Telus Corp (TU) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Telus 2012 Q1 earnings conference call.

I would like to introduce your speaker, Mr. John Wheeler.

Please go ahead.

Welcome, and thank you for joining us today for our first-quarter investor call from Edmonton, where earlier today, we held our 2012 annual meeting.

The call is scheduled for up to one hour.

The news release on first-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.

In addition, Darren Entwistle's slides and speech from this morning's meeting are posted for viewing on our AGM site.

You'll be in listen-only mode during opening comments, and let me now direct your attention to slide 2. The forward-looking nature of this presentation, answers to questions, and statements about future events are subject to risks, and uncertainties, and assumptions.

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 United States.

Turning to slide 3 for an outline of today's agenda, we will start with a brief opening comment by President and CEO, Darren Entwistle; followed by a review of the quarter by Executive VP and CFO, Bob MacFarland; Joe Natale, our Chief Commercial Officer, will comment on several key operating highlights.

We will then conclude with a question-and-answer session, as usual.

Let me turn the call over to Darren, starting on slide 4.

Thank you, John.

Before we move to first-quarter results, I will make a brief statement about our share conversion proposal.

Indeed, it is unfortunate that a US hedge fund caused us to withdraw the resolution to convert our shares to a single class.

This is particularly disappointing, given this hedge fund's sole objective was to derive a short-term economic profit, regardless of the negative impact on Telus's true long-term shareholders.

Telus employees collectively own 8.2 million common shares, making them the largest owner of common shares.

Indeed, the value of our team members' investment is approximately 20 times greater than Mason Capital's net economic interest in Telus.

Paradoxically, Mason has four times the voting power of our employees.

It is disappointing, given the stringent oversight our Company is subject to, that Mason Capital was able to action empty votes in order to manipulate the market for a short-term financial gain.

Importantly, the Canadian Coalition for Good Governance has publicly condemned empty voting.

Moreover, they fully support the one share, one vote principle, consistent with the approach Telus is taking.

Mason Capital's strategy is particularly disconcerting, given they accumulated their large ownership position only after our February 21 announcement and are certainly not here for the long haul, unlike our truly committed shareholders.

In fact, leading independent proxy advisor Glass Lewis publicly stated they were troubled by the brief period in which Mason had invested in our Company.

Indeed, Glass Lewis went on to state that the simplified share structure and improvement in corporate governance would have been in the best interest of both common and non-voting shareholders.

Importantly, our position was further validated by ISS.

Collectively, these leading independent proxy advisory firms issued a total of four recommendations supporting our share conversion proposal, and rejecting Mason Capital's position in respect of this matter.

Clearly, there are improvement opportunities that must be addressed if we are to protect the interests of long-term shareholders and the ability of our Companies to progress their strategies.

Moving to slide 5. Our proposed structure, intended to align Telus with corporate governance best practice, would have realized a number of benefits, including the enhanced liquidity and marketability of our shares, and improved share value.

Indeed, as shown on slide 6, since the announcement, our common shares increased in value by 4%, and the non-voting shares increased in value by 5.9%.

Over this same period, conversely, the TSX has dropped 7.3%, while the MSCI Global Telecom Index has dropped 0.7%.

I believe our true shareholders recognize these benefits.

When excluding Mason Capital's empty votes, our proposal would have been overwhelmingly approved by both classes of shareholders, with 92.4% of the vote.

Indeed, I believe that Telus, our Leadership Team, and our Board has earned the support of our shareholders through the efficacy of our long-term winning strategy and the vastly superior economic returns we have generated for investors.

Turning to slide 7. Although the motion to convert all shares to a single class was withdrawn, the Board and I remain united and intent on converting on a one-for-one basis to a single-share class, and implement that structure in the future.

This simplified structure is the right model for Telus, and we are committed to delivering it for our shareholders.

Moving on, now, to our first-quarter results.

Telus continues to build upon our Company's operational momentum, which is significant.

Indeed, we delivered the most TV, high-speed Internet, and wireless client net additions in Canada.

Furthermore, we had the highest wireless ARPU, and the lowest wireless churn amongst our Canadian peers.

This led to strong results, with wireline data revenue growth of 13%, and wireless data growth of 36%.

Consolidated results were driven by outstanding wireless revenue and margin enhancement.

This performance is the direct result of Telus's investment in our network technology, and the commitment to the client experience displayed passionately by our dedicated team members.

Telus's operational execution and 121% increase in free cash flow is enabling the continued realization of my personal three-year goals for earnings per share and free cash flow growth through 2013.

Our strategy and excellent operational results, both absolutely and on a relative basis, also support our dividend growth model through 2013.

In this regard, we are delivering to shareholders a 10.9% higher dividend compared to a year ago.

I will now turn the call over to Bob.

Thank you.

Thanks, Darren, and good afternoon, everyone.

Let's start a review of the first quarter, beginning with wireless on slide number 8. Total wireless revenue increased by nearly 6%, including network revenue growth of 7%.

This was driven by both continued ARPU and subscriber growth.

Equipment and other revenue declined by 9.5%, due to lower acquisition and retention volumes.

Wireless EBITDA was higher by 13% year over year, while EBITDA margins and total revenue increased by 2.9 points to 44.7%, or just over 48% of network revenue.

In addition, the EBITDA flow-through from external network revenue was an impressive 84%, as we balanced subscriber growth with strong cost control.

As expected, capital expenditures increased to CAD151 million, due to the launch and expansion of our urban 4G LTE network.

Despite the increased CapEx, simple cash flow remained stable due to the strong EBITDA growth.

Turning to slide 9, Telus had healthy first-quarter post-paid net adds of 63,000, up 21% year over year.

