the resolution of this important matter.

In the past few months, TELUS retabled their comprehensive offer of settlement and implemented this offer on July 22nd. We also implemented an array of lock-out measures from April to July to bring pressure to bear on our union. Unfortunately, the TWU remains unwilling to deal realistically with our offer or to submit it to their membership for a vote. Instead, the TWU responded to our initiatives by bringing new legal challenges, a work-to-rule campaign, and rotating strikes. This culminated on the 21st of July with the TWU's call for a full-scale strike by the approximately 13,000-person bargaining unit across Canada.

The TWU has consistently mounted legal challenges to TELUS's actions before the CIRB and the federal court of appeal. The TWU has repeatedly sought third-party intervention to replace the process of free collective bargaining. Fortunately, TELUS has won a long string of legal decisions over the course of the 2005 financial year that confirm established labor principles which underpin the negotiations process in Canada.

We realize that the many labor events and legal challenges can be difficult to absorb. For those interested, we have summarized these developments in two appendices at the end of today's slide package.

Let's now move to slide 7. Our highest priority during the strike is to insure that we continue to provide quality customer service. To this end we have fully activated our robust emergency operations procedures that have been four years in the making. Managers have been deployed to preassigned roles for which they first received training in 2004 and refresher training earlier this year. The results to date are indeed very encouraging.

Customer service metrics show that TELUS and TELUS Mobility are keeping service levels in many areas at the same level or better, relative to where they were prior to the strike. This is due in part to TELUS's operations being highly automated, with approximately 80% of service work being done without a visit required to a customer location.

For example, TELUS is answering calls faster on average now than before the strike. We are also exceeding our targets in other automated service work such as ADSL quick installations and repairs. Moreover, we have made tremendous headway in reducing work that requires a truck and a crew to be sent to a site. At this time, the repair queue of non-automated work resulting from the strike is cleared in Alberta and is declining rapidly in British Columbia. Where new orders are involved, we are prioritizing the work to ensure customers' health and safety is protected and for business customers who require service to continue their operations.

It's significant that our efforts to maintain customer service have been supported by the large number of unionized team members still coming to work. The number of employees in Alberta choosing to work is increasing each day and currently stands at circa 50% of our unionized employees choosing to come to work, serve our customers, and demonstrate their commitment to their fellow colleagues and TELUS.

It should also be noted that unionized team members in central Canada are also on the job at TELUS Mobility. In addition, TELUS Quebec is not impacted by the current situation and union team members continue to work in the province of Quebec. At present, TELUS is not allowing BC union members to cross the picket lines.

TELUS was also quick to apply for and win court injunctions in both British Columbia and Alberta over the past two weeks that limit picket line activity. These injunctions guarantee unfettered ingress and egress from not only our own facilities but also to the facilities of our customers and suppliers. Additionally, they prohibit intimidation of managers and unionized team members who choose to work.

While the TWU ordered a full general strike, this has not transpired. About 70% of our 28,700 TELUS employees remain at work. And east of British Columbia, about two-thirds of our unionized team members remain on the job. Through team members' hard work and desire to serve our customers, TELUS remains fully operational and this will not change, regardless of the duration of the work stoppage.

Moving to the next slide, slide 8, let me reiterate that the offer to the TWU and our unionized team members is a comprehensive, high quality, and generous offer. It will make our bargaining unit the best-paid telecommunications workers in Canada. The offer also contains a broad provision for guaranteed employment security.

Please note that the initial major outlay of cash payments to unionized team members will not occur until the offer is ratified. As previously communicated, we estimate that the past payments and lump sums payable on ratification are approximately $200 million. To put this in perspective, this represents an initial average payment of $16,000 per employee upon signing and ratification of our proposed collective agreement. Importantly, we have fully accrued for this offer and there will not be a one-time charge to the income statement.

At the end of the day, TELUS's offer provides the flexibility we need to compete on an even playing field against our competitors and continue our track record of financial and operational success that we've established. TELUS is resolved to stay the course and have our unionized team members understand, vote on, and accept the excellent offer we have made to the TWU and to them.

Let me now turn things over to George and to Bob to more fully brief you on the excellent operational and financial results that continue to be generated by the TELUS team.

Thank you, Darren and good morning everyone.

You can turn now to slide 10. Let me begin with a few comments on the wireless industry.

As you can see, the Canadian wireless industry continues to grow at a robust pace. At the end of the second quarter, penetration stood at about 49%. This represents a more than 5% expansion from this time last year and shows the market continues to accelerate with the three players on a national basis. The 12-month net additions include more than 400,000 industry net ads in the second quarter of 2005, a solid 1.4. penetration gain in the second quarter alone.

Next slide. TELUS Mobility once again had an excellent quarter as almost all key operating and financial metrics improved year-over-year. Our strategy of profitable subscriber growth continues to be successfully executed as illustrated on this slide. While capturing our fair share of net additions, we are achieving a disproportionate share of EBITDA and cash flow growth. TELUS Mobility is now generating more EBITDA and free cash flow than our two major competitors, despite having fewer subscribers.

Turning to slide 12, in this quarter, TELUS Mobility's industry-leading RPU continued this quarter. Accelerating data sales, MOU expansion and price increases resulted in RPU improving for the 10th consecutive quarter-over-quarter period. Of note, post-paid RPU increased from $66 to $68, despite increased competitive pressures.

As well, on July 1st, as preannounced, we increased our evening and weekend clock to begin at 9:00 p.m. from 8:00 p.m. and increased the price of the 6:00 p.m. start time from $5 to $7 for all new clients. We grandfathered all previous clients. In the first month, over 80% of those who chose the EW option took the $7.00, 6:00 p.m. option, in essence adding a $2 price increase to those choosing the EW option of 6:00.

