TELUS Q3 2006 Earnings Call Transcript

| About: TELUS Corporation (TU)

TELUS Corporation (NYSE:TU)

Q3 2006 Earnings Call

November 3, 2006 11:00 am ET


John Wheeler - Vice President, Investor Relations

Darren Entwistle - President, Chief Executive Officer, Director

Robert G. McFarlane - Chief Financial Officer, Executive Vice President


Marje Soova - Goldman Sachs

Vince Valentini - TD Newcrest

Jonathan Allen - RBC Capital Markets

Dvai Ghose - Genuity Capital Markets

Glen Campbell - Merrill Lynch

Jeffrey Fan - UBS Securities

Michael Rollins - Citigroup

Vance Edelson - Morgan Stanley

Robert Goff - Haywood Securities

James Breen - Thomas Weisel Partners

Peter MacDonald - GMP Securities

John Henderson - Scotia Capital Markets


Good morning, ladies and gentlemen. Welcome to the TELUS third quarter 2006 earnings conference call.

I would like to introduce your Chairperson, Mr. John Wheeler, Vice President of TELUS Investor Relations. Go ahead, sir.

John Wheeler

Thank you very much, Ron. Welcome to the webcast and conference call for TELUS, and let me introduce today the TELUS executives online with us. They are Darren Entwistle, President and CEO, and Bob McFarlane, Executive Vice President and CFO.

We will start with introductory comments by Darren and then Bob. This will be followed by a question-and-answer session with both executives. This call is scheduled for one hour.

The news release on the third quarter financial and operating results and detailed supplemental investor information are posted on our website at For those with access to the Internet, the slides are posted for viewing at You will be in listen-only mode during the opening comments.

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

Now over to Darren on slide 3.

Darren Entwistle

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

The Government of Canada’s decision to arbitrarily alter the tax regime affecting income trusts while TELUS is in the midst of our conversion to a trust is both disappointing and unexpected. TELUS’ decision to proceed to an income trust was predicated on tax policies that the Canadian Government had reviewed and reaffirmed twice in the last year.

Clearly a consistent legislative framework is critical to making sound investment decisions. Companies should be able to rely on this continuity when in the process of implementing major strategic decisions. To be blindsided by a policy change of this magnitude without warning or due process is disappointing.

Our decision to proceed with an income trust was predicated on the effectiveness of our winning strategy that has been in place since 2000. TELUS’ superior asset mix, strong and predictable growth, and our track record of operational excellence make TELUS an attractive trust candidate with the potential to set a new standard for income trust performance.

It is important to note that the benefits of tax efficiency within a trust structure simply accentuate the strategic value we create for our shareholders and augment the cash available for re-investment into our core business.

TELUS is assessing the implications of the Federal Government’s tax plan before making a decision on whether to proceed or cancel the proposed income trust conversion. TELUS believes we have the fiduciary responsibility to determine fully the feasibility of still proceeding on the income trust path before making any firm pronouncements in this regard.

In any case, the fact remains -- with or without the trust structure, TELUS’ winning strategy, superior assets, operational excellence and strong growth profile, as demonstrated again this quarter, remains undiminished.

Moreover, TELUS remains committed to returning surplus cash flow to security holders in the most tax efficient way possible. Accordingly, our dividend growth model and our ongoing share repurchase programs will continue to create value for investors.

Let’s turn now to slide 6.

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

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

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

Let me now comment on unfolding developments in telecommunications regulations as set out on slide 7.

IP technology is collapsing distance, reducing costs, and eradicating borders. The basic definitions and distinctions we have all relied upon for decades are no more within the telecommunications industry, which makes regulating the industry based on the Telecommunications Act from 1993 untenable.

In the IP world, we no longer need heavy regulation to ensure a competitive environment and affordable pricing. Robust competition is giving consumers virtually unlimited choice and diversity. Businesses like TELUS must be allowed to innovate freely to meet the growing demand.

The landmark work of a telecommunications policy review, commissioned by the government, recognized the virtue of this approach. Its recommendation that we should rely first and foremost on market forces generated a rare consensus within the telecommunications industry, and establishes the blueprint for effective regulatory reform.