This included the loss of 5,000 Government Canada subscribers, compared to a loss of 16,000 a year ago.

Normalized for these losses, post-paid net additions would have been about 68,000 in both periods.

Telus estimates approximately 5,000 Government Canada subscribers are left to transition, which can be expected to happen over the balance of the year.

Notably, Telus's smartphone base increased to 56% of our post-paid subscriber base, and reflects a significant 18-point increase from 38% last year.

Once again, our post-paid net adds represented greater than 100% of total net adds, given pre-paid subs declined by 41,000.

Consequently, the higher value post-paid mix of the total subscriber base increased to 84%.

All in all, another very satisfying quarter for Telus subscriber results.

Slide 10 shows the strong metrics related to our wireless marketing and loyalty efforts in the quarter.

Gross adds of 363,000 decreased by 6%, as we chose not to be overly reactive to competitive offers made in the quarter.

Telus reported industry-leading blended churn of 1.55% this quarter, lower by 15 basis points year over year.

This reflects strong prior-period retention efforts, lower Government Canada deactivations, an ongoing increasing proportion of subscribers that are post-paid, and continued market success with respect to our corporate priority of putting customers first.

Churn was lower in nearly all provinces, including Alberta and BC.

Churn normalized for Government of Canada deacs was a touch lower, at 1.52%, compared to 1.62% a year ago.

Cost of acquisition per gross add increased by only 4% to CAD362 due to higher per unit subsidies from the higher mix of smartphone sales, price competition, and to a lesser extent, the higher commissions on more expensive smartphones, partly offset by lower advertising and promotion expenses.

Retention expense actually decreased 6%, due to lower retention volumes resulting from strong retention efforts over the past year, as post-paid clients took advantage of our clear and simple device upgrade program, and to a lesser extent, commission savings from recent dealer acquisitions.

This is a very good result, considering higher cost smartphones represented 83% of post-paid retention loading.

The combination of healthy ARPU growth and improved churn has led to a 12% increase in the lifetime revenue, as well as a COA-to-lifetime revenue ratio declining to 9.5% from 11.9% in the fourth quarter of 2011, and down from 10.2% a year ago.

Meanwhile, retention costs-to-network revenue ratio actually improved 1.5 points to 10.7%, despite the pressures associated with high subsidy smartphone loading.

These metrics reflect the sound economic management by Telus in appropriately balancing growth with long-term profitability.

Slide 11 shows the breakdown of Telus's total ARPU between voice and data.

Wireless ARPU increased by 1.7% and represents the sixth consecutive quarter of ARPU growth.

In addition, wireless ARPU growth increased sequentially over the fourth-quarter growth rate of 1%.

This increase in overall wireless ARPU was driven by an increase in post-paid ARPU, as well as the higher mix of post-paid subscribers.

Data ARPU growth was 29% year-over-year, exceeding the revenue impact of the voice ARPU decline of 10%.

Voice continues to reflect competitive intensity, and some substitution of voice MOUs by data usage.

Data ARPU now represents 39% of ARPU, up 8 points from last year, and at CAD22.83 is now the highest in the industry, driving a similar result for overall Telus ARPU.

This is clear evidence of the success of Telus's HSPA network investment.

Turning to slide 12, wireless data revenue increased by 36% year over year to CAD498 million.

This growth was driven by strong smartphone service revenues, including increasing text messaging, due to higher penetration of smartphones and associated adoption of data plans, increased rates for pay-per-use text messaging, more devices that provide an Internet connection, including tablets, and higher data roaming volumes.

Data now represents 39% of network revenue compared to 30% a year ago.

Turning to slide 13, let's review our wireline segment results.

Revenue increased by 2%, due to strong data revenue growth of 13%, reflecting strong TV subscriber growth, which offset ongoing declines in traditional voice local and long distance revenues, which were down 7% and 11%, respectively.

Reported wireline EBITDA decreased by 11% due to a non-cash valuation adjustment recorded in Q1 2011, as well as reduced contribution from the declining higher margin legacy voice services, and a lower defined benefit pension expense recovery, partly offset by ongoing growth in lower margin Optik TV and other services and equipment sales.

Reported EBITDA margins declined to 30%.

As expected, wireline capital expenditures decreased by 13% to CAD290 million, due to lower investments for broadband expansion, partly offset by higher investments for new Internet data centers.

Simple cash flow was down slightly to CAD97 million.

Turning to slide 14, when excluding the non-cash gain from the acquisition of Transactel and the equity loss for Telus's residential component of the real estate joint venture, Telus's adjusted wireline EBITDA declined by 7%.

Normalizing for the CAD5 million increase in restructuring cost to CAD9 million this quarter, adjusted EBITDA declined 6.5%.

The equity loss from our real estate joint venture reflects our portion of the first-quarter costs associated with the Telus Garden residential development.

While the impact this quarter was small, there will be ongoing impacts in future periods.

Adjusted EBITDA less CapEx increased by 14%.

Slide 15 shows the results of our continued success of rolling out Optik TV.

Telus TV net adds remained strong, with 44,000 new customers, while the TV base increased by 54% to surpass 550,000.

Overall, we continue to be pleased with the momentum in this business, including improved costs of acquisition, stable customer churn, and good ARPU growth.

Turning to slide 16, despite competitive promotions by a primary cable competitor, Telus generated strong and stable high-speed Internet loading of 16,000 for the quarter.

Total high-speed Internet subscriber base is up over 6% to reach 1.26 million.

Slide 17 shows our residential and business NAL performance for the quarter.

Residential NAL losses of 47,000, which equated to a 7.2% erosion rate, accelerated from a year ago, due to the increased price-based competition from a primary cable competitor during their fiscal second quarter, along with ongoing wireless substitution.

