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Q1 2003 investor conference call - Robert McFarlane presentation
Great, thanks George and congratulations on a great quarter.
Turning to slide 24, you can see on a consolidated basis in the quarter, revenues were up 2-1/2% and EBITDA was up 14% so clearly a significant margin expansion occurred in the quarter. On the net income basis, we reported $91 million of net income, that's $92 million increase year over year, and that corresponds to a 26% share EPS, up 27 cents. Now 15 cents of the EPS in the first quarter is due to a favorable tax settlement with CCRA but even excluding that settlement, the normalized EPS, if you will, of 11 cents still corresponds to a 12 cent year over year increase and is significantly ahead of plan. So a very positive quarter financially. As reported yesterday we have declared the dividend of 15 cents per share payable July 1.
Turning to slide 25, on the capex front, a significant decrease of almost 50% year over year. That corresponds to a 12% capex intensity level in the first quarter, however, we do expect that capex will ramp up over the balance of the year closer to the original 20% or less annual target. On a free cash flow basis we reported a healthy $376 million free cash flow and let's turn the page to slide 26 to get a break down of that.
Starting with EBITDA of $670 million, as Darren mentioned, that is net of pension expense in that line. The EBITDA as reported is before restructuring and workforce cost reduction, so they are shown separately on this slide, in terms of the cash impact or the cash paid as opposed to the original provision. Second line, capex at $208 million, then cash interest at $36 million, as you may recall, our larger public bonds have interest payable on a semi-annual basis and therefore the second and fourth quarter of the years we tend to have a jump in the cash interest paid, nor in those quarters the interest paid is somewhere in the neighborhood of $180 million as compared to the $36 million in this quarter.
The cash tax line is an interesting development in this quarter. As a result of a very favorable settlement that we have reached, so on a net basis there's $6.5 million of cash taxes for the quarter, now that, if you refer to the statement of cash flows, you'll see that for that purpose we included the ITC's in that line; of course ITC's are already in the EBITDA line, so to put on that basis we backed it out here. Cash dividends of $45 million reflect a 17% dividend reinvestment plan participation rate; pleased to see that increase in the 14% area last quarter. So the reported free cash flow of $376 million is the resulting figure.
Now to reconcile that to a change in net debt, you can see that a change in working capital and some other miscellaneous items amount to about $47 million. A big chunk of that change in working capital is the result of a $25 million; excuse me, $21 million of reduced accounts receivable through the sale of and to the securitization program.
Non-public share issuances, as you know, we have a significant employee shareholder and participation in our employee plan and about $20 million came into treasury during the quarter. Cash restructuring charges were $154 million, so this again, relates principally to severance being paid out in the quarter. And therefore the net reduction in debt in the first quarter was approximately $195 million.
Turning to slide 27, highlights in the communication segment were, well we had experienced revenue softness with our revenues down 3.4%, the largest reason for that was due to the price cap, normalizing for that, revenues would be down 1-1/2%. EBITDA still grew at 5-1/2% so exceeding or more than offsetting the revenue decline, and as Darren already mentioned, that EBITDA growth rate of 5-1/2% is net of a $22 million price cap effect as well as $16 million of pension expense change. So normalizing for the price cap the EBITDA expansion would've been approximately 10%, and if one adds the pension expense, it's over 13%. Capex down by 50%, so the story as it is with Mobility, is significant cash flow expansion with $339 million and up 115% year over year.
Turning to Mobility in slide 28, George touched on this, with revenues up 19%, EBITDA up 46%, of course as George mentioned a year ago, the first quarter included a $21 million provincial sales tax credit, so if one normalizes for that, the EBITDA growth rate was 76% year over year. The first quarter of 2003 did benefit from a $5 million favorable industry Canada license fee credit, so that helped network expenses be flatter than otherwise.
The revenue, 87% of revenue growth of EBITDA before COA -- sorry for every dollar of revenue growth, EBITDA, before COA, increased by 87 cents, so that's the flow through before cost of acquisition from revenue growth. And of course, as George inferred, if one normalizes for the PST a year ago, it'd be over 100%. The point here is tremendous economies of scale being experienced as margin expansion is occurring from the revenue growth. So 36% is the network margin or 33% of total revenues, and that's a 6-point gain, year over year.
Turning to slide 29, a significant cash flow expansion in both Communications and Mobility is resulting in the debt being reduced, and with EBITDA going up, consequently our net debt to EBITDA ratio continues to improve. It decreased from 3.5 last year to 3.2 times at the end of the third quarter -- first quarter this year. Of course we believe we are on track to achieve the target of 3.0 or less by the end of this December and less than 2.7 by December 2004. That reflects the credit enhancement that's occurring at TELUS.