TELUS supports the government taking two specific actions as quickly as possible.

First, it should implement the recommendations of the telecom policy review report in full and with immediate effect.

Second, it should directly overturn the decisions on voice-over IP and the deregulation of local services.

These decisions create unfairness in the marketplace. These decisions restrict competition. These decisions delay the innovative products and services that consumers demand, indeed expect.

In our view, substantive regulatory change is long overdue. The study has been done and they are complete. The consensus has been forged. It is now time for the government to act, and we are cautiously optimistic it will do so.

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

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

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

Turning to slide 9, solid subscriber growth, coupled with a 15th consecutive quarter of year-over-year growth in ARPU, produced a 17% growth in TELUS’ wireless revenue. This enabled TELUS to realize a significant milestone by achieving a record $1 billion of wireless revenue in the quarter.

Similarly, EBITDA also increased by 17%, supported in part by a third consecutive quarter of improved efficiency and the cost of acquiring customers. The net result is a healthy wireless margin of 47.5%.

Let me now turn your attention to slide 10, for the highlights in the wireline side of our business. TELUS’ third quarter results demonstrate once again our resiliency in a tough industry, and place TELUS ahead of many North American telcos.

To begin, TELUS experienced several improving trends, including stable revenue and a double-digit increase in operating profit. Notably, in particular, data revenues were very robust this quarter, up 9% across an array of services, including hosting, outsourcing, and our solid high-speed Internet growth this quarter at 41,500 new clients.

At the same time, TELUS experienced only moderate network access line losses at 2.8%.

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

An important development in September that advances materially our growth strategy into Central Canada was the major new partnership that we are embarking upon with the Government of Ontario.

Under this agreement, TELUS will provide, TELUS will manage, and we will supply a portfolio of network services, including IP security for the entire Ontario government network.

This five-year contract and our partnership is valued at $140 million. This agreement demonstrates that the Government of Ontario has recognized the value of our investment in IP technology that provides unprecedented robust network connectivity, services, functionality, and flexibility. As well, once again, our implementation with the Government of Ontario will build upon our strong IP technology implementation track record that began a while back with the TD Bank.

All in all, it was a strong third quarter for TELUS, based on our wireless and wireline results. Let me conclude on slide 11 by reviewing a few noteworthy consolidated highlights.

Owing to our accelerating revenue and earnings this quarter, we are making a number of mainly positive revisions to our full-year consolidated guidance. Based on the solid performance of our ADSL service, TELUS is revising upward our annual Internet guidance by some 8%.

Additionally, TELUS has tightened the ranges on all of the consolidated guidance factors, including revenue, EBITDA, earnings per share, and free cash flow. Indeed, in respect of earnings per share, we are announcing today that we are increasing the range to $3.15 to $3.25.

As I mentioned earlier, TELUS has also announced today a substantial increase in our dividend to $1.50 per annum.

There is no doubt that this has been a difficult week for TELUS and our investors. On behalf of the entire TELUS leadership team and our Board, I commit to you that TELUS will proceed as it always has in the best interest of our security holders. I can tell you unequivocally TELUS remains committed to our winning strategy and we pledge to continue to execute our plan with unparalleled excellence.

I appreciate sincerely the support and as well, the constructive advice that you each give into our company during this challenging period.

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

Robert G. McFarlane

Thanks, Darren, and good morning, everyone. Let me begin with a review of our wireless results, referring to slide 13.

It seems logical to start here because, as Darren mentioned, wireless represented more than 50% of consolidated EBITDA this quarter. Wireless revenues, EBITDA, and cash flow continued to deliver strong double-digit growth. Revenue surpassed $1 billion, driven by strong subscriber growth and higher ARPU.

EBITDA increased 17% with industry-leading wireless EBITDA margins of 47.5%.

Cap-ex increased year over year as expected in the third quarter, but we nevertheless have lowered our guidance for full year 2006, as I will outline a little later.

As shown on slide 14, net subscriber addition growth continued to be robust, and was relatively unchanged year over year at 137,000. Post-paid subscriber growth was up slightly to 109,000, while prepaid additions of 29,000 were slightly lower than last year. Post-paid net adds as a percentage of total net adds increased to 79% in the third quarter.