Business NAL losses of 10,000, which equated to a 1.6% erosion rate, accelerated from a year ago, largely due to the implementation of voice and data services for wholesale customers in the first half of 2011, ongoing competition in the small and medium business market, and continued conversion from legacy voice services to IP services.

The overall blended NAL erosion rate was 4.6%.

Putting this all together, let's look at Telus on a consolidated basis, starting on slide 18.

Revenue in the first quarter increased by 4% over the same period a year ago, while reported EBITDA increased by more than 2% to surpass CAD1 billion for the first time.

When adjusting for the equity loss of Telus Garden in the first quarter of 2012, and Transactel gain in the first quarter of 2011, adjusted EBITDA increased by more than 4%.

Reported earnings per share increased by nearly 6% to CAD1.07, and I'll explain the underlying drivers in a moment.

Capital expenditures were higher by 7.8% for the reasons discussed earlier.

Free cash flow before dividends increased by 121% to CAD358 million, driven primarily by lower discretionary defined pension contributions, increased EBITDA, and lower financing costs.

Slide 19 provides a detailed breakdown of the components of reported EPS, including CAD0.04 for the Transactel gain in the first quarter of 2011, and CAD0.03 of positive income tax related adjustments in the first quarter of 2012.

Normalized EBITDA growth contributed an impressive CAD0.13 to the upside.

Lower financing costs due to lower interest rates added CAD0.04 to the upside.

Higher depreciation and amortization expenses associated with a larger asset base as result of recent capital expenditures and acquisitions negatively impacted EPS by CAD0.06.

Lastly, a lower pension expense recovery and higher restructuring and other expenses each contributed CAD0.02 to the downside.

As slide 20 outlines, in March, Industry Canada released its 700 megahertz and 2.5 gigahertz spectrum option and foreign direct investment policies.

Prime 700 megahertz spectrum has been divided into four paired blocks of 10 megahertz each, which match the same blocks acquired by AT&T and Verizon in the United States.

Meanwhile, holders and acquirers of 2.5 gig spectrum will be capped at 40 megahertz a spectrum, which ensures Telus is eligible to obtain up to 40 megahertz of spectrum in total.

This is good news for Telus, as it provides our organization an opportunity to rebalance legacy spectrum holding advantages caused by past spectrum allocations.

The 700 megahertz spectrum option has been delayed to the first half of 2013, while the 2.5 gig spectrum option should occur a year later, in 2014.

In addition, Industry Canada has lifted foreign ownership restrictions for carriers with less than 10% national market share.

Telus encourages the Government to go beyond this initial step and work towards full ownership and liberalization, and put Canada's telecom industry on an equal footing with our global trading partners.

Overall, Telus believes this was a thoughtful and balanced decision that meets the Government's overall objectives of promoting consumer choice, supporting sustainable competition through investment and technology, and further expanding broadband services in rural markets.

Turning to slide 21, with a good start to the year, Telus is reconfirming its 2012 guidance.

Revenue is expected to increase by 3% to 6%, driven by both wireless and wireline.

EBITDA after restructuring is expected to increase by 1% to 6%, as growth in wireless more than offset wireline.

Restructuring costs are now expected to be approximately CAD50 million for the full year, an increase of CAD25 million from our original estimate, as additional cost saving initiatives have been identified, including real estate consolidation.

Earnings per share is targeted to be flat-to-higher by 10%, and it's important to highlight that the proposed 2012 Ontario budget includes a corporate tax rate freeze at the current rate of 11.5% until the budget is balanced.

If enacted, this rate freeze would reverse previously enacted rate reductions expected in 2012 and 2013, and result in an approximate CAD0.05 unfavorable non-cash impact in 2012.

In addition, for modeling purposes, depreciation and amortization is expected to be around CAD1.9 billion for the full year, as a result of an increasing asset base resulting from strong subscriber growth, acquisitions, and investment.

Finally, capital expenditures are budgeted for CAD1.85 billion.

Let me conclude on slide 22.

The first quarter of 2012 represents a better-than-expected beginning to the year, with strong free cash flow generation supporting an even stronger balance sheet.

Despite industry-leading wireline revenue growth backed by strong operational results from Optik TV and high speed Internet, profitability for this segment declined but was consistent with internal plans.

We continue to be relentless in identifying opportunities for appropriate cost reduction, and based on the increase initiatives in the pipeline, we now expect 2012 restructuring expenses to double to CAD50 million from the previous estimate.

Despite this change, the full-year 2012 wireline profitability target range remains achievable, and accordingly, we reaffirm our existing full-year consolidated annual targets.

Now, over to Joe to make some final comments.

Thanks, Bob.

Good afternoon, everyone.

I'm going to provide color around some key operating trends, starting on slide 23.

We again saw strong post-paid wireless loading, 63,000 in the first quarter.

This was up over last year, and accomplished in spite of intense competition, as we saw competitors carrying aggressive December promotions through Q1, and in spite of the loss of 5,000 subscribers related to the Federal Government contract.

Telus's continued focus on high-quality subscribers is evidenced in our ARPU momentum, with the sixth consecutive quarter of year-over-year growth.

The 1.7% ARPU expansion was driven by very strong ongoing growth in wireless data, resulting in industry-leading ARPU.

We continue to generate very robust smartphone adoption.

Smartphones represented 68% of post-paid gross loading, compared to 54% a year ago.

Telus's smartphone base increased by 63% year over year, and now represents 56% of our post-paid base.

This is an 18-point increase over 38% last year.

Thus, we are continuing to see the benefits of our evolution to HSPA, and more recently LTE, with even faster speeds, as well as the disciplined acquisition and retention investments that we are making.

