Telus Corp (TU) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the TELUS Q2 2010 earnings conference callI.

I would like to introduce your speaker, Mr.

John Wheeler.

Please go ahead.

Welcome, and thank you for joining us today for our second quarter investor conference call.

This call is scheduled for up to one hour.

The news release on second quarter financial and operating results, and detailed supplemental investor information are posted on our website, telus.com/investors.

For those with Internet access, the quarterly presentation slides are also available on our website.

You'll be in listen-only mode during the opening comments, and now let me direct your attention to slide two.

The forward looking nature of this presentation answers to questions and statements about future events are subject to risk and uncertainty and assumption.

Accordingly, actual performance could differ materially from statements made today, so do not place undue reliance on them.

We also disclaim any obligation to update forward looking statements, except as required by law.

I ask that you read our legal disclaimers, and refer you to the risks and assumptions outlined in our public disclosures and filings with Securities Commissions in Canada and the US.

Turning to slide three for an outline of today's agenda, we'll start with introductory comments and a review of the quarter by Bob McFarlane, our Chief Financial Officer.

Bob will review both segmented and consolidated results, and give updates on the issues outlined on the slide.

We will then conclude with a question and answer session with Bob, Joe Natale, our Chief Commercial Officer, and Darren Entwistle, President and CEO

Let me now turn the presentation over to Bob, starting on slide four.

Thanks, John.

Good morning, everyone.

Let's begin with the summary of the wireless segment highlights, which continue to show an improving trend.

Overall wireless revenues increased by 6%, reflecting wireless data revenue growth of 26% or CAD57 million, and equipment and other revenue growth of CAD27 million, which mainly reflects revenue from Black's Photography and to a lesser extent from increased smartphone sales.

OpEX increased by 7% as a result of the inclusion of the Black's expenses, and to a lesser extent higher cost of acquisition expenses, related to higher subscriber loaning and provision of more expensive smart phones, as well as higher network roaming expenses.

This was partially offset by good cost control reflecting lower labor costs, reduced bad debt expenses, and a decline in retention costs.

All in, wireless EBITDA increased by a healthy 6%, and reflects improved revenue growth, notably including an improved ARPU trend combined with strong subscriber addition, while EBITDA margins on total revenue remain relatively unchanged.

And the margin on network revenue expanded about 9 basis points to 46.1%.

The 48% reduction in CapEX year-over-year reflects the ramp down given the extensive coverage and quality of our 3G plus network, that was substantially completed last November.

Simple wireless cash flow increased strongly by 39% to CAD424 million, due to the lower CapEX and the EBITDA growth.

Turning to slide five.

Total wireless net adds led the industry this quarter, increasing by 12% to 124,000.

Postpaid net adds also led the industry, and increased by 15% to 109,000, and represented 88% of our total net adds, despite minimal Apple iPad activations.

Strong TELUS subscriber loading was driven by demand for HSPA handsets, particularly smart phones.

The good growth in postpaid net adds likely reflects an improvement in economic conditions, and expanded industry-wide demand for wireless, as well as enhanced TELUS distribution for the iPhone starting in March, and our continued focus in adding high quality customers.

Overall, our total subscriber base is up 6.5% year-over-year, and now totals 6.7 million.

Also notable is the fact that net adds at the three national wireless providers expanded in the second quarter by an estimated 15%, representing the first such year-over-year increase in subscriber growth in eight quarters, which bodes very well for the wireless industry as a whole going forward.

The next two slides provide additional detail on TELUS's improved success with smart phones, which reflect the competitive benefits of our investment in the HSPA plus network.

Smart phone subscribers now represent approximately 25% or 1.4 million of TELUS's postpaid subscriber base, up substantially from 16% a year ago.

In the second quarter, 34% of all smart phone loading was new to TELUS.

The iPhone, and our wide selection of Blackberries, continues to drive retention loading.

The new and growing selection of Android powered devices also rounds out or PDA line-up.

As shown in slide seven, wireless data revenue growth for the second quarter increased by CAD57 million or 26% year-over-year, reaching CAD273 million.

Data now represents 24% of network revenue compared to 20% a year ago.

Year-over-year growth reflects strong smart phone service revenue and text messaging, driven by increased penetration of smart phones, increased adoption of data plans, increased mobile internet keys, and higher inbound data roaming volume.

We continue to be bullish on future wireless data growth, given these trends and the increasing functionality and appeal of the new devices we can offer customers, as more exciting new devices become available on our new HSPA plus network.

Slide eight shows the improving metrics related to our wireless marketing effort in the second quarter.

Gross additions increased by 2.7%, with postpaid loading up 12%.

As mentioned, this reflects an improvement in both economic conditions, and enhanced distribution for the iPhone starting in March of this year, in both Best Buy and Future Shop.

Blended churn of 1.45%, our lowest customer churn rate in two years, improved by 10 basis points over last year, and reflects lower involuntary churn, greater choice in handsets, including the iPhone, and successful retention efforts.

Postpaid churn remain low at 1.09%.

COA per gross add increased by 10% to CAD342.

However, it's important to note, that this included a one time settlement for wireless channel subsidies for prior periods, which totaled roughly CAD15 on a per gross add basis.

Management has been tasked to ensure process deficiencies in this area are not repeated in the future.

Net of those factors, COA increased slightly due to higher subsidies in higher marketing expenses for new device launches.

We were pleased to see our cost of retention decrease by 1.7% despite higher retention volumes and increased provision of expensive smart phones.

While in part, this was aided by favorable US dollar exchange rate compared to last year, retention cost per retained subscriber showed much cause of improvement, reflecting management efforts to moderate such cost.

Slide nine shows the break down of TELUS's total ARPU between voice and data for the second quarter.

Encouragingly, the 1.9% year-over-year decline in blended ARPU for the second quarter is a continued sequential improvement from the 4.4% decline reported in the first quarter of 2010, and the 7.7% decline in the fourth quarter of 2009.