Next slide. I am very pleased with how efficiently we are achieving subscriber and revenue growth. TELUS Mobility experienced its best Q2 subscriber growth in its history, yet was able to reduce cost of acquisition 11% year-over-year and reduce our cost of acquisition over lifetime revenue to an all-time low of 8%. These results bode well for future EBITDA margin expansion at TELUS Mobility.

Next slide. Finally, the increase in RPU and subscribers combined with tight cost control produced an EBITDA network margin of 49% and free cash flow margin of 31%. TELUS Mobility has now achieved the status as the most profitable wireless carrier in North America in terms of margin, an achievement the entire TELUS team is very proud of.

With that, I'll hand the call over to Bob Mcfarlane. Bob, over to you.

Great. Thanks, George, and congratulations on a solid quarter.

Let's begin my comments with a recap of Mobility's outstanding results, referring to slide 16. As you've justified heard from George, TELUS Mobility reported best-in-class results in the North American wireless industry. Mobility continues to deliver impressive double-digit revenue, earnings, and cash flow growth. While TELUS Mobility's subscriber base is the third largest in Canada, its revenue growth at 19%, and notably, its EBITDA of 367 million in cash flow of 252 million, led the Canadian industry.

The strong results are not only characteristic of a healthy growing industry but also reflect the superior execution of TELUS Mobility's strategy in maximizing profitable growth.

TELUS Mobility's operational excellence is evident on slide 17. Net additions were up 15% to a second quarter record for us of 131,000. Churn increased slightly while at the same time the cost of acquisition per gross ad decreased 10% to $342; both led the Canadian industry.

This is important as it means our record subscriber growth was achieved along with considerable marketing efficiency. Clearly with increasing RPU, decreasing COA, TELUS Mobility is generating profitable growth that is creating tremendous shareholder value.

Turning to slide 18, as mentioned, second quarter net adds were up 15% versus the second quarter of 2004, with continued strong post-date additions and increased prepaid additions. Our total subscriber base has also increased by 15% year-over-year, with post-paid representing 82% of our over 4.1 million subscribers.

Turning to slide 19, given the strong year-to-date net add results, up 11% over last year, if we have another successful second half of the year similar to that in 2004, we will be headed for increased net adds in 2005. Accordingly, we are increasing our full-year 2005 guidance for Wireless net additions to greater than 525,000 net addition.

Turning now to our wireline segment results on slide 20, TELUS Communications recorded its fourth straight quarter of year over year revenue growth with revenues up 2.3%. The revenue breakdown is shown here and three items really stand out.

One, we were pleased to keep local revenues flat, given the competitive nature of the marketplace. Second, and most notably, is long distance, as we were able to hold LD revenue flat, a sharp contrast with the industry trend, given our differentiated strategy which Darren referred to earlier. The third highlight is the strong data revenue growth, up 10% on a reported basis. Underlying organic data growth is approximately 9% when excluding the impact of regulatory decisions and acquisitions made in the past year. We continue to execute our data focus strategy in both our incumbent and nonincumbent markets.

Slide 21 shows the rest of financial results for the wireline segment. EBITDA remained flat at 499 million this quarter. Normalized for restructuring, acquisitions, and regulatory decisions, EBITDA increased by just under 2%, which is in line with revenue growth. Simple cash flow declined this quarter due to higher CapEx , but remains 15% higher than last year on a year to date basis.

Turning to slide 22, another area of strength for TELUS in the second quarter was our nonincumbent operations in central Canada. Our focus on quality recurring revenues is continuing to pay off. Revenue of 156 million was up 19% and we generated our third straight quarter of positive EBITDA. We remain on track to achieve our annual guidance for nonincumbent EBITDA which we increased last quarter to a range of 15 to 20 million for all of 2005.

Let's go to slide 23 to look at high-speed internet results. In the seasonally low second quarter, TELUS added 17,000 high speed internet subscribers, down slightly from last year's second quarter. Including 261,000 dialup subscribers, TELUS's internet subscriber base now totals 990,000 with 74% being high-speed.

Slide 24 highlights our network access line or NAL performance. TELUS had 1.8% fewer network access lines this quarter than a year ago. Part of this result is due to the loss of one large wholesale business account, representing 13,000 lines, as well as the removal of temporary lines following the BC provincial election. Without this wholesale account loss, total NALs would have declined by 1.5 percent. Regardless, TELUS experienced increased residential line losses, reflecting increased competitive activity from resellers, VoIP competitors, including the introduction of cable telephony in Calgary and Edmonton, as well as ongoing wireless substitution. While we expect improved business NAL results in the future, increasing competition in the residential segment is expected to result in future line losses to be greater than our historical experience.

TELUS consolidated results are shown in slide 25. Consolidated revenue was up 8%, driven by revenue growth in both wireless and wireline, as I noted earlier. EBITDA grew 10%, due to both continued expense control and significant growth at Mobility. Capital expenditures were up this quarter by 18%. And while CapEx was up this quarter in both our segments, as you can see in slide 26, on a year to date basis, capital intensity, calculated as CapEx divided by total revenue, has declined in both Communications and TELUS consolidated. The exception is in TELUS Mobility, where investments in network capacity and EVDO deployment have increased our capital intensity by a modest amount to 11%, year-to-date. Given the labor disruption, we expect capital expenditures to be lower in the second half of the year, so we're leaving guidance unchanged.

Let me briefly update you on our attempts to reduce share delusion. During the second quarter, our effort to redeem 150 million of convertible debentures in June became a large conversion event, as our nonvoting share price surpassed the conversion price of $39.73. As a result, 88% of the debentures elected to convert into 3.3 million nonvoting shares. Only 17.9 million were redeemed for cash. The difference between the redemption value and the 17 million book value was treated as an expense and resulted in a pre-tax charge of approximately $900,000.

