Telus Corp (TU) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the TELUS 2013 Q2 earnings and guidance conference call.

I would like to introduce your speaker, Mr. Darrell Rae.

Please go ahead.

Welcome and thank you for joining us today for our second-quarter 2013 investor conference call.

The call is scheduled for up to one hour.

A news release for our second-quarter financial and operating results and detailed supplemental investor information are posted on our website, TELUS.com/investors.

You will be in listen-only mode during the opening comments.

Let me now direct your attention to slide 2. This presentation, answers to questions and statements about future events such as 2013 guidance, intentions for dividend growth, and future share purchases, 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.

Slide 3 outlines today's agenda.

We will start with opening comments by President and CEO Darren Entwistle, followed by a review of operational highlights by Joe Natale, our Chief Commercial Officer.

John Gossling, our CFO, will provide a review of second-quarter financial results, before concluding with a question-and-answer session.

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

Thanks, Darrell.

Before we review our second-quarter results, I want to take the opportunity to speak to the current regulatory landscape that we are facing.

While TELUS always welcomes healthy competition, the federal government's current policy framework for the wireless marketplace contains three loopholes that offer materially unfair advantages to large foreign corporations.

Accordingly, we've approached the federal government with three reasonable asks to close these shortcomings, and thereby level the playing field for Canadian wireless companies.

Firstly, we're asking the government to ensure that any foreign entrant be required to build its own network in both rural and urban communities, and not piggy-back on the networks TELUS has invested billions of dollars to build across our vast and sparsely populated geography.

Indeed, since 2000 we've invested over CAD100 billion in technology and operations across Canada.

Notably, our country, Canada, is number one globally when it comes to private investment in telecom infrastructure per capita, effectively double the OECD average.

As a result, Canadian networks have been ranked as world leading in terms of reliability, speed, and the extensiveness of the network coverage.

Sadly, Canada does not have the fastest wireless speeds amongst the 34 OECD countries.

Indeed, we were only ranked number two.

In the spirit of being Canadian, I would like to take this opportunity and apologize to all of my fellow citizens for beating every country in the OECD report except Denmark, in terms of wireless speeds.

Sorry about that, and you've got my word that we're working to become number one from the number two position we currently hold.

Notwithstanding this, according to the OECD report, Canada's networks are 2.5 times the average speeds of those wireless data activities in Germany and Italy, three times the wireless data speeds offered in the US and France, and nine times the wireless data speeds in the UK.

On July 25, interestingly, the European Commission issued a press release about the poor quality of wireless service across Europe, citing that three-quarters of Europeans have no access to 4G wireless services that are already available to 80% of Canadians on an LTE basis.

The Commission also cited that there is virtually no rural access to 4G LTE across Europe.

Notably, the Commission's Vice President, Neelie Kroes, stated, and I now quote -- I'm on the side of the citizens, the taxpayers, the voters, who just want their phones and their tablets to work.

It's frustrating when my phone stops working in Brussels because we only have 3G.

Millions share my frustration every single day.

She went on to state, and again I quote -- the EU is teetering on the edge of network collapse.

Fortunately, thanks to the world-leading investments that we've made in Canada in wireless infrastructure, technology, coverage, and reliability, exactly the opposite is true in our country.

Notably, in addition to our global leading investments in both network quality and the reliability that that underpins, Canadians also enjoy highly competitive pricing amongst developed nations.

The OECD reports that Canada falls in the middle of wireless pricing when compared with our G7 peers.

Secondly, we are asking the federal government to level the playing field so TELUS has the same access to spectrum in the upcoming auction as foreign carriers.

As it stands, Verizon would be allowed to buy two prime blocks of spectrum while TELUS can only buy one.

Notably, Verizon's regulatory position at home is the antithesis of the advantage that they may be seeking to leverage in Canada.

We strongly support statements expressed on the record by Verizon in numerous regulatory filings and investor meetings that a level playing field is the correct model for conducting a spectrum auction.

TELUS believes that this is true whether it's the FCC 600-megahertz auction or whether it's Industry Canada's 700-megahertz auction.

Finally, we are asking the federal government to level the playing field so TELUS can compete equally with foreign entities in the acquisition process for Canadian wireless companies.

The absence of a competitive bidding process means that another foreign organization can potentially acquire Canadian wireless companies and their inherent spectrum at a discount.

It is important to remember that the AWS entrants now up for sale were able to purchase taxpayer-subsidized spectrum at a 41% discount compared to what the incumbents paid back in 2008.

Our three requests would close the loopholes associated with the protections intended for smaller, developing wireless companies in Canada that a large, deeply resourced foreign organization is looking to exploit.

For 13 years, TELUS has consistently advocated publicly for a fair and a competitive environment, including the full liberalization of foreign ownership within our industry.

Given the current potential for a significantly unfair playing field, we are asking our investors and customers to make their views known.

They can do this by writing letters to the members of Parliament, and by requesting meetings with them to discuss this very important topic for our country and our citizens.

I would encourage you to visit fair4canada.ca for more information.

I can say I truly appreciate your support in advocating for a level playing field, that we believe at TELUS will benefit all Canadians, from consumers, to businesses, to rural residents, to technology employees, to current and future pensioners.

Turning now to our financial results, the second quarter was notable for TELUS, and TELUS's investors, as well, as a result of our continued robust on-strategy execution, and our ongoing shareholder-friendly initiatives.

TELUS realized significant 6% revenue growth, generated by both the wireline and wireless segments of our business.

Importantly, this balanced growth across wireline and wireless that is a hallmark at TELUS, is unique amongst global incumbent telecommunications providers.

Clearly, it demonstrates the efficacy of our ongoing strategy of investing in advanced broadband data technology and services, coupled with our unwavering dedication to putting our customers first in our hearts and minds.