The improving trend is due to a lower rate of decline in voice ARPU, now at 7.2% this quarter, compared to 9.5% in the first quarter of 2010, and 12% decline in the fourth quarter of last year, offset by a higher rate of increase and data ARPU, which is now at 19% or CAD13.80, compared to a 17% increase in the first quarter of 2010.

The strong growth in data ARPU largely reflects the date revenue trends I've already mentioned earlier.

Data ARPU now represents 24% of ARPU, up 4 percentage points from last year, and represents a significant ongoing opportunity for continued growth.

On Tuesday, TELUS announced plans to deploy dual cell HSPA plus technology in select urban areas as outlined on slide 10.

This is consistent with TELUS's technology evolution towards LPE, and dual cell HSPA plus will further increase the high speed wireless data speeds we can offer customers, to up to 42-megabytes per second.

TELUS is the first carrier in North America and one of the first globally, to successfully test and begin to deploy HSPA plus dual cell technology into its networks New devices starting with mobile Internet keys are expected to be commercially available starting in 2011.

This is a very cost effective upgrade for TELUS.

It can be easily accommodated within this year's CAD1.7 billion consolidated CapEx guidance.

Turning to slide 11, let's review our wireline segment results.

Revenue decreased by 4% due to ongoing local and long distance revenue declines, as well as local equipment revenue that in aggregate were only partially offset by data revenue growth of 5%.

Operational expenses were lowered by 3%, or CAD27 million, reflecting enhanced cost control and outcomes of prior period restructuring cost investment.

Restructuring costs this period decreased by CAD30 million year-over-year to CAD19 million, down from the high level of restructuring activities in the second quarter of 2009.

Operating profitability, as measured by EBITDA, was higher by 4%, due to lower operational expenses and restructuring costs, more than offsetting the revenue decline.

EBITDA margins on total wireline revenue increased by 230 basis points to 32.4%.

Wireline CapEx decreased by 19% to CAD298 million, mainly due to lower investment in network access, partially offset by continued investments in TELUS TV and broadband initiatives, including VDSL2.

As a result of the EBITDA increase, combined with lower CapEx, wireline cash flow increased strongly to almost CAD100 million this quarter.

Slide 12 highlights our network access line in internet indicators.

Business now losses of 12,000 continue to reflect a decline in voice lines in western Canada from competitor activity, which more than offset increased data lines in Ontario and Quebec.

Residential line losses of 51,000 reflect aggressive price and marketing competition that we continue to see from the primary cable TV competitor for much of the quarter, as well as wireless and technological substitutions.

High speed net adds to 3,000 for the quarter were disappointing, and reflect the low share in the face of aggressive promotional discount offers by our principal cable competitor, in a market exhibiting declining growth, as household penetration rates mature.

Slide 13 shows our continued success with TELUS TV in the second quarter.

Total net adds continue to be strong, increasing by 71% year-over-year to 29,000, while the total subscriber base nearly doubled to 228,000 over the past year.

Our overall success is attributable to improved product capability and features, providing positive competitive differentiation, as well as from continued enhanced broadband coverage.

As shown on slide 14, in June we launched our optic TV brand, powered by Microsoft media room, as well as optic high speed offering Internet access speeds of up to 15 Megabits per second.

TELUS launched this new brand to create awareness that TELUS has a differentiated TV service, which can be best highlighted by a product branding.

The optic TV footprint continues to expand, and now covers approximately 1.9 million households, or just over 80% of our top 48 communities in BC and Alberta.

This week TELUS announced that Microsoft Xbox 360 gaming systems can be used as a digital set top box for optic TV.

TELUS is among the first globally to introduce this innovative capability and demonstrates our commitment in providing innovative, new products and services to our customers.

Also this week, TELUS launched its first remote recording application for optic TV customers.

Remote recording is an enhancement to optic TV that allows customers to manage their personal video recorder, or PVR for short, using a web connected computer or on their iPhone.

TELUS customers can now remotely record, delete, and manage the content on their PVR, as well as view and search their TV guide using the Internet or their iPhone.

We expect the remote recording application will soon be available on additional smart phone platforms.

These new features, available on the media room platform, are expected to support enhanced ARPU and customer loyalty, and illustrate the progress we're making as in realizing benefits from significant investments in wireline and wireless broadband for mutual benefit.

Putting all of this together, let's look at TELUS on a consolidated basis starting on slide 15.

Consolidated revenue in the quarter increased by 1% over the same period a year ago.

Operating expenses were slightly higher, mainly due to higher wireless subscriber acquisition costs and the inclusion of Black's Photo expenses in 2010, as well as increased TELUS TV programming costs resulting from the increased subscriber base and higher wireline advertising and promotion costs, partly offset by lower wireline salaries and benefits from fewer FTE's.

Restructuring costs were lower by CAD34 million, where our estimate of CAD75 million for the full year remains unchanged.

EBITDA growth of just over 5% reflects improved revenue growth from wireless, sustained traction from efficiency initiatives, and lower restructuring cost.

Reported EPS increased by 19% to CAD0.92, and when normalized for income tax related adjustment, EPS increased by 25%.

I'll show that analysis on the next slide.

Meanwhile, consolidated CapEx decreased by 29% for the reasons I've already mentioned.

We do expect capital spending to pick up in future quarters, in line with our annual guidance to accommodate growth.

Free cash flow increased by 67%, reflecting improved profitability and reduced CapEx.

Slide 16 shows the detailed break down of the components of reported EPS, including CAD0.03 of positive income tax related adjustment incurred in the second quarter, and CAD0.06 in the same quarter last year.

Lower restructuring costs positively impacted EPS by CAD0.08, lower depreciation and amortization added CAD0.04 to the upside, and reflects the net impact of investment tax credits and a change in asset life, as well as other changes in TELUS's asset base net of fully amortized assets, offset by increased depreciation for our wireless HSPA network and related software.

Normalized EBITDA growth contributed CAD0.03 to the upside, lower statutory tax rates and other tax items added CAD0.03 of growth, improving normalized financing costs added CAD0.01 to the upside offset by higher pension cost.