The continued share price increases also led to auction and warrant exercises, with 2.2 million shares being issued. However, we remained active on the normal course issuer bid and repurchased 6.5 million shares in the second quarter. So in aggregate, these events resulted in a 1 million net reduction in the total number of shares outstanding in the second quarter.

Slide 28 gives you further details with regard to our share buyback program. Under this program, TELUS is permitted to repurchase up to 25.5 million shares over a one-year period ending in late December. In the second quarter of this year, we were active in the market, purchasing 6.5 million shares for $272 million at an average price of $41.76. We have now repurchased a total of 12.8 million shares, representing 50% of the authorized program. TELUS continues to believe that these share repurchases constitute an attractive investment opportunity and a desirable use of TELUS's substantial cash position that enhances the value of remaining shares.

Let me focus for a minute on bottom line EPS on slide 29. While reported EPS was up 10% this quarter, it was net of 17.5 million pre-tax provision for an unfavorable court of appeal decision related to the early redemption of some BC TEL bonds back in 1997. This provision, plus the expense related to the convertible debenture redemption, equated to a 3% share reduction in EPS this quarter. In addition, last year there was a $0.13 favorable impact for the settlement of tax matters. So taking this all into consideration, you can see on this slide that the underlying normalized EPS was up $0.21 cents or a healthy 60%.

Slide 30 shows how the 208 million in reported free cash flow was generate this quarter. TELUS makes its semi annual interest payments for the TELUS Corp. bonds in the second and fourth quarters. Looking below the free cash flow line, cash dividends paid to shareholders were 144 million in the second quarter.

Now, before our yield investors get too excited, I should point out that this represented two dividend payments, as remittance of the first quarter dividend occurred on April 1st and remittance of the second quarter dividend occurred on June 30th: both in the second quarter, technically.

After factoring in nonpublic share issuance and changes to working capital, TELUS had 181 million in cash available for debt reduction and share repurchases. As mentioned, we used $272 million to repurchase shares and paid almost 18 million to redeem convertible debentures, which was offset slightly by an increase in capital leases. So overall, TELUS ended the quarter with 1.1 billion in cash, down only slightly, by 106 million during the quarter.

Finally, as you can see in this last slide, we're maintaining our consolidated guidance despite the current TWU strike. Operating results were ahead of plan in the first six months of 2005 and we're encouraged that the successful implementation of our emergency operations plan in response to the TWU strike, as well as the significant and increasing numbers of bargaining unit members in Alberta who are working, and so we believe that the existing financial guidance remains achievable, although actual results will be influenced by the duration of the current labor disruption.

Now, George and Darren, I would be happy to take your questions, so I'll turn the call back to John Wheeler to moderate. Thank you.

Thank you very much, Bob, and just before I turn the call over to Jennifer to conduct the question and answer session, can I please ask your cooperation once again for one question at a time, please. If there is a related follow-up question, please add that onto the other one, but please let's try to keep this to one question and move through the questions and recycle, given the time. I think we're in very good time today.

So, over to you, Jennifer.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] The first question comes from the line of Vance Edelson from Morgan Stanley. Please proceed with your question.

Okay, thanks, guys. Good quarter. I wanted to focus a little on the EVDO deployment, which it sounds like was largely responsible for the increase in CapEx. Would you say you've become more aggressive on it, considering that the U.S. carriers are clearly pushing forward with their own 3G plans and -- or would you say the CapEx increase is pretty much in line and could you remind us what you think the total CapEx outlay would be over a two or three-year period to go out with EVDO? Thanks.

Over to you, George.

Yes, I'll answer it. Our EVDO plans, obviously, have been encouraged by the success in the U.S.. We've not accelerated that plan. The quarter numbers are part of the annual business plan numbers so we weren't really outside of where we thought we would be. We'll still run the overall business in that 11 to 13% CapEx to revenue range.

Our EVDO deployment, we've chatted before that it is our expectation to have the network ready such that we're in the marketplace to be competitive with our competitors, a launch which from our end, our expectations is we would see it in the market possibly first quarter next year, maybe -- or late this year, and so we're working towards that. The labor disruption could have some impact on our EVDO deployment in western Canada, although we're working to mitigate that as best we can.

In terms of an overall number for that build-out, I don't have that at my fingertips for the next two to three years, other than to assure investors that our -- and I've mentioned before in our model that our CapEx to revenue range of 11 to 13% going forward we believe can be maintained as we deploy EVDO further than our first deployments this year.

And you're pleased with the handset pricing? Sounds like they're generally coming down, such that it's not going to hurt your equipment margin much when the time comes?

Yes, what we're pleased with is clearly the development in the U.S. is giving us the confidence to go forward on that. We'll have to, as we do with any technology, early adopt or some of those devices will be more costly than normal. But we should be able to absorb that in our normal COA costs.

Okay. Thanks a lot, George.

Thank you.

Thank you very much. Our next question comes from the line of Richard Talbot from RBC Capital Markets. Please proceed with your question.

Thanks very much and good morning. My question is on the wireless side.

George, if we look at the second quarter additions for the three largest operators, this would be the largest quarter in the industry's history, even surpassing second quarter of 2000. Do you believe that we're borrowing from other quarters, perhaps during the year, or do you think that this is perhaps the beginning of a reacceleration in the overall market? And related to that I guess, as the volume of subscriber growth accelerates, I wonder if you could talk about the incremental EBDA to revenue margin. It slowed down a little bit this quarter. I'm just wondering if that's more a timing issue or do you see moving into sort of a slightly thinner margin on a go forward basis? Thanks.