TELUS’ prepaid offer continues to provide superior subscriber economics with higher ARPU, relatively lower churn, and a growing total base.

Overall subscribers increased 14% to 4.9 million, so TELUS continues to experience solid growth, and our overall subscriber mix remained at 81% post-paid.

Our revenue and EBITDA gains are being driven by more than just subscriber growth. As shown on slide 15, ARPU continues to increase, up $2.00 year over year, driven by significant growth from adoption of new wireless data services, which has exceeded erosion in traditional voice services.

TELUS’ wireless data ARPU increased more than $2.00, or 79% to $5.11, and accounted for almost 8% of ARPU this quarter. While this represents excellent momentum, there remains a great opportunity to catch up to other providers in this area to drive ongoing future revenue growth from wireless data.

Slide 16 provides a breakdown of our profitable subscriber operating metrics. Our low blended prepaid and post-paid churn rate increased slightly to 1.36%. Coupled with higher ARPU, the average lifetime revenue per TELUS subscriber remained relatively flat, at an industry-leading $4,800.

We recorded our third consecutive quarter of sequential COA declines in Q3 to $386, although it increased slightly from last year. In spite of this, we were able to keep our marketing efficiency metric -- that is, cost of acquisition over lifetime revenue -- stable at 8%, as indicated on the last line of the slide. This is very close to our all-time best ever efficiency result of 7.7% recorded last year.

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

Now, let me turn to our wireline operations on slide 18.

Wireline margins improved as EBITDA increased 10% on a reported basis, while revenues were stable year over year. Normalized for higher restructuring costs incurred this quarter and $68 million in net wireline expenses from the labor disruption last year, EBITDA was down 3%.

Importantly, excluding increased product cost of sales from significantly stronger ADSL loading, normalized year-over-year EBITDA was actually quite steady. Capital expenditures were higher this quarter, reflecting increased investments as well as an artificially low level last year, due to the labor disruption.

Slide 19 provides TELUS’ wireline revenue breakdown by product. The positive highlight for the wireline segment in Q3 was the strong revenue growth in data. We are encouraged by the results. Data revenue grew 9% due to increased Internet and enhanced data revenue and growth in high-speed subscribers, as I will describe on the next slide. Overall revenues were held relatively stable as data growth fully offset the erosion in local, long distance, and other revenue.

Local and long distance revenue declines are reflective of the increased competitive environment from wireless and VOIP, whereas the decline in other revenue was in part due to the retroactive treatment of certain adverse regulatory decisions.

Turning to slide 20, high-speed Internet net adds experienced another quarter of strong growth, increasing to 42,000 due to higher gross additions from effective marketing promotions combined with lower customer churn rates. Our high-speed Internet subscriber base now totals 872,000, up 19% from a year ago, which represents 81% of our total Internet subs, now at 1.1 million.

Since the end of the labor disruption in mid-Q4 2005, TELUS’ marketing efforts have been quite successful in garnering the clear majority of high-speed Internet subscriber growth in our incumbent markets. We intend to maintain this pace to better balance our high-speed Internet market share, relative to cable Internet, and accordingly have again raised our guidance for full-year net additions.

Slide 21 provides a quick snapshot of our non-incumbent or non-ILEC operations in Central Canada. This represents a sub-segment of our wireline results. Our focus here remains on generating quality, recurring data-focused revenue, such as the Government of Ontario contract that Darren mentioned. Non-ILEC margins continue to improve as EBITDA increased to nearly $10 million on a $9 million, or 5.5% growth in revenues to $160 million.

Please note that EBITDA result included approximately $3 million in favorable, non-recurring items. We remain on track to achieve our annual guidance for non-ILEC revenue and EBITDA.

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

Slide 23 shows TELUS’ total subscriber connections. This graph shows that on a consolidated basis, continued growth in wireless and high-speed Internet subscribers is more than offsetting the secular declines in residential network access lines that I just mentioned.

Interestingly, TELUS has 10%, or about 1 million more total connections than it did two years ago, despite increased competitive pressures in the wireline environment.