Normalizing for positive income tax related adjustments, EPS increased by a healthy 25% to CAD0.89 from CAD0.71.

Slide 17 shows the changes in FTE staff counts for the first half of 2010, compared to the ending balances for 2009.

The domestic telecom staff count, excluding the staff from Black's, is down by 750.

Together, Black's and TELUS International are lower by 350, which largely represents seasonality.

And as you can see, we remain focused on efficiency enhancements, and are well on our way towards our annual target of reducing the domestic telecom staff count by approximately 1,000 in 2010.

Turning to slide 18, I would like to also take a moment to review TELUS's recent refinancing in July.

TELUS successfully issued senior unsecured tenure notes at 5.05%.

This landmark CAD1 billion debt issue was CAD240 million larger than the next non-bank or non-government issued so far this year.

Our issue was obviously well over-subscribed.

The net proceeds of the refinancing are to be used in September, to partially redeem approximately 45% of the outstanding $1.36 billion of 8% notes, due June 1, 2011, as well as the related swaps.

The expected redemption price is approximately $640 million, and the estimated payment to terminate the associated cross currency interest rate swaps is approximately CAD313 million.

TELUS expects to record a pretax charge of CAD58 million for the early partial redemption, or after tax approximately CAD0.13 per share in the third quarter.

Benefits of this debt issue include reduced refinancing risk, well-staggered debt maturity profile, and interest expense savings of approximately CAD30 million annually.

Slide 19 provides a quick update on TELUS's I for S conversion status.

Section 8-2 in the MDNA provides full transparent status on key topics and progress against key milestones of TELUS's change-over plan.

TELUS currently expects to quantify impacts on key financial statement line items and other measures in our third quarter disclosure on November 5.

Notably, under our most current understanding and application, pro form net income for the first half of the year under IFRS, is estimated to be approximately the same as under Canadian or US GAAP.

Of course, there is a chance that this could change in the future as accounting standards evolve.

Overall, TELUS's I for S conversion project is well underway, and on track with our target conversion date of January 1, 2011.

To conclude the financial review, slide 20 outlines our updated 2010 consolidated guidance.

We appear to be on track to achieve our profitability guidance, which many viewed as aggressive when issued back in December 2009.

While wireline revenues will be challenged near term to meet the original guidance targets, effective wireline cost control and good overall wireless results have combined to provide a current outlook for full year profitability, consistent with our original consolidated guidance.

Longer term, we're optimistic that our integrated future friendly home product portfolio and business market potential will lead to improved wireline revenue trends.

The underlying EPS growth rate is expected to be 2% to 16%, when excluding positive income tax related adjustment and loss on partial early redemption of debt in 2009.

One last notable item as highlighted in our MDNA, cash taxes are now expected to be in the range of CAD330 million to CAD370 million, down CAD55 million from our initial expectation.

This reflects anticipated reductions of tax installment payments in the back half of 2010, from a recent tax decision ruling after quarter end, and related as well the past taxation years by resolutions of negotiated items with the revenue authority.

In summary, results for the second quarter of 2010 showed positive trends in both wireless and wireline, and demonstrate the realization of benefits from our major 2009 strategic investments in broadband networks and operating efficiency.

The wireless blended ARPU, a decline of 1.9% is continuing to improve, and reflects moderated voice ARPU declines, as well as strong data ARPU growth.

Net subscriber growth improved year-over-year by 12%, and reflects strong post-paid adds since we focus netting higher quality subs and improving our blended churn to the lowest level in the last two years.

Wireless revenue and EBITDA growth of 6% represent an improving trend.

In wireline, TELUS TV subscriber growth continues at a healthy pace and reflects the benefit of significant investments we've made in broadband.

Wireline EBITDA improved year-over-year despite reduced revenues, due to an improved cost structure, and the efficiencies we instituted last year, as well as into this year from our restructuring program.

Robust free cash flow growth of 67% on a consolidated basis reflects lower CapEX and increased cost savings.

And finally, our mid-year results provide us with increased confidence in the likelihood of achieving our aggressive profitability targets for the full year.

On that note, let me conclude, and let's move to the Q and A session.

Back to you, John.

Thanks, Bob.

Daniel, can you please proceed with questions from the queue for Bob, Joe, and Darren?

Thanks very much.

Yes.

Thank you.

Our first question will come from Peter Rhamey with BMO Capital Markets Peter, please go ahead.

Great, thanks very much.

Two questions, if I may.

On the RPU front desk, certainly voice RPU trends have improved to the point where it's tracking more closely to the industry at large.

So that means going forward in our modeling, looking at the performance of wireless we have to rely on the trend and data RPU, and I'm wondering if you give us some color.

Your RPU is growing very well in data, but it does lag some of your peers -- you're at 19% and some of your peers are at closer to 30% to 40%.

Could you talk a little bit about -- is there something systemically different about TELUS than your peers in terms of penetration of value-added services?

Should we look at the other carriers performance and say, that's what the future is for your company and that transition should occur over the next few quarters?

The second question has to do with wire line -- wire line margins are flat year-on-year, ex restructuring charges.

I notice they took a sequential decline.

I was wondering if you could give some color on what's happening there, in terms of any one-time items that impacted margins in wire line.

Thank you.

Okay, Peter.

Well, going to the first question on the RPU trends.

I think the essence of it is -- what's your potential relative to the past and are there reasons for differences between our situation and, say, other carriers.

I think the answer to that is, yes, there are some differences that come to my mind.

Firstly, as you know, when we're on the CDMA standard, we were not enjoying the provision of the iPhone, as well as Blackberry smart phones.

We tended more often than not to be receiving them on a deferred basis relative to the GSM standard.

As a consequence of those two factors, which as you know, they're the dominant smart phones, comprising almost all of that category, that in the recent past, that number of two, three years, we started to experience a data revenue growth pattern that lagged that of, say, Rogers who was showing good progress in that area.