Okay, Richard, in terms of the market subscriber growth, yes, we were pleased with the quarter. Certainly there's been no discussion -- there's been no discussion here at TELUS Mobility that we feel that we pre-bought any of the quarters or it was a rollover from a previous quarter, so I think we're just seeing an acceleration of growth, you're right, and that's obviously given us the confidence on our revised guidance on net adds.

The one thing I will mention, I'm sure investors will have noted, we had an increase in our mix of prepaid versus post paid, even though we had a very strong quarter on our post paid. We have seen some incremental growth in the prepaid area. That is primarily, we believe, driven by the fact that we lowered price, not as far as the new entrants had, but had to lower prices to stay competitive with both Bell and Virgin and therefore some clients were taking prepaid that we think previously would have taken post paid on family plans, so we've seen some acceleration there.

In terms of margin flow-through, I'm quite positive, obviously, when we're getting a 49% margin in the business and in the second quarter, you know, our flow-through was 68% on network revenue and I've mentioned before that any time we can achieve the 70% number, obviously that's a tremendous achievement, so we're at 68.1. We're obviously adding to our margin overall, such that we were able to come in at 49. So I'm not concerned with it. Obviously, I don't think you can run the business permanently at 70% incremental margin flow-through, otherwise your overall margin is going to go to 70 and I doubt that's going to happen in a fully competitive marketplace.

But clearly, I think with the cost of acquisition that we were able to achieve in the quarter, there is still room for additional margin expansion and we'll be trying to run the business that way.

Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from the line of Rob Goff from Haywood Incorporated. Please proceed with your question.

Thank you very much. And may I echo that, in terms of it being a very strong quarter.

I'm interested in your take on the initial round of competition with Shaw on the digital telephony. Any lessons you've learned from that or any implications? Also related to that, my question would be to what extent are your out-of-region calling patterns different on LD and how may that impact the impact of Shaw competing in telephony?

Hi, Rob, it's Darren. I'll take this particular question. I think from the perspective of TELUS's response to Shaw's entry into telephony, it's early days still. I think as Bob has indicated, the most dramatic impact on our network access line erosions in the second quarter was the loss of business lines related to a single customer loss to a competitor. Those business lines were not high margin business lines that were lost to a competitor which contributed to the erosion.

Secondarily, the second most contributing factor to our network access line erosion was indeed not Shaw but other competitors on the VoIP front.

I think in terms of lessons learned, I would say that when you see TELUS eventually enter the TV market, you can expect us to enter in a very disciplined fashion. I think disciplined behavior as it relates to pricing drives better innovation, which I think at the end of the day is something that's going to give you a better result with customers. So if we see a situation where Shaw is disciplined in terms of their entry into telephony and TELUS acts similarly, in terms of our entry into the entertainment distribution market, then I think that begets a more stable competitive environment. It drives better investment in innovation and I think at the end of the day, a better platform for sustainable business competition out there between ourselves and Shaw.

In terms of out-of-region, if I put the wireless LD to one side, which is a strong result for our organization, our philosophy in Ontario and Quebec as it relates to our wireline operations is not to emphasize the selling of long distance. We just don't think that that's the right strategic model in entering Ontario and Quebec. Our focus is very much on data and data applications and providing managed network solutions.

To the extent to which we secure those managed network solutions and can offer something like voice and long distance as a data application within that managed solution, then that's something that we will do. But in terms of our LD patterns out of region, we don't actually promote the LD. We promote the data solution and then try and piggyback LD on it and we think that provides, again, a more sustainable, more competitive -- a more long-term model in terms of the efficacy of our strategy and entering Ontario and Quebec and trying to build the platform for long-term success.

Thanks. Sorry, Darren, my question there on the out-of-region was more on the residential side; i.e., do Alberta/B.C. residential subscribers have more out-of-Canada calling than perhaps in Ontario and Quebec?

I couldn't comment on that right now, Rob, without specific numbers on the calling patterns in front of me, so I'd have to get back to you on that.

Okay. Thanks and good luck.

Thank you. Our next question comes from the line of Glen Campbell from Merrill Lynch. Please proceed with your question.

Yes, thanks very much. My first question was on wireless. There's some cautionary language in the MD&A, suggesting that RPU trends in the back half the of the year may flatten, which is interesting given how strong RPU was in the second quarter. I'm wondering, George, if you could talk a little about what's behind that.

Sure, Glen, thank you. I made the same comment on the call the last quarter and clearly, we put the language in. It was really just to try to caution investors. We've had ten quarters of improving RPU, we want to continue to see that improve and I've talked about things we're doing to try to make that happen. Our concern is the gap between us and one of our competitors continues to grow and, clearly, if they see an increase in RPU, that will give us the ability to, I think, continue to see that. But there is a point where the gap, once you get over 20%, we're just concerned that we can't keep growing that gap. When we see text messaging included in new rate plans by our competitors that we don't think are required, we think that can have some impact in the future on accretive RPU.

So we just want to let investors know when you get into the $60-plus RPU level, we just all want to be cautious. But no overall -- or no concern that we've seen, it's seasonal [ph], going forward, some decline in our RPU.

Is there anything you're seeing in your loadings or sort of your revenue churn that would suggest that this is about to happen now? Or is this just --

No, it's quite frankly, Glen, it's just, it's 100,000 foot common, if you will, that says in a competitive marketplace with three players, the gap between you and one of your competitors can probably only be so large and we have to therefore make sure we maintain competitive responses. That's really the point.

Having said that, if we can continue to see data growth accelerating as we're seeing and see the market absorb some of the price changes, we'd obviously like to see it continue to increase, but we want to just try to be as cautious there as we can given the marketplace.

Terrific, thanks very much.

Hopefully that's helpful.

Thank you. Our next question comes from the line of Peter McDonald from GMP Securities. Please proceed.