Our second-quarter subscriber connections experienced strong growth, increasing by 82,000, and they now total 3.2 million.

Notably, we generated 100,000 higher-value post-paid net adds with industry-leading post-paid churn of 1.03%.

Additionally, our wireline subscriber base increased for the 11th consecutive quarter, as our TV and high-speed Internet net additions again exceeded our moderating network access line losses.

Importantly, we continue to streamline our business to focus our resources on key growth areas, whilst adapting to declining revenue from traditional phone services.

In this regard, we tripled our restructuring investments to CAD39 million in the second quarter compared to a year ago, and have raised our restructuring estimate for the full year to CAD100 million.

These efficiency investments are part of our robust earnings-enhancement program, targeting incremental EBITDA of CAD250 million or better by 2015.

Normalized consolidated EBITDA increased by 6.5%, contributing to adjusted EPS growth of an impressive 12.5%, which of course underpins our dividend growth model.

On that point, turning to our Company's focus on creating and supporting shareholder value, it is notable that we have returned, through dividends and CAD536 million of share repurchases, almost CAD1.2 billion to shareholders in the first seven months of 2013 alone.

Notably, we've acted to take advantage of our strong balance sheet and current share price, receiving approval to double our share purchase program in 2013, up to CAD1 billion dollars, or 31.9 million shares in totality.

It is our intention, subject to ongoing Board assessment, to continue this share purchase program for up to CAD500 million each year from 2014 through 2016, for a total of up to CAD2.5 billion of share purchases and cancellations.

These initiatives, coupled with our multi-year 10% annual dividend growth program, are consistent with our goal of providing ongoing and superior investment returns to our shareholders.

Looking ahead, I believe TELUS is indeed well-positioned to achieve our 2013 financial growth targets, and those that extend beyond 2013 in terms of returning cash to shareholders.

I think we're well-positioned to continue advancing our national growth strategy, focused on data and wireless.

I'm confident we can continue to deliver value in the future by having a strong balance sheet that positions us exceedingly well, both to support returning cash to shareholders, but also to participate vigorously in upcoming spectrum auctions.

We also are supported by a robust earnings-enhancement program, and we will always have efficiency as a hallmark of our leadership activities within this organization.

I'm confident we can continue to deliver value in the future through our multi-year dividend growth and share purchase programs, and I'm confident that our team's unwavering commitment to putting our customers first across all segments of our business will pay off for us, both in terms of our operational results, but also our economic results, because of the superior loyalty and retention that we achieve through these activities, and the financial results that they yield.

I now invite you to hear from Joe, who will take you through the highlights of our second-quarter results, followed by John Gossling.

Thank you, Darren.

Starting on slide 5, we produced healthy and leading second-quarter, post-paid wireless net additions of 100,000, with the mix continuing to shift towards smartphones and higher-end post-paid plans.

Although post-paid net additions were down slightly year over year, we maintained our strategic focus on quality, high value, smartphone-centric loading.

Overall, our total post-paid subscriber base was up 5% from last year.

Moving to slide 6. TELUS reported an 11th consecutive quarter of year-over-year blended ARPU growth, up 1.4%.

This was driven by strong ongoing wireless data growth of 17%, as we continue to generate robust smartphone adoption.

Our smartphone subscriber base increased to 71% of our post-paid base, a 12 point increase, compared to 59% last year.

This is being supported by the continuing rapid expansion of our 4G LTE network, now covering nearly 80% of the Canadian population.

I would note that Canada is third in the world in terms of smartphone penetration, behind only Japan and South Korea, and three times the world average when it comes to smartphone adoption.

Thankfully we have made the investment to enable this, as there's no point in having the best smartphones, if you don't have the network to accommodate it.

As shown on slide 7, TELUS reported low and stable blended churn of 1.4% this quarter.

Post-paid churn was an industry best, at 1.03%.

This was in the face of a highly competitive intensity in the quarter.

Low churn allows us to take a more measured approach in acquiring new customers, in line with our consistent focus on higher-quality subscribers.

Our industry leading churn reflects a few things -- the significant investments we've made in evolving our world-leading network technology and coverage; our disciplined acquisition and retention investments, particularly directed towards smartphones; and our team's relentless focus on the customer experience.

Turning to slide 8, our low churn rate and ARPU growth supports our continued industry leadership in lifetime revenue per subscriber, up again this quarter, to more than CAD4300, the highest in five years.

In the second quarter, our cost of acquisition per gross addition was CAD374.

Year-over-year, this is down more than 7%, in spite of intense competitive activity, and continued focus on loading higher-cost smartphones.

TELUS's marketing efficiency, a ratio of cost of acquisition per gross add to lifetime revenue, remains industry-leading.

Our investment in cost of retention was down slightly at 10.5% of network revenue, the lowest in three years.

Turning the page, on July 30, TELUS launched our new SharePlus rate plans, the latest innovation in the evolution of clear and simple customer approach.

The plans include unlimited nationwide talk and text, and the ability to share data amongst members of your family or small business.

These new plans were the result of listening to our customers, and what is important to them -- simplicity, transparency, and the option to bring your own device.

We expect these plans to support our industry-leading subscriber economics.

The rate plans are aligned with the type of device customers choose, supporting our ability to continue offering the best devices at subsidized low prices that Canadians want.

The plans are based on a more-for-more value proposition, with a floor on voice pricing, and important churn benefits from shared data plans.

In addition, the enhanced simplicity and unlimited nature of the new plans supports greater efficiency, reducing calls into our call center.

In July, we also refreshed our Koodo pricing model.

The new small, medium, and large tab structure now gives customers the opportunity to obtain high-end smartphones on Koodo at attractive up-front price points.