While we spent less on retention year over year, Telus again reported lower and industry-leading blended churn at 1.55%.

This is down both year over year and sequentially, representing the best churn rate since mid-2010, reflecting our wireless network evolution and Telus's clear and simple customer-focused initiatives.

Our churn led the industry by a significant margin.

Notably, post-paid churn was the lowest in five years, or since the introduction of wireless number portability in Canada.

We are seeing the continuation of very positive trends in wireless.

As a result of Telus's industry-leading ARPU, churn, and COA, our lifetime revenue per customer is the highest in the industry by a 20% margin, and illustrative of the value creation we are achieving for our shareholders.

Turning to slide 24, we were pleased with the continued strength in demand for Optik TV, with 44,000 TV net additions in the quarter.

Optik TV continues to drive leading North American IPTV penetration gains.

We are seeing continued positive momentum on the overall economics of Optik TV and Internet.

Particularly noteworthy is increasing ARPU on both products, as a large number of TV customers come off introductory pricing, as well as the impact of rate increases on both TV and high-speed Internet.

We generally remain satisfied with the pull-through effects of TV on our future-friendly home strategy, supporting continued, healthy high-speed Internet loading, and helping us win back clients.

However, aggressive pricing from our cable competitor, particularly in the first two months of the quarter, did impact residential access line losses in the quarter.

As a result, this is the first quarter since Q2 of 2010, or the June 2010 launch of Optik, that we have not seen a year-over-year improvement in NAL losses.

Our incremental NAL losses were typically lower-ARPU, more price-sensitive clients, many of which we classify as promotion jumpers, and with the majority having only a single product with Telus.

This latter point speaks to the critical importance of our bundling strategy.

Of TV customers added in the quarter, almost all continued to either add or have an existing service with Telus.

At the same time, we are encouraged by the market dynamics more recently, and as a result we have seen home phone losses moderate.

As shown here, combined TV and high-speed Internet net additions of 60,000 again exceeded residential NAL losses.

This was the seventh consecutive quarter we have seen this encouraging trend, which very nicely supports growth in Telus's overall customer connections.

Continuing our track record for introducing innovative new features in Optik, in April Telus introduced a Twitter app.

Our Optik customers are now able to tweet while they're watching, and follow what others are saying about their favorite show through TV tweets, creating an innovative new social TV viewing experience.

This follows the February introduction of the ability for customers to control both live and recorded TV using hand gestures and voice commands over Xbox 360 Kinect.

Telus was the first in the world to offer this.

It also followed the introduction of Optik on the go, which allows Optik TV customers to view increasing selection of commercial-free TV, on-demand shows, and movies on select smartphones, tablets, and laptops anywhere in Canada.

We remain very excited about our ongoing Optik TV momentum, as well as a feature and service road map for Optik TV.

Watch for Telus to continue to differentiate our premium Optik TV offering with more to come in terms of content, applications, and features.

And with that, I will turn the call back to John for the Q&A session.

Thanks, Joe.

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

And I would just let people on the line know that Darren had to leave to travel to an external Board meeting.

He apologizes, but he is extremely confident that Bob and Joe can handle your questions.

Over to Peter.

Thank you.

(Operator Instructions)

Our first question comes from Greg MacDonald from Macquarie Securities.

Please go ahead, Greg.

Thanks.

Good afternoon.

Quick question, if I can, clarification, and then have I an operating question.

The clarification one, and I guess it goes to Bob.

Talking about other actions, looking at other actions for collapse in the structure, can we assume that those actions are linked to lobbying efforts on the part of the regulators with respect to this empty vote practice, or are you looking at options beyond that?

Thanks for the question, Greg.

Your first question, in respect to, on a go-forward basis, as you know, what we made clear today is that we intend to reintroduce a proposal in due course for one-for-one exchange ratio to get to the right result that our shareholders who actually own a piece of the Company on a net basis want us to arrive at.

In terms of how we get there, I think the first thing that's obvious about our unprecedented situation is that it begs for regulatory intervention.

We were a guinea pig, and it shouldn't be allowed to happen again.

In terms of, on a go-forward basis, whether it will involve a regulator, I can't see how regulators could not be looking at this situation.

They publicly indicated that they are studying empty voting.

The concept of empty voting has moved from theory to reality in a very ugly fashion here, contrary to the interests of shareholders, given that we had 92.4% support of non-Mason shareholders for the resolution, yet they were still able to block it with a relatively minor economic interest in the Company.

So in our view, that begs for regulatory intervention.

But in terms of the exact nature and timing of a future proposal, that's for us to know and others to speculate on.

Our interest is aligned with our long-term shareholders in terms of not disclosing any specifics about what we may do.

Okay.

Thanks for that, Bob.

Joe, can I ask you a broader question?

With smartphones now surpassing 50% penetration levels for most incumbent carriers, the user experience is clearly becoming more about data access than communication.

What do you guys think of the potential for quad play offers as a competitive differentiator?

I note that you, in particular, as a Company might be interested in this, given the competitive dynamic that's unique in the West relative to other markets.

Greg, I think the thesis on the quad play, or the integration of wireless and wireline, is something that is very important to us.

If you look at some the moves we've made as of late, I talked about Optik TV.

Part of creating Optik on the go was to create some compelling evidence of solutions and applications that reinforce the reasons why wireless and wireline solutions are converging and coming together.

I think if we can create more compelling notions like that for customers, then they will see a broader opportunity and reason to look at the bundle as a whole, including wireless.

No question that's successive.

Our future friendly home strategy has been predicated on the bundle in the West.

We've seen great economics in terms of household ARPU going up, in terms of better churn when a customer is on the bundle.

And therefore, we believe extending that to wireless a good thing.

