TELUS Q2 2006 Earnings Conference Call Transcript (TU)

Aug. 4.06 | About: TELUS Corporation (TU)

TELUS Corporation (NYSE:TU)

Q2 2006 Earnings Conference Call

August 4, 2006 11:00 am ET


John Wheeler - IR

Darren Entwistle - CEO

Robert McFarlane - CFO

Peter Adderton - Founder and CEO, Amp'd Mobile


Simon Flannery – Morgan Stanley

Peter McDonald - GMP Securities

Jonathan Allen - RBC Capital Markets

Marie Silva - Goldman Sachs

Vince Valentini - TD Newcrest

Glen Campbell - Merrill Lynch

Rob Goff - Haywood Securities

John Henderson - Scotia Capital

Peter Ramey - BMO Capital Markets

Devi Goss - Genuity Capital Markets


Good morning, ladies and gentlemen, and welcome to the TELUS second quarter conference call. I would now like to introduce your chairperson, John Wheeler, Vice President of TELUS Investor Relations. Please go ahead, sir.

John Wheeler

Good morning. It is John Wheeler here. Thank you very much for joining us for the second quarter conference call and webcast. Let me introduce the TELUS executives online with us today. They are Darren Entwistle, President and CEO; and Bob McFarlane, Executive Vice President and CFO here with me in Vancouver. As well with us today is a special guest speaker, Peter Adderton, CEO and Founder of Amp'd Mobile, who is joining us from the eastern U.S. We will start with introductory comments by Darren, Peter and then Bob. This will be followed by a question-and-answer Session with Darren and Bob.

The news release on second quarter financial and operating results and detailed supplemental investor information are posted on our website at In addition, a joint release of TELUS and Amp’d Mobile has just been released. For those with access to the internet, the slides are posted for viewing at on the investor site. You will be in listen-only mode during the opening comments.

Let me direct your attention to slide 2. The forward-looking nature of the presentations, answers to questions and statements about future financial results and guidance are subject to risks and uncertainties and assumptions. Accordingly, TELUS’ actual results could differ materially from statements made today, so do not place undue reliance on them. I ask that you read your legal disclaimers and refer you to the risks and assumptions outlined in our public disclosure and filings with securities commissions in Canada and the U.S.

Now over to Darren on slide 3.

Darren Entwistle

Good morning. During my remarks today I will provide TELUS' perspective on recent developments in the Canadian telecom industry, followed by the highlights of TELUS' strong second quarter results. Additionally, I will be introducing an exciting and innovative wireless service that TELUS is bringing to Canada.

Given that TELUS is the last Canadian telco to report its second quarter results, it is insightful to observe the metrics of the wireless industry relative to some investor concerns I heard over the last few quarters. The solid wireless results in aggregate we see today reflect a robust Canadian wireless industry. Notably, industry revenue is up 17%. In addition, the total number of wireless subscribers is up 11% on a year-over-year basis to 17 million subscribers. It is also interesting to note the industry’s focus on the more profitable post-paid subscriber segment.

Encouragingly, ARPU increased year-over-year for each of the three major players with an average increase in ARPU of 5%. Moreover, churn in Canada was again down for all three players. Clearly the average churn rate for the industry of 1.6% sets the standard for most wireless operators worldwide to aspire to. The combination of industry ARPU accretion and improved customer retention has led to an increase in the average lifetime revenue for the industry of 8% which is the most telling economic driver for wireless.

A concern for investors recently has been the trend in the cost of acquisition. In the second quarter, this trend is reversed and indeed decidedly so for two of the three major operators. As a result of these factors, industry EBITDA was up 22% over last year with the operating margin for the industry improving by 180 basis points to 43.5% and cash flow up a strong 24%. All in all, an encouraging and hopefully indicative quarter for wireless in Canada.

Let me also touch on the unprecedented regulatory developments in Canada transpiring this year, as outlined on slide 5. I am guardedly optimistic that we are now moving in the direction where the future may hold less regulation rather than more.

The telecom policy review recommendations issued in March generated a rare consensus within our industry, and indeed, established a blueprint for effective reform that should be pursued. I applaud Industry Minister Bernier for proactively embracing these recommendations. In June, Minister Bernier tabled an unprecedented policy directive advising the CRTC to rely on, in his words, “on market forces to the maximum extent feasible.” This is, without a doubt, a welcome reflection of his vision of a sustainable business model for our industry, governed by free market forces rather than regulation. TELUS supports this thought leadership which can, without a doubt, better enable our entire industry to take advantage of the IP world.

Recent developments at the CRTC are also encouraging and point to beneficial change for our industry. Firstly, the CRTC was directed to reconsider its original decision on VoIP and to take into account the telecom policy review recommendations. On a related note, the CRTC's local forbearance decision was also appealed to Cabinet by TELUS and other ILEC's, reflecting our mutual desire for a clearer and more expedient path to deregulation in Canada. Indeed, we are pleased the CRTC is now considering the inclusion of wireless substitution in its market share test for deregulating local phone service.

Secondly, the CRTC decided appropriately against regulating mobile broadcast services. This is consistent with their past policy of taking a light regulatory approach to wireless that has been so fundamental to the enormous growth of the mobility industry.

Thirdly, the CRTC has set an appropriately narrow range and a focused scope of issues to be explored and reviewed in the ongoing proceeding on local price gaps which will reach determination in 2007. I am hopeful that we are seeing a transition from a series of punitive regulatory decisions for the ILEC historically towards a more balanced and sustainable industry model that allows market forces to determine competitive outcomes.

I will now turn our focus to TELUS' results as outlined beginning on slide 6. The strong and sustained subscriber growth on this chart of total customer connections demonstrates conclusively the efficacy of TELUS' national growth strategy focused on wireless and data. Over the last two years alone TELUS has seen more than 1 million new subscriber connections. Importantly for investors to note, the average revenue per connection has also increased, in this case by 3% to $64.40.

In the second quarter TELUS' fast-growing wireless subscriber base which is up 14% to 4.7 million subscribers has, for the first time in the Company's history, crossed over to exceed TELUS' network access lines. If this keeps up, who knows, we may eventually get some facsimile of a wireless EBITDA multiple in our stock valuation.

On the wireline data front, high speed ADSL growth was strong with 14% growth in our subscriber base reflecting TELUS' successful marketing campaigns and our commitment to customer loyalty and retention.

As shown on slide 7, we are making positive revisions to our consolidated guidance for the full year. Owing to our strong growth in wireless, TELUS is raising our wireless revenue and net additions outlook. By extension, we're increasing our consolidated revenue guidance this quarter by $25 million to a range of $8.625 billion to $8.725 billion of revenue on a consolidated basis.

TELUS' guidance in respect to capital expenditures is being increased modestly by 3% due to continued growth investments for strong home starts in Western Canada, and accelerated broadband rollout programs in our access infrastructure and TELUS' ongoing billing system conversions. It is important to note however for investors that TELUS' consolidated free cash flow forecast remains unchanged at $1.6 billion.

I am also pleased to report that earnings per share today is being increased significantly by $0.50 to a range of $2.95 to $3.10 primarily as a result of federal and Alberta tax changes, and as well, TELUS' positive operational performance.

Let's now turn to slide 8. There were several noteworthy points in the wireline side of our business in the second quarter of this financial year. On a positive note, TELUS has seen only moderate network access volume losses at 2.6%, given that residential line losses of 4.6% were offset partially by business line growth.