To conclude for the wireline segment, you can see on slide 24 that we are making minor revisions to our 2006 guidance to reflect year-to-date results and our expectations for the rest of the year. Reflecting improved margin expectations, we are increasing the bottom-end of our EBITDA guidance by $25 million, despite lowering the range for total wireline revenues by $25 million.

Cap-ex is increasing by $25 million, reflecting significant investments in local access, broadband deployment, and new system and service development. Finally, due to continued momentum and year-to-date results, we are increasing our high-speed Internet net additions guidance to 135,000 or more, as mentioned earlier.

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

Turning to slide 26, we can see that normalizing for $65 million in net consolidated expenses incurred for the labor disruption last year, as well as an $11 million increase in restructuring costs this year, underlying EBITDA grew 6.5%.

In a similar manner, slide 27 shows EPS this quarter normalized for positive tax related adjustments in both quarters and a labor disruption impact. As you can see, underlying EPS growth was still very significant at 42%.

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

All in all, EPS growth was significant any way you cut it.

Now let me turn to slide 29 and discuss an important component of returning capital to shareholders. Establishing our dividend growth model approach two years, TELUS set a target payout ratio guideline of 45% to 55% of sustainable net earnings on a prospective basis. Given TELUS’ strong financial results to date, positive prospects for future growth and operational cash flows, and consistent with our dividend growth model approach, as Darren mentioned earlier, today we announced a significant 36% increase in our dividend, effective for the January 1, 2007 payment.

The decision to once again significantly increase our dividend reflects our confidence in TELUS’ ability to continue to grow EPS on a sustainable basis, and our ongoing commitment to return capital and create value for shareholders.

Turning to slide 30, in the third quarter, we remained active in the market but at reduced levels from what we had witnessed recently, as repurchase activities were curtailed ahead of our September 11th income trust announcement. Even so, TELUS purchased a total of 2.1 million TELUS shares for $120 million in the quarter. In total, to September 30, TELUS has repurchased for cancellation a total of 14 million shares since December, 2005, for $658 million.

TELUS’ current NCIB repurchase program expires mid-December, 2006. Subject to obtaining customary regulatory approvals, we intend to renew in December our NCIB share repurchase program for 2007.

Slide 31 shows the trend in return of capital to shareholders since 2003. In 2005, when one aggregates dividends and share repurchases, we returned $3.30 per share in capital.

In 2006, this number is on its way to the neighborhood of $3.45 per share when one adds dividends to projected full-year share repurchases, based on annualizing our year-to-date run-rate.

In the event TELUS does not pursue an income trust conversion, then in 2007, the combination of the higher dividend and significant share repurchases at an amount consistent with our existing year-to-date run-rate, would result in a total return of capital to shareholders of approximately $3.85 per share. You should note that this approaches the level of cash distributions per unit previously announced in the event TELUS converts to an income trust.

While I put out the 2007 figures for illustrative purposes, what is clear is that regardless of corporate structure, TELUS intends to deliver on our commitment to return a significant amount of capital to investors.

Let me conclude on slide 32. Today, we are making minor changes to our consolidated guidance to reflect revisions to our outlook for both wireless and wireline guidance previously mentioned. Consolidated revenue guidance is being narrowed, with no change to mid-point. We are also narrowing and raising the low-end of our EBITDA guidance range. Restructuring and work-force reduction costs are expected to total up to $80 million, as compared to up to $100 million previously.

Our EPS guidance range has increased by $0.15, which reflects the $0.09 positive tax impact recognized this quarter, as explained earlier, and an improved earnings before tax outlook.

Consolidated cap-ex remains unchanged, while our free cash flow guidance range has been revised to the higher end. We now expect more than $1.6 billion in free cash flow in 2006.

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

John Wheeler

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

Question-and-Answer Session


(Operator Instructions)

The first question will be from Marje Soova from Goldman Sachs. Go ahead, please.

Marje Soova - Goldman Sachs

Thank you. You have discussed plans with dividends and share repurchase for next year. I was wondering if you could also just address your views in terms of leverage targets going forward, and if you would be open to increases in leverage in order to enhance returns to equity shareholders. Thank you.