We've just recently completed some systems changes that will enhance our ability to deliver on that capability, and make it a customer friendly process and solution around it.

The challenge, if there is one, around the quad play is you get into households where there are various wireless contracts in place with different termination expiry dates with individual members of the household, and therefore, in some households it's harder to actually make the proposal, and make it a simple and clean proposal.

Therefore you have to kind of really pick the spots where you believe you've got the greatest opportunity and benefit.

Surveys from our customers tell us that they really are divided.

Some of them love the idea of the quad play, and think it's a tremendous idea, and will leverage that opportunity, and others are skeptical, and it's up to us to really help them understand the efficacy and the benefit.

But I think it's not just about price bundling, and therefore the [tiering of the] economics.

I believe that it's important to create solutions that resonate and are compelling for customers to see the power of wireless and wireline coming together in a whole host of applications, which we have planned.

Thanks, Joe.

Peter, next question, please.

Thank you.

Our next question comes from Phillip Huang from UBS securities.

Please go ahead, Phillip.

Hi.

Thanks.

Good afternoon.

Question on wireless ARPU.

It's nice to see the growth this quarter helped by increased roaming and data usage.

Just wondering if there was any one-time factors that drove the performance.

I thought Q1 wasn't typically a big period for roaming, so just curious whether it's driven by a shift in your subscriber mix, and thus more sustainable.

And also, I have been assuming sort of flat-to-1% ARPU growth for the year, and obviously, it's great to see it's well above that range.

So just wondering if I should adjust my thinking a bit, based on the current visibility.

Thanks.

It's Bob here.

In terms of the wireless ARPU, there were no unusual or one-time impacts that I can think of that would make it non-representative.

So I don't think you need to normalize it, really, in any fashion.

In terms of how it reflects or represents future results, we are reluctant to forecast ARPU, per se.

We had talked about up to 1% ARPU as a rough kind of guidance expectation back in my December guidance call.

It's always difficult to forecast a year ahead.

Here we are talking, as you mentioned, one quarter doesn't make a year, but it's a great start to the year.

It's clearly above the 1% top end of where we are hoping, and I think we saw the wireless results reflect that.

So it's very encouraging.

I'm not therefore saying plop in 1.7% as a static growth factor forever more, but I think in terms of the strength, there is nothing unusual, and therefore we have the opportunity to have some good results for the balance of the year.

Great.

If I could follow-up on that roaming, because seasonally, Q1, I thought, isn't a big roaming quarter.

I was just wondering whether you are seeing some help from enterprise, for example, whether you are seeing some benefit from increasing your mix in terms of enterprise customers, and that's why you are seeing that benefit in roaming on a year-over-year basis.

I'll start off.

If Joe wants to kick in to augment, he can do that.

I would say, firstly, it may be at risk of stating the obvious, but on a year-over-year basis the seasonality effect is the same, and therefore, 1.7% increase reflects similar sort of patterns.

What is changing, as you know, is the international roaming revenues for us as a result of the HSPA network build.

And sometimes we kind of -- oh, yes, we built that a few years ago, so that's in the past.

What we have to remember is while it enabled us for the first time to enjoy participation in non-US international roaming in a meaningful way, it wasn't instantaneous with respect to whole market, because it was with respect to people who had HSPA handsets as opposed to GSM, and GSM was the dominant side of the base.

So, as time has marched on, more and more of the traveling base has HSPA phones, whether they're our clients going overseas, or whether they are oversea clients coming here.

So, there is a built-in inflator in volume, if you will, that is a multi-year dynamic that we are really only in year two of, so to speak.

So, I think that's a positive contributor -- it is a positive contributor to our ARPU growth year over year, and it would expected to be so on a go-forward basis.

In respect of whether by segment, Joe, did you want to comment on that?

I don't think there is any massive shift by segment.

The only thing I would add, Bob, is that as we see expansion of people on tablets, and more smartphone base, and the expansion towards LTE, I think we will naturally see a greater consumption of data roaming in the fullness of time.

And if you look at roaming, as Bob said, outside of North America, we haven't traditionally participated in that market until HSPA.

Rogers had an effective monopoly on that market for a long time.

We, as a new entrant, we have head room, and some opportunity for us to gain market share and continue to drive growth in traditional voice roaming, but also create the right customer experience, and make customers feel more comfortable in turning on their data roaming when they are traveling abroad, which is part of our focus around data notifications, and some of our customer friendly strategies.

That's very helpful.

Thanks very much.

Thanks.

Next question, please.

Next question is from Peter Rhamey from BMO Capital Markets.

Please go ahead, Peter.

Great.

Thanks very much.

Joe, you mentioned the competitive environment with Shaw, and that you had seen some improvement in the competitive environment.

It seems that every three or four quarters that Shaw does increase the competitive intensity.

I was wondering if you could be a bit more specific about what you saw in the quarter that hurt your cost structure, and then what you are seeing Shaw do now that is encouraging to you.

The second question is for Bob.

On the real estate, you did talk about you will be taking some additional costs through the P&L.

I was wondering if you might be able to give us a bit of a quantification of roughly what that might be, and as well, if there are any cash requirements involved.

Thank you.

Okay, Peter.

I would say first of all, it's important to note that despite behavior, aggressive pricing behavior from our cable competitor, we still enjoyed strong Optik loading, both for TV and high-speed in the quarter.

A place where we saw a challenge was really around home phone access lines, which we talked about earlier.

And the aggression kind of started, I would say, back in the December time frame, with CAD100 per product Visa gift cards being handed out by our competitor.

We saw some very aggressive outbound telemarketing offers, where home phone was being marketed at anywhere from CAD0 to CAD10 a month for 12 months, and really kind of aimed at that base of customer that only had home phone with Telus.

