Telus Corp (TU) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the TELUS third quarter 2006 earnings conference call. I'd like to introduce your chairperson, Mr. John Wheeler, Vice President of TELUS Investor Relations. Go ahead sir.

Thank you very much Ron. Welcome to the webcast and conference call for TELUS and let me introduce today the TELUS executives on line with us. They are Darren Entwistle, President and CEO, and Bob McFarlane, Executive Vice President and CFO. We will start with introductory comments by Darren, then Bob. This will be followed by a question-and-answer session with both executives.

This call is scheduled for one hour. The news release on the third 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 posted for viewing at TELUS.com/Investors. You'll be in listen only mode during the opening comments.

Let me now direct your attention to Slide 2. The forward-looking nature of the presentations, answers to questions and statements about proposed income trust conversion, future financial results, guidance, financing and share repurchase programs are subject to risks and uncertainties, and assumptions. Accordingly, they could differ materially from statements made today, so do not place undue reliance on them. I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosure and filings with securities commissions in Canada and the United States. Now over to Darren on Slide 3.

Thanks John, good morning everyone. Let's get started on Slide 4. I will begin today's discussion by addressing the surprising tax policy development in Ottawa this week and the implications for TELUS' proposal to convert to an income trust. I'll then move on to the highlights of TELUS' strong third quarter results, including developments on the regulatory front and TELUS' new partnership with the government of Ontario.

The government of Canada's decision to arbitrarily alter the tax regime affecting income trusts while TELUS is in the midst of our conversion to a trust is both disappointing and unexpected. TELUS' decision to proceed to an income trust was predicated on tax policy that the Canadian government had reviewed and reaffirmed twice in the last year. Clearly a consistent legislative framework is critical to making sound investment decisions. Companies should be able to rely on this continuity when in the process of implementing major strategic decisions.

To be blindsided by a policy change of this magnitude, without warning or due process, is disappointing. Our decision to proceed with an income trust was predicated on the effectiveness of our winning strategy that has been in place since 2000. TELUS' superior asset mix, strong and predictable growth and our track record of operational excellence make TELUS an attractive trust candidate, with the potential to set a new standard for income trust performance.

It is important to note that the benefits of tax efficiency within a trust structure simply accentuate the strategic value we create for our shareholders and augment the cash available for reinvestment into our core business. TELUS is assessing the implications of the federal government's tax plan before making a decision on whether to proceed or cancel the proposed income trust conversion.

TELUS believes we have the fiduciary responsibility to determine fully the feasibility of still proceeding on the income trust path before making any firm pronouncements in this regard. In any case, the fact remains, with or without the trust structure, TELUS' winning strategy, superior assets, operational excellence and strong growth profile, as demonstrated again this quarter, remain undiminished.

Moreover, TELUS remains committed to returning surplus cash flow to security holders in the most tax efficient way possible. Accordingly, our dividend growth model and our on-going share repurchase programs will continue to create value for investors. Let's turn now to Slide 6.

Consistent with our track record, TELUS is announcing a 36% increase in the quarterly dividend to $0.375. This is the third successive double-digit increase in as many years in our dividend. We will also continue to pursue our program of returning cash to our investors by way of our normal course, it's your bid.

Under TELUS' two share buy back programs, we have thus far repurchased 35.7 million shares for $1.6 billion. Should TELUS not proceed with an income trust conversion, we plan to continue with significant repurchases into the future. Bob McFarlane will provide details of our next NCIB program at our 2007 guidance call in mid December.

Clearly TELUS will continue along the strategic journey that we began six years ago. Whether as a corporation or an income trust structure, TELUS is committed to continuing to create value for all of our investors.

Let me now comment on unfolding developments in telecommunications regulation, as set out on Slide 7. IP technology is collapsing distance, reducing costs and eradicating borders. The basic definitions and distinctions we have all relied upon for decades are no more within the telecommunications industry, which makes regulating the industry, based on the Telecommunications Act, from 1993, untenable.

In the IP world, we no longer need heavy regulation to ensure a competitive environment and affordable pricing. Robust competition is giving consumers virtually unlimited choice and diversity. Businesses like TELUS must be allowed to innovate freely to meet the growing demand. The landmark work of the telecommunications policy review, commissioned by the government, recognized the virtue of this approach. Its recommendation that we should rely first and foremost on market forces generated a rare consensus within the telecommunications industry and establishes a blueprint for effective regulatory reform.

TELUS supports the government taking two specific actions as quickly as possible. First, it should implement the recommendations of the Telecom policy review report in full and with immediate effect. Second, it should directly overturn the decisions on voice over IP and the deregulation of local services. These decisions create unfairness in the market place. These decisions restrict competition. These decisions delay the innovative products and services that consumers demand, indeed expect. In our view, substantive regulatory change is long overdue. The studies have been done and they are complete. The consensus has been forged. It is now time for the government to act and we are cautiously optimistic it will do so.