The new rate plan structure provides Koodo customers the ability to graduate to a higher-end device such as an iPhone 5, and still remain with their preferred brand.

We believe this will continue to resonate well with our customers.

Notably, the Koodo brand was ranked number one in customer satisfaction by J.D. Power for a second year in a row.

In addition, TELUS was ranked number one amongst all national full-service brands by J.D. Power.

To conclude on wireless, leading operating metrics and recent innovative marketing developments clearly align with our strategic focus on smartphones, high-quality loading, and an enhanced customer experience.

This focus is leading to profitable subscriber growth for TELUS and for our investors.

Turning to wireline on slide 10, you can see the increased scale we are continuing to build in TV and high-speed Internet.

TV subscribers were up 31,000 in the quarter, and the base grew by 25% over last year, as we continue to expand market share.

The demand for TELUS's premium Optik TV offering remains healthy.

Our share of the available market is stronger than ever.

There continues to be good pull-through growth and trajectory in the demand for our high-speed Internet services, at 13,000 this quarter in net additions.

It should be noted that these additions were somewhat dampened by the severe flooding experienced in Southern Alberta at the end of June.

We continue to see positive momentum in the overall economics of Optik TV and Internet.

ARPU continues to increase as a larger proportion of our TV customers come off introductory pricing, and add channels and content.

Given the ongoing positive momentum we are seeing on optics operating metrics, the lifetime revenue of a TELUS TV subscriber increased by 10% year over year, and 30% for high-speed Internet customers.

Combined TV and high-speed net additions of 44,000 exceeded residential NAL losses.

This was the 12th consecutive quarter that we have seen this trend.

While moderate residential NAL losses were down, we're still seeing substitution impacts while competition remains intense, yet stable.

We were particularly active this quarter in our ongoing efforts to identify efficiency opportunities to mitigate substitution and competition impacts.

Our ongoing focus on efficiency enhances our ability to deliver a superior customer experience.

With that, I'll turn the call over to John to walk you through the financials.

Thanks, Joe.

I'm on slide 11.

Second-quarter wireless results continue to be strong across the board despite increased competitive intensity.

External wireless revenue increased by 6%, reflecting continued subscriber and data revenue growth, while EBITDA for the quarter increased by 5%.

EBITDA was impacted by higher restructuring and other like costs in our wireless business of CAD10 million.

When excluded, EBITDA increased by 6%, reflecting a margin of 48.1% of network revenue, up 50 basis points year over year.

This is the sixth consecutive quarter of year-over-year margin expansion.

Capital expenditures decreased by CAD23 million, or 12%, due to lower 4G LTE expenditures.

Simple cash flow increased by CAD55 million, or 13%, to CAD495 million, due to higher EBITDA and lower capital spending.

Slide 12 shows the combined impact of our data ARPU growth, plus the increase in our subscriber base, which resulted in wireless data revenue increasing by CAD89 million, or 17% in the quarter.

As Joe mentioned, this growth was driven by higher penetration of smartphones, and associated take-up of data plans, as well as higher data roaming volumes.

Data now represents 43% of network revenue, compared to 39% in the same period a year ago.

Slide 13 shows our improving wireline financial results.

Revenue increased by a notable CAD79 million, or more than 6%, due to strong data revenue growth from TV and high-speed Internet subscriber growth, combined with higher ARPU.

Wireline EBITDA declined by 1%, but was impacted by significantly higher restructuring and other like costs of CAD29 million, which increased by CAD20 million year over year.

Normalized EBITDA, excluding the net gain last year on TELUS Garden and restructuring, and other like costs in both periods, was up 7.3%.

The improvement reflects improving Optik TV and Internet margins, helped by lower subscriber acquisition costs, and continued ARPU growth.

Notably, normalized EBITDA margin improved by 30 basis points to 26.6%.

Wireline capital expenditures decreased by 4%, due to lower expenditures related to supporting TV growth, and the construction of our Kamloops Internet data center.

Slide 14 shows we are generating strong wireline data revenue growth of CAD103 million, or 15%.

In addition to TV and high-speed Internet subscriber and ARPU growth, this result was also driven by increases in hosting and managed workplace revenues, and growth in TELUS Health revenue.

Data revenue represents 60% of external wireline revenue, up four points from a year ago.

Putting the two segments together, TELUS reported strong consolidated results, as shown on slide 15, with revenue growth up 6%.

Reported EBITDA increased by 3%, while normalized EBITDA, when excluding the gain last year on TELUS Garden, and restructuring and other like costs in both periods, was up 6.5%.

Basic earnings per share decreased slightly but was impacted by certain items that I will discuss in detail on the next slide.

Adjusted EPS was up 12.5%.

CapEx was down 6.6%, due to lower capital expenditures in both wireless and wireline.

Simple cash flow increased by 15%, due to both the EBITDA growth and lower CapEx.

As shown on slide 16, basic EPS was impacted by certain items.

These four items, after income taxes, include -- the gain net of equity losses related to the TELUS Garden residential real estate partnership recorded last year; restructuring and other like costs in both periods, which is higher by CAD0.03 per share year over year, due to an increased focus on efficiency; the long-term debt pre-payment premium, related to the early redemption of CAD700 million of long-term debt, as part of our successful refinancing efforts; and income-tax-related adjustments, including the legislated BC provincial corporate income tax rate increase, from 10% to 11%.

So when you exclude these items, adjusted EPS was up CAD0.06, or 12.5%, to CAD0.54 per share.

Slide 17 provides a break-down of adjusted EPS drivers this quarter.

Strong normalized EBITDA growth was the primary driver, which added CAD0.07 to the upside, while lower depreciation and amortization added CAD0.01 to the upside.

Higher blended statutory tax rates and higher financing costs each contributed CAD0.01 to the downside.