Moreover, our strong marketing programs have driven a 71% increase in high speed Internet net additions on a year-over-year basis. Notably, TELUS also implemented a $1 increase in pricing for high speed Internet this quarter reflecting our philosophy of driving profitable growth.

At the same time TELUS is not immune to the industry pressures that are affecting our long distance business, with revenue being down 10% on a year-over-year basis. Additionally, enterprise re-pricing and as well, intense competition, are affecting our non-ILEC growth in central Canada. For these reasons, we have narrowed the top end of our 2006 guidance for our wireline operations in the provinces of Ontario and Quebec. Notwithstanding these factors, TELUS' wireline results demonstrate our resiliency in a tough industry and place TELUS ahead of many of our North American peers.

Investors should know that there are three themes for our wireline business that reflect TELUS' operating cadence. Firstly, we are intent on sweating TELUS' portfolio of heritage products and services to stabilize revenue and march in performance in the face of competitive intrusion and technology substitution. This goal of reinvigorating our traditional product lines should be supported by increasing deregulation that gives TELUS the freedom to act more competitively in respect to pricing, bundling and win back activities.

Secondly, TELUS will continue to drive revenue growth through our future friendly home strategy, providing integrated home networking, security and entertainment applications over TELUS' wireline and wireless infrastructure.

Thirdly, TELUS will continue to be vigilant in respect to our productivity programs as outlined on slide 9. To maintain our competitive advantage, the operational efficiency program that TELUS began five years ago continues today into a fourth phase. TELUS is progressing a wade array of cost reduction programs across the organization which incorporate productivity opportunities from the progressive collective agreement that was secured in 2005.

TELUS’ operating efficiency initiatives fall into three broad categories. First, the outsourcing of non-core or peak load work. The second category is the consolidation of offices and call centers. The third category is driving process improvement and automation.

In respect to outsourcing, TELUS has fully or partially contracted out a number of non-core functions including property management, custodial services, building maintenance, mail services, fleet maintenance, and pay phone counting. As a result of these outsourcing initiatives, approximately 250 employees have either accepted an offer of redeployment or a voluntary departure package.

Regarding office consolidation, to achieve greater efficiency and improve customer service simultaneously, we have rationalized a number of offices into larger centers. For example, in operator services we've consolidated our retail office and call center in Victoria into Calgary and Edmonton; and as well, we consolidated our conference operation into the B.C. lower mainland. Additionally, we have completed the consolidation of two field dispatch centers in Greater Vancouver into Calgary. Through these initiatives, approximately 500 employees have either accepted an offer of redeployment or a voluntary departure package.

We are also transforming our organization to a more variable cost structure through the increased use of temporary employees that allows TELUS to synchronize our resources with the variability of customer demand.

Finally, with respect to process improvement and automation, TELUS continues to focus on streamlining functional area processes which includes building on the learnings that we garnered as a management team deployed for emergency operations during the last labor dispute. For example, we are automating our directory listings functions and making process improvements in our business support functions such as human resources.

TELUS' traction in driving operating efficiencies is evidenced by the $81 million that has been invested in restructuring and workforce reduction charges over the last three quarters following the labor disruption, including the $30 million recorded in the second quarter of this year alone.

In areas like office and call center consolidations, TELUS sees relatively short conventional payback periods; whereas in respective outsourcing activities, by example, implementation takes longer and paybacks can extend over several years It should be noted, however, that all of these initiatives have positive MPV and IRR business cases.

Turning now to our wireless highlights on slide 10, TELUS contributed to the strong industry results being enjoyed by investors this week. Noteworthy for TELUS is the 18% growth in wireless revenue, facilitated by a 14th consecutive quarter of increasing ARPU, and as well, a solid quarter of net additions. TELUS' $2 accretion in ARPU was supported by a 121% increase in our wireless data revenues and as well, best in class customer retention.

Of particular interest to TELUS investors are two key operating parameters. First, TELUS' cost of acquisition of $394 is down sequentially quarter to quarter by 8% compared to the first quarter of 2006. Second, at 46.4% our wireless margin is up 200 basis points sequentially and 100 basis points on a year-over-year basis.

From an investment perspective, TELUS' higher wireless capital expenditures this quarter reflect the continued aggressive roll out of our high speed EV-DO network to 19 communities across Canada over just the last eight months alone. TELUS' industry-leading EV-DO network has speeds that are indeed best in class, and it is serving as a catalyst for continued wireless data growth in business services and increasingly in consumer applications, as we can see in turning to slide 11.

Today I am please to do announce an exciting new initiative between TELUS and Amp’d Mobile, made possible by TELUS’ leading EV-DO network that will yield opportunities for Canadians who want more from their mobile devices. TELUS is partnering with Amp’d Mobile in two ways. Firstly, through a U.S. $7.5 million capital investment through our venture capital arm, TELUS Ventures. Secondly, we have secured a unique licensing and service agreement on the commercial front with TELUS bringing Amp’d highly interactive and customized mobile entertainment information and messaging services to Canada. Amp’d differentiated services and technology make it possible for clients to easily access personalized wireless content on TELUS' high speed wireless network.

Turning now to slide 12, Amp’d Mobile, in our relationship, will be responsible for marketing and bringing exciting and exclusive entertainment to Canadian wireless subscribers. TELUS, in this partnership, will manage sales and distribution, billing, client care, network operations and pricing; thereby ensuring that Canadians continue to receive TELUS' best in class client experience.

Initially, the Amp’d Mobile, powered by TELUS service will be focused on the post-paid subscriber segment. This innovative partnership, coupled and augmented by the TELUS brand, will enable us to engage new clients and earn additional revenue from the tech savvy entertainment-focused youth demographic.

It should be noted that this deal is not a traditional MVNO but rather this partnership is an exclusive licensing and service agreement. We see a great fit with TELUS as the Amp’d Mobile approach mirrors TELUS' marketing philosophy in Canada with a premium and youth-oriented brand, a high ARPU and a focus on post-paid customers. I am delighted to have Peter Adderton, the founder and CEO of Amp’d Mobile on our call this morning. For those of you who do not know Peter, he is renowned for his success in founding and creating the highly successful Boost Mobile youth brand in the U.S. and Australia. Since 2000, that brand has attracted over 4 million users. I will now turn it over to Peter who will take you through slide 13 and beyond. Peter, over to you.

Peter Adderton

Thank you very much, Darren. We're very pleased to be here to tell your investors and the Canadian media a little about Amp’d Mobile. Of course we appreciate the vote of confidence by TELUS as evidenced by your investment in our company, Amp’d Mobile Inc. here in the U.S., alongside our other select group of investors. Just a short note on the investors that TELUS is joining. MTV Networks out of New York, Intel, Capital, Universal Music -- one of the largest music providers in the world; Qualcomm, the founders of the EV-DO CDMA technology, and premium equities funds here in the U.S. So we are pleased to have TELUS as one of the high caliber investors that we have in our company.

We look forward to providing you and the organization there at TELUS an excellent return on the investment. We think we're off to a great start here in the U.S., and we believe we'll get the same traction that we're getting in the U.S. in Canada.

I will just take a little moment to talk about slide 13 and 14 to explain our successful Amp’d Mobile concept here in the U.S. and for the Canadian Audience; and for the international investors who may not be that familiar with the Amp’d Mobile brand.

Amp’d Mobile’s broadband wireless services combines acquiring coverage with the fastest download speed in North America. Amp’d offers traditional services such as voice and text, but we have a completely different fresh user interface that is really designed to optimize the third generation technology that TELUS has recently rolled out. We have fully customized handsets and content, Amp’d Mobile Amp’d Live environment brings more relevant, personal experience to the wireless lifestyle with unique music, video, community, and entertainment and sports and games. We really believe our company as a mobile entertainment company more than just a wireless company.