Again, for investors and the media on the phone this morning, I would ask you how much of a risk is it for the current government to implement a major change in regulatory policy that was commissioned by the previous government? Certainly there should be a consensus in this regard and it should drive a bias for action and deliver the long necessary change that will ensure Canadian competitiveness for our industry going forward.

Let's now turn our focus to TELUS' third quarter results, as outlined on Slide 8. Our investments and our execution of our national growth strategy has resulted in a distinct shift in our wireless revenue. As well, it's resulted in a distinct shift in earnings and cash flow streams. It now reflects a more robust balance between our mature voice business and our higher growth wireless and data businesses.

Indeed, for the first time, TELUS generated more than 50% of our operating profit from our wireless operations. At 51%, this is fourfold higher today that it was six years ago and this is a testament to the efficacy of a strategy that we embarked upon back in 2000.

Turning to Slide 9, solid subscriber growth, coupled with a 15th consecutive quarter of year-over-year growth in ARPU produced a 17% growth in TELUS' wireless revenue. This enabled TELUS to realize a significant milestone by achieving a record $1 billion of wireless revenue in the quarter. Similarly, EBITDA also increased by 17%, supported in part by a third consecutive quarter of improved efficiency in the cost of acquiring customers. The net result is a healthy wireless margin of 47.5%.

Let me now turn your attention to Slide 10 for the highlights in the wireline side of our business. TELUS' third quarter results demonstrate once again our resiliency in a tough industry and place TELUS ahead of many North American telcos. To begin, TELUS experienced several improving trends, including stable revenue and a double digit increase in operating profit. Notably in particular, data revenues were very robust this quarter, up 9% across an array of services, including hosting, outsourcing and our solid high speed internet growth this quarter, at 41,500 new clients. At the same time TELUS experienced only moderate network access line losses at 2.8%.

From an investment perspective, wireline capital expenditures were up $135 million this quarter due to two factors. First, this obviously reflects TELUS' extremely low level of CapEx last year, owing in principle to the labor disruption. Secondly, TELUS is in the midst of a cyclically high investment cycle, with the enhancement of our broadband network, the implementation of TELUS TV and as well our obligations in servicing the vibrant housing industry here in western Canada.

An important development in September that advances materially our growth strategy into central Canada was the major new partnership that we are embarking upon with the government of Ontario. Under this agreement, TELUS will provide, TELUS will manage, and we will supply a portfolio of network services, including IP security, for the entire Ontario government network. This five year contract, and our partnership, is valued at $140 million. This agreement demonstrates that the government of Ontario has recognized the value of our investment in IP technology that provides unprecedented robust network connectivity, services, functionality and flexibility, and as well, once again, our implementation with the government of Ontario will build upon our strong IP technology implementation track record that began a while back with the TB Bank.

All in all, it was a strong third quarter for TELUS. Based on our wireless and wireline results, let me conclude on Slide 11 by reviewing a few note worthy consolidated highlights. Owing to our accelerating revenue and earnings this quarter, we are making a number of mainly positive revisions to our full year consolidated guidance.

Based on the solid performance of our ADSL service, TELUS is revising upward our annual internet guidance by some 8%. Additionally TELUS has tightened the ranges on all of the consolidated guidance factors, including revenue, EBITDA, earnings per share and free cash flow. Indeed, in respect of earnings per share, we are announcing today that we are increasing the range to $3.15 to $3.25. As I mentioned earlier, TELUS has also announced today a substantial increase in our dividend to $1.50 per annum.

There is no doubt that this has been a difficult week for TELUS and our investors and on behalf of the entire TELUS leadership team and our board, I commit to you that TELUS will proceed, as it always has, in the best interest of our security holders. I can tell you unequivocally, TELUS remains committed to our winning strategy and we pledge to continue to execute our plan with unparalleled excellence. I appreciate sincerely the support and as well the constructive advice that you've extended to our company during this challenging period.

Let me now turn the call over to Bob and he can brief you in more detail on TELUS' third quarter results.

Thanks Darren and good morning everyone. Let me begin with a review of our wireless results, referring to Slide 13. It seems logical to start here because, as Darren mentioned, wireless represented more than 50% of consolidated EBITDA this quarter. Wireless revenues, EBITDA and cash flow continued to deliver strong double digit growth. Revenue surpassed $1 billion, driven by strong subscriber growth and higher ARPU. EBITDA increased 17%, with industry leading wireless EBITDA margins of 47.5%. CapEx increased year-over-year, as expected, in the third quarter, but we nevertheless have lowered our guidance for full year 2006, as I'll outline a little later.

As shown on Slide 14, net subscriber addition growth continued to be robust and was relatively unchanged year-over-year, at 137,000. Postpaid subscriber growth was up slightly to 109,000, while prepaid additions of 29,000 were slightly lower than last year. Postpaid net adds as a percentage of total net adds increased to 79% in the third quarter. TELUS' prepaid offer continues to provide superior subscriber economics, with higher ARPU, relatively lower churn and a growing total base. Overall subscribers increased 14% to 4.9 million. So TELUS continues to experience solid growth and our overall subscriber mix remained at 81% postpaid.