And if one turns to slide 30, you'll see the bond performance over the past 12 months; and that is quite the story. As a bit of a "V" there, I don't know that this has occurred elsewhere, perhaps unprecedented to see an investment grade bond drop as much as it did upon the credit downgrades that occurred in the July timeframe of 2002. But the main point, I don't think that's the unusual part, I think the unusual part is that it came back even more since.
And so you can see that we're actually trading at levels higher than that which prevailed prior to the rating cut a year ago; of course we have not had a rating change other than an outlook change from one agency. So I think this says that the market is viewing their-selves, as a credit that it is stronger than it even was before we had the downgrade, it's a relatively unusual situation, but that's what's occurred. In fact, we on various days in the past 10 days, have had the spread in our public bond issues actually trade underneath the spread to when they were originally issued in 2001. Again, very healthy reflection of how the bond market is viewing the credit worthiness of TELUS.
Turning to slide 31, yesterday I announced that we will be renewing our bank credit facility in the amount of approximately $600 million for the 364 day portion, which added to the existing $1.5 billion term facility, mean that we have about a $2.1 billion aggregate facility of which we're borrowing $500 million or less currently.
We have no material changes to the terms and so it's essentially a straightforward renewal for us. I think the positive story is that we've received commitments in the past week well in excess of $750 million, even though we're only looking to renew at $600 million. And in this environment of tightened credit availability, I think that's an important testimony to the strength of TELUS and its reputation and ability to access capital in the market.
Turning to slide 32, we set financial targets for 2003 and by December 16, guidance call and you can refer to those in slide 32. Of note you see that the free cash flow target was set at $300 million to $600 million, reflecting the fact that there is about $200 million estimate range in respect of cash taxes from cash taxes of $25 million to a credit position of $175 million; and that variance was largely due to the uncertainly over the potential settlement with CCRA over certain disputed matters.
Turning to slide 33 you'll see an update on those negotiations. During the quarter we reached a settlement that will result in approximately $200 million of taxes to be refunded; in addition to that there is about $9 million of accrued interest, which after tax is $6 million, so approximately $206 million on a combined basis. Now the income statement impact, which results principally because of historical tax rates being higher than current tax rates, so when you apply the settlement back to the past where there is a income statement positive impact of approximately $47 million. That corresponds to the 15 cents per share EPS pickup as a result of this settlement.
Now from a cash flow perspective, we've yet to receive the cash payments in this settlement, and therefore you'll note that the taxes receivable on the balance sheet have increased by approximately $200 million in accordance with this settlement. In terms of our cash flow implications to this calendar year, we expect to receive somewhere in the neighborhood of $150 million of cash of this $200 million settlement, which combined with approximately $50 million of loss carry-backs that we expect to receive later in the year, coincidentally totals the similar $200 million number.
That is why we have revised our free cash flow range, at least we narrowed the range, as the lower end of $300 million has been raised to $500 million and therefore, as you can see on slide 34, we have revised the free cash flow range now to the $500 million to $600 million range. The EPS was boosted by 15 cents, again reflecting the income tax settlement. In terms of Mobility, as George referenced, in accordance with revised industry growth expectations and a continuation of similar shares, we expect approximately 350,000 net additions for TELUS Mobility. Because of the margin expansion and, in part, the subscriber estimate reduction, we've revised guidance for the Mobility EBITDA, by about $50 million so the increased range is now $675 to $700 million.
On the Communications segment we've experienced revenue softness and at this juncture there isn't sufficient clarity and visibility on revenues for us to, with certainty, revise guidance in that segment. Clearly on our operating expenses driven by our OEP program, we seem to be achieving, if not exceeding our expectations in that regard; however at this juncture it's unclear whether the positive story here to date on the OEP and projected for the rest of the year, will offset or not potential revenue weaknesses. So, therefore, we felt it's more appropriate to defer a revision of guidance on Communication until we have more data points in the second quarter. Accordingly, we have left the Consolidated guidance unchanged and the Communications segment unchanged; however, added, obviously if you add the two segments together it'll be higher than the Consolidated guidance.
In summary, on slide 35, TELUS Communications clearly was a very positive story this quarter as we drove significant efficiencies and for a telco in North America, 5-1/2% on the Wireline side EBITDA growth is truly a very positive story. On the TELUS Mobility front, obviously, excellent results that we've covered and so on a combined basis, very positive financial results reported. With reduced capex intensity, we're driving significant cash flow generation, which is reducing debt and leverage and translating into an enhanced credit profile. And lastly, as just referenced, we've raised our earnings guidance for the year in part because of the tax settlement and so we have a very positive outlook for our earnings and other financial targets for the remainder of 2003.
Q1 2003 investor conference call - presentations
John Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
George Cope, president and chief executive officer, TELUS Mobility
Robert McFarlane, executive vice-president and chief financial officer
Question period