We launched Amp’d Mobile earlier this year and we now have got nationwide U.S. coverage. While our approach is to offer both post-paid and prepaid plans, the focus has been in the U.S. and will be in Canada on the post-paid service. Our strategy and tactics are to deliver fast profitable growth as indicated by our high ARPUs, which is significantly higher than U.S. average. To give you an example, they are two times the U.S. average that Amp’d Mobile is experiencing in its early days.

I know I get this question a lot. Let me note that we are a private company and we do not publicly disclose our operating metrics, however in their due diligence TELUS Wireless clearly liked what they saw along with the other investors that Amp’d Mobile has.

I am just excited about the fit that we see with TELUS and the approach to Canada on many levels. With our success here in U.S. market as the premium mobile brand, we believe partnering with TELUS represents the best possible combination for setting a new standard for mobile entertainment in Canada. Amp’d Mobile in Canada will be responsible for marketing and bringing the freshest, hottest and most exclusive content to the Canadian users, as well as providing optimized handsets capable of faster download speeds.

Through Amp’d Mobile differentiation, through our proprietary Amp’d Mobile Live environment, clients will have access to music, 3D gaming, live sports, concert video streaming, mobile communities, unique personalized features as well as their traditional mobile phone and message functionality.

Darren and I believe that our specialized Amp’d Mobile brand will complement the TELUS brand and allow us to successfully target the lucrative 18-35 year old age group, a hip and tech savvy youth, and the young adult market segment. Amp’d Mobile’s laser focused approach will be well received, I believe, in Canada.

What makes this approach work is leveraging a 3G EV-DO high speed networks of TELUS. We use a high speed EV-DO 3G network here in the U.S. and it has worked great for us. So I guess, get ready for the Amp’d brand. It is powered by TELUS and it is hitting the market in 2007. I, along with the entire Amp’d Mobile team here in the U.S. and Canada see a win-win for partnering with TELUS, and really a tremendous opportunity. We had it back to you, Darren, and thanks again for the opportunity.

Darren Entwistle

Thank you very much, Peter. It would be fair to say that TELUS and our leadership team here at TELUS look forward to working with you and your team successfully in the coming years and we're very excited by the partnership.

I will now turn the call over to Bob to brief you in detail on TELUS' second quarter financial results. Bob, over to you.

Robert McFarlane

Great, thanks, Darren. Let me begin my comments with a recap of our excellent wireless results shown on slide 19. Wireless revenues, EBITDA and cash flow continue to deliver strong double-digit growth. Revenue increased an impressive 18% in the second quarter driven by strong subscriber growth and higher ARPU. EBITDA increased 20% despite higher gross additions which caused higher costs of acquisition. This led to 100 basis point improvement and industry-leading wireless EBITDA margins to 46.4%, which was a second quarter record for TELUS.

Capital expenditures of $209 million for the first six months of 2006 is consistent with annual guidance of approximately $450 million. Simple cash flow also set a second quarter record, increasing 17% to $293 million.

As shown on slide 20, although our customer growth declined slightly year-over-year, our post-paid subscriber growth was steady at 103,000 while prepaid additions of 21,000 was somewhat lower than last year. Interestingly, we note TELUS was the only one of the three national carriers to have positive prepaid additions this quarter. TELUS prepaid continues to be distinctly superior in subscriber economics with higher ARPU, relatively lower churn and a growing total base.

The net addition subscriber mix improved from 79% post-paid one year ago to 83% this quarter. Overall subscribers increased 14% to 4.7 million and our overall subscriber mix remained at an industry-leading 81% post-paid.

As shown on slide 21, ARPU continues to increase, up $2 year-over-year driven by significant growth in wireless data, stable voice ARPU and increased customer usage. Consistent with our disclosure of wireless data ARPU, data revenue accounted for $4.45 or 7% of ARPU this quarter up a notable 94% from $2.30 or 4% a year ago. Wireless data revenue as a whole increased 121% when compared to the same quarter last year.

Continuing a multi-year positive trend, ARPUs have been up across Canadian industry as shown on slide 22. As you can see, TELUS maintains a 13% premium to our closest competitor. The $2 improvement in wireless ARPU for TELUS in Q2 represents the 14th consecutive quarter of increased ARP.

TELUS' profitable growth strategy is evident on slide 23. Our low blended churn rate declined again this quarter decreasing 7 basis points to 1.3%, our post-paid churn also continues to decline and reached a record low for TELUS at 0.9% this quarter. Coupled with higher ARPU, the average lifetime revenue per TELUS subscriber has again increased up 9% to $4,860.

COA recovered this quarter on a sequential basis from Q1 although it increased 15% from last year. In spite of this, we're able to keep our marketing efficiency metric by COA over lifetime revenue stable at 8% as indicated on the last line of the slide.

As you can see in the next slide, this is a best in class result. We compare very favorably with our peers in this metric. TELUS' wireless marketing efficiency is shown by COA at 8.1% of lifetime revenue remains very attractive both on an absolute and on a relative basis, demonstrating TELUS’ continued profitable growth focus.

TELUS’ $394 COA per gross addition decreased $35 from the first quarter and represents the lowest reported COA of the three national carriers in the second quarter. This is quite encouraging when you consider that TELUS led the industry in net addition and increased ARPU, decreased churn and decreased our COA per gross add.

To conclude the wireless segment on slide 25, today TELUS is updating our full year 2006 guidance. I am pleased that today we're raising wireless revenue guidance range by $25 million to $50 million. This reflects the strong ARPU growth experienced to date, as well as expectations for higher subscriber growth in the range of 560,000 to 590,000. EBITDA guidance remains unchanged reflecting new higher net addition guidance and the associated variable COA. Clearly the outlook for wireless remains strong.

Let me turn to our wireline operations on slide 26. Wireline revenue declined 2% reflecting industry-wide trends that Darren mentioned. Wireline EBITDA decreased 8.5% as a result of lower revenue, higher costs associated with increased high speed internet additions, and the increase in restructuring charges. Normalized for the $22 million increase in restructuring costs, EBITDA declined a more moderate 4%. Capital expenditures were 6% higher this quarter due to increased spending primarily for network access growth to serve housing growth in Western Canada, our broadband build in our incumbent territories, and billing system and service development.

Slide 27 provides TELUS' wireline revenue breakdown by product. Reflecting industry wide pressure, TELUS experienced erosion in local and long distance. Local decreased 3.6% primarily due to network access line erosion while L D revenues declined primarily due to increased competitive pressures and technology substitution in the residential market.

The decrease in other revenues was primarily the result of lower customer premise equipment sales as well as a retroactive rate reduction from a CRTC decision. One highlight for the wireline segment in the second quarter was in data. We’re encouraged by our data results. Data revenue grew 6% due to increased Internet revenue and growth in high speed subscribers as shown on the next slide.

High speed Internet net adds increased strong growth increasing 71% to 29,000 due to higher gross additions from successful promotions and lower customer deactivations. Our high speed internet subscriber base now totals 831,000, up 14% from a year ago which represents 79% of our total Internet subs now at approximately 1.05 million. This is a key element of our data growth strategy and our future friendly home initiative.