And I think that was really, largely and dominantly a function of the inability for us to be offering iconic handsets in a timely basis.

So, clearly with the launch of our HSPA plus network, that situation has changed dramatically and so we're seeing a reacceleration in our data growth in that area.

As well, I -- I'm not privy to all the detail.

I think it's difficult to make comparison to the Bell organization, given the inclusion of the Virgin Mobile results, given the control versus a former JV position.

So, there's a dynamic there as it relates to Virgin going from pre to postpaid, in the past flowing through in a year-over-year for a period of time that Bell didn't own all of them.

So, I won't go into detail on that.

They've had a good RPU improvement, that's not -- I'm not challenging that point.

I'm just saying it's clearly a different factor to get into pro forma year-over-year.

In our case, we've owned all our subscribers last year, owned them all this year, so there's 100% inclusion of both revenues and subs, and numerator and base.

At the end of the day, at 1.9% decline, we're not saying, by any stretch of the imagination, that our mission has been accomplished, But certainly, when we're finishing last year down 7.7% and setting our targets up for this year, you may recall in that December guidance call, I had more than one question sort of pressing me on the reasonableness of the wireless assumptions and our targets, and given the decline in RPU.

We indicated at that time that our guidance range was predicated on improving that RPU decrease from where it was at down 7.7%, to low single digits, to approaching zero.

Now, obviously, it's a work in progress.

It went to 4.5% in the first quarter, now 1.9%.

I'm not signaling that it's in the cards for constant improvement.

We're obviously going to work there.

It's obviously going to be, in part, a function of what's going in the marketplace.

But suffice to say that we're pleased with the step function improvement that we've made.

We're pleased to see some positive, shall we say, lifting of the tide in the industry, and that bodes well for our potential going forward on the RPU front..

Very good.

Your second was on wire line margins, is that correct?

Yes, sequential decline in wire line margins; year-on-year they were flat but sequentially they're down 200 some odd basis points.

Sequentially, right.

In the first quarter of this year, there were some one time items of a positive nature, and I did try to point them out in the first quarter call -- but thank you for reminding everyone of that -- and included a large software sale that we made during the period, that was substantially all margin, as well as capital taxes were -- were reduced in the quarter flowing through into OpEx.

The combination of those put us into the teens, in terms of one time items.

I'll have to go back and dig out my notes.

But if people would refer back to my first quarter comment, I'm pretty sure it was in the mid-teens or thereabouts -- mid-to-high teens -- the aggregate of one time items.

So, they're positive, you take them, they are good news when you get them.

But to your point, it does create a bit of a noise over the sequential period trend.

Very good.

Thanks, Bob.

Okay, Daniel.

Next question please.

Our next question will come from Maher Yaghi at Desjardins Securities, please go ahead, Maher.

Thank you for taking my questions.

Great quarter on the wireless.

Actually, I just wanted to touch base on the wire line side, and more specifically on your internet subs and video subs.

When you look at the Optik launch that you guys did in the second quarter, you mentioned on the call that you were somewhat disappointed by your internet ads in the quarter.

Can you maybe talk about what your expectations for the second half of the year, in terms of internet subscribers on the Optik product line.

Are we going -- should we look for a knee jerk reaction, up in the third quarter or fourth quarter as the product trends up or, the adoption rate of the product is maybe slower than what you had expected?

I'll take that question.

I think it's important to recognize the dynamic in Q2 around our internet business.

As we mentioned on the last call, we saw some very aggressive behavior from our cable competitor, and that persisted all through the second quarter, where we saw, CAD9.95 price offers for home phones, for high speed and a very aggressive basis across the board.

It wasn't really until June -- early June where we launched Optik TV on a mass basis, and we also completed our 15mbp/s profile footprint, where we've got 82% of the home in the top 48 cities ready for Optik TV, where we can push the message hard and drive to the marketplace with a strong Optik TV message.

What's happened, through the latter part of June and the early part of Q3 is that our cable competitor has relented on the price aggression to some degree.

We've seen a much more sanguine approach, in terms of that behavior.

The second thing that's happened is that we've been pushing hard in the marketplace on Optik TV, and the feedback and the momentum has been building in a very substantial way.

The growth has been week-on-week for Optik TV customers overall.

But the important thing to bear in mind is that the Optik TV customer is coming with the bundle, for the most part.

The level of bundling we're seeing is very encouraging, both in terms of double play and triple play bundling and a level of win backs has also been very encouraging.

We did hit an inflection point with respect to the overall dynamic on Optik TV and what it means to our business through the latter part of Q2.

When you're competing face-on on price, the choice is to drop your price and drive the economics in a different direction when you've got the capability that we now have in place with Optik TV, and all that comes with it, we can now fight very effectively with both hands in front of us and we expect much better progress on that front in the months and quarters ahead.

We were definitely not satisfied with HSIA loading through Q2, it's something that we as a team have taken very seriously.

We feel good about the prospects going forward.

Great.

Just a follow up on the voice part of your wire line business.

The reacceleration of the negative year-on-year decline.

Can you maybe talk about the cause of that and what's behind it and what do you see going into the second half on that side?

Well, we expect the voice revenue, it's really a story on network access line loss.

Network access line loss for us in Q2 is something that has been a challenge, for some of the same reasons I just articulated, around some of the pricing behavior in the marketplace.

We were down 8.2%, which was largely in line with our peers in Canada, and certainly substantially better than many of our U.S.

peers.

But frankly, we're dissatisfied with that result.

With a network access line also comes the LD capability, long distance capability that goes with it.

As a result, there's a loss of some very good margin business for us.

Most of the declines were in DC, due to competitive losses, the aggressive behavior from our cable competitors exactly the same in this vein as I just finished describing on the high speed front.

We have seen some offset, based on our business growth in eastern Canada.

To me, the direction for our team is very, very clear.

Number one; we've got to drive our meeting room and OptikTV, Optik high speed to the home service, like crazy through the marketplace.

To me, that is the path to not just driving TV growth, but driving retention around high speed and driving retention around voice services, and the requisite economics that go with that.