Our revenue and EBITDA gains are being driven by more than just subscriber growth. As shown on Slide 15, ARPU continues to increase, up $2 year-over-year, driven by significant growth from adoption of new wireless data services, which has exceeded erosion in traditional voice services. TELUS' wireless data ARPU increased more than $2, or 79%, to $5.11 and accounted for almost 8% of ARPU this quarter. While this represents excellent momentum, there remains a great opportunity to catch up to other providers in this area to drive on-going future revenue growth from wireless data.

Slide 16 provides a breakdown of our profitable subscriber operating metrics. Our low blended prepaid and postpaid churn rate increased slightly to 1.36%. Coupled with higher ARPU, the average lifetime revenue per TELUS subscriber remained relatively flat at an industry leading $4,800. We recorded our third consecutive quarter of sequential COA declines in Q3 to $386, although it increased slightly from last year. In spite of this, we were able to keep our marketing efficiency metric, that is cost of acquisition over life time revenue, stable at 8%, as indicated on the last line of the slide. This is very close to our all-time best ever efficiency result of 7.7%, recorded last year.

To conclude the wireless segment update on Slide 17, today TELUS is updating our full year 2006 guidance. We are narrowing our wireless revenue guidance range by $50 million to the upper end of the previous guidance range. Our EBITDA guidance range also moves upward by raising the low end by $25 million. As mentioned earlier, our guidance for CapEx is expected to approximate $425 million, down $25 million. Our net addition guidance remains unchanged, and clearly the outlook for wireless remains very strong.

Now, let me turn to our wireline operations on Slide 18. Wireline margins improved as EBITDA increased 10% on a reported basis, while revenues were stable year-over-year. Normalized for higher restructuring costs incurred this quarter and $68 million in net wireline expenses from the labor disruption last year, EBITDA was down 3%. Importantly, excluding increased product costs of sales from significantly stronger ADSL loading, normalized year-over-year EBITDA was actually quite steady. Capital expenditures were higher this quarter, reflecting increased investments as well as an artificially low level last year due to the labor disruption.

Slide 19 provides TELUS' wireline revenue breakdown by product. The positive highlight for the wireline segment in Q3 was the strong revenue growth in data. We're encouraged by the results. Data revenue grew 9%, due to increased internet and enhanced data revenue, and growth in high speed subscribers, as I will describe on the next slide. Overall, revenues were held relatively stable as data growth fully offset the erosion in local, long distance and other revenue. Local and long distance revenue declines are reflective of the increased competitive environment from wireless and VoIP, whereas the decline in other revenue was in part due to the retroactive treatment of certain adverse regulatory decisions.

Turning to Slide 20, high speed internet net adds experienced another quarter of strong growth, increasing to 42,000 due to higher gross additions from effective marketing promotions, combined with lower customer churn rates. Our high speed internet subscriber base now totals 872,000, up 19% from a year ago, which represents 81% of our total internet subs, now at 1.1 million. Since the end of the labor disruption in mid Q4 2005, TELUS' marketing efforts have been quite successful in garnering the clear majority of high speed internet subscriber growth in our incumbent markets. We intend to maintain this pace to better balance our high speed internet market share, relative to cable internet, and accordingly have again raised our guidance for full year net additions.

Slide 21 provides a quick snapshot of our non-incumbent or non-ILEC operations in central Canada. This represents a sub-segment of our wireline results. Our focus here remains on generating quality, recurring data focus revenues, such as the government of Ontario contract that Darren mentioned. Non-ILEC margins continued to improve as EBITDA increase to nearly $10 million, on a $9 million, or 5.5% growth, in revenues to $160 million. Please note that EBITDA result included approximately $3 million in favorable non-recurring items. We remain on track to achieve our annual guidance for non-ILEC revenue and EBITDA.

Slide 22 highlights our network access line performance. TELUS saw increased residential line losses year-over-year, at -4.8%, reflecting increased competitive activity from retailers and VoIP competitors and, of course, from on-going wireless substitution. This was somewhat offset by business lines increasing 0.7% year-over-year, resulting in an overall line loss of 2.8%.

Slide 23 shows TELUS' total subscriber connections. This graph shows that on a consolidated basis continued growth in wireless and high speed internet subscribers is more than offsetting the secular declines in residential network access lines that I just mentioned. Interestingly TELUS has 10%, or about 1 million more total connections than it did two years ago, despite increased competitive pressures in the wireline environment.

To conclude for the wireline segment, you can see on Slide 24 that we're making minor revisions to our 2006 guidance to reflect year to date results, and our expectations for the rest of the year. Reflecting improved margin expectations, we are increasing the bottom end of our EBITDA guidance by $25 million, despite lowering the range for total wireline revenues by $25 million. CapEx is increasing by $25 million, reflecting significant investments in local access, broadband deployment and new system and service development. Finally, due to continued momentum and year to date results, we are increasing our high speed internet net additions guidance to 135,000 or more, as mentioned earlier.