Slide 29 highlights our network access line performance. While challenged in this area industry-wide, our 2.6% decline was actually an improvement from last quarter. TELUS experienced increased residential line losses at negative 4.6% reflecting increased competitive activity from resellers and VoIP competitors and of course from ongoing wireless substitution. However, business lines improved both sequentially and year-over-year increasing 0.6% as growth in non-incumbent business lines offset the decrease in incumbent business lines.

To conclude in wireline, you can see on slide 30 we're making minor revisions to our 2006 guidance to reflect year-to-date results and our expectations for the rest of the year. We're reducing the top end of our ranges for both total wireline and non-incumbent revenue by $25 million tightening the range for non-ILEC EBITDA to $29 million to $30 million. Reflecting significant investments in local access, broadband deployment and new system and service development we're increasing our CapEx estimate slightly to approximately $1.15 billion.

Turning now to look at TELUS on a consolidated base, here in slide 31 revenue growth from the second quarter was 6%. EBITDA increased 4% which includes a $24 million incremental increase in restructuring charges. Excluding this impact EBITDA on a consolidated basis grew faster than revenue at 6.4%, which means underlying consolidated operating margins have improved.

EBIT improved an impressive 27% which is much higher than our EBITDA growth even excluding restructuring due to reduced depreciation and amortization costs as a result of investment tax credits record this quarter and an increase in fully amortized assets. Reported EPS increased by 94% which includes certain nonrecurring items as I will explain on the next slide.

EPS this quarter was impacted positively by the revaluation of net future income tax liabilities following the lowering of federal and Alberta tax rates and the elimination of federal large corporation taxes. The total impact of these decisions was a favorable $0.32. In addition, there was another $0.02 positive impact for recognition of investment tax credits as mentioned earlier for assets capitalized from prior years. When normalizing for these tax-related adjustments as well as taking into consideration the $0.03 negative impact last year related to booking the accrual for the BCTel bond litigation underlying EPS was still up an impressive 23%.

Slide 33 gives analysts a further breakdown of the 94% increase in EPS. In addition to the $0.32 tax adjustment impact mentioned on the prior slide, EBITDA growth contributed $0.06 of the EPS improvement while lower financing costs contributed $0.05 to the result. The reduced financing costs are primarily due to the early redemption of the $1.6 billion of debt in December of 2005. As already mentioned, the BCTel bond litigation expense accrual recorded in Q2 '05 and the lower depreciation expense explained another $0.03 each. Finally, the 4.5% decrease in outstanding shares as a result of NCIB repurchases contributed about $0.02 to reported EPS.

Turning to slide 34, in the next quarter we continue to be active in the market purchasing 5.6 million TELUS shares for $249 million. By the end of this quarter, TELUS had repurchased for cancellation a total of 11.9 million shares since December 2005, representing 50% of our updated NCIB, a run rate that is so far is consistent with a full annual program. Clearly we're continuing to deliver on our commitment to return a significant amount of capital to investors.

Turning to the next slide, our EBITDA growth and debt repayment has put us well within our debt policy targets. In fact, this quarter Moody's changed its outlook to positive from stable while reiterating its BAA2 rating on TELUS' debt. TELUS is also well on its way to refinancing the 2007 debt coming due. In May, TELUS closed a $300 million debt offering of 5% notes maturing in 2013 where the proceeds were used to early terminate cross currency swaps associated with our U.S. notes maturing in 2007. The swaps were then reset at lower rates lowering our total outstanding liability while maintaining our fully hedged position. We also locked in interest rates in the first quarter of 2006 for a further $300 million to be refinanced in the future, from yet to be issued debt.

Turning to the next slide, let me conclude. Today we're making changes to our consolidated guidance to reflect revisions to our outlook for both wireless and wireline guidance previously mentioned. Consolidated revenue guidance has been adjusted upwards by $25 million, and our EPS guidance range has increased $0.50 which in large part reflects the positive tax impacts explained earlier and an improved earnings before tax outlook. Note at $1.55 billion to $1.65 billion our free cash flow guidance has not changed, despite the increase in CapEx guidance.

With that, Darren and I would be pleased to answer your questions. I will turn the call back over to John Wheeler.

John Wheeler

Thank you very much, Bob. Just before I turn the call over to Tammy to conduct the Q&A session, can I ask your cooperation for one question at a time, please. However, if you need a follow-up question related to the answer to your first question, that is appropriate, of course. Tammy, please proceed.

Question-and-Answer Session


(Operator Instructions) Our first question from Simon Flannery – Morgan Stanley.

Simon Flannery – Morgan Stanley

Thank you very much. Good morning. Sprint yesterday was talking about the dual mode handsets they were expecting to get over the next couple of quarters, push to talk on IDEN combined with CDMA voice; and also the progress they're making on Q Chat over Rev A. Can you talk about the potential plans that you might have to use some of these devices and potentially follow along with what Sprint plans to do in terms of network migration? Thanks.

Darren Entwistle

Thanks for the question Simon. I think in TELUS’ case it is fair to say we're somewhat of a cheerleader if you will for Sprint/Nextel in this regard, because as you know and many investors should realize, we both have the CDMA and the IDEN technologies. So essentially in our case we are a follower given that the economies of scale are really driven by the Sprint Nextel decision on these technologies.

So I think what is fair to say is that we're well positioned to reap the benefits of those decisions, and we're eagerly supporting the direction that Sprint Nextel is taking.

Simon Flannery – Morgan Stanley

Thank you.


Our next question comes from Peter McDonald - GMP Securities.

Peter McDonald - GMP Securities

Thanks. Just before I ask my question, I think Simon also asked about the network migration that Sprint talked about, if you can address that part of it.

Darren Entwistle

I don't recall -- what are you specifically referring to by network migration?

Peter McDonald - GMP Securities

I think what he was referring to was network migration to GSM.

Darren Entwistle

I don't think that's what I heard. I think he was referring to the convergence of IDEN CDMA and what is the nature of the technology to be deployed to bring high speed capability to IDEN.

Peter McDonald - GMP Securities

Okay, then maybe you can discuss then, the network migration that Sprint talked about that they're contemplating it and what your thoughts are on that.

Darren Entwistle

Well, in terms of network migration -- are you referring to GSM technology?

Peter McDonald - GMP Securities


Darren Entwistle

I think it is pretty early days to be speculating about CDMA versus GSM technology, certainly with an investment in CDMA, it is somewhat akin to the old Beta/VHS argument of years ago. In our respect, if you look at our results, if you look at our CapEx intensity, if you look at our network sharing arrangement with the Bell organization which is to our mutual advantage, I think a unilateral swap to a different technology would not be a prudent move to take.

In terms of the evolution to 4G technologies, I think similar to the answer I gave Simon, in the case of TELUS we will be observing the developments of the larger carriers. So in our respect we certainly have no intentions or contemplations of changing our technology at this juncture.

Peter McDonald - GMP Securities

Can I ask a couple of questions on the Amp’d deal?

Robert McFarlane


Peter McDonald - GMP Securities

First on brand, will the phone be branded as Amp'd, and then what happens on the billing? You take care of the billing, but the bill comes as a TELUS bill or an Amp'd bill?

Darren Entwistle

The bill comes as a TELUS bill. In terms of the branding on the hardware or form factor handsets if you will, the extent to which it is an optimized handset customized to the Amp’d application it is Amp’d Powered by TELUS. What we're doing from a brand affinity perspective.

I guess maybe to expand upon my answer, Peter, to your question, I think it is important to highlight some non-trivial differentiating factors related to this arrangement versus what would be a more traditional MVNO model that we've seen in the Canadian market. First of all, this is not a traditional MVNO. This is a licensing and service agreement. If you really want to look at hard and differentiating factors, this particular application needs an EV-DO network to be delivered. I would say that axiom is not true of the type of MVNOs we have seen thus far within the Canadian market place.