Before I pass the call back to Darrell, I wanted to say thank you to John Wheeler, our Vice President of Investor Relations, who has provided TELUS with 22 years of dedicated service.

As many of you know, John has decided to retire from TELUS this September.

The TELUS team will certainly miss his wise counsel and positive presence, but there's no doubt that he has earned what I hope will be an equally fulfilling retirement.

At this point, I'll pass the call back to Darrell.

Thanks, John.

Matthew, can you please proceed with questions from the queue for Darren, Joe, and John?

(Operator Instructions) The first question is from Greg MacDonald of Macquarie.

Please go ahead, Greg.

Thanks.

Good afternoon, guys, or good morning.

First of all to John Wheeler, good luck John, it's been nice working with you.

Also wanted to ask a question on something that continues to impress me, and that's the access line numbers.

Access line erosion is a better number for you guys than it seems for other telephone companies, including those that actually have some reasonable IPTV traction.

I guess what I want to ask is overall, what's the potential for this trend to be continuing, and I wonder if you just might answer that question in the context of the two biggest drivers of the impact to your wireless substitution and cable competition on the negative side, and then IPTV, to what extent is that actually helping you with this impressive rate of erosion, if you can call it that?

Thanks.

Greg, I'll take the question.

A few thoughts overall.

Yes, we've seen an improving trend around access line erosion, both on the residential side and the business side.

A few comments, first, on the residential side.

It's no question that the majority of the impact in terms of erosion overall is coming from our other substitution.

If you look beneath the number, well over 50% or 60% of the erosion is coming from customers who are deciding to cut the cord and move to a wireless-only solution.

For us, that's actually a net positive when you consider our footprint on wireless across the country, versus our footprint on wireline in Western Canada covering 23% of the population; and of course Eastern Quebec, as well.

But we are a net gainer when it comes to wireless substitution overall.

If you look at what's helping us stem the remaining portion of it, it really comes down to our ability to bundle services.

So IPTV on the consumer front has really been the driving force on that end.

Of our IPTV customers, 97% of the customers have at least one other residential product with us, and well over three-quarters add home phone or high-speed, or both at the same time, when they add TV.

We're seeing that effect clearly because of the offering and the superior capability of Optik TV, and what it means for customers coming back to us.

In fact, a strong majority of the customers we're gaining through Optik TV left us a long time ago.

We have no services with them whatsoever, and they're coming back as a result of the compelling value proposition around TV.

On the business front, the analogy is also true.

On the business front, we've got a Business Freedom bundle that's doing well for us in the marketplace.

Business Freedom is essentially a wireless and wireline solution that is clear and simple in terms of the value proposition, and offers business customers the opportunity to combine all of their services and needs, whether it's wireless, wireline, hosting capabilities, website hosting, other data services, and pay for it on a transaction or per-seat basis.

That innovation, both in terms of the offering itself, and the clarity and simplicity around this, actually helped us stem losses to our cable competitor on the business side, and do very well in terms of driving ARPU growth for the bundled offering, and driving churn improvement as a result, as well.

That's sort of the landscape when it comes to NALs, the things that we're doing to help moderate and continue the trend.

Joe and his team have done an excellent job in terms of putting customers first, and having a view on clear and simple value pricing services, and support that extends from wireless into wireline.

I think that focus on putting customers first has improved our retention characteristics, not just on the wireless side of the business, but also on the wireline side of the business, and is serving us very well across both.

I think going forward into the future, it will be interesting to see the synergistic nature of Joe's SharePlus plans that have been recently launched on mobility being inculcated into the bundle with IPTV and HSIA.

When you think about data pooling within the household, I think that will improve the stickiness of our relationships, and I think that would have extensibility to NAL mitigation, in a way that would be quite positive.

I'm looking for that synergy to augment the retention characteristics of the bundle still further, and I like the extensibility of data sharing and what it can do to solidify our NAL relationship with the household or network access line relationship with the household.

That makes a lot of sense.

Joe, can you tell us what percentage of IPTV customers actually keep the phone, the land line -- even a ball park?

I wouldn't -- I'm not really comfortable disclosing that, given the competitive sensitivity around that, but I think my comment that over three-quarters are adding home phone and high-speed, I think, speaks to the headline statement overall, Greg.

All right, thanks.

Our next question is from Jeff Fan of Scotiabank.

Please go ahead, Jeff.

Thanks, and good morning, everyone.

My question is for Darren on the regulatory side.

The first part is [wholly] understand your comment regarding the piggy-backing of the network with the mandated roaming rules, but I guess there's still -- those roaming rates are still negotiated.

So I guess what I'm asking is, is there a concern or fear that the regulator may move to some sort of a mandated roaming rate situation?

The second part to that question along the regulatory side, also is, as you mentioned, Verizon's position in the US is very similar to most incumbents, not having any preferential auction rules.

Obviously, what potentially could be inconsistent for them is that they're actually taking advantage of some of those preferential rules here in Canada if they do decide to enter.

A business has got to do what a business has to do, but I'm just wondering from your angle and from the industry, whether there's an opportunity to address that inconsistency with some of the appropriate regulatory bodies, especially in the US on Verizon is doing, versus what they're saying?

Okay.

It's interesting that you addressed the regulatory question to me, because we've actually moved that portfolio over to John Gossling.

Thank you very much.

As it relates to roaming, a few things.

Firstly, when we have tabled our three asks, which are highly correlated, I think it's a bit inappropriate that you would consider giving a deeply resourced foreign entrant near-exclusive access to an acquisition within the Canadian landscape, or a series of acquisitions within the Canadian landscape, where they would be able to secure both network infrastructure and spectrum at a significant discount, because of the absence of a competitive process -- then on top of that to have mandatory access that goes just beyond network carriage that could extend to towers or responsibilities on the roaming front.