Thanks. I know you probably have some opposition to strike questions, but I'm going to try and ask a related one and basically it has to do with the financial impact and I think most of us were surprised at the higher expenses and increased promotional activities and the lost revenue at Alliance's strike, so I was just hoping to get an undate on the expected financial impacts on your business, now that the strike is underway. Thanks.

Okay. It's Bob Mcfarlane. I'll field that question, Peter.

As Darren mentioned, we've been in a training mode, preparation mode for emergency operations procedures for quite some time, so to that extent, whether it's the second quarter, where obviously there was a ramp-up and we did have some work-to-rule going on, or in preceding quarters, we've been incurring some EOP, if you will, for short costs.

On a go-forward basis, given the strike, obviously, they have increased, but we've also got some positive factors that I outlined in my comments earlier, given the significant portion of employees who are continuing to work.

So at the end of the day, it's certainly not in our interest to give specific disclosure on that cost item. I think that in contrast to the Alliance situation which you referenced, which my recollection is they withdrew guidance. If I'm wrong with that, I apologize, but I do believe they withdrew guidance upon the implementation of their labor disruption. In contrast to that situation, we're reinforcing our guidance here and clearly we have positive results, year to date, and great momentum, but we also have the reality of a degree of uncertainty here, given the labor disruption and, in particular, the duration, which is an indeterminate time frame to measure given current events.

So that being the case, I think it would be foolhardy for us to convey a degree of precision with our forecasting, either to raise our guidance or lower or whatever, given that we think that even with a strike occurring and continuing, we expect it to fall within the range of guidance provided.

Of course, if the labor disruption takes a turn and provides more certainty in our forecasting ability, we may be able to raise our guidance, but it would be certainly premature to do that at this juncture. So I think you should take some comfort in the reinforcement of guidance and the lack of specific changes, more of a reflection of the reality of being in a labor disruption.

I appreciate that. That's helpful.

If I could just ask a follow-up. I think before you talked about the first level of impact being a one-year timeline and after that you would start to get a larger negative impact. Does the timeline still sit somewhat the same as what you previously discussed?

That's not quite correct, if I understood the question. So maybe I'll put it in my own words here and that will maybe clear it up.

In terms of the impact on labor disruption, it actually reduces over time. It reduces over time because your management team becomes more productive. You identify -- we've already identified a number of process improvements. Actually, some of which occurred during the -- during the rotating strike that preceded the general strike, so there's productivity improvements that arise just by the very nature of being able to understand better the front line business processes that are going on.

So at the end of the day, yes, we have managers, we are incurring overtime and so on and so forth, but at the same time as we've mentioned, with the significant number of unionized employees working, that means that a good chunk of our management that otherwise would have been deployed in emergency procedures are doing their normal day-to-day jobs. And so consequently we're very encouraged by the developments to date and hopefully there will be resolution. But it would be mistaken to think that over time it gets worse. Over time it actually gets better.

Okay, thank you.

Thank you very much. Our next question comes from the line of Greg McDonald from National Bank Financial. Please proceed with your question.

Thanks, good morning, guys. This question's for George and it's related to the industry growth in subscribers. I want to bring up the issue of wireline substitution because if we're not seeing an acceleration yet, I'm wondering whether that's to come, I've gotten a hint from looking at other telephone companies maybe a little bit more than yours in terms of the gap between what the cable companies are clearly taking and what they're losing, and it seems to me that that's growing a bit. That showed up a little less for your numbers.

But I'm wondering, George, if you could comment on whether you see that trend accelerating and whether you think that's going to have an impact on RPU, going forward. I would suggest maybe a positive impact.

And a related question to that, if the industry moves toward a hybrid wireless wireline type of a model, what is the ability of TELUS to offer this kind of product or are you looking at that right now?

Okay, Greg, I'll try to answer both questions as best I can here. The first one, in terms of acceleration and growth, I commented -- and I think Richard mentioned as well -- it wasn't the best second quarter so we clearly see an acceleration in our growth. We tend very much so here at TELUS Mobility to look to the U.S. market, where historically we have trailed 24 to 36 months in penetration, so there's significant confidence here that since we've done it for the last 20 years that we will trend towards the penetration levels the U.S. is at today within the next 36 months, so that allows for significant growth going forward.

We are continuing to see an increase in subscriptions of evening and weekend rate plans, which obviously does drive some substitution from wireline to wireless, and what's of course t strategy important for TELUS is, although we obviously have our land line business in the west, the fact that we have such a national wireless carrier could actually in the end would be accretive for our organization. So we're well positioned for that.

In terms of hybrid wireless and wireline coming together with products such as WiFi and Wireless [ph], those are things we are looking at, following the developments and clearly, as that market evolves and if it evolved importantly from the strategic standpoint, TELUS mobility and TELUS TCI would be in a position to be in that marketplace. But we're watching that as it unfolds, is the way I would describe it at this point.

Okay. Is it your opinion, George, that that will be a major move toward -- the market will move in a major way toward that trend?

Which of the --

The hybrid.

Major? I think it's very early days on that. As I mentioned, we're looking around the world, as people have begun to implement it, we will see. I think it's too early for me to form an opinion on that at the moment.

Okay, thanks.

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

Thanks very much. The question relates to your access lines. You flushed out competitor of impacts and the wholesale impact. One other piece of the puzzle there may be just household growth, which I assume has been very strong.

Can you give us any characterization of the gross versus net declines in your access lines, especially residential? And related to that is, I'm very surprised to see the disconnect between your access lines going down 2% year-over-year but your local revenues only dropped 0.2 and your long distance revenues, as you noted, were flat. I'm wondering if you think there was some sort of lag or delay impact here, where you lose the lines but then the revenues don't go out until future quarters. Thanks.