To demonstrate the unique aspect of this application requires an EV-DO network as the delivery mechanism. Other things that are different is the post-paid focus of the Amp'd model versus what we have seen in terms of other more traditional MVNOs being focused on prepaid.

The other differentiating factors also include the significantly higher ARPU driven off the back of the unique content of the application and the focus on post-paid, and I think Peter made comments during the call about Amp'd achieving an ARPU which was twice the industry standard within the U.S.

Other aspects that are differentiating are the fact that we get exclusive access to innovative and unique content and that is very exciting, and when you look at a lot of the other MVNOs we have seen traditionally in the Canadian market they don't bring unique or exclusive content with them to the partnership arrangement on a wholesale business.

The other things that are different again from the traditional MVNO are the fact that from a form factor perspective, Amp'd will be providing Optimized handsets that are customized to the Amp'd application leveraging the EV-DO bandwidth that TELUS provides, and applications that are suitable to the entertainment downloading and distribution that is being provided.

Another element that is different is a lot of other MVNOs have distinct branding that is separate from the wholesaler providing the network access in the first place. In respect to this deal, because of the synergies between the Amp'd and TELUS brand, given that we have a commonality in terms of premium brand as it relates to value add and high ARPU and a brand as well mutually that resonates well with the youth market, we see a strong brand association and affinity which is why we are going forward with the Amp’d Powered by TELUS nomenclature.

Finally, differentiating ourselves from traditional MVNOs, TELUS will control the pricing and the sales and distribution model, in addition to what we will provide on the client care front. So when you add up all of those factors, the EV-DO network, the post-paid focus, the high ARPU, the exclusive and exciting content that Amp’d brings to the table, the customized handsets for the application, the brand affinity and association, and the control that we have over sales and marketing -- particularly as it relates to pricing client care and billing -- I think this is a unique model, and a sustainable model and one that we're very excited about in terms of the economic contribution that it can make to our organization.

Peter McDonald - GMP Securities

Just on that, Darren, with all of what you said, does that mean on the pricing model between the two of you that they get revenue per customer per month only and there is no other financial impacts on the way that you look at each customer?

Darren Entwistle

We have an economic share model, Peter, that I am not going to delve into at this particular juncture, but it would be fair to say in terms of subscriber growth we have an economic share model. In terms of securing our clients we also have a cost share model, so to speak. So overall we share in the economic gain as we bring subscribers on board in the fashion I previously described.

Peter McDonald - GMP Securities

Thank you.


Our next question comes from Jonathan Allen - RBC Capital Markets.

Jonathan Allen - RBC Capital Markets

Thanks very much. Just a quick follow-up question on the Amp’d Mobile. First of all, from a customer perspective or from a reporting number, will you be consolidating those into your post-paid base or will this be showing up as some sort of a separate wholesale line?

The second question, Darren, you mentioned that Amp’d Mobile is bringing exclusive content to the business. I was wondering if as part of the agreement TELUS would also have access to use some of that content for your existing Spark plans for the core post-paid base?

Darren Entwistle

Jonathan, the answer to your latter question is yes. We have access to that content not just by the way for the Spark brand in terms of wired or mobile offering. We would also have access to that content to support TELUS TV.

In respect to reporting I will hand it over to Bob McFarlane.

Robert McFarlane

We would of course be reporting these as post-paid subscribers as they are sold in post-paid format, so these are our subscribers. It is not a wholesale arrangement like an MVNO. There is really not even a close call on this one. They're subscribers of TELUS.

Jonathan Allen - RBC Capital Markets

If I could follow up on one other question; in the U.S. though we haven't seen specific results, it had been rumored that Amp'd had gotten off to a fairly slow start. I believe the rumor was about 50,000 adds in the first six months. I was just wondering if you see any differences between the Canadian and U.S. market where Amp’d would be more successful, in your view, than they were in the U.S.?

Robert McFarlane

Actually having conducted due diligence pursuant to our venture capital investment, we're very pleased with results. They haven't disclosed them but let's just say that the economic profile and the rate of growth of this organization in the United States has been truly a positive one, and I am not sure why you would have heard rumors to the contrary. Obviously we've done the due diligence. We know the numbers. They're outstanding, and we're excited to bring this concept to Canada.

Darren Entwistle

Both in respect of subscriber growth and ARPU performance, Jonathan.

Jonathan Allen - RBC Capital Markets

Great. Thanks very much.


Thank you. Our next question comes from Marie Silva from Goldman Sachs. Please go ahead with your question.

Marie Silva - Goldman Sachs

Thank you. I wanted to get your thoughts on the overall prepaid market this quarter. You guys obviously performed better than others but it still seems like there is a year-over-year slowdown. I would just like to understand the dynamics there.

Also, just thinking about the prepaid ARPU and the beta contribution there, I just wanted to see if you can give any color on that. Thank you.

Robert McFarlane

In regard to prepaid comments in the market, I think as a general orientation, if you look at the heritage of the respective firms, tell us historically a lower prepaid in our base. Rogers, by way of an example, through the acquisition of Microcell, really augmented the significant base of prepaid, and of course acquired an organization with a certain churn profile as well, so they have done quite well focusing on post-paid.

I think that is really where most marketing dollars and distribution channel emphasis has been in the Canadian market. If you look at a relative change, I would say the other two competitors, more so on the post-paid side.

Of course, the Bell organization effectively out-sources part of its sub prepaid focus through the Virgin Mobile MVNO. In our case, it is all internal and we have really continued.

We had no specific promotions in the area in this quarter. We are very comfortable with the mix that we had.

I think the reason we are seeing why we have net adds where that is not the case for certain of the other organizations, is one had significant write-downs as they cleared the ship for the new team, and the other one, of course, has a materially higher churn rate.

Really, the issue on prepaid is driving economics, in our case at the $26 ARPU, which is approximately double that of our competitors, having a churn rate of about 3%, and then not directing many advertising dollars at all towards promoting that product, and containing the subsidy related to the handsets we sell -- all of which combines to drive positive economics for us.

Post-paid are worth more, but the prepaid still have value and that is why we continue with our traditional emphasis in that regard. We are quite pleased with the results we saw in the quarter.

The one other thing I would mention is for the first time I do not know in how many years -- in fact, it may be quite a long time since I have seen a TV ad advertising prepaid on TV. One of our competitors is doing that right now, with $0.01 evening weekends. That is something we try to stay away from, because then you are directing fixed cost promotion dollars to a lower economic product offering.

That is something we are quite careful about. When you look at our COA, that is why we really emphasize look at the COA in relation to the lifetime revenue and what is that return, and at approximately 8% COA to lifetime revenue on an overall basis, you can see whether it is post-paid or prepaid. We have a very, very efficient marketing cost for our wireless offerings.

Darren Entwistle

It would be a good piece of analysis, actually, for the analyst community to do, to breakdown COA as a percentage of prepaid lifetime revenue, to judge the efficacy of those investments.

Marie Silva - Goldman Sachs

Then, the use of ARPU -- data contribution to ARPU on prepaid versus post-paid?

Robert McFarlane

Yes, I know you answered it. You notice John did have a one-question limit, so I was hoping the referee would enforce it, but we do not disclose our data by prepaid and post-paid specifically, but what I would say, and you are on to something, is the way in which we have taken prepaid to the market, and this is consistent over, really from the beginning of the prepaid offering, is we do not position it as a discount offering. We do not position it as an inferior offering. It is similar handsets we are selling to a market that tends to be youth-orientated. They tend to be using data services and value-added services, and that drives a much higher ARPU than relative to our competitors.