You'll see a lot more from us with respect to bundling and integrated solutions.

This week we launched the Xbox capability.

We launched remote PBR capability from your iPhone, or the web.

And soon from Blackberry and other platforms.

You'll continue to see those type of solutions, which are not just about driving TV growth, but protecting and enabling another success in the voice service area overall.

The other factor you'll see from us is a very strong focus on customer service retention and fulfillment.

The organization has been very, very steadfast, let's focus the last little while on finding exactly the improvements that we need to make in our call centers and our web experience, in the field that's driving even greater sense of satisfaction and customer fulfillment in that area.

I think those are the real antidotes, if you will, to what's been happening on the local access front.

Thank you.

Daniel, next question please.

Thank you.

Our next question will come from Phillip Huang at UBS Securities.

Please go ahead, Phillip.

Thanks, good morning.

My question is on wireless retention spending.

It was 9.9% of network revenues this quarter compared to 10.3% in Q1, and well above 10% in each quarter last year.

Given the greater wireless competition, I would have expected retention cost to go up.

I think you mentioned in MDNA that you saw FX benefits as well as lower commission.

Can you talk a bit about how significant those benefits were, and also maybe helps us understand whether the lower commission can sustain into future quarters?

Thanks.

Well, we're quite pleased with the improvement in the retention spend.

When we were back in the fall about to launch the new network and have the benefit of marketing the iPhone, we're well aware of the potential for margin dilution in the near term that other carriers had experienced through the provision of the iPhone, so it became a structured program in our organization, with respect to how to mitigate those impacts over all on retention so that we -- so we maintain margin through the ramp-up period of marketing the iPhone and other HSPA devices.

So, here we are in the middle of 2010 and when we look at where we've been in the first six months of the year, we're quite pleased both with it over all and in particular with the trend going into the second quarter.

Now, part of that benefit, as mentioned, is due to some foreign exchange on a year-over-year basis, depreciation of the Canadian dollar has helped somewhat.

Now, we do have a hedging program for part of our purchases, so it's not, flow through against the entire purchase base, but certainly on an element it has helped in that area.

But we've had improvements, really across the board, both on the A&P side.

So I think that's fairly remarkable.

When you look at the successful loading we had in the quarter and our A&P spend was, not -- it was actually constant, almost down slightly year-over-year.

I think that's good going on that front.

And on the commission side, it was a big element of our structured program to reduce distribution costs and you continued to see benefits of that flow through and help us out on the retention expanse -- or expanse per retained person, either way you look at it.

So, really across the board.

So, while the number one element may be FX, we did have positive impacts across the board.

And so when you notice that retention volumes were up significantly year-over-year and yet your retention dollar costs were down, slightly, that's a real nice out come for the organization.

Got it.

Would you say the lower commission was a greater benefit than the FX benefit then, just directionally?

Well, if you -- if you measure it on total dollars, the FX benefit was the number one reason.

But, as mentioned, there are positive impacts, both on commissions and other elements, such as subsidy and A&P.

Got it.

Thanks very much.

And Joe, you wanted a post script on that?

Just one quick comment as follow up to the question.

We saw churned improved by 10 basis points from a year ago.

A big factor, if you look at it operationally, a big factor was that a year ago given the lack of HSPA capability, the device disadvantages, the structural disadvantages overall that we had in the wireless market.

We had developed an approach to retention, that I think was quite an expensive approach to retention, out of necessity.

When it came to policies around upgrades, or policies around saving or winning back customers.

Because, if you were to walk through our call centers and our stores, you would find, in many cases a bit of an apologetic tone about not having the iPhone or not having the latest Blackberry Bold, and apologetic tones usually result in some sort of economic expenditure in order to please and satisfy the customer.

In November, with the launch of the HSPA, all of a sudden we could really fight with both hands.

A,s a result of that, we systematically went through the various policies in the Organization aimed at retention mechanisms, and said, how do we drive the retention volume up, gather remarkable improvement and churn at the same time not below the bank doing so?

The team has done a very good job of balancing those factors over all in terms of driving much better retention performance, given the new world we live in.

Great, thanks for the additional color.

Daniel, next question.

Our next question will come from Greg MacDonald at National Bank.

Please go ahead, Greg.

Thanks.

Good morning, guys.

I have a modeling question on depreciation first, and then I have another more broad question on strategy.

The quick modeling question here, Bob, depreciation expense down in the quarter, you mentioned asset life changes, I'm assuming there's a recurring nature to that.

The MDNA also talks about lower retirements in 2010.

Not sure what quite the impact is there.

Can you give us a sense, quickly on whether the CAD316 million for the quarter that we saw is where we should be basing our go-forward analysis on depreciation now?

Okay, Greg.

Yes.

Well, I think the first factor, which is actually one driving in increase, maybe it's obvious but worth mentioning, we launched HSPA plus network in November, so we started depreciating those related assets at that time, that's not resonant in the prior period year-over-year.

So, the starting point was an increase.

Your question is why there was there, overall, a decrease and how we model it going forward.

It's a great question.

Firstly, the asset life change that is referenced -- they're a number we always go through.

We cycle through all our assets with economic life and technological obsolescence studies and the like.

In this quarter, we did -- two of the most notable things were; one, to adjust the life on our set top boxes to five years, which is pretty well over the industry standard, and we've been around now actually offering these for four to five years as well and they're still in use in the marketplace.

So, there's imperical basis for that, economically.

Secondly, we adjusted the depreciation for our cell sites.

So, formally, we just depreciated cell sites and aggregate, whereas now we're depreciating the component parts with between the civil works over 25 years, such as the tower construction, what have you.

And then the underlying economics being separately depreciated at 10 years, formerly we just blended in aggregate to 15 years.

And funny enough, when you do it in components, you end up with less depreciation.

And this is an approach that's required in IFRS -- so we essentially involved our systems to doing that, starting this year.

At the end of the day I don't think anyone would have predicted there'd be a difference when we started out.