I would say those things are deeply mutually exclusive, in my view.

Secondly, I understood the policy on the regulatory front in Canada to be infrastructure-based competition; and that's been a long-standing regulatory policy within this country.

Basically, the thesis is if you want to compete, and you want to have a sustainable competitive position in the marketplace, and you want to differentiate yourself on features other than just price discounting, then you have to build, and you have to make an investment in that regard.

When I look at an organization like Verizon that's a well-respected organization, but deeply resourced, I ask myself, can that organization afford to build?

I would say if TELUS, Bell, and Rogers can afford to build, if TELUS, Bell, and Rogers can invest over CAD400 billion in cumulative CapEx and operating investments over the last decade in our country, and if we had the discipline and the sustainability to wait 27 years to go cumulative cash flow break-even as an industry, then I think a deeply resourced organization like Verizon should seek to answer the same challenges and build out their own infrastructure to make sure that they've got both the right economics and the right technologies to support a sustainable position within the Canadian landscape.

But from my perspective, going back to the first point, I find it inappropriate to mingle allowing someone to buy an asset on a near-exclusive basis, and then on top of that, give them mandatory network access and roaming rights.

I would say hopefully people will see the fairness of our position, that our position is reasonable, and it's fact-based, examining the data that's available, and the position that Verizon is in to compete, both commercially and compete on a level playing field in respect of an auction.

As it relates to the situation in the US, I touched upon that in my comments.

I find it quite interesting, because there is, indeed, a dichotomy.

To hear the position being put forward by Verizon in the US as it relates to the 600-megahertz auction, as I said, I'm strongly supportive of their position.

I think the competitive process should determine the outcome, not artificial regulation or government intervention.

I support the thesis that there should be a level playing field, and that will yield not just the best result in the auction, but the most sustainable long-term result in the auction.

I also note with interest their comments about any advantages that would be contemplated for a T-Mobile or a Sprint.

The position there is that those organizations are deeply resourced, and can fend for themselves in an auction process.

I think the same is true for Verizon if they elect to come in to the Canadian market and participate in the 700-megahertz auction.

They have the resources to compete quite effectively and take care of their own position, and do what they think is right for their organization.

I would import into Canada two US components.

One is the thesis that the level playing field is the right way for it, if it's good enough in terms of the 600 auction in the US, it should be good enough for the 700-megahertz auction in Canada.

The second would be you don't want to have governments picking winners and losers through intervention in an auction process, but let free market forces determine the competitive outcome.

If deeply resourced organizations like T-Mobile and Sprint in the US don't need any additional advantages, then I would say Verizon does not need any additional advantages in terms of participation in the Canadian 700-megahertz auction.

I'm make one final comment on this.

The spectrum portfolio that we have today at TELUS took us 30 years to build.

If this is the starting point for Verizon, then they're going to have to have the stamina, the discipline, and the patience to build that portfolio over the fullness of time; but through a level-playing-field auction process, without government intervention skewing the playing field, picking winners and losers.

I would say as it relates to spectrum auction, let's have uniformity of policy across North America.

I think that's going to yield the best outcome overall.

Okay, thanks.

Next question.

Our next question is from Dvai Ghose of Canaccord Genuity.

Yes, thanks very much.

A question for Joe or John and maybe one for Darren.

The first question is on your wireline margins.

If I strip out your restructuring and the TELUS Garden gain a year ago, your margin this quarter on wireline is about 27.4%, it's up slightly from a year ago at about 27.1%, 27.2%, and down from 29.2% in the first quarter.

That's despite the fact that you've got increased ARPU, reduced churn, increased lifetime revenue per subscriber, increased cost-cutting, et cetera.

Why have we not seen more of an impact in terms of margin?

Dvai, it's John.

Your observations are good, in terms of the pieces that are driving it.

There is always a seasonality in wireline that is not consistent.

The other thing that as you're adjusting the Q2 numbers, there was an impact of the flood in Southern Alberta -- that was about CAD5 million in Q2 this year.

That is causing a drag as well.

There will be some more of that in Q3, as the clean-up continued into July.

There's a lot of moving pieces, but certainly that's probably the biggest driver in addition to what you've noted.

But do you think a 30% margin is conceivable in the medium to longer term?

Well, it's certainly where we would like to get back to.

There's no question.

But the mix is the biggest factor in determining that in terms of the product mix.

Great.

We're already on the record as saying 30% is where we would like to get back to in previous statements with investors, so I'll underscore that comment by John.

I would note that we are up on a year-over-year basis.

I would note that I think as you have remarked on, we have a goal to start -- eliminate the margin erosion, have margin stability, and then move the margin accretion with the goal to getting to the 30% margin level.

The other thing is there are not very many wireline companies around the world.

You are the one that referenced normalizing for the TELUS Garden gain.

When you normalize for that, our EBITDA growth on wireline was 7.3%.

I don't think there are very many wireline companies around the world generating growth of 7.3% at the operating profit level.

I would say that's a good start.

Want to get to 30% on the margin front.

Want to stop the margin attrition, flatten it out, and start the margin accretion.

That's absolutely what this organization is focused on.

The other thing I would say, back to my comments, this is not an organization that's a one-trick pony on the wireless front.

We have a great asset composition, and we've got two contributing factors to our bottom-line growth -- one being the traditional one on the wireless side, but we have an emerging one on the wireline side, and I'm encouraged by that.

I think that's very fair.

My other question for you, Darren, is look, with Verizon obviously, there's a campaign going on, and I wish you the best of luck; but so far it seems to fall on deaf ears with government.

We'll see if that changes.

I know this is a very speculative question, but if you assume the status quo in terms of the regulatory situation and a Verizon entry, are you still comfortable in assuming 10% per-year dividend growth model, and a CAD2.5-billion NCIB?