Really, it is a different payment mechanism, and that is a different marketing approach than some other organizations have traditionally done in North America. I think that is one of the contributors to why we have superior economics.


Thank you. Our next question is from Vince Valentini from TD Newcrest. Please go ahead with your question.

Vince Valentini - TD Newcrest

Thank you. I will limit myself to one question on cap-ex, but I hope you guys go a bit longer than normal today, because your remarks were a bit longer than normal, and I think there are a lot of questions left in the queue.

On cap-ex, Darren, you talked about sweating the assets on the wireline side. I think that is a great strategy but if I look at your cap-ex, you are spending way more than any of your peers on the wireline side. The new guidance would suggest about 24% cap-ex intensity for this year versus your peers are in the 15% to 19% range.

Is 2006 an unusual year, with a bunch of projects that all hit and a bit of catch-up from the strike last year? Or do you view this 24% as a new trendline going forward? Thank you.

Darren Entwistle

I would say 2006 is a year where we are experiencing some strains, without a doubt, given that we came off a year where in 2005, we could not effectively deploy capital because our ability to implement was infringed upon by the work stoppage. Clearly we have a lot of catch-up to do in that regard.

It is also exacerbated by some other considerations. In both Alberta and B.C., there is a considerable amount of access network expansion related to new home starts. Clearly this is not a situation where we can mop up all of that connectivity ourselves, given that we now have a competitive model within that market, given that we are experiencing for the first time effectively, competition within the access infrastructure itself with our cable competitor.

The home starts for us are driving capital, when previously we would secure 100% of the connections, but of course, within a competitive scenario, that is no longer the case. Without a doubt, it is augmenting the type of capital that we have to deploy to address those home starts.

It is also fair to say that the broadband build that we have embarked upon, it is proceeding exceedingly well. We are, of course, making an investment in a prudent and progressive fashion in our access infrastructure to upgrade the bandwidth to facilitate the future funding of home services that we would like to provide into people’s homes over the foreseeable future.

Also, one of the major drivers that we have not discussed a lot, but clearly, certainly 2006 is a year where we are inaugurating and doing some heavy lifting, if you will, as it relates to systems conversions, and more pointedly, systems consolidations within the wireline area of our business.

As I have indicated previously, the legacy of bringing B.C. Tel, Alberta, and TELUS Quebec together has encumbered us with a myriad of order entry systems, order processing systems, and billing engines, which we are seeking to consolidate down to one single customer care platform. That is a major systems initiative for us, and again, 2006 represents a lot of heavy lifting in that regard as we seek to establish momentum in respect to that system convergent program.

I guess maybe the best way to describe it, when you look at the cap-ex intensity, I talk about 2006 being somewhat unique in terms of the strain related to the factors that I just talked about, and by strain I would say that this is not a new trendline, but perhaps pushing the outside of the envelope. Management is very sensitive to working within a reasonable cap-ex intensity range. It is not entirely atypical, but we are pushing the upward bound, without a doubt, and we are doing that as a result of the factors that I just talked about.

It is also important to say, from an affordability perspective, although we have modestly increased our guidance in terms of cap-ex by $50 million, or circa 3% on the $1.5 billion to $1.55 billion base, we are still sticking to our free cash flow target, where the midpoint is $1.6 billion.

It would be fair to say that the organic performance of the business, if you will, is funding the strain that we are facing on home starts. It is funding the very positive momentum that we have been able to establish, perhaps more expediently than we thought in terms of the broadband build and bandwidth upgrade and the access infrastructure, and it is also supporting the systems rationalization, which is so key to our future strategic goals as a national organization.

John Wheeler

Next question.


Thank you. Our next question is from Glen Campbell from Merrill Lynch Canada. Please go ahead with your question.

Glen Campbell - Merrill Lynch

Thank you. My question is for Darren. There has been some volatility in the stock, and a lot of speculation in investors around the question of whether there is or is not a process underway to review the possibility of income trust conversion.

I was wondering if you could comment on that, and in particular whether there is a formal process, whether the board is involved, whether the process would end with a specific decision. Thank you.


Thanks for that question, Glen.

Firstly, let me point out that the answer I provided on the last quarterly call, the Q1 call, was both comprehensive and exacting.

I embellished upon that answer in late June at a Montreal investor lunch that was broadcast on the web and covered by one of the analysts on this call, but it was publicly available information -- in fact, widely available information. Again, the comment I made in Q1 and, more to the point, the elaborate comments that I proceeded with in late June at the Montreal investor lunch, they stand as stated.

I guess if I am going to make any additional comments, it would be fair to say that the management team at TELUS, the leadership team at TELUS, the CEO of TELUS, and the Board of TELUS bring no bias to the issue of income trust in this organization.

What I can say is that we do bring a bias to the following matters. We are biased against financial engineering for the sake of financial engineering. We are biased in favor of financial engineering or any legal structures that support the implementation of the company’s strategy. At the end of the day, we believe that financial engineering should further the company’s strategy, not be a replacement for it.

The next comment I would have to say is that we are not supportive of any type of hybrid income trust model, because that drives an operational dichotomy into the organization, which serves to frustrate the implementation and the successful realization of the strategy. So to the extent which we have an axiom that everything that we do within this organization has to support the strategy. We are not going to pursue a legal structure or financial engineering that would server to undermine it, but driving an unnecessary and artificial dichotomy into the operations into the organization through a hybrid structure.

Indeed, it would be fair to say that if you look at the moves we have made most recently, with the merger of our wireline and wireless business, this is not a holding company. This is an operating company with a very focused and successful strategy.

The other thing perhaps to point out in terms of our credentials as an organization is that when it comes to distributing cash, it would be fair to say that we have been highly sensitive to the subject of cash distribution. To put some empirical evidence behind that, if you look at the cumulative impact of the two NCIB programs that we have embarked upon thus far, we have repurchased almost 34 million shares, and we spent almost $1.5 billion doing that. I do not think there would be many share repurchase programs within corporate Canada that would match the fact that we a have effectively put our money where our mouth was, and have executed against the expectation that we have set with the marketplace.

Contemporaneous with, of course, the two NCIB programs, we have also seen TELUS deliver an almost 90% increase in our dividend from what was a dividend of $0.15 two years ago to a quarterly dividend of $0.25 today.

I guess when it comes to the subject of cash distribution, it is one that is on the present within this organization. As I have said previously, on the record as I referred to, this is a management team that does not close doors to opportunities for share value creation that are in support of the strategy of this company.

John Wheeler

Next question, please.


Thank you. Rob Goff from Haywood Securities, please go ahead with your question.

Rob Goff - Haywood Securities

Thank you very much. My question would be on the TELUS TV, what your expectations are there and how they may have changed with development south of the border. Thank you.

Darren Entwistle

Our expectations in respect to TELUS TV have not changed. We continue to believe that entertainment distribution, coupled with providing data networking within a home on both a wireline and a wireless basis is a core component to our Future Friendly Home Strategy.

We have progressed with commercial rollouts in Calgary and Edmonton, are looking to expand that in Alberta. We are of course now conducting inaugural employee trials in the lower mainland of B.C., with a view to commercial deployment later this year.

TELUS TV is proceeding according to plan. We are positively disposed to the progress that we are making in respect of both the product and the network and process infrastructure that has to support it.