Okay, Vince. It's Bob here. So firstly, you are correct that household formation has been strong in western Canada with the economy and low interest rates, so that's been a positive factor, if you will, to residential NALs. Of course there's a variety of factors. You have wireless substitution. You have second line loss with internet expansion. You have competitive activity, so on and so forth, so there's a lot of factors swirling around there and we don't disclose the gross and net on NALs so I won't be able to provide you with that figure.

In terms of the -- in terms of the NALs being down and yet local revenues being relatively flat, I guess, the large account loss that we refer to was VPOPs, that's a wholesale business, and there was 13,000 lines, so that is -- that's a business client so it didn't even turn up, if you will, in the residential side. And we've also had some good wholesale, residential results and helping to offset just some of the plain vanilla residential line business. And so consequently we're able to keep revenues relatively flat.

The line losses that we experienced, really, whether it's that big account that I referred to -- that happened during the quarter, at the start into the middle of the quarter -- so there was revenue impacts from that in the second quarter, so while some of that will flow into the third quarter, it really was substantively in the second quarter. So that isn't a timing issue there in relation to why we're strong on the revenue side. Go ahead, Darren.

I think, Vince, you also asked about LD and there's no magic here in terms of the stability that we've enjoyed consistently now for quite a while on the LD front. We've communicated in the past and this continues to be true that we have pursued astute and selective opportunities to increase price on the LD front and we've done that on both a business and consumer basis. We have a differentiated bundling philosophy such that when we construct a bundle of our services, we construct the bundle to protect or inculcate those services that generate high margins, and of course one of those services is indeed LD, so we construct our bundles to preserve or extend the margins that we enjoy from heritage services like long distance.

Also, we have long believed that the right approach in a competitive market is not just to have a vibrant retail business, but also to pursue wholesale opportunities, and we have a very high-performing wholesale business at TELUS on a national basis that makes a meaningful contribution to our long distance revenues and that will continue to be the case going forward.

And as I said previously in responding to Rob Goff, in terms of our national expansion into Ontario and Quebec, although we have very much a data focus on providing managed network services, to the extent to which we can leverage our leading IP technology to carry voice services as a data application on our IP infrastructure, then we'll do that and that of course is an additional contributor for us.

So really, those are the four points that have allowed us to be fairly robust on the LD front in the face of advancing competition.

Okay, thanks.

Thank you very much. Our next question comes from the line of John Henderson from Scotia Capital. Please proceed with your question.

Good morning. Thanks. I just wondered if you could comment on your preparedness for launching IPTV, kind of -- what mill ware provider would you be using, maybe how many homes passed, do you expect to get to that could have the service if you're launched by year-end and by year-end '06, et cetera, and what implications that should have for CapEx, going forward.

Okay, well, I'll take that one, John. Firstly, I would say our ability to launch TELUS PB at the present point in time with a work stoppage is of course highly limited, so it would be fair to say that those plans that we had in place and the capital that they would generate are going to get you elongated as a result of our limited operational capability to pursue new endeavors during the course of a work stoppage.

The plans that we had this year and the capital intensity that Bob talked about in the communications side of the business included the capital for a progressive rollout of entertainment distribution capability and infrastructure. We're not going to be giving any forecasts or setting guidance in respect to homes passed and penetration levels at this stage. I've said previously that we need to cover up three areas before we advance a more robust, a more accelerated launch at TELUS TV and those factors will remain the same in terms of making sure that the economics hold water and are accretive to the original ADSL business case so that we're improving the return by delivering new applications over that high-speed infrastructure. We want to make sure that the technical capability is completely robust and that ranges from network performance to the quality of the picture being as good or better than the incumbent.

In terms of you middleware question, at the present point in time we are deploying a middleware solution from Alcatel. Whether we continue with that middleware solution into the future remains to be determined. We of course have choices on that front, a number of players in the industry have moved to Microsoft. That's not a decision that we have made at this juncture. We want to make sure on the middleware front that we pick a solution, whether it's an Alcatel, a Microsoft, or a smaller company that specializes in this particular piece of software, we want to make sure that we pick a provider where we can have some long-term stability, where the software performance is robust, we don't have technical problems, but most importantly, we want to pick a middleware solution that allows us to differentiate our service from the incumbent on a range of factors other than price. I have said repeatedly that we will not enter the entertainment distribution market and pull the price lever. We will come in and we will predicate our solution on innovation and strong non-price differentiation, so we want to make sure that in terms of the software, we pick a software provider for the long-term that can facilitate our desire to be highly differentiated from the incumbent.

And then finally from our perspective in terms of our plans going forward, we want to make sure that we've got the operational capacity to proceed at a pace that can allow us to deliver excellent customer service.

So that's very much our philosophy right now, but our plans are on hold until we see the work stoppage through to a positive conclusion and I think we can give you greater clarity at that juncture. Suffice to say, right now, we will be challenged to hit our forecasted CapEx levels on the communications side of the business if the duration of the work stoppage goes for any significant amount of time.

Thanks very much.

Jennifer?

Yes, sir. The next question comes from the line of Peter Rhamey from BMO Nesbitt Burns. Please proceed with your question.

Hi, good morning. I'd like to probe a little bit more on voice revenue in the quarter. And I guess this is most appropriate for Bob. I didn't hear you mention it, but I think deferred revenue accounting benefited your local revenue in the quarter and that might have improved performance.

And then on the LD side, very strong performance there and that's terrific, but I thought you were discounting or had at one point discounted some of your long distance in Calgary when Shaw launched there and I'm wondering whether that is something you continue to do and whether that is something you're doing in Edmonton now that they've launched there. Thank you.

Okay, Peter. You are correct regarding the local revenue. Essentially we had an L&P recovery from the deferral count of about $10 million, if you go into last year. So that's -- in terms of comparing year over year. In terms of this quarter, competitive digital networks services, CDNS decision, if you'll recall, basically increased the discounts on wholesale data. And so the charges that we levied to other carriers on data went down. So that was a reduction in data revenues. When you look at our data numbers, they are net of ballpark $10 million if you will, of increased discounts related to CDNS.