Robert G. McFarlane

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

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

John Wheeler

Ron, next question, please.


Thank you. The next question is Vince Valentini from TD Newcrest. Go ahead, please.

Vince Valentini - TD Newcrest

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

Robert G. McFarlane

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

John Wheeler

Ron, next question.


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

Jonathan Allen - RBC Capital Markets

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

Robert G. McFarlane

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

Having said that, we have always reminded anyone when we have had the opportunity that the dual-share cost structure at TELUS is solely to facilitate compliance with foreign ownership restrictions that govern the telecom sector, while at the same time allowing unfettered access to global capital markets and unfettered ability for non-resident investors to invest at will in TELUS.

Having said that, we have also emphasized that if the legislation changes such that TELUS is no longer subject to foreign ownership restrictions, then the articles of the company provide for an automatic conversion of the non-voting shares into the voting class, and therefore, I certainly have not understood a rationale for a differential pricing between the two classes when they enjoy the same dividend and participation in economics.

Having said all of that, we are familiar that certain hedge funds like to take positions and play one way or the other, and that is really not in our interest to facilitate in one direction or the other. All I would suggest is that when it came to an important vote, such as the vote that would occur in order to decide whether the company would convert into a trust, you will notice that the non-voting share is perhaps mis-named. It actually has a vote as a class.

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

John Wheeler

Ron, next question, please.


The next question is Dvai Ghose from Genuity Capital Markets. Go ahead, please.

Dvai Ghose - Genuity Capital Markets

Thanks very much. I just want to come back on those two points that were made earlier, Bob. First of all, on the voting/non-voting side, you were going to collapse them on the trust. I do not think there is anything magical about a trust vis-à-vis foreign ownership, so why wouldn’t you do it as a common equity?

Second, it is great to see a quick response to the trust debacle of Tuesday with a 36% increase in the divi, but even on a fully taxed basis, looking at your $1.6 billion or so of free cash flow and taxing it, there is only a 47% payout. You were prepared for something like an 80% payout as a trust. Is there any reason why it should not be that much as a common equity on a fully taxed basis?

Robert G. McFarlane

In regard to the first part of your legal two-part question, I do not, so there has to be a fine levied from John on you, Dvai, although I must say you are improving from your normal five-part questions.

The dual share class structure has worked well for the company in the past. The difference in a trust structure is you cannot have two classes of units in a trust, so it is not a possible structure that could be facilitated in a trust structure. So we have come up with a structure that facilitates compliance with foreign ownership, but essentially a class to one unit class.

Given that the government’s announcement was unexpected, at least by TELUS, and this is Friday and it was only on Tuesday, late Tuesday the government made the announcement, I think any expectation that we would have a model to collapse a share structure that has been in existent for the past six years and worked well is a little bit accelerated. Certainly we have no intentions, again, to do so.

As always, we will always give consideration to good suggestions from our shareholders, but this structure has worked well for us in the past and therefore to proceed on that default basis should not be controversial.

In terms of the second part of your question, which relates to the dividends, as I emphasized in our presentation, the combination of a return of capital in the form of dividends and share repurchases, just keeping share repurchases at the existing run-rate experience this year into next year would lead to a combined approximate $3.85 return of capital per share.

Given there were different classes of shareholders, some taxable, some non-taxable, we have in the past received considerable feedback as to preference for either dividends or share repurchases, and that is not a unique preference amongst all investors, so we chose in the past to have a dual track initiative return capital shareholders, been widely applauded by all shareholders for that approach.

What we are doing today is reminding the investment community that in the event that we do not pursue an income trust conversion, we will revert to our traditional approach to return a significant amount of capital to shareholders, both in the form of dividends and share repurchases.

As I have illustrated, the aggregate amount of that, just continuing with our existing share repurchase program run-rate, in combination with the new higher dividend, would lead to a combined return on capital that approaches the same distribution of capital that have been contemplated in an income trust conversion scenario.

John Wheeler

Next question.