If so, why?

The answer is yes, I am comfortable with our dividend growth model targeting 10% growth per year through 2014, '15, and '16, and I'm comfortable in the sustainability of our CAD2.5-billion NCIB program.

The answer on the why front, Dvai, is because I like the fact that we have a great asset composite, and we've got two growth tenets, not just one, as per my previous comments.

In fact, I would hope as we get into 2014, we can give you greater disclosure on the third growth tenet, being our health care business.

In terms of why, I think we're exceedingly strong when it comes to brand and distribution.

I think you heard Joe's comments about how successful we are being on our customers-first strategy, and what the perception is of both our TELUS and our Koodo brands in the marketplace.

I like our competitive positioning because of what we can do on wireless and wireline bundling, and we just talked about that.

The economic benefits of that are extremely laudable, even at the hygiene level in terms of mitigating a NAL erosion, as we referenced in Greg's question.

I like the fact that when you have got the ubiquity of coverage that we have with our macro wireless network, we are ideally positioned to develop a small-cell underlay on a meshed basis to, again, further differentiate ourselves in the marketplace.

I think that will be exceedingly challenging for any foreign entrant coming into the market at this juncture.

I like the fact that we are an organization with an extremely strong balance sheet.

Think of what it does for us.

It supports what we want to do from affordability as it relates to dividend growth models and NCIBs.

It supports our ability to push fiber deeper into our access network, to support both our TV product, but also our small-cell strategy.

And it supports our ability to make choices in the spectrum auction, not limited or encumbered by the lack of availability of cash resources.

Lastly, we have a heritage on the cost-efficiency front.

What the market takes out of our profit lines, we'll put back through improved continuous improvements in cost efficiency.

When you put all those together, I think we're in a pretty powerful position.

I'll just go back to your comment about if the regulatory environment doesn't change.

I just want to take a second to reflect on that, because even if the regulatory environment doesn't change, I can tell you right now, the Canadian telecom landscape will change.

I make these comments as someone who spent 10 years of my life going around the world focused on developing wireless businesses.

Canada cannot support 10 wireless carriers, let alone 11 with Verizon coming on the scene.

That's not a point of intuition or subjectivity.

That's just an empirical fact.

So Verizon can come, any foreigner can come.

We've been pro the removal of foreign-ownership restriction since 2001, when it was a headline in The Globe and Mail.

But Canada cannot support 11 wireless carriers.

All you have to do is have the intellectual curiosity and discipline to harvest the facts, to look around the world, to see the US market with 10 times our population density going down now to four carriers.

Europe is going down to three carriers.

You've seen it now in Ireland, Austria, and Germany, with the KPN acquisition; and Japan is already at three.

Given the vastness of our geography, the topographical challenges, and the sparsity of our density in this country, we're going to see a rationalization.

It is inevitable.

That's the one thing that's not going to be stopped.

It's the regulation that won't be sustainable.

The other thing that I think is disappointing is, when you have artificial regulation that frustrates free enterprise and market-driven outcomes, it hurts a lot of things that are very important to this country.

It hurts rural investment.

One of the major differentiating factors for us when we deploy wireless infrastructure in Canada is that we just don't do it in urban centers.

We do it across Canada.

That's why our HSPA+ network right now covers over 98% of Canadians.

You look at the situation in Europe, and it's absolutely deplorable, and new broadband technologies don't make it out to the rural domain.

They remain vested within the urban markets, and I think that's disappointing, because we believe in Canada that all Canadians should benefit from the advantages that technology can provide, from lifestyle choices, to the competitiveness of small businesses, to the efficiency of the public sector.

In addition to policies of this ilk that are wrong-headed, hurting rural investment, I think it's going to hurt pension values.

I think the wealth situation of pensioners, given the pressure that pension funds are under, post the economic down-turn, is a very serious consideration; and then finally, employment.

I think these are deeply concerning considerations.

But I'll close with one last comment, if things don't change.

How are people, both internal and external to Canada, going to look at our country in the future and its regulatory framework?

Let's just break it down into four constituencies.

If you're an incumbent and you were told that the spectrum auction rules that came out a year ago, with their protectionist thesis, capping incumbents at 10 megahertz each, were intended to provide protection to fledgling new entrants so that they could continue their growth trajectory, and were not intended to be leveraged or exploited by an interloping deeply resourced foreigner -- if you were told that unequivocally by your government, and then that landscape completely changed 12 months later, you would have a loss of confidence as to the predictability or transparency of that regulatory environment.

If we shift now from an incumbent, and you're looking at it from, let's say, a Videotron perspective, they made an investment decision back in 2008 as to what the future would look like in so far as access to spectrum is concerned.

They had representations made to them.

Now, those representations are turning out to be highly differentiated from what they were in terms of the original statement, and you see a situation where in the province of Quebec, if Verizon has the ability to pursue two blocks of the prime block spectrum, and you have TELUS, Bell, and Rogers competing for the remaining two, you're going to have a crowding-out effect.

By the way, the protectionist thesis that was the hallmark of the original spectrum auction rules was to prevent crowding out of new entrants.

That's the reason that they were included in the first place, but that's now what we're going to see.

Again, from a confidence, a transparency, and a predictability perspective, it's not just the incumbents that have a difficulty with this, it's also new entrants like Videotron and Eastlink.

Thirdly, let's look at a WIND.

It's interesting, because the caller market liberalized from a foreign investment perspective.

It has to be liberalized not just when you're on the way in, but it has to be liberalized to let you leave when you choose to leave, and that's not the situation.

We saw some semblance of foreign ownership restrictions with market-share caps introduced -- call that liberalization on the way in.

Well, where is liberalization on the way out?

They have an asset; they want to sell that asset.