Now, since we've already -- in our accounting, at least, we've already made deductions from our revenues and income statement in respect to the deferral account, and those had previously been charged to the local revenue line in terms of our internal allocation, then that discount was eligible for recovery from the deferral account so that recovery, if you will, came -- was an offset, if you will, to the previous expense recorded in the local revenue.

So put simply, that 10 million of CDNS had the impact of reducing our data revenues, increasing our local revenues.

So net, net the neutral impact on your overall revenue line?

That's right. That's why when I say internal allocation, that's quite correct. I'm referring to when you start to allocate between product line categories, it really benefited local this period because we previously expensed it and hurt our data revenue. So our data is in spite of that. Our data growth is in spite of that 10 million.

Great. That's a good answer. Thank you. What about the LD side?

Do you want to repeat the question, Peter?

On the LD, I thought -- you've been very good at maintaining price and, as you mentioned, increasing prices in selected areas, but I understood that there was a promotion in the Calgary market with Shaw launching there to reduce your -- introduce a North American LD plan that was a bit below where you were before. I was wondering whether that is still in place and if not, what you were doing on a go-forward basis?

I would say in general there hasn't been a lot of, shall we say, competitive response. We do -- to your point, make changes and some are planned. Sometimes it's not specifically -- I know Shaw is sort of on the analysts' minds, but there are a lot of prepaid card and long distance resellers out there with very aggressive international pricing and North American pricing, so we do make adjustments from time to time. I think that -- I'm certainly not aware of a concerted price change specifically in relation to Shaw that we're rolling out.

Great. Thanks ver y much.

Peter, Darren here. Two things I think to reflect upon. One is, given Shaw's entry price point in the marketplace, which was disciplined -- and I've talked about smart competition being the most robust and sustainable competition -- given their original price point being disciplined, we did not feel it necessary to respond with price discounts. In addition to that, we have such an array of LD plans that we can customize those plans to customers in a fashion that best befits their calling pattern and the bundle of services that they take from TELUS.

Great. Thank you very much.

Thank you very much. Our next question comes from the line of Jeff Fan from UBS. Please proceed with your question.

Yes, thank you very much. It's a question for George and it's regarding the wireless industry once again. You mentioned that Canada is about 24, 36 months behind the U.S.. When we look back to the U.S. industry at that point in time, there was a slight shift in that the operators or the industry as a whole started to take advantage of elasticity and started to introduce big bucket minutes or increased minutes of use, and given the elasticity at that point in time, they were able to still increase revenue, increase RPU, with the increased usage of minutes.

Do you see that developing in Canada? Do you see an opportunity to do that or -- I just wanted to get your comments there. Thanks.

Yes, definitely, there's been a significant difference in the marketplaces in that area. A couple comments I'll make: In Canada, the subscription of evening and weekend rate plans -- certainly at Telus Mobility, I can't comment on our competitors, -- but as an important element of what we're seeing in terms of growth subscriptions, and that why is why you saw us take the clock up another hour, move from 8:00 to 9:00 and increase the pricing there, because we're seeing great demand there and we don't think it will impact overall demand in the industry. So that's one key part of that driver in terms of increased minutes, if you will, on the network side in the organization.

The other point, there is a difference in the country still that's pretty dramatic and that is in Canada, and we at TELUS mobility continue to do that, is most of our rate plans, literally all, do not include long distance and also in the U.S. they have. And so that's been a major revenue opportunity for the wireless industry in Canada and we think that will continue to be.

So you will, I think over time, continue to see buckets get larger, but our belief is they won't get to the levels that we've seeing in the United States because we're seeing healthy growth now with the pricing we have in the marketplace.

Our true belief at TELUS Mobility is we would reach -- we would grow at those penetration levels to the U.S. over the next three years without any price change in the marketplace, quite frankly, and really our price reductions in Canada by TELUS Mobility are generally led as competitive responses only.

Okay, great. Thanks a lot.

Operator: Thank you very much. Our next question comes from the line of from Dvai Ghose from CIBC World Markets. Please proceed with your question.

Yes, thanks very much. Congratulations on the great results. Darren, you mentioned that you're delaying the launch to TELUS TV because of the strike. I'm wondering to what extent you're also delaying a dividend increase. You continue to have the lowest payout ratio in the sector, as well as the ability to push through restructuring costs with positive future cash flow implications. I think your year to date restructuring costs were about 17 million versus annual guidance of 100 million. And if the strike does continue, will you not make, you know, these changes as required because of the strike or will you at some stage decide to bite the bullet and go ahead anyway and what really brings a strike to a head? I understand you're going back into negotiations in the next couple of weeks. Is that something we should look to or is there something that you can do on your side to try and entice members back to work?

Thank you, Dvai, for your classic multi-part question. I'll see if I can cover off all the various components.

It's a nice segue to use TELUS TV as a precursor to a question on the dividend. I think it would be fair to say that our decision in respect to the dividend, our dividend payout ratio and the like, will be independent of a work stoppage. So hypothetically, I think it would be fair to say that a work stoppage would not impinge negatively upon any decision that the board might take, because it is the province of the board, that the board might take in the following quarters to consider increasing the dividend. So I think it's important to point out that there is independence between our decision in respect to the dividend as an organization and as a board in the quarters that follow from what is transpiring in respect to the work stoppage itself.

Number two, in respect to our restructuring costs, I think, yes, it will be challenging to hit our original target that we put forward, but nevertheless we're maintaining our guidance in that regard because we believe that it's important to pursue as expeditiously as possible the efficiency gains that we have targeted within our business and the hundred million dollar investment that we want to make in realizing those efficiency gains.