But at the end of the day, there is a difference there in lowering the depreciation.

So those two items are, recurring in the future and would be approximately a CAD15 million element in lower depreciation on a year-over-year basis.

We also have assets in use that are fully depreciated, and so when you have assets that were formerly being depreciated that ended their accounting economic life but are still in use, then you have a reduction in depreciation and so, that was really almost an equivalent impact in the quarter.

And then we had investment tax credits, which related to the 2008 year of being approved and so there was a impact there, as it relates to the assets that were in use since that time.

So, it's a change or depreciation.

There's another impact into OpEx, so it's a little smaller.

But in that regard, that really reflects approval of what we've applied for, and I think we're going to have less volatility in the future, certainly desire that, in regards to ITCs.

In the past we've had quite a lumpy recognition due to extended and protracted periods waiting resolution with the CRA.

We now seem to have a process worked out and methodologies that are acceptable, such that we can get approvals within a reasonable period of time and essentially for what we applied for.

So, therefore on an ongoing basis, I would not expect that resolution of those items would be very lumpy.

So, that's really the story there.

At the end of the day, the net of it all was that the depreciation expense went down, and at the end of the day, given the recurring nature of the asset life changes, I guess there would be a more modest reduction than what you would otherwise have modeled, Greg, on a go forward base.

Thanks for the detail on that.

I guess one good thing about that IFRS, right?

Second question; strategically, Bell indicated on its recent conference call the Solo will be matched will launch the Chatter offering on pricing in the near term.

How does TELUS view -- I haven't heard anything out of TELUS on the [Kudo] product.

How does it view the potential to respond there?

Any opinions on developments on that front?

And if you could tell us -- I don't know if you shared this before, but would you be willing to share what percentage of subs are currently Kudo subs?

I'm not going to share that with you, Greg.

I'm not going to postulate a model for the industry, but I can speak to you in terms of TELUS' perspective.

Sometimes, in our view, it makes sense to be expeditiously reactive.

Other times, I think it makes sense to keep your powder dry.

And from a TELUS perspective, for the present point in time, we're going to follow the latter and keep our powder dry and have a watching brief in terms of what's unfolding in competitive landscape of our industry and the insurgence of the new entrance, and the response that Rogers and Bell are perpetuating in terms of Chatter and Solo.

And we've reached this view in terms of keeping our powder dry based on, effectively, five reasons.

Number one, when I look to our Q2 results, and I see the strong performance at the Organization, in terms of our loadings being up in aggregate 12%, 15% on the postpaid front, so the quality is very good in the mix.

I'm pleased with the fact that we came in with a 1.45 churn rate in terms of customer loyalty and retention.

It's the best that we've delivered in a couple of of years.

I'd like to see the amelioration that's transpiring in terms of RPU resiliency.

So, when I look at our Q2 results, I think it probably makes since, from our perspective, to keep our powder dry for the present point in time.

Also if you look at the top three players in the wire less industry, I think over all on the Q2 front, for the three of us being up 15% in terms of subscriber additions, it speaks to the overall healthiness of the industry.

Second thing that is influencing our thinking, is that we watched the porting data extremely carefully.

And I don't think the porting data that we are experiencing right now, as it relates to the evolution of the new entrance in the industry, is something that's going to compel us to act at this particular juncture.

Number three, on top of having a look at the data, I think some of the launch challenging being experienced by the new entrants speak to the difficulties inherent in our industry.

It's one thing to procure a spectrum, it's another thing to build a quality network and all the marketing infrastructure that you need behind that to be successful and to be sustainable.

And clearly, the launch challenges are things that people need to work through.

But given those launch challenges are quite reflective of some of the issues that the new entrants are having to deal with, again, I'm satisfied right now in terms of the TELUS status quo.

Fourth thing I would say is certainly coloring my perspective, is that our our industry has a certain level involvement on the regulatory and political front.

I want to be particularly diligent in terms of any market intervention that TELUS is involved with, that it does not heighten the regulatory or political interest in our industry, because I don't think that's a positive thing for TELUS and I don't think it's a positive thing for incumbents.

Then lastly, I'd have to say I'm pretty satisfied with the competitive portfolio that we have now with TELUS, Kudo, and the Mike brand.

On the Kudo front, one of the points that, was not made in terms of response to Peter Rhamey is that we have not had a data device within the Kudo portfolio.

That's a little bit different than what you would see at Virgin or what you would see at a [Fido], and it was nice to in see Q2 at the launch of the Kudo Curve.

Still nascent, because when we launched it at the midpoint of Q2, and now with the INQ coming online in Q3, hopefully we'll see some data revenue growth being contributed from the Kudo side of our Organization.

But for the present time, I'm satisfied that we've got the right competitive portfolio from a product brand perspective, and I think that is accurately reflected in our Q2 results overall, supported by the porting data.

I'm cognizant of the launch challenges that the new entrants are experiencing, and I'm sensitive to the political and regulatory environment.

Lastly it's not like we're -- despite those five points, it's not like we are sitting on our hands, in terms of how the competitive landscape is evolving.

I think it's been two years now that we've said at TELUS on the wireless front we've got a really strong focus on AMPU.

Recognizing that there are going to be inherent challenges on the RPU front, in terms of price commoditization -- similar to certain challenges that we experienced historically on wire line.

To recognize that reality and say, okay, given the pressures that you're going to experience, whether they come from heightened competitor intensity or from new technologies coming to fruition, it's incumbent upon the management team to take a focus on the profit line, what I would call AMPU.

And we've been doing that for a couple of years across all of our brands, and I think the cost efficiency approach, in this particular area.

And I've talked about some of the things that we're doing there, whether it's related to the device strategy or it's related to our channel, or customer care economics, or our procurement practices, or our economies of scope and bundling, or the cost structure of our network.

We're putting a lot of focus in terms of cost efficiencies and better economics for wireless, so that we have a sustainable business in the face of new competitive intrusion and new technology evolution.

That's the area that we're pushing hard on right now.

Thanks.