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

Glen Campbell - Merrill Lynch

Thanks very much. A question on employee headcount. I notice that it rose about 10% year over year in the wireless segment, roughly in line with subscriber growth, and clearly we are looking for opportunities for operating leverage going forward. Could you talk about what might have driven that, and also how it might change going forward, whether we might look for slower growth relative to subscriber growth in the future? Thank you.

Robert G. McFarlane

I guess we are getting into the micro now. In terms of the staffing on the wireless side, I would point out that revenues grew at a 17% clip and subscriber growth grew at a 10% clip, so that is a healthy ratio, I would suggest.

The EBITDA margin, the organization at 47.5%, also -- that, by the way, is of total revenues, not merely of network revenues -- is also industry-leading, so we have a high margin level, high productivity level in the organization. Obviously we are investing to maintain superior levels of customer service. You can see in the churn rate that is maintaining an industry-leading low level, that that is having and continuing to have positive effect. We are also investing in adding expertise in the area of wireless data. That is probably the biggest growth area outside of the operations area in the consumer operations.

Obviously with the significant growth in wireless data, that is also paying dividends. I have no specific guidance in relation to staffing levels on a go-forward basis for the wireless operation.


The next question is from Jeffrey Fan from UBS Securities. Go ahead, please.

Jeffrey Fan - UBS Securities

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

Robert G. McFarlane

Jeffrey, in terms of the wireless ARPU, I think your question is a good one, and maybe it will help clear up a misconception that seems to be out there. As you know and as we emphasized in our presentation, we have experienced great wireless ARPU growth, up a couple of bucks to the $5.11 territory.

Having said that, we have experienced a traditional repricing downward in the voice services area. I do not really see the price-per-minute trend, of a decreasing price minute for voice changing. That is a function of the very competitive aspect of the Canadian wireless industry.

What we are really experiencing here is that the introduction of new wireless data services and a tremendous accelerated adoption of those services facilitated by new, high-speed EV-DO handsets, the EV-DO investment, in our case, at least, that we have made in our network, et cetera, has led to a rapid acceleration of data that has exceeded the voice revenue decline on a per subscriber basis.

That is a trend that I would say based on past experience, we would expect to continue in the future. So the great aspect of this industry is even though it is becoming less and less expensive for consumers to enjoy the benefits of voice wireless services, from a carrier perspective, we are introducing new services that obviously are being enjoyed, as they are receiving rapid take-up. The net result is accretive to our overall ARPU.

John Wheeler

Ron, next question, please.


The next question is from Michael Rollins from Citigroup. Go ahead, please.

Michael Rollins - Citigroup

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

Darren Entwistle

Thanks for the question. It is law right now. In terms of a tax change, per se, it is implemented with immediate effect and becomes law and then is codified in retrospect. That is necessary for the purposes of confidentiality and secrecy when you are making a major policy move in so far as tax legislation is concerned. So it is law now and it gets codified retrospectively through government.

It would be fair to say that in terms of the steps that are about to unfold, we are faced with a very difficult, if not extremely challenging, scenario. In terms of the comments I made this morning, and as well as Bob, given that we felt the income trust conversion was a laudable pursuit, we feel that at this juncture, only 48 hours effectively into the decision, it is premature to shut the door to the income trust conversion at this juncture. Indeed, I think if we had been easily dissuaded in the past from certain strategies, we would not have built the asset base that we enjoy today.

We believe that TELUS, within this difficult scenario, has a good argument that we should experience the same grandfathering as the existing income trusts. Clearly we feel strongly in that regard, because as a public company, we made a public pronouncement in terms of our intention to convert to an income trust. I think when a public company makes such a public pronouncement, it should expect a certain degree of consistency and continuity in respect of the existing legislative framework when we are in mid-stream of our implementation of this major strategic decision. Without a doubt, when investors are making decisions based on that public pronouncement, I think investors should count on a certain degree of consistency and continuity in terms of tax legislation as well.

It is very clear that this was the expectation set by the standing government in terms of their election platform. One of the axioms was not to change the tax legislation pertaining to income trusts.