Clearly that was successful, because whenever you offer things for free, customers tend to buy them.

With the same time, for customers we managed to save, we were able to convince them to bring their entire product suite over to Telus, and as we mentioned earlier, often when we are winning back a customer, we are winning back multiple services.

I think given the base, the incumbent base, now, of our cable competitor, whenever there is an action of that nature, it will certainly have an impact on their own retention costs, and will drive re-rate in their own base, as we saw through their most recent results.

What's moderated in the last little while is some of those extreme offers have disappeared from the marketplace.

And we have seen a price increase put forward by our cable competitor, and a much more disciplined and sanguine approach in the marketplace as a whole.

As a result, in the last little while, we have seen things moderate back to normal run rates as we were seeing prior to this intensive promotional period.

As to the cycle of it and the frequency of it, that's something that I really can't answer.

You'd have to ask the Shaw organization on that front.

Is it fair to say, though, Joe, that you had to increase your promotional spend during the quarter to counter that?

I'm wondering whether you'll get a bit of a margin bounce on a go-forward basis because of this.

There is no question that we had to increase our promotional spend in the quarter.

And our overall margin was exacerbated by the price war that was happening in the quarter on a number of fronts; spending more on advertising, spending more in the call center to support some of the saves and win back activities that were going on, spending more with respect to some counter promotions that were out there, et cetera, all things that we felt were the right strategies that wouldn't affect the long-term economics of our TV business or Internet business, would protect ARPU and ARPU growth, which is really the game we are playing, but were certainly causing some temporal or short-term pain in the quarter.

Great.

Thanks, Joe.

Peter, I think the second part of your question was on the real estate.

Just for people's background here, we have established two joint ventures with Westbank, a major property developer based in Vancouver; one JV for the development of a 22-story commercial tower which will house our future executive head offices of Telus.

So, we will be both a co-developer as well as a major tenant.

The second building is a 44-story residential condo complex being built on what formerly was a parkade that was not revenue producing that we owned.

In each case there is some real estate that we own that we are contributing to the joint ventures that triggers a gain, I guess, when that occurs.

And then, of course, you've got the development costs as you construct that are negative, and that at the end point, you start to book revenue.

So, if you take the condo complex -- first of all, we are accounting for all of these on joint venture equity based accounting.

And so on the condo complex, it sold out before we even went to public marketing.

So, it was quite the phenomenal success in the Vancouver community, given it's 44 stories.

So, as that gets completed in a couple years' time frame, and then we've delivered on our end to build, then people take occupancy, and then at that point you recognize revenue.

So, there is some profits from contributions that can hit a quarter.

There is ongoing losses, pro rata losses being booked as you are developing the two buildings.

Then you have got this revenue realization that occurs towards the end.

So from a guidance perspective, we did not include this in 2012 estimates.

We booked this, as a revenue side, with be other revenue.

And for definition of adjusted EBITDA in earnings, we are backing out any gains or losses associated with the real estate development.

If you look at it in the long term view, this is a positive MPV endeavor for the Organization, where we can essentially use unutilized or underutilized real estate that's located on the number one shopping street in Western Canada.

It was a garage, basically, that we paid taxes on, and we didn't have any revenues from, that now will become a landmark in terms of high-quality green development of Vancouver, branded Telus Gardens.

At the end of the day, we will get nice offices and be one of the major tenants.

The commercial tower is already more than 50% pre-leased before a shovel hit the ground.

It's going to be another success story.

That's the background.

And since it's kind of non-telecom operational, that is why we do the adjustments.

So, I think that's what I would encourage people to do on a modeling basis, is whether there is a gain in a quarter or a loss in a quarter, you should probably just adjust it out to get to the pure telecom profitability.

And you'll provide disclosure to allow us to do that in the future?

Yes, yes.

And we just started -- this quarter, it was like CAD1 million, or something.

So it was really not material.

But we put it into the adjusted definition for the reason of establishing the precedent we will carry forward with, regardless of which direction profit or loss it happens to be net on a given quarter in the future.

Great.

Thank you.

Thank you.

The next question comes from Jeff Fan of Scotia Capital.

Please go ahead, Jeff.

Great.

Thanks.

Good afternoon.

Great performance in the wireless segment, especially with respect to your churn.

But I do want to focus on the wireline, because it feels like if the wireline margins and profitability were better, the overall performance of the Company would be that much better.

So, my question is on the wireline margin.

When should we start to expect to see some kind of stability going forward?

I realize that in the quarter there was some competitive activities with Shaw, but going forward, just looking at the TV EBITDA drag and other factors, wondering if you can help us out in looking out into the future, when we should expect to see some stability there.

I'll start out there.

So you said you wanted to dwell on our outstanding performance in wireless?

Oh, sorry, sorry.

That's already good.

We don't need to talk more there.

(Laughter.)

If you want to dwell on it, we are open to that.

On the wireline side, I think we are all familiar with the legacy side, and I think Joe's last answer, when we talked about the competitive environment, how that can ebb and flow depending on the aggressivity of promotion.

So hopefully we will see a little better environment in the second quarter on, in terms of impacting some of our legacy services.

In terms of TV, which you referenced, as you know, we are starting to build some good scale.

It contributes a negative EBITDA to the Company today, but an improving number, so as each quarter goes on, that negative impact is reducing.

And so, in terms of in the past, we've talked about breakeven, what have you, and it is partly a function of what is the growth profile, because the more you load in a quarter, the more you actually delay a little bit your near term profitability, but you're torquing the downstream growth rate.

In our case, we really see 2013 as really the watershed year, where we cross over from a negative EBITDA contribution to a positive EBITDA contribution on that TV business.