Daniel, next question please.

Thank you.

Our next question will come from Jonathan Allen at RBC Capital Markets.

Please go ahead, Jonathan.

Thanks very much.

Just thinking over the next few months; you've got, I think if I recall, a fairly large union contract coming up in November of this year for about 11,000 employees.

Just wondering, since TELUS has been pretty active with the reductions in the full-time employee count -- just wondering if there are any early signs that this can be any difficulty in renegotiating this, and whether or not there are any contentious issues that you're seeing in early negotiations?

Really appreciate that question.

I'll field that.

A few things that I think are worth pointing out.

The relationship that TELUS has with the TWU is probably the best that it's ever been historically.

Over the last five years, we have worked hard within the management ranks to build a rapport with the TWU, where we can have a constructive dialogue, and I feel that -- I feel that we've achieved that.

Number two, I think it's interesting to note that given that the contract will be expiring around the third week of November, traditionally we would probably not begin bargaining until around October.

Actually, in this particular instance, we've started bargaining early and we started in in July.

So, I think that's a pretty good indicator, when we've actually advanced the bargaining date, which was an agreement reached between TELUS and the TWU.

We said, let's not wait until October.

Let's go to the bargaining table early.

We mutually agreed that that was the right thing to do, and I think it's created a positive dynamic, if you will, at the table.

The next thing that we did is we both agreed to go through joint training in terms of our respective negotiation teams.

And that again allows people to get to know each other, not when they're going through the contention of negotiations, but in advance of that, because they get to know each other as they go through the joint training that we've conducted.

Again, that was something that both TELUS and the TWU were supportive of.

The extent to which people can get to know each other, in advance of negotiations doesn't mean that the negotiations are not going to be contentious, but it allows a healthy level of respect and recognition to develop, and I think that always adds to a positive dynamic at the table.

Next thing to point out is that the preponderance -- the significant preponderance of transformational changes that TELUS felt that it was necessary to achieve in modernizing the previous collective agreement, was effectively realized in the last bargaining round.

So, you know, in 2005 when the new agreement was ratified, it was with rife with significant transformational components to modernize that collective agreement and recognize the industry that we have to evolve in.

Whether it's the competitive intensity, or the speed of technology change, or the issues that we have to deal with on the regulatory front, or what our customers expect from us today and what they'll expect for us tomorrow.

All the changes that we needed to transform the old agreement were effectively realized last time around.

And so this exercise is much more of an incremental exercise, and I think that will make the challenge more reasonable for the bargaining teams to address, versus what was the case on the previous occasion.

So, I'm cautiously optimistic, there's no guarantees when it comes to bargaining.

It's a dynamic that involves two parties, and it's never perfectly within your control, but we're off to a good start.

I don't think it's the same tall order that we had to answer last time around.

It's much more incremental in its orientation.

I think we are exceedingly well-prepared.

One of the things that TELUS, in terms of leveraging technology and intellectual property resonant within our Organization, is that there's hardly a company in the world that understands business continuity planning better than we do.

So, whilst I'm cautiously optimistic, we are very well-prepared as a risk management perspective as well.

I think that actually buttresses your negotiating position at the bargaining table.

Lastly, I think it's important to note that in terms of the union that we have in Quebec, the SQET, it was only 48 hours ago that we just ratified our collective agreement with the SQET in Quebec, and I think it's a very positive indicator that we got that agreement ratified through a negotiated process.

I also think it's a positive indicator that when the SQET took that collective agreement out to the unionized employee base for ratification, the level of support in terms of the vote was 95%.

So, it was overwhelmingly supported.

It was an agreement that reached through an negotiated process, and hopefully that is a great trend line or leading indicator, or call it a cultural orientation to take to the bargaining table with TWU.

Again, as I say I'm cautiously optimistic.

But we are exceedingly well-prepared for whatever eventuality that may present itself.

Thanks, Darren.

Thanks, Darren.

Next question, Daniel, please.

Thank you.

Our next question will be from Dvai Ghose at Cannacord Genuity.

Please go ahead, Dvai.

Thanks very much.

Good afternoon.

Question regarding CapEx and cash-flow generation.

Your guidance calls for 19% (inaudible) decline in CapEx this year and you're down 31% at the halfway mark.

Similarly, your free cash-flow guidance is 750 to 950 unchanged, even though you've done nearly CAD500 million at the halfway mark and you've just reduced your tax cash guidance.

I'm wondering if your targets now seem overly conservative, or whether I'm missing something in the second half, in terms of CapEx, like an accelerated fiber build or a new non-incoming contracts, et cetera?

Well, Dvai, as I said just the other day here internally, I've learned in my career never to challenge the spending side of the Organization to spend.

But having said that, we do have plans in place for the expenditure of the full CAD1.7 billion this year, and I would agree with the observation that this represents a significant ramp up from what was experienced in the first half of the year.

But the plans are in place to do that, and so that's our expectation that we'll have the requisite supply/demand interlock to execute on that basis.

It remains to be seen as to the extent to which that occurs, but certainly that is the intention and we have full plans in place to do that.

In respect of the free cash-flow on top of that, I think you're picking up, of course, the positive change in our tax expectation.

So, while that's not a target item that we guide, it's an input assumption that we estimate for our guidance.

It never lasts, obviously, as a positive factor for us which is beneficial with respect to our balance sheet.

So, it's our intention to make the expenditures for the full CAD1.7 billion, in terms of what it would represent.

There's nothing unusual, per se, in there.

It really reflects the continued roll out of our broadband program including, which we've been doing for some time now, the VDSL2 upgrade.

But it does not reflect a special program per se, that wasn't resident in the past.

It really is execution of our existing plans.

I if could just have a quick follow up, Bob.

You also said that your target over the next three years is to reduce capital intensity to about 15%, and you seem to be well on the way to that, notwithstanding your comments about the second half CapEx.

I'm wondering if you're still comfortable in assuming that in the context of the fact that a lot of your peers, Manitoba Today, Bell [Alliance], recently even Bell Canada talking about fiber in the home builds?