I would say on balance, our decision to implement the new collective agreement on the 22nd of July on a net basis will improve our ability to pursue the efficiency gains that are available to us within the confines of the new collective agreement. So putting that new collective agreement in place will allow us to begin implementing the efficiency gain measures that we have set out. Our ability to do that, however, is going to be somewhat tempered by the fact that we now have significant demands on our resources to maintain our operations and to deliver customer service. So while we now have the opportunity, if you will, under the new collective agreement to pursue the efficiency gains, our ability is somewhat dampened by the fact that our resources are now stretched to handle our operations and to deliver customer service during a work stoppage period.

So I think on a net basis, we're now in a better position to pursue the efficiency gains, but our pace is not going to be particularly quick, given the demands on resources during the work stoppage.

Dvai, what else do you want to know? How are we going to bring this thing to a head? I think it would be fair to say that the primary capability for us right now is to pursue getting Alberta back to work. We have circa 50% of our unionized employees now working in Alberta. We have good momentum. The trajectory of people coming back to work is very encouraging for us. Given that we have 100% of our unionized employees working in Ontario and Quebec, if we can complement that with getting Alberta back to work, then we're going to have a supermajority of unionized employees voting with their feet, if you will, and choosing to work within the confines of the new collective agreement. And I think that will send a strong signal to our union that they should perhaps reflect upon their decision not to put the off route to a vote and maybe consider an alternative course of action because when a supermajority of unionized employees is at work, they're working under the model of the new collective agreement, then I think that's a pretty loud voice that's going to demand to be answered by the TWU and to give those people a democratic ability to express their views on the collective agreement that we have proposed and the collective agreement that we have implemented.

In terms of the duration of any strike, that's impossible for me, obviously, to predict because it's not perfectly within my gift or my control. I think, Dvai, what it is important to point out is that our emergency operations plans and procedures are four years in the making, so they are very, very robust. We have the operational capability, the people and the technology to weather a work stoppage of any duration. So one of the silver linings, if you will, for how long this has dragged out, is the fact that it's afforded us the opportunity to get very well prepared from an operations perspective, from a technology perspective, and from a people perspective.

Also, I think it's important that, as Bob has rightfully pointed out and as I alluded to in my opening comments, that we are maintaining guidance for the year across our 14 financial and operational metrics, with one exception being the increase that we are postulating in terms of wireless net additions. And I think that's a differentiated -- that's a differentiated piece of behavior from this management team in terms of what has transpired at other organizations during a work stoppage, where they've actually deferred their guidance because of the lack of predictability in terms of a work stoppage.

And I guess lastly, I think something that's worth pointing out, given that most of the change that we're seeking is in BC, we are fundamentally different than the TELUS or the BC Tel that weathered previous work stoppages. We are no longer a provincial telco. We're a national telco and we can bring national resources to bear to shore up our capabilities in any single province. So previously within BC for example we could only draw upon the BC management team. Now in terms of maintaining operations in BC, we can draw upon the management team in Alberta, Ontario, and Quebec and that was a resource pool not available to previous administrations within BC Tel.

Additionally, from a technology perspective, we have capabilities that we haven't had in the past. About 80% of our business is now fully automated. In terms of our technology from a call center perspective, we can reroute calls to any of our call centers on a national basis to deal with something that's a particular problem with in any province, we can override that by shifting the traffic to another call center where we've got a more union-friendly zone within the TELUS organization.

So leveraging technology to good effect I think puts us in a very robust position to weather work stoppage of any duration and to deliver against the operational and financial metrics that we have set out for investors.

Thanks very much. Darren, very comprehensive. Thank you.

Thank you very much. Our last question is a follow-up from the line of Vince Valentini from TD Newcrest. Please go ahead, sir.

Great. Thanks for letting me in twice.

A question for George on the prepaid side. The cost of acquisition was down this quarter. Would you attribute any of that to the prepaid percentage of your adds being a bit higher than it was in the second quarter of last year?

And also, an interesting comment on pricing. I agree with you that Bell and Virgin moved first and you followed them, but I'm interested to note that you actually added more prepaid customers this quarter than anybody else, especially if I take Bell's number and back out a portion that would have been Virgin's, your 27,000 adds was way higher than Roger's and higher than either Bell or Virgin's, so can you comment -- do you think you maybe followed them down a bit too much on price on the prepaid side this quarter?

Okay. Let me answer the end and say no to that. We're still a significant premium price on prepaid to those competitors. Our RPU on prepaid still -- actually increased quarter over quarter on a year over year basis to $25. So I think we're roughly double the competitive average. So we haven't -- we don't think we've gone too far there. It's important I think, Vince, to do gross versus net on prepaid. If you reverse engineer us against our competitors and you'd get a feel there. But having said that, I do acknowledge that there was some prepaid growth in the industry because of lower pricing on that sense.

The other question was -- oh, mid-COA. Yes, that's a good point and that would be true that the economics of what we pay to get a client on prepaid is less than what we pay on post paid so the way the model should work is if we have a higher quarter of prepaid we should you see some benefit and obviously, part of that flowed through to our COA. So that's a fair point to make.

Okay, thanks.

Thank you.

Okay, thank you very much, Jennifer, for the question and answer, and we'll just close off now.

Thanks, John. Thank you very much to all of our investors on the line and the analysts for joining us today. We certainly appreciate your interest and your continued support of TELUS.

Hopefully as the months proceed and we speak with you again, we can get the work stoppage put behind us and move forward under a new collective agreement and deliver against the expectations that we have set with you. Certainly from TELUS's perspective, we believe that we have put forward an excellent offer from the perspective of our unionized employees and hopefully at the end of the day, the qualities and the attributes of that offer will prevail. Thank you very much.

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