Obviously we will have some hiccups along the way but it would be fair to say that our position on TELUS TV is as strong now as it has ever been.

It is also important to point out, unlike high-speed Internet access in the early days, where effectively it was a footrace between ourselves and our cable competitor for verging customers in the marketplace, and it mattered who got to the customer first, so to speak, speed had an importance to it.

It would be fair to say that the entertainment distribution market is a sedentary market, which allows us the opportunity to be very considered in our approach, to take our time in terms of our deployment -- to make sure that all of the factors that I talked about previously from the economics of TELUS TV to the technology of TELUS TV to the commercial differentiation of TELUS TV, are resonating well within the market, with customers, and with our shareholders.

Once again, just to draw emphasis on this particular point as it relates to commercial differentiation, TELUS TV -- and I have talked about this at some length with institutional investors, in great granularity, if you will -- TELUS TV will be a highly differentiated product from the incumbent on factors other than price.

We do not see any efficacy in coming forward into the market with a need to replicating proposition to that of the incumbent, but rather one that is significantly differentiated with product attributes that resonate well with customers, are meaningful for customers, and product attributes whereby we can derive a decent, economic rent from those features from the customers that we are seeking to address. Price is not a feature within our portfolio of differentiating factors.

We are going to be very sanguine and very economic in our approach, and we are going to be very considerate and temper our timing accordingly.

At the end of the day, in terms of the way that we enter the entertainment distribution market, we want to grow value holistically in that market when you add up the economic share of both ourselves and our cable competitor, rather than erode value by a foolishly aggressive pricing philosophy.

John Wheeler

Next question.


Thank you. Our next question is John Henderson from Scotia Capital. Please go ahead.

John Henderson - Scotia Capital

Thank you. I have a question around your voluntary retirement program. I am wondering how the pace of adoption of that has proceeded, whether it was at all back-end or front-end loaded throughout the quarter.

Just as a quick follow-up on the retroactive revenue hit to other revenue in the quarter, I wonder if we can get some sense of the size of that.

Robert McFarlane

John, the retro that hit the other income was in the neighborhood of $2 million, $2.5 million. That was in relation to a CRTC decision on space and power charges from other carriers into our facilities, so that was the second quarter impact.

The first part of your question I believe related to early retirement offers, et cetera. We do not have a broad-based, nor do we have any intentions for, a broad-based early retirement offer like we did a number of years ago, with the first phases of our operational efficiency program.

Rather, we are giving targeted offers to the areas that Darren referenced by way of example, where we have a specific call center operation or function that we are consolidating operations, or moving, so on and so forth, or outsourcing, and so have a targeted offer to the team members affected in those specific areas.

Now, in the relation to outsourcing as negotiated in the new collective agreement, the affected team member has a variety of options. He can either follow the work, if it is to a new location. He can be redeployed elsewhere in the company, if there is an available position, or of course he could elect to go and work for the outsourcer at whatever compensation and arrangements the outsourcer pays their own people.

If they in fact stay in the organization, elect to not take advantage of an [ERIP] offer in the short-term and are redeployed to another job function, their former compensation is guaranteed for the first year.

The dynamic, therefore, is that in many cases, there is not the normal type of pressure, if you will, to make an early rather than later decision, so the timing on the effect of these people leaving the organization can be upwards to a year.

To the extent they are redeployed in other functions where a vacancy is created through attrition or what have you, then that is fine. That is an effect of redeployment of human capital in organization.

Within a quarter, I do not have top of my mind the flow-through, but I think that we are very pleased with the progress we made in the second quarter in terms of the efficiency initiatives.

When you have a chance, with our disclosure, refer to the financial statement note on restructuring and you can look there and see the difference between the accounting recognition of the restructuring charge and the payout of the accrued liability for restructuring. There is a difference but it is a minor difference.

We are getting fairly close these days with the accounting rules of the past couple years to a near-cash basis, so that might be helpful for your analysis.

Darren Entwistle

John, it is also fair to say that one of the degrees of latitude that we negotiated within the new collective agreement was to have the right to proceed with targeted and precise voluntary departure programs. We did not have that right in the past. As a result, we had to do broad-based voluntary departure and early retirement programs, which are very expensive for shareholders.

Frequently, you have a situation where the people that you want to stay, leave and the people where you need to downsize, stay. That is true in respect to both functions and geography, and it is a logistical nightmare for management to work through.

Now we have the right to be targeted and we can be much more efficient and effective in terms of our voluntary departure programs.

Additionally, as I indicated in my remarks, it would be fair to say, in looking at both outsourcing and consolidations on a bifurcated basis, the payback period on outsourcing is more elongated for the reasons that myself and Bob cited, whereas the payback on office consolidations is a little bit more immediate.

It would also be fair to say that, given the nature of the time that we want to afford employees to make the choice between redeployment or voluntary departure, typically these programs, in terms of harvesting the efficiency benefits, are more back-end loaded. There is that particular bias and it is an institutionalized bias, in the way that we put the proposal in front of employees, to make the appropriate choice for both themselves and as well for the organization.

John Wheeler

Thank you. Next question.


Thank you. Our next question is from Peter Ramey from BMO Capital Market.

Peter Ramey - BMO Capital Markets

A follow-up on the previous question, and then one of my own.

What I hear you saying there, Darren, is it sounds like a lot of the financial benefits of some of the actions you are taking now will be more of an impact in '07 versus '06. Would that be a fair statement, or am I oversimplifying?

Robert McFarlane

Peter, maybe I will just give Darren a breather. That is exactly correct.

The typical efficiency effort, where you are recognizing the costs up-front, you are paying them out over, in terms of departures, over the next few months and, as just mentioned, in some cases upwards to a year down the road.

The savings, of course, are on a monthly basis as you have reduced your cost structure. So in terms of a net impact of savings, there is some in-year benefit but it is really driven into subsequent years. It is not only a 2007 -- it flows through into subsequent years.

Peter Ramey - BMO Capital Markets

Okay, perfect, and…

Darren Entwistle

Just for your modeling purposes, in terms of what we have said publicly on the record in the past at investor meetings, is that holistically across the three broad-based programs that I talked about, on average you are looking at payback periods between 18 and 24 months.

To be more explicit, to break it down, as it relates to consolidations, on a consolidation basis, you are going to have a payback period in the 18-month zone. As it relates to outsourcing, outsourcings can go beyond 24-month period.

What we try to do is to say on average, typically that is the type of thing that we would see in combined outsourcing and consolidations where, on a consolidation basis, you got an 18-month payback, on an outsourcing basis, it could be 24 months or longer. We have had a little bit more of a bias thus far towards consolidation. That is the range that we talked about.

When you get into process automation and process re-engineering type programs, you can have paybacks that extend well beyond 24 months. Just to give you a flavor of the payback associated with the program, so that you can get a view.

The most important point is the point that Bob made, that once the efficiency gain is realized, it is recurring in nature, rather than a one-off benefit. When you look at the benefit being implemented, it is on a multi-year basis thereafter.

Peter Ramey - BMO Capital Markets

That will be very useful for trying to get this incorporated in my model.

With regard to competition in voice-over IP from the cable competitor, you lost 52,000 lines in the quarter. I think I am going to get this wrong, Bob, but 30,000 you lost in Q1.

I was wondering if you could add some color on what specific actions, if any, did the cable competitor take different in Q2 versus Q1, and any actions that you might have taken that were different -- what the nature of the footprint expansion of the cable operator was.

You do have the flexibility now to do win-backs. I was wondering if that was material in the quarter. Thank you.