Now, turning to Slide 25 to look at TELUS on a consolidated basis, revenue growth in the third quarter was 7%. Reported EBITDA increased 13%, while reported EPS increased 77%. I will elaborate on both of these figures on the next few slides.

Turning to Slide 26, we can see that normalizing for $65 million in net consolidated expenses incurred for the labor disruption last year, as well as an $11 million increase in restructuring costs this year, underlying EBITDA grew 6.5%. In a similar manner Slide 27 shows EPS this quarter, normalized for positive tax-related adjustments in both quarters and the labor disruption impact. As you can see, underlying EPS growth was still very significant at 42%.

Slide 28 gives analysts a further breakdown of the positive contributors to the 77% increase in earnings per share. While $0.12 were related to the labor disruption last year, EBITDA growth generated $0.09. Lower depreciation and amortization contributed $0.05. Lower financing costs, due to the retirement of debt at the end of 2005 and lower rates, added $0.04, while tax related adjustments and a decrease in the average number of outstanding shares, due to share repurchases, represented another $0.04 each. All in all, EPS growth was significant anyway you cut it.

Now let me turn to Slide 29 and discuss an important component of returning capital to shareholders. Establishing our dividend growth model approach two years ago, TELUS set a target pay out ratio guideline of 45% to 55% of sustainable net earnings on a prospective basis. Given TELUS' strong financial results to date, positive prospects for future growth and operation cash flows, and consistent with our dividend growth model approach, as Darren mentioned earlier, today we announced a significant 36% increase in our dividend, effective for the January 1st 2007 payment. The decision to once again significantly increase our dividend reflects our confidence in TELUS' ability to continue to grow EPS on a sustainable basis and our ongoing commitment to return capital and create value for shareholders.

Turning to Slide 30, in the third quarter we remained active in the market, but at reduced levels from what we had witnessed recently, as repurchase activities were curtailed ahead of our September 11th income trust announcement. Even so, TELUS purchased a total of 2.1 million TELUS shares for $120 million in the quarter. In total to September 30, TELUS has repurchased for cancellation a total of 14 million shares since December of 2005 for $658 million. TELUS's current NCIB repurchase program expires mid-December 2006. Subject to attaining customary regulatory approvals, we intend to renew in December our NCIB share repurchase program for 2007.

Slide 31 shows the trend in return of capital to shareholders since 2003. In 2005, when one aggregates dividends and share repurchases, we returned $3.30 per share in capital. In 2006, this number is on its way to the neighborhood of $3.45 per share, when one adds dividends to projected full year share repurchases, based on annualizing our year to date run rate. In the event TELUS does not pursue an income trust conversion, then in 2007 the combination of the higher dividend and significant share repurchases at an amount consistent with our existing year to date run rate would result in a total return of capital to shareholders of approximately $3.85 per share. You should note that this approaches the level of cash distributions per unit previously announced in the event TELUS converts to an income trust. So while I put up the 2007 figures for illustrative purposes, what is clear is that regardless of corporate structure, TELUS intends to deliver on our commitment to return a significant amount of capital to investors.

Let me conclude on Slide 32. Today we are making minor changes to our consolidated guidance to reflect revisions to our outlook for both wireless and wireline guidance, previously mentioned. Consolidated revenue guidance is being narrowed, with no change to mid-point. We're also narrowing and raising the low end of our EBITDA guidance range. Restructuring and work force reductions costs are expected to total up to $80 million, as compared to up to $100 million previously. Our EPS guidance range has increased by $0.15, which reflects the $0.09 positive tax impact recognized this quarter, as explained earlier, and an improved earnings before tax outlook. Consolidated CapEx remains unchanged, while our free cash flow guidance range has been revised to the higher end. We now expect more than $1.6 billion in free cash flow in 2006.

And with that Darren and I would be pleased to answer your questions. So I'll turn the call back over to John Wheeler to moderate this part of the call.

Just before I turn the call over to Ron to conduct the Q&A session, can I ask your cooperation for one question at a time please. Ron, please proceed.

[OPERATOR INSTRUCTIONS] The first question will be from Marje Soova from Goldman Sachs. Go ahead please.

Thank you. You haven't discussed plans for dividends and share repurchases for next year. I was wondering if you could also just address your views in terms of leverage targets going forward and if you would be open to increases in leverage in order to enhance returns to equity shareholders? Thank you.

Thanks Marje. In regards to leverage, we have an established and well known leverage policy as it relates to both debt to EBITDA being in that ratio of 1.5 to 2, as well as net debt to capitalization. At this time we're making no change to our leverage policy and it has in the past been viewed in the corporate structure as the optimal range for our organization.

I know that there was discussion in the contemplation of an income trust scenario, wherein due to the lack of tax deductibility of interest, and therefore the higher cost of capital associated with debt in an income trust structure, that there is logic to perhaps having a lower leverage than otherwise. Obviously, in a corporate structure scenario that would not be applicable and therefore for the time being we are maintaining our existing leverage policy.