I think the first thing is -- I won't get into specific firms, but it would be fair to say that the state of our technology evolution is at a relatively advanced state, in terms of deployment, compared to many other tell co's.

So, the big -- in terms of broadband expansion facilitated as you've seen the Optik TV, more of it is behind us, than ahead of us.

That isn't the case for everyone.

As you know in respect of the -- in respect of fiber to the home, as you know, we are doing that in instances that make clear economic sense to us and in green field deployment and the like.

Although, fair to say the economy there's less green field than there was a few years ago, but the point still holds.

And in terms of other announcements, with respect to, say, ground field fiber to the home, I think Darren has made comments in the past that, look, this is not a surprising development.

It's inevitable over the long term.

And so without getting -- giving specific guidance or, a specific number but directionally, to give the concept, I think we have illustrated that by saying, look, over the next 15 to 20 years we're going to chunk through it and therefore it's not going to be in our expectation for our business, an item that's going to swell into one year or two years as was done, say, with Verizon or what have you in the past.

Rather it's going to be an orderly, long-term upgrade, and therefore would be consistent with the type of CapEx profile we would normally have.

So, that's really the TELUS approach and I think, when you look at the results, and Joe's comments earlier today, in terms of the progress that we're seeing in that area.

We're very pleased with the strategy that we've embarked upon and don't see any reason to change that.

Thanks very much.

Okay.

We've gone a bit over.

But we'll take one more question and Daniel, please do that.

Thank you.

Our final question will come from Vince Valentini at TD Newcrest.

Please go ahead.

Thanks very much.

Thanks for taking the question.

It's on your EBITDA guidance -- which is a bit scary there, and it's kind of along the same lines as Dvai, which is unusual for me.

You've done 4.5% EBITDA growth year-to-date.

And you had a pretty nasty Q4 last year, which I'm sure you remember -- which should set up easier comparisons in the second half of the year.

Can I get you on this call to talk about your 0% to 6% EBITDA guidance for the year, whether the high end of that is maybe a little more realistic than the low end?

And maybe as part of that if you can talk about the iPhone 4, if you have any big concerns about subsidies spiking up?

And maybe that's some reason for caution in your second half EBITDA guidance?

Thanks.

Well, Vince, sorry, or is that Dvai?

I'm getting mixed up.

Sorry about that.

Thanks for the question.

Fair to say, I can recall one year where we lowered guidance at mid-year and end up having to raise it by the end of the year, and if we hadn't made the adjustment, we would have been there in the first place.

So, once bitten, twice shy, so to speak.

And I think that point I'm trying to make is we are at the mid-year, and we do believe what we're heading -- in the range and therefore there's no reason to modify it.

In respect of trend lines, we -- there's a couple things that do come to mind.

One maybe is an obvious point -- that respect of wireless for which our Organization, as you know, it's a disproportionate share of our EBITDA relative to our line, Q4 -- Q3, Q4 are your big loading periods, the back-to-school and the Christmas, right?

So, the gross ads related to COA always has a moderating effect on your margins, relative to the first half of the year.

I think that's pretty well known out there, in terms of the analyst community.

But it's worth pointing out.

The second factor in terms of back year -- I think this may be a little unusual.

We had significant expense contraction through efficiency efforts, and in the third quarter particularly of last year.

So, if you want to get down to a quarter -- I'm not saying it's one time -- but when you have a big, big impact in one quarter successfully from your efficiency initiatives, and then you go to the subsequent year, it's good going just to maintain that or a modest improvement.

And so when you do the year-over-year on a percentage change, you're going to see that that has a challenge for us to have a good result.

So, I think we're going to have good results for the back half of the year.

That's certainly our hope, our desire, and our trend line.

Having said that, as expressed on a year-over-year basis, I think on the wire line side, there's going to be challenge there given the significant expense improvement that we realized back in the Q3 of last year.

So I repeat, we expect to have good performance to achieve our EBITDA targets.

But if you're going to get down to part of the years, and those components compared to same period year before, there's a greater challenge particularly in the third quarter, and then just layered over that we've talked about the likes of Chatter and the industry.

We can never control all the variables because many of them are external to our organization.

So, I think all that bodes well for the methodology we're taking, which is to reconfirm our profitability guidance and as we get closer to the end of the year, perhaps we'll be in a better position to reassess.

Thanks.

Top up Vince, on the iPhone 4 launch, I think that was part of your question as well.

The iPhone 4 launch has gone very well for us.

We see a very strong demand for the iPhone 4.

In fact, the initial launch of inventory sold out very, very quickly.

Supply is somewhat of a challenge, as it always has been with the Apple organization over time, given overall worldwide demand for the product.

We are certainly getting our share of supply overall.

I think the important thing to remember is that -- a couple things.

First of all, we have been seeing about a one third/two third split between new customers and retention customers across our smart phone base overall, if you will.

If you look at the iPhone base, we've launched the iPhone eight months ago.

If you want to do some very quick and dirty math, our average iPhone customer has been with us four months.

If you think about those who joined recently and those who joined eight months ago.

The upgrade challenge for us is far different than the other organizations that have had the iPhone for a long time.

I think that's there's an opportunity for us as an organization as those who had the iPhone 2 or 3 along the way and looking at an upgrade, looking at potential iPhone 4.

I think typical consumer behavior is to put their head up and say, maybe I should consider another provider as I do that.

I think -- I look at the iPhone 4, over all as an opportunity for us.

Certainly the subsidies is what the subsidy has always been with the Apple organization, and we have to wash the economics of that subsidy across that new customer.

But we are seeing a very high valued client with very strong RPU that comes with that loading.

For us I think overall it's a very positive thing.

Good.

Thank you, Joe.

And with that note we'll call that to a conclusion and thank everybody online and on the web for joining us today.

We appreciate your interest and support in TELUS.

Thanks.

Have a great day.

This concludes the TELUS Q2 2010 earnings conference call.

Thank you for your participation, and have a nice day.