The exact quarter, I can't pinpoint it, because it will be a function of the pattern we have from quarter to quarter.

I can say that we will cross, and probably be at least breakeven for the year.

So, the TV is quickly getting to that point where it's adding, and as I mentioned, each quarter it's contributing less of a loss.

So, as we are hitting this point now where, take this quarter on a year-over-year basis, we have similar adds year-over-year, and so therefore the loss, the negative contribution is reducing on a year-over-year basis, in a quarter where, in the past, we had much higher adds in the current period than we did a year before, while it actually had a bit of a temporary offsetting factor.

So, I think at this point we are comfortable with the level of additions we are having, seasonally adjusted, and we have been quite successful in the market.

And so maintaining that pace will be a good result for us, and that will lead to the positive contribution in 2013.

Just a quick follow-up.

The point where you sort of cross over to positive EBITDA, does it come with a certain level of penetration number, or subscriber count on TV, that we should be sort of looking at?

I think we want it to be hesitant about getting into that level of detail, other than it's a higher number than we have today.

Just to augment my answer just a little bit, I think we tried to highlight in our disclosure that, year-over-year, we had the Transactel gain.

When we acquired control of Transactel, the accounting rules required us to value our pre-existing ownership position at the new fair market value of the latest investment, and that resulted in a CAD16 million non-cash gain being recorded a year ago in both other revenue, believe it or not, the accounting rules require that, as well as flowing down to profit.

So, we highlighted that this time last year.

We adjusted it out so we wouldn't be promotional and whatever to get to core operating.

So, on a year-over-year basis, as we look back, I think it's fair to back it out, as well.

And then we also had increased restructuring expenses, and as well, a change in the pension expense.

So, when you adjust for those factors, you get to negative EBITDA somewhere around the 4% to 5% range, which I'm not saying is fantastic, but I think the stated number, the nominal number, can be quite misleading from a true underlying profitability perspective.

Okay.

Thanks, Bob.

Next question, please.

The next question comes from the Dvai Ghose from Canaccord Genuity.

Please go ahead, Dvai.

Thanks very much.

Can I start with the wireless side, please?

Joe, I would like to dwell on your success.

You had 13% wireless EBITDA growth in the quarter, 14% if you exclude restructuring.

You've maintained guidance of 5% to 10% EBITDA growth.

Is that simply being prudent because it's Q1, and it's a very competitive world out there, or is there some concern about the 2% ARPU growth sustainability, the 3% decline in acquisition expense, and the 6% decline in retention expense, given there will be new smartphones like the iPhone 5 later this year?

What are the factors behind not raising guidance there?

Thanks, Dvai.

Well, let me stand back for a minute, and just say that we've had the last many quarters where we delivered very good performing wireless results, in the face of what is probably the most competitively intensive market that we've seen for many years.

In fact, I would say that this past quarter was sufficiently so, as well, and with a lot of the promotions that were happening around the Christmas selling season dragging through most of Q1, and therefore were alive and well through the whole quarter.

Usually we see intensity at the end of a quarter.

Now we are in a mode where we are tending to see promotional aggressiveness throughout the whole quarter for the last few quarters.

If I look at what's at the heart of our success, without getting too specific and divulging any competitive information, I would say, at the heart of it, there are a few things that are a virtuous cycle of institutionalized capability for us.

First of all, on the smartphone side of things, we have 44% of our base that doesn't have a smartphone.

And in this highly penetrated base of overall mobile users and mobile subscribers, there is an opportunity to really go after the most valuable customers, and continue to populate our base with the most valuable and most lucrative customers, and we have been pushing very hard on that front, whether it's voice of data migrations, or whether it's driving hard and just increasing the strength of our data portfolio.

The second thing I would say is, churn is a magic drug.

Churn allows us to really step back from some of the most extreme and long-term damaging promotions that are out there.

There's no question, as different competitors feel the pain with respect to their operating results, they've stepped on the gas with respect to aggressive promotions.

When you've got the kind of churn rate that we have been enjoying, we have an opportunity to stand back a little bit, not having to rely as heavily on gross loading to make the net number, and therefore we can moderate the COA expense around that, and don't have to do some of the silly things that we saw in the market through Q1, like free incoming minutes was something that happened through most of the quarter, something we never jumped into, something we think is highly dilutive from a medium and long-term point of view.

The third thing I would say that we have a habitualized program of driving both the customer experience and cost control.

And when you can maintain your cost base, or even shrink your cost base in parts of the organization, the EBITDA flow-through is an incredible thing that helps to fuel the previous few things I just talked about.

So, within Telus, we call this the virtual cycle, because all three of these things really fuel one another.

And at the end of the day, the strength of the Management Team and their focus and intensity has really been at the heart of all this.

Will there be some bumps in the road, or blips with respect to COA, or some of the elements?

Sure.

Every time there is an iconic device that comes out, we tend to have to dig a little deeper with respect to COA, and do the right thing, both for acquisition and retention.

But when you have this virtual cycle operating, it gives us the EBITDA head room to not only make those investments in the quarter, but make them with an eye to really driving better, longer-term results, and continue to drive accretion in all the fundamental metrics.

So, I would say that's our view on it.

Goodness, at this stage, let's see how the rest of the year plays out, and we can talk about what else we see in the marketplace.

That's sounds good.

If I could just follow up on the wireline side.

I understand we all would like to see higher margins, and better pricing, and so on.

But if I look at the impact of the pricing of the quarter on yourselves versus Shaw, clearly it was a lot worse on Shaw.

You've reached, really, your guidance.

Your numbers have come in in-line to above street expectations because you are driven by wireless.

They've had to slash their guidance for free cash flow from CAD550 million to CAD450 million.