Okay, Ron, next question please.

Thank you. Next question is Vince Valentini from TD Newcrest. Go ahead please.

Thanks very much. Bob, could you give us an updated estimate, assuming you're not a trust, what type of cash tax payments you'd expect to make in 2007 and 2008?

In regards to income taxes, they would be negligible as they would pertain to foreign income that we earned and therefore from a materiality perspective cash income taxes would commence in 2008.

Okay, Ron next question.

The next question is from Jonathan Allen from RBC Capital Markets. Go ahead please.

Thanks very much. As part of the income trust conversion in September, you had also announced a collapse of the dual class share structure. Even though the income trust consideration is now being reconsidered, is there any change in your view on collapsing the dual class shares?

Jonathan, in terms of the two classes of shares, we've had a structure in the corporate structure that has worked well for ourselves. Clearly, as you referenced, in the income trust conversion scenario we intended to collapse into one class of units because you can't have multiple classes in the trust structure.

Having said that, we have always reminded anyone when we have had the opportunity that the dual share cost structure at TELUS is solely to facilitate compliance with foreign ownership restrictions that govern the telecom sector, while at the same time allowing unfettered access to global capital markets and the unfettered ability for non-resident investors to invest at will in TELUS. Having said that, we have also emphasized that if legislation changes such that TELUS is no longer subject to foreign ownership restrictions, then the articles of the company provide for an automatic conversion of the non-voting shares into the voting class.

Therefore, I certainly have not understood a rational for differential pricing between the two classes when they enjoy the same dividend and participation in economics. Having said all of that, we are familiar that certain hedge funds like to take positions and play one way or the other and that's really not in our interest to facilitate one direction or the other. All I would suggest is when it came to an important vote, such as the vote that would occur in order to decide whether the company would convert into a trust, you will notice that the non-voting shares, perhaps misnamed, actually have a vote as a class.

So I would just remind investors that there are significant shareholder rights for perhaps the misnamed non-voting share class at TELUS and we have no intentions at this stage to publicly announce regarding a conversion of the two classes, but again I remind that I think the rights are virtually identical between the two and I certainly don't understand the rationale for differential pricing.

Okay Ron, next question please.

The next question is [Devie Goth] from [Jenudi Capital Markets]. Go ahead please.

Yes, thanks very much. I just want to come back on those two points that were made earlier Bob. First of all, on the voting, non-voting side, you were going to collapse them on the trust. I don't think there's anything magical about a trust vis-a-vis foreign ownership, so why wouldn't you do it as a common equity? And second, it's great to see a quick response to the trust debacle of Tuesday, with a 36% increase in the divvy, but even on a fully tax basis, looking at your $1.6 billion or so of free cash flow and taxing it, there's only a 47% pay out. You were prepared for something like an 80% pay out as a trust. Is there any reason why it shouldn't be that much as a common equity on a fully tax basis?

Well, in regards to the first part of your illegal two-part question, I don't. So there will have to be a fine levied from John on you, Devie. Although, I must say you're improving from your normal five-part questions. The dual share class structure has worked well for the company in the past and the difference in a trust structure is you cannot have two classes of units in a trust. So it's not a possible structure that could be facilitated in the trust structure. So we've come up with a structure that would facilitate compliance with foreign ownership, but essentially collapse to one unit class.

Given that the government's announcement was unexpected, at least by TELUS, and this is Friday and it was only on Tuesday, late Tuesday, that the government made the announcement, I think any expectation that we would have a model to collapse a share structure that had been existence for the past six years and worked well is a little bit accelerated. So certainly we have no intentions, again, to remind -- to do so. As always, we'll always give consideration to good suggestions from our shareholders, but this structure has worked well for us in the past and therefore to proceed on that default basis shouldn't be controversial.

In terms of the second part of the question, which relates to the dividends, as I emphasized in our presentation, a combination of return of capital in the form of dividends and share repurchases, just keeping share repurchases at the existing run rate, experienced this year, into next year would lead to a combined approximate $3.85 return of capital per share. Given our different classes of shareholders, some taxable, some non-taxable, we have in the past received considerable feedback as to preference for either dividends or share repurchases and that is not a unique preference amongst all investors.

So we chose in the past to have a dual track initiative in returning capital to shareholders. We've been widely applauded by all shareholders for that approach. What we're doing today is reminding the investment community that in the event that we do not pursue an income trust conversion, we will revert to our traditional approach to return a significant amount of capital to our shareholders, both in the form of dividends and share repurchases, and that, as I've illustrated, the aggregate amount of that, just continuing with our existing share repurchase program run rate, in combination with the new higher dividend, would lead to a combined return on capital that approaches the same distribution of capital that had been contemplated in an income trust conversion scenario.

Next question.

The next question come from Glen Campbell from Merrill Lynch. Go ahead please.