Robert McFarlane

Firstly, in terms of our cable operator, they have continued to increase the geographic territory in which they have marketed to, so whether that is on a year over year or on a sequential quarterly basis, they are continuing to ramp up the geography which they cover. That is a built-in dynamic that would be affecting the residential line losses.

In addition to the cable competitor, there is also Rogers and the other CLEC operators typically with VoIP, unlike Rogers, but they are all aggressively offering their products at a deep discounted basis in the marketplace. That is driving some of the line loss.

As I referenced earlier, or alluded to in my comments, wireless substitution continues to be a significant trend. You may be familiar with some of the recent reports where lower mainland actually leads the country in terms of the percentage of households that have adopted wireless only communication, which leads to another topic which we will not go into, but the whole forbearance decision and why it is appropriate for it to be reviewed, i.e. the definition of local market excluding wireless makes no sense in our context.

Also, our success in our high-speed net adds, while the majority are fresh new adds, of course you will note the dial-up reduction in the quarter. I think it was around 11,000, or thereabouts by memory. A chunk of those are conversions, or migrations may be a better name for it -- migrations through high-speed. Quite often that has an associated second line loss. That contributes to the trend.

As well, what is an offsetting factor in our case, at perhaps 4.6% -- I do not want to brag about it, it seems to be a fairly good rate on a relative basis, North America wide. In part, we are helped by the fact that we have had strong household formation in Western Canada.

In some cases, I think it is important for analysts to realize that a gain for one of our competitors is not necessarily a lost line for ourselves if we did not have the line in the first place. That would apply to a new home.

Those are some of the dynamics that are driving that statistical result.

Darren Entwistle

It is also important to point out that when you look at the slide that I presented at the outset of the call, it highlights the differentiation of wireless within our asset mix at TELUS, given that wireless is almost half of our business operationally, and more so from a cash flow perspective.

It is interesting to note that, on a connections basis, unlike many of our competitors we have enjoyed an incremental gain in connections over the last couple of years of 1 million connections, which is a combination of wireline and wireless. Again, that is a situation that is different in TELUS than other organizations, because the disproportionate position of wireless within our asset mix, and to have a situation where connections have gone up by 1 million over the last 24 months, and have been accompanied by an increase in the average revenue per connection to over $64, I think that begets more overall stability in terms of TELUS at the corporate level.

John Wheeler

Operator, we have gone on for about 45 minutes here, so we will take one more question, please.


Thank you. Our last question is from Devi Goss from Genuity Capital Markets. Please go ahead.

Devi Goss - Genuity Capital Markets

I wanted to ask you about your non-ILEC basis. On a factual basis, does it include Cogeco cable’s wholesale revenues? Are they included in your business access lines? You have reduced your non-ILEC guidance. You only did 4% year-over-year revenue growth in the quarter, despite the fact that I assume you are including the wholesale business from Cogeco, so that suggests perhaps the retail business is even worse.

Can you confirm all of that and tell us what these drivers are? Is it pricing competition from a competitor, lack of demand, IP substitution putting pressure on margins, et cetera?

Darren Entwistle

I will kick it off and provide Bob the opportunity to comment as well.

A couple of things to note -- it would be fair to say, as I indicated in my comments that the competitive intensity in some of the repricing pressure that we are experiencing, if you would, experiencing within Ontario and Quebec is mitigating the growth that we aspire to at the revenue and at the EBITDA level for our performance in Ontario and Quebec.

Just to get some figures on this down, essentially right now, what we have done in revising downwards our guidance is to say that we are now expecting 3% to 6% revenue growth -- not what we had aspired to, but not an abysmal performance by any stretch of the imagination.

If you go to the EBITDA level as it relates to our non-ILEC business, again, despite the haircut that we have given to the upper end of our range, reducing it from $40 million to $30 million, that would still represent an EBITDA year-over-year improvement of 18% to 42%.

When you are looking upwards of 6% revenue growth and potentially upwards of 42% EBITDA growth, now what we would have liked to achieve obviously in Ontario and Quebec, but nevertheless, not the most abysmal result that we could post.

It would be fair to say that the underlying root cause is a couple of things that have been challenging for us.

Number one, in addition to the competitive pricing pressures, which I will come back to, we have experienced lower CPE sales, which have had a greater impact on revenue than margin because of the lower profit profile associated with equipment sales.

Also, we are not flattered, on a year-over-year basis, by the fact that the first half of 2005 on the wireline business was particularly strong. Holistically it was strong but it was particularly strong as it related to, or solid, if you will, as it related to our non-ILEC business.

In the first-half of 2005, we had a number of large contracts that we had won previously starting to ramp up, and make not just a contribution at the revenue level, but a contribution at the EBITDA level as those contracts went from EBITDA negative to EBITDA positive. That does not flatter or does not assist, if you will, the year-over-year comparison.

The other thing that I would point out is in terms of pricing pressures, we are observing what we do, which we -- that we believe to be not the most astute, not the most economic pricing behavior in the marketplace, and let me elaborate upon this a little bit further.

What is happening right now in the business market and in the corporate market is effectively a technology rollover to IP. Everyone is heading in that direction. It is just a timing question of how quickly they move to IP and how they proceed with IP on a modular basis. There is no doubt that this is the direction that our customers want to go. Typically they are proceeding in a modular fashion and they are dictating, if you will, the timing.

What is frustrating for me is the fact that with IP, we are making a capital investment, as are our competitors, in bringing this technology to fruition. This technology gives customers greater bandwidth in terms of access speeds and transmission speeds than what they had with their legacy technology. It gives them greater functionality than what they have had with their legacy technology.

Very importantly, in today's sort of risk-imbued business world, it gives them greater flexibility than they had with their old technology.

Yet it seems to me that out in the marketplace amongst our peers, they are seeing fit to accompany this technology rollover, which delivered such fantastic discernible benefits for our customers -- from bandwidth to functionality to flexibility -- and yet what they are doing is they are chopping their incumbent prices in half, accompanying that with the technology rollover.

I just do not understand how when you are bringing a product to market, that you have invested in, in terms of capital and op-ex dollars, that does so much more from a speed, functionality, security and flexibility perspective than the incumbent solution, yet you charge half the price of what you were previously charging. I just do not think that is a particularly astute pricing model.

I would also say as an incumbent, keeping market share at any cost is not the correct economic philosophy, to say the very least. In fact, I think incumbents would be better off to exhibit price discipline -- accept the fact that market share loss and competition are inevitable, they are not going away, it is sustainable -- and through their price discipline, in terms of the market share that they keep, get a better economic result than seeking to keep all of their market share, regardless of price and the economic consequences.

So that is a little bit of our philosophy, as both a new entrant and as an incumbent, as to what represents the best economic result in facing competitive intrusion.

I will hand it over to Bob now to make a comment.

Robert McFarlane

Thanks, Darren. Devi, in respect of the statistical aspect to your question, to the extent that Cogeco utilizes our transport to deliver their service, then we would be recognizing the revenue related thereto. That is not universal to their operation.

We do not recognize lines or NAL's in respect of N customers that they have. I think that would be in contrast to the Shaw situation, as I understand it.

John Wheeler

We will wrap it up here. There was a lot of information disseminated over the course of today, particularly augmented by the Amp’d announcement.

I want to thank you all for your participation and the excellent questions. I appreciate your support of TELUS and I wish you all the best for the long weekend.


Thank you. This now concludes the TELUS second quarter investor conference call. Thank you from TELUS.

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