I would suppose that the reason that they want to monetize the asset is they need the money to take their network technology in Europe from 3G to 4G -- part of the European issue that I articulated in my comments.

So they want to monetize the Canadian investment, yet they can't do that through a competitive process that would allow them to maximize value.

We're not saying Verizon should be barred from that acquisition.

They should compete for it.

Similarly, TELUS should compete for it, or Bell, or Rogers, and again, let the process and the competition determine the outcome.

If Verizon is willing to pay the most, then they can be successful.

If not, then again the competitive process will determine the outcome.

But that's the optimal result.

I would find it disappointing if I came into a market under certain terms and conditions, but I could not leave under those terms and conditions, and I could not have the opportunity to leverage a competitive process to maximize value.

Then lastly, sometimes I wonder what Verizon must be thinking, because if they are looking at investing in Canada, I think one of the things that they would be questioning is, well, the regulatory environment right now may be skewed in our favor and give us certain advantages that we can exploit, but if the regulatory environment is going to change incessantly, and the application of the rules is going to change, then how can we be certain that next time around, it's not skewed against us, and it doesn't hurt us?

I think when you have that lack of consistency and continuity, people say, you know what?

Yes, it might look favorable in getting in, but I can't count on the rules being consistent, and the next time they change, it may not be in my favor.

I think that is not a regulatory environment that should be countenanced by this country, and it's not what I experienced in other markets that I worked in around the world.

Well, thank you very much, Darren.

I don't know if you have righteousness on your side, but you certainly have the facts on your side.

I appreciate it.

Yes, we'll go next question.

Perfect.

Our next question is from Drew McReynolds of RBC.

Please go ahead, Drew.

Thanks very much, and certainly shifting gears a little bit here.

Just with respect -- I guess for you, Joe -- on the wireless side, you did take some of your M2M subscribers out of the calculation of ARPU.

Just wondering if that had any material impact in the quarter?

Then on the traffic, the data traffic side on the wireless, you just alluded to some of the traffic being impacted by Wi-Fi hot spots.

I'm just trying to understand whether that's kind of a discretionary off-loading from you, or whether it's a substitution, in fact, for just understanding the relationship there?

Thank you.

Sure.

On the M2M front, only has a very small impact in the quarter.

It's a growing business for us, and we want to treat it appropriately in terms of how we count these subscribers going forward and its impact on the overall clarity of our reporting metrics, so no real substantial impact in the quarter on that front, Drew.

Drew, can you repeat your second question?

Yes, sure.

I noticed in the MD&A you guys alluding to some of the data growth in the quarter being negatively impacted by off-loading some of that traffic on the Wi-Fi.

I'm just wondering if that's a substitution effect that's under way, or is it something that you guys are doing to manage the network load?

Yes, I think we've highlighted that as a risk factor, Drew.

We won't give more specificity on that, other than to say when we move traffic over to Wi-Fi, what we give up on the margin front, we more than save on the CapEx front by deferring network exhaust at the macro level.

That's why we're pursuing a strategy of a macro/microcell combination.

Because economically -- looking not just at the P&L, but the balance sheet of the organization, as well -- we're willing to give up an element of revenue to save dollars of CapEx, by managing better exhaust at both the technology and at the spectrum level.

If we can defer that by moving traffic from macro to micro, it's an economically sanguine thing to do.

Okay, thanks for that.

It's NPV positive, is what I'm saying from a bottom-line perspective.

Thank you.

Thanks, Drew.

Next question?

Okay.

Our next question is from Glen Campbell of Bank of America.

Please go ahead, Glen.

Yes, thanks very much.

I had one each on wireline and wireless.

Starting with wireline, you had very good revenue growth in data.

John, you talked about some of the drivers there.

Could you confirm whether there are, say, one-time factors helping that revenue in this quarter?

I'm thinking of lumpiness around equipment sales, or whether we should look at the revenues in there as being a pretty clean run rate?

Glen, it's John.

It's quite clean.

There's isn't a lot of lumpiness that happened in the quarter; it's really an ARPU story.

The quality of the earnings, Glen, is very solid.

That was a terrific number.

On the wireless side, you don't disclose post-paid ARPU separately, I respect that.

But it looks like we're looking at roughly flat post-paid ARPU?

As you look forward --

(multiple speakers) flat, Glen.

Still a little bit better?

Yes.

Okay, that's great.

Given what we're seeing with pricing, which is sort of super aggressive pricing through the first half, and maybe a more disciplined environment going forward, can you give us your thoughts on where -- on how post-paid ARPU is likely to trend over the next year or two?

Sure.

Why don't I start, and John, you can certainly pipe in.

You look at ARPU in first half of this year; it's roughly up year to date by 1.7%, roughly up 2.1% over the same period.

Last year, our revenue guidance, Glen, is, as you know, 6% to 8% growth.

It kind of implies a small positive increase in ARPU overall.

As we've said before, it's often very hard to predict ARPU for all the reasons that we all understand.

On the upside, the smartphone growth opportunity continues to drive ARPU in the right direction for us.

Not just smartphone adoption in terms of penetration going north of 71%, but also customers that make the move from less-capable smartphones to more capable smartphones, make the move from HSPA smartphones to LTE smartphones.

We're seeing data growth and ARPU growth as a result of that.

You add to that the fact that our new share plans really have a more-for-more component or design element within them.

That, we believe, will give us some lift or growth on the ARPU front.

We talked about roaming in the past.

We're still a relatively new player when it comes to international roaming, given the growth and opportunity in that area.

I think that will have a positive impact.

The downward pressure is going to come from the fact that we're seeing a lot of tablet loading and data-only device loading.

Now the margin in that loading is very good, very attractive to us as an organization.

But ARPU will have downward pressure as a result of it.