They have a dividend payout now of 95%, and a much higher leverage ratio than you.

Are you really overly concerned?

Because it certainly seems as if the price war that they may have started in home phone has damaged them a lot more than it's damaged you.

You start and then I will go.

Thanks, Joe.

Dvai, I would say that your observations, I wouldn't challenge.

Certainly, for our Organization, we derive a vast majority of our cash flow and earnings from the wireline segment.

We have a nice integration opportunity with respect to the two segments, but discretely on the wireline side, as you saw, our results in terms of subscriber numbers were resilient in the face of the promotional activity, and one can argue that the type of above-line activity was a negative sum game for our competitor.

But we respect them.

They have been very capable in terms of what they have done in the past.

They have been very successful in the marketplace, with the majority of internet subscribers relative to our organization, as an example.

And so we are making good strides in TV, as well.

But we respect them as a competitor, and it's not for us to predict what they may do in the future.

Clearly, clearly this Organization is in a very strong position, and it would be imprudent for anyone to think they can disrupt or take us off our stride through promotional activity.

That's great.

Thanks very much.

I think the strategic -- the only other comment I would add, Dvai, is that the efficacy of our strategy around TV has never been stronger in our minds.

If I look carefully at the household that has Telus TV, from a household ARPU point of view, from a churn point of view, especially as they come off of promotion, the economics are very sound.

Very, very sound.

At the end of the day, I think we talked about this on the previous call, roughly only about 20% of our EBITDA overlaps with Shaw's, and roughly 80% of their EBITDA overlaps with us.

And now, with respect with home phone services, they have a sizable base.

So, when there is strong aggressive activity in the marketplace, it will wash back on their base.

I think those are some structural elements that I think will continue to kind of hold the balance.

Makes sense.

Thanks a lot, Joe.

Peter, we have gone through an hour of elapsed time, even with our late start, so we will take one last question, please.

Thank you.

The last question comes from Glen Campbell of Merrill Lynch.

Please go ahead, Glen.

Thanks very much.

Bob, I had a couple of non-operating items.

You were talking about Telus Garden, and the fact that all of the condos are now pre-sold, and the commercial building half leased.

Can you give us just a ballpark range on the cash that Telus is likely to pull out of that venture?

That strikes me as being potentially a nice asset that a lot of us are not considering.

And then as a follow-up, you also mentioned in the MD&A the catch-up tax obligations that Telus, like other companies, have with respect to the change in rules on partnerships, but didn't quantify.

Could you give us a sense of what the total obligation there might be?

Thanks.

Okay.

Well, let me start with -- you asked about the tax impact.

This will be the Federal budget change on tax deferral staggered year end, so LP subsidiaries?

That's right.

So, for 2012, this year, there would be -- we don't expect any notable impact on our cash tax payments.

The guidance range we have is CAD150 million to CAD200 million, I believe.

So, there will be no change to that guidance range of cash taxes for the full year.

We did align a couple of our two main partnerships in terms of their year ends with our corporate operating company in the past quarter.

That increases the higher current income tax expense, but there is no change in the total income tax expense, so it doesn't affect the accounting earnings.

In terms of, on a go-forward basis, I guess our installments would be higher in 2013, with I guess in a higher tax expense, presumably, in the 2013 to 2017 time period.

It's a five year transition, as I recall, in terms of the phase-in.

So, top of mind, I don't really have more to say than that.

So, for this year it's really a non-factor.

On a go-forward basis, it's going to be a reduced deferral, but not really a change in the aggregate tax.

I mean, other companies, Rogers, Shaw, sort of disclosed figures in the range of several hundred million dollars in total.

Would it be fair to assume that, for Telus, it's that kind of a number, too?

When they say that, you are referring to acceleration, or the overall tax?

It's the cumulative five-year impact on cash taxes through 2016, I guess it's this transitional period.

Yes, well, I would -- top of my mind I don't have a number for you.

I mean, I'm not sure what others have done, but there has been, in our case, material clarifications occurring as recently as the past couple weeks with CRA, in terms of how this is actually going to be applied to us, et cetera.

There is a lot in flux that makes it somewhat indeterminate.

What I would say is that it's not going to affect our cash tax guidance or our tax expense, and therefore EPS with respect to this year.

I mentioned the Ontario budget; that will impact the EPS by CAD0.05, although not our cash tax, because it's a foregone future rate reduction.

And then getting beyond that, Peter, it's very complicated, given our corporate structure and the phase-in period, and the actual rules.

So, I'm not really in a position to provide guidance beyond this year.

And then Telus Garden?

Telus Garden.

Your question was in terms of the magnitude, I think.

Well, yes, what I might do is, at a future call, provide a little more guidance on that.

When I say pre-sold, the way it works, of course, is there is deposits received that binds the purchaser's commitment.

But while that cash is received, we don't book revenue until we have -- there is a percentage completion on the commercial, and there is the delivery in getting the final installment from the retail or residential purchaser.

On the residential one, as each condo unit takes possession, you're recognizing revenue, because you are essentially [at strated] so you are selling off a piece of that real estate with every condo sale.

The commercial tower is different.

It's like a developer.

We are having an ongoing ownership of the tower on a joint venture basis, so we have a landlord position.

We have a tenancy position.

And we are also a financier to the partnership, in terms of some debt.

And so there is a lot of flows that go on there.

I think, for the sake of time here, because I don't have specific color, let me think about what I can say to provide people a little more background about that at a future call.

That sounds great.

Thanks, Bob.

Thank you.

Thank you, everybody, for taking the time to join us today.

We, as always, appreciate your interest and continued support.

Have a great evening.

Ladies and gentlemen, this concludes the Telus 2012 Q1 earnings conference call.

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