I would say at the end of the day, TELUS certainly deserves a degree of consistency and continuity when it comes to tax legislation when you reflect upon the fact that we are one of the largest investors in Canada, having expended some $42 billion over the last six years in the high-tech telecommunications industry in Canada.

The other thing that we feel assists us in our case in arguing that we should experience the same grandfathering as existing income trusts is the fact that the TELUS trust had some very interesting attributes associated with it. We would argue that within the TELUS trust, there would be no tax leakage for the government to experience. I think this is particularly true now that the government has implemented a four-year transition period.

The other thing that is interesting and attractive about our income trust conversion is that TELUS was intending to carry on with our investment in Canada unabated and undiminished within the income trust structure. We were going to continue to invest in telecoms and innovation, and in effect, recycle some of the tax efficiencies that we would have enjoyed through the trust conversion back into our core business.

Notwithstanding all of this, it would be fair to say that if we do elect to remain a share corporation, TELUS continues to enjoy a superior asset base and a superior asset mix, and I think it would be fair to say that this superior asset base that has been delivered from our winning strategy will continue to deliver for investors an excellent growth profile into the future. These attributes are independent of whatever legal structure we choose to pursue, whether it is the continuation of a share corporation or the conversion into an income trust.

I think there is no better empirical evidence in terms of the future prospects of TELUS and as well, our growth potential being delivered for investors, than what we have announced today with the 36% increase in the dividend, and as well, what we have achieved thus far with the NCIB program and our desire to carry on with that program through 2007, should we not convert to a trust.

John Wheeler

Ron, next question, please.


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

Vance Edelson - Morgan Stanley

Thanks a lot. If we could just go back to wireless for a second, the overall wireless churn was up slightly. I was just wondering, is there any IDEN impact there that you could break out? If not, what accounts for the up-tick in churn? Then, similarly, as we go into number of portability next year, could you let us know the percentage of the base that is on contract? Thank you.

Robert G. McFarlane

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

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

John Wheeler

Ron, next question.


The next question is from Rob Goff from Haywood Securities. Go ahead, please.

Robert Goff - Haywood Securities

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

Darren Entwistle

I guess the quick answer to your question, Rob, is that it is all of the above. We are seeing line losses that are related to cable telephony in Shaw. We are seeing line losses related to the typical competitive intrusion that we have experienced in the past from the likes of Primus.

We are seeing line losses related to the Rogers organization and their activity in our market, and we are seeing line losses related to technological substitution, whether it is VOIP and some of the VOIP providers, or whether it is wireless substitution.

I think it is fairly uniform across the board. It varies on a quarter to quarter basis, but if you took a more long-term view, empirically speaking and went back 12, 18 months, there are fairly consistent contributions from each of the constituencies that I have articulated.

John Wheeler

Ron, next question.


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

James Breen - Thomas Weisel Partners

Great, thank you very much. On the video side, could you give us an update on TELUS TV and how the rollout has been, and potentially any color on the preliminary take-rate results? Thank you.

Darren Entwistle

The rollout on TELUS TV has always been designed to be progressive. It is a neighborhood-by-neighborhood rollout, effectively. We have launched TELUS TV commercially within the Edmonton and Calgary markets, and we are looking to move out from those major markets to semi-urban confines of various geographies within Alberta. As well, we are progressing from an employee trial in the lower mainland of Vancouver to a commercial deployment in the lower mainland of Vancouver, again on a neighborhood-by-neighborhood basis.

It has always been our desire that the expansion of TELUS TV should not be one that exhibits expediency as its defining characteristic. The early results for us on TELUS TV are encouraging. The robustness of the technology is performing very well, meeting or exceeding, if you will, our expectations. We think the product has a number of very attractive characteristics that are significant in terms of differentiating our product versus the incumbent.

As we have indicated on numerous occasions, TELUS TV is a service predicated upon feature differentiation rather than price discounting, and that continues to be our mentality in terms of rolling out the product. As well, you will have noted that just prior to the income trust conversion, we indicated that we had embarked upon or were in the process of a $600 million broadband expansion within our ILEC territory to raise the bandwidth speeds from where they are right now to 15 to 30 megs, which will allow us to introduce new services over the course of 2007 that we think consumers will find attractive, most notably high definition TV.