Yes, thanks very much. A question on employee head count. I noticed that it rose about 10% year over year in the wireless segment, roughly in line with subscriber growth. Clearly we're looking for opportunities for operating leverage going forward, can you talk about what might have driven that and also how it might change going forward, whether we might look for, say, slower growth relative to subscriber growth in the future? Thanks.

I guess we're getting into the micro now. In terms of the staffing on the wireless side, I would point out that revenues grew at a 17% clip and subscriber growth grew at a 10% clip. So that is a healthy ratio, I would suggest. The EBITDA margin the organization at 45.5% also, that by the way is of total revenues, not merely of network revenues, is also industry leading. So we have a high sharing level, high productivity level in the organization.

Obviously we are investing to maintain superior levels of customer service. You can see in the churn rate, that is maintaining industry leading low level, that that is having and continuing to have, a positive effect. We are also investing in adding expertise in the area of wireless data. That's probably the biggest growth area outside of the operations area and the consumer operation. And obviously with significant growth in wireless data, that is also paying dividends. I have no specific guidance in relation to staffing levels on a go forward basis for the wireless operation.

And the next question is from Jeffrey Fan from UBS Securities. Go ahead please.

Thanks very much. My question is on your wireless ARPU. When we look at the data growth in ARPU is certainly strong, but when we subtract that out, looking at voice and other ARPU, it looks like it's down a little bit year on year. Can you talk about maybe how you would plan to grow that side of the ARPU, not the data, but the non-data? It looks like your minute of use is also flat. Is minute of use something that you could use to drive further growth, or maybe there are other levers that you could use? Thanks.

Jeffrey, in terms of wireless ARPU, I think your question is a good one and it may help clear up a misconception that seems to be out there. As you know, and as we emphasized in our presentation, we have experience wireless ARPU growth, up a couple bucks to the $5.11 territory. Having said that, we have experienced a traditional repricing downward in the voice services area. I don't really see the price per minute trend of a decreasing price per minute for voice changing. That's a function of the very competitive aspect of the Canadian wireless industry.

What we're really experiencing here is that the introduction of new wireless data services and a tremendous accelerated adoption of those services, facilitated by new high speed EBDO handsets, EBDO investment, in our case, at least, that we have made in our network, et cetera, has led to a rapid acceleration of data that has exceeded the voice revenue decline on a per subscriber basis. So that's a trend that we I would say, based on past experience, would expect to continue in the future. So the great aspect of this industry is even though it is becoming less and less expensive for consumers to enjoy the benefits of voice wireless services, from a carrier perspective, we are introducing new services that obviously are being enjoyed, as they are receiving rapid take up, and the net result is accretive to our overall ARPU.

Ron, next question.

And the next question is from Michael Rollins from Citigroup. Go ahead please.

Hi, good morning. I was wondering if you could walk us through the steps from here with respect to the income trust tax proposal. What are the steps for that to become policy or law, so to speak, and within that context, what are the opportunities possibly for some sort of compromise or renegotiation of the principles of that new tax proposal? Thanks.

Thanks for the question. It's law right now. In terms of a tax change, per se, it's implemented with immediate effect and becomes law and then in codified in retrospect and that is necessary for the purposes of confidentiality and secrecy when you are making a major policy move, and so far as tax legislation is concerned. So, it's law now and it gets codified retrospectively through government. It would be fair to say that in terms of the steps that are about to unfold we are faced with a very difficult, if not extremely challenging, scenario.

In terms of the comments I made this morning, as well as Bob, given that we felt the income trust conversion was a laudable pursuit, we feel that at this juncture, only 48 hours effectively into the decision, it's premature to shut the door to the income trust conversion at this juncture. Indeed, I think if we had been easily dissuaded in the past from certain strategies, we wouldn't have built the outfit base that we enjoy today. We believe that TELUS, within this difficult scenario, has a good argument that we should experience the same grand-fathering as the existing income trusts. Clearly we feel strongly in that regard because, as a public company, we made a public pronouncement, in terms of our intention to convert to an income trust and I think when a public company makes such a public pronouncement, it should expect a certain degree of consistency and continuity in respect to the existing legislative framework when we are in mid stream of our implementation of this major strategic decision.

Without a doubt when investors are making decisions based on that public pronouncement, I think investors should count on a certain degree of consistency and continuity in terms of tax legislation as well. And it's very clear that this was the expectation set by the standing government, in terms of their election platform. One of the axioms was not to change the tax legislation pertaining to income trust. I would say at the end of the day TELUS certainly deserves a degree of consistency and continuity when it comes to tax legislation. When you reflect upon the fact that we are one of the largest investors in Canada, having expended some $42 billion over the last six years in the hi-tech telecommunications industry in Canada. The other thing that we feel assists us in our case in arguing that we should experience the same grandfathering as existing income trusts is the fact that the TELUS trust had some very interesting attributes associated with it.

We would argue that within the TELUS trust there would be no tax leakage for the government to experience and I think this is particularly true now that the government has implemented a four year transition period. The other thing that is interesting and attractive about our income trust conversion is that TELUS was intending to carry on with our investments in Canada unabated and undiminished within the income structures. So we were going to continue to invest in telecom innovation and, in effect, recycle some of the tax efficiencies that we would enjoy through the trust conversion back into our core business.