I think it's important to look at the overall AMPU and the margin at 48.1% in the quarter, which is up 50 basis points from a year ago, and we watch that line very, very carefully.

ARPU is sort of one indicator of how we're doing, but that AMPU line is truly the battle cry for the organization from that perspective.

At the end of the day, it is subject to a lot of competitive reactions.

You said it best, Glen.

Look what happened the first half of this year.

We saw absolute madness in Q1, led by the Rogers and Fido team.

That leaked through into Q2 in terms of some of the aggression that happened.

There was so much value being offered in the flanker brands that it caused a migration shift, and it caused a lot of re-rating in the marketplace as a whole.

We really tried to stay out of it, as much as we possibly could.

One of the advantages of having a great churn performance as an organization, and really having a focus on likelihood to recommend the customer loyalty from that perspective, is we've been able to rise above from some of that craziness, and really stay away from some of the re-rating type plans that were out there, double-double, double-triple, CAD39 plans.

I mean, really it was quite a litany of aggressive rate plans throughout the first half of the year.

Our tact has always been to really try to offer more for more.

That's why you've seen us add bigger data buckets to customers in promotionally intense periods, in the sake of trying to preserve ARPU, and preserve margin, rather than driving customers to re-rate because they see aggressive plans in the marketplace.

We watch it carefully.

We're looking at small positive increases, what's in our numbers and what's in our plans.

Of course, we're trying to achieve more than that through the course of the year and next year.

Okay, thank you.

Okay.

We'll extend the time here and take two more questions, Matthew.

Perfect.

Our next question is from Tim Casey of BMO.

Please go ahead, Tim.

Hi.

Just switching over to wireline, could you characterize what you're seeing on the wireline side with respect to pricing, promotional activity, and what not, against your primary competitor there?

Thanks.

Sure.

We're seeing a competitive intensity that has not really subsided substantially, or changed in the last few quarters.

Nowhere near the all-out price war that we saw at the beginning of 2012 and the end of 2011.

Are we fighting head to head in the marketplace?

Absolutely.

There's a lot of aggression, not just with respect to promotions, but also with respect to save offers and win-back offers for both organizations.

There's been a bit more sanguine discipline with respect to some price increases by our cable competitor that we've seen as of late, and we are carefully balancing our goals and ambitions around EBITDA and EBITDA margin, with the desire to grow the TV business.

We will do so in an economically balanced way.

We're happy with the loading that we're achieving as an organization, but we're not going to do it at the cost of throwing EBITDA margin and growth to the side.

I would say it's a relatively more stable pricing environment than we saw at the beginning of 2012, is sort of the punch line for you.

Thank you.

Matthew, we have time for one more question.

Perfect.

Our last question is from Simon Flannery of Morgan Stanley.

Please go ahead, Simon.

Great, thanks for fitting me in.

I wondered if you could talk about the balance sheet a little bit.

You've got still very good credit ratios, about 1.7 times debt to EBITDA.

You've obviously got an opportunity with where the stock price is right now.

You've been active in the first half of the year.

You've got some opportunity to continue to be aggressive in the second half of the year.

How do you balance the potential funds required for the spectrum auction, the buy-backs, and the leverage ratio?

We've seen AT&T take their leverage up, in part due to the opportunities given by the credit markets.

Is that something where you might be more comfortable taking advantage of the buy-backs and moving your ratio up a little bit from here?

Thanks.

Thanks, Simon.

It's John, I'll take that one.

Certainly you've seen what we've done in terms of expanding the program for this year, and Darren's comments on what we would like to do in the future.

I think you've hit -- you've answered most of your question, actually.

The leverage is very strong, 1.7 times, low in our target range, so certainly there's opportunity there.

We are generating CAD4 billion-plus of EBITDA, so there's good support there; and we do have very strong liquidity at over CAD2 billion.

Given the weakness that we've seen in the stock price, given the fact that the corporate development activities are perhaps restricted right now, in particular one that we weren't able to complete, it made a lot of sense to push that NCIB share buy-back higher this year.

I think your comments around the credit markets, even though yields are up pretty significantly, actually, in the last few months, we certainly have got an eye on that.

I think those things all point to a very strong position in terms of what we can do in our buy-back.

You've seen what we've done so far, pushing through the CAD500-million very quickly, and we'll continue to do different things in the market, whether they're private market transactions, whether they're -- we're in a blackout, so right now we're doing automated buy-backs.

We're being quite aggressive.

Simon, I think it's worth you having a look at the modeling in respect of -- let's say the NCIB program, and its synergistic relationship with our dividend growth model.

The extent to which, we are buying back stock and canceling it, and the stock has a characteristic of a 10% dividend growth rate.

It is a very judicious and economic thing to do, and helps with, I would say, the longer-term credit profile of this organization from a uses of cash perspective.

Secondly, in terms of the quality of our balance sheet, it's underpinned by the quality of our assets and the earnings that they generate, and the quality of our earnings on wireless, and on wireline to the point I made earlier, is excellent.

I think that underpins not just the current state of the balance sheet, but its robustness well into the future, assimilating events like a vigorous spectrum auction.

Lastly, one of the things in looking at TELUS from a leverage ratio perspective, I'll remind people that in terms of tax affecting your leverage ratio, we are in a cash-tax-paying situation.

To the extent to which we see any elevation in our leverage ratio, it has positive consequences as it relates to our cash-tax position.

Those are three elements that I would add to the comments that John made.

Thanks very much.

Thanks, Simon.

On behalf of Darren, Joe, and John, I would like to thank everybody for taking the time.

Sorry we ran a little bit over, but as you realize, I think we had some important issues to discuss.

Enjoy your summer.

Ladies and gentlemen, this concludes the TELUS 2013 Q2 Earnings and Guidance Conference Call.

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