We are very encouraged by the performance of the product. The take-rate, although we do not disclose it and we will not be disclosing it for some time to come, we are very satisfied that with the progressive rollout and a progress take-up, and again we are focusing on feature differentiation rather than price-based discounting, and the performance of the network has also been strong.

John Wheeler

Next question, Ron.


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

Peter MacDonald - GMP Securities

Thank you. Could you just walk through some of the specific opportunities you see for you, if the TPR is used for the basis for a telecom act? Maybe you could reflect those on the changes that are already happening within the current regulatory format. Specifically, what I am looking for is, should we be concerned that the changes to a potential telecom act or forbearance will result in pricing pressures, or could we be optimistic that price increases could result under the TPR?

Darren Entwistle

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

It would be fair to say that the forbearance move that we hope would come to fruition with the TPR being implemented would allow us to pursue a number of very attractive marketing initiatives.

Number one, it would allow us to pursue a bundling strategy that we have been prevented from implementing in full. I think at the end of the day, a lot of our customers, particularly within the consumer market, would be highly attracted to the type of bundle that we could put together between regulated voice services, high-speed Internet services, wireless services, security services, and entertainment services. I believe that the freedoms that we will enjoy as a result of bundling will be very attractive.

Additionally, it would be fair to say that we can pursue a greater level of simplicity in our rate plans with consumers, and to the extent to which we can simplify our rate plans, I think that makes us less susceptible, more resilient, if you will, to competitive intrusions, because consumers can more clearly understand the value that they derive from their relationship with TELUS.

As well, it would be fair to say the extent to which our rate plans are simpler, that will also help us take cost out of our business, because when you have complex rate plans that are a result of a legacy regulatory environment, and these give rise to queries by customers in terms of the bills that they receive and calls into our call centers. Every time one of our call center agents answer the phone to handle a billing query, that is an $8 charge to the TELUS organization, so I think our ability to pursue simplicity within a de-regulated environment will not only help us retain clients and grow our relationship. It will also help us enjoy cost efficiency.

The other thing that I think will be attractive for us is we will be able to do more segmented pricing. We have not been able to do very segmented pricing in the past, whether the segmentation is on a needs basis, a geographic basis, whatever.

I think to the extent we can better tailor our marketing packages to key market segments, then we can create more value for customers and create more value for TELUS along the way.

I think it would be very positive for us to be unencumbered from the win-back rules that we currently face, although the win-back rules have been truncated recently. It would be fair to say that we do not think there is parity right now within the win-back domain, to the extent to which that when TELUS secures a new TV customer from the cable incumbent, the cable operator can go after that customer immediately with a win-back activity, whereas when we lose a telephony customer to cable, we have a 90-day moratorium that frustrates our ability to win back in an expedient fashion.

These are all the things that I think will come to fruition on the forbearance front that indeed will be very welcome in terms of developments for TELUS.

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

John Wheeler

Ron, we will take the last question. We are just coming up on the hour. Thank you.


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

John Henderson - Scotia Capital Markets

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

Robert G. McFarlane

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

Darren Entwistle

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

The other area for us that was somewhat frustrating, if you remember back to the first-half of 2005, we delivered a very strong result on the wireline side of the business to couple the strength, the performance, on the wireless side. It would be an accurate description to say one of the areas of focus for us and frustration is some of the LD erosion that we have been experiencing.

In the first-half of 2005, we were pretty much best-in-class in holding the line on LD erosion, and we have seen some slippage in that regard. Some of it is because of the operational impact caused by the labor disruption that is giving us a hangover. I am hopeful that as a result of our marketing activities going forward as it relates to win-back or what we will be able to achieve on the deregulation front, we can shore up our LD activities, and if not completely thwart the erosion, do a better job slowing it versus what we have experienced over the last couple of quarters.

John Wheeler

Thank you very much, investors, for taking the time to join us today. We appreciate your ongoing interest and continued support of TELUS. Have a good day.


This concludes the TELUS third quarter 2006 earnings conference call. On behalf of myself and the rest of the conferencing team, thank you from TELUS.

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