Not withstanding all of this, it would be fair to say that if we do elect to remain a share corporation, TELUS continues to enjoy a superior asset base and a superior asset mix and I think it would be fair to say that this superior asset base that has been delivered from our winning strategy will continue to deliver for investors an excellent growth profile into the future and these attributes are independent of whatever legal structure we choose to pursue, whether it's the continuation of a share corporation or the conversion into an income trust. And I think there is no better empirical evidence, in terms of the future prospects of TELUS, and as well our growth potential being delivered for investors, than what we have announced today with the 36% increase in the dividend, and as well what we have achieved thus far with the NCIB program and our desire to carry on with that program through 2007, should we not convert to a trust.

Okay Ron, next question.

The next question is from Vance Edelson from Morgan Stanley. Go ahead please.

Okay, thanks a lot. If we could just go back to wireless for a second. The overall wireless churn was up slightly. I was just wondering, is there any Idem impact there that you could break, or if not, what accounts for the uptick in churn. And then, similarly, as we go into number portability next year, could you let us know the percentage of the base that is on contract? Thanks.

Well, without disclosing specifics, what I can say is our churn actually decreased year over year, so that's certainly not a cause of the increase. It's a very marginal change on a year over year basis, so my interpretation was it's essentially steady as she goes.

In terms of the percent of contract of our subscribers, I'm not familiar that we have previously disclosed that, but suffice to say that TELUS as an organization has been a leader going back a number of years ago. A good clue would be the fact that we have an approximate 81%/19% split in terms of postpaid and prepaid subscribers. Obviously, substantially all of the postpaid are on a contracted basis, typically with terms of up to three years.

Okay Ron, next question.

Next question is from Rob Goff from Haywood Securities. Go ahead please.

Thank you very much and good morning. Could you give us a bit of perspective on where you are seeing losses in the residential and balance side? Is it to wireless? Is it the elimination of second line for high speed users? Is it Shaw or other IP providers?

I guess the quick answer to your question, Rob, is that it's all of the above. We're seeing line losses that are related to cable telephony and Shaw. We're seeing line losses related to the difficult competitive intrusion that we've experienced in the past from the likes of Primus. We're seeing line losses related to the Rogers Organization and their activity in our market. And we're seeing line losses related to technological substitution, whether it's VOIP, and some of the VOIP providers, or whether its wireless substitution. I think it's fairly uniform across the board. It varies on a quarter to quarter basis, but if you took a more long term view, empirically speaking, and went back 12 or 18 months, there are fairly consistent contributions from each of the constituencies that I've articulated.

Next question Ron.

The next question is from James Breen from Thomas Weisel. Go ahead please.

Great, thank you very much. On the video side, can you give us some update on TELUS TV and how the roll out has been and potentially any color on the preliminary take rate results? Thanks.

Well the roll out on TELUS TV has always been designed to be progressive. It's a neighborhood by neighborhood roll out. Effectively we have launched TELUS TV commercially within the Edmonton and Calgary markets and we're looking to move out from those major urban markets to the semi-urban confines of various geographies within Alberta, and as well we are progressing form an employee trial in the lower mainland of Vancouver to a commercial deployment in the lower mainland of Vancouver, again on a neighborhood by neighborhood basis.

It has always been our desire that the expansion of TELUS TV should not be one that exhibits expedience as its defining characteristic. The early results for us on TELUS TV are encouraging. The robustness of the technology is performing very well, meeting exceeding, if you will, our expectations. We think the product has a number of very attractive characteristics that are significant in terms of differentiating our product, versus the incumbent. As we have indicated on numerous occasions, TELUS TV is a service predicated upon feature differentiation rather than price discounting, and that continues to be our mentality in terms of rolling out the product.

And as well you will have noted that just prior to the income trust conversion we indicated that we had embarked upon, or were in the process of a $600 million broadband expansion within our ILEC territory to raise the bandwidth speeds from where they are right now to 15 to 30 megs, which will allow us to introduce new services over the course of 2007 that we think consumers will find attractive, principally, or most notably, if you will, high definition TV. So we're very encouraged by the performance of the product. The take rate, although we don't disclose it, and we won't be disclosing it for some time to come, we are very satisfied with the progressive rollout and the progressive take up. And, again, we're focusing on feature differentiation, rather than price based discounting and the performance of the network has also been strong.

Next question Ron.

The next question is from Peter MacDonald from GMP Securities. Go ahead please.

Thank you. Can you just walk through some of the specific opportunities you see for you, if the TPR was used for the basis for a Telecom Act and maybe you can reflect those on the changes that are already happening within the current regulatory format. And specifically what I'm looking for is should we be concerned that changes to a potential Telecom Act or forbearance will result in pricing pressures, or could we be optimistic that price increases could result under the TPR?

Well, number one, I think the best interests of our investors are served by me not disclosing on a conference call our price strategy going forward under forbearance or even under regulation. I think that is a matter of confidentiality that in the best interest on investors we should not disclose within a public domain.

It would be fair to say that the forbearance move that we hope would come to fruition with the TPR being implemented would allow us to pursue a number of very attractive marketing initiatives. Number one, it would allow us to pursue a bundling strategy that we have been prevented from implementing in full and I think at the end of the day a lot of our customers, particularly within the consumer market, would be highly attracted to the type of bundle that we can put together, between regulated voice services, high speed internet services, wireless services, security services, and entertainment services.

So, I believe that the freedoms that we will enjoy as a result of bundling will be very attractive. Additionally, it would be fair to say that we can pursue a greater level of simplicity in our rate plans with consumers, and to the extent to which we can simplify our rate plans, I think that makes us less susceptible, more resilient, if you will, to competitive intrusion, because consumers can more clearly understand the value that they derive from their relationship with TELUS. And, as well, it would be fair to say the extent to which our rate plans are simpler, that will also take costs out our business, because when you have complex rate plans, that area result of a legacy regulatory environment, and these give rise to queries by customers, in terms the bills that they receive, and calls into our call centers, every time one of our call center agents answers the phone to handle a billing query, that's an $8 charge to TELUS organization.

So I think our ability to pursue simplicity within a deregulated environment will not only help us retain clients and grow our relationship, it will also help us enjoy cost efficiency. The other thing that I think will be attractive for us is we'll be able to do more segmented pricing. We've not been able to do very segmented pricing in the past, whether the segmentation is on a needs basis, a geographic basis, whatever, I think to the extent we can better tailor our marketing packages to key market segments, then we can create more value for customers and create more value for TELUS along the way. I think it will be very positive for us to be unencumbered from the win back rules that we currently face. Although the win back rules have been truncated recently, it would be fair to say that we don't think that there's parity right now within the win back domain.

To the extent to which that when TELUS secures a new TV customer from the cable incumbent, the cable operator can go after that customer immediately with a winback activity, whereas when we lose a telephony customer to cable, we have a 90 day moratorium that frustrates our ability to win back in an expedient fashion. So these are all the things that I think will come to fruition on the forbearance front that indeed will be very welcome in terms of developments for TELUS.

And people also easily forget that local services, which are regulated, are not the only area targeted for forbearance. A lot of people find it difficult to believe, but it's true, our call management services, including staple features like voice mail, are also regulated. So getting those services, like the call management services, including voice mail, deregulated will give us a lot more latitude in terms of our product and marketing activities into the future and I think that will help us grow value for both consumers and, by extension, investors.

Ron, we'll take the last question. We're just coming up on the hour. Thank you.

The next question is John Henderson from Scotia Capital. Go ahead please.

Thank you very much. Just wondering if you could comment on last year, the strike related revenue impacts and how much they may have been in that quarter, in Q3. I know Alliant gave estimates of their strike related revenue impacts in 2004 and showed them at about the same as the cost impacts in each of the quarters that they had the strike. Would that be a fair kind of starting point?

Rob, my recollection, in terms of the third quarter last year, with the labor disruption, is that there was minimal revenue impact as a result of that strike. If you recall, certainly our wireless operations continued almost unabated. In terms of the wireline operations, given that we had the majority of our [inaudible] unit in Alberta working, in addition to management working over time, we maintained essential services. So, while there was some slowdown in terms of hooking up new lines and the like, I think it is difficult to measure with any exact fashion what the revenue impact was, but I would find it hard to believe that it would anywhere approach the level of costs that we incurred.

I think the one thing, John, that's a very obviously empirical difference, building on Bob's point, is on the wireline front we were impacted, in terms of our ability to deliver on DSL in the third quarter of 2005. We achieved back in that third quarter about 7,000 net adds. And of course we bettered that result by an incremental 34,000 net adds, to a total of 41,500 in the third quarter of 2006 and I guess there's a legacy impact from that, it would be fair to say.

The other area for us that was somewhat frustrating, if you remember back to the first half of 2005, we delivered a very strong result on the wireline side of the business, to couple the strength of the performance on the wireless side and it would be an accurate description to say one of the areas of focus for us, and frustration is some of the LD erosion that we have been experiencing. In the first half of 2005 we were pretty much best in class in holding the line on LD erosion and we have seen some slippage in that regard. And some of it is because of the operational impact caused by the labor disruption that's given us a hangover and I'm hopeful that as a result of our marketing activities going forward, as relates to win back, or what we will be able to achieve on the deregulation front, we can shore up our LD activities and, if not completely thwart the erosion, do a better job slowing it, versus what we have experienced over the last couple of quarters.

Okay, well thank you very much investors for taking the time to join us today. We appreciate your on-going interest and continued support of TELUS. Have a good day.

This concludes the TELUS Third Quarter 2006 Earnings Conference Call. On behalf of myself and the rest of the conferencing team, thank you from TELUS.