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Q1 2004 investor conference call - Robert McFarlane presentation

Thanks, John. And good morning, everyone. Following on my presentation yesterday at our Annual General Meeting, I will try to briefly summarize our 1st Quarter results and, in particular, I will try to add some colour, rather than repetition to my presentation yesterday.

Turning to Slide 4, it illustrates the various highlights at a summary level from the 1st Quarter. TELUS Mobility was perhaps the highlight of the quarter, as it again demonstrated excellent performance, with outstanding results for the quarter. In fact, we enjoyed a record $100 million annual increase in network revenue. As well, the Mobility segment again demonstrated continued customer satisfaction with top quartile churn of 1.5% - in fact, it was 1.49% if you go to the second decimal, for what that's worth - and a low cost of acquisition, which was down 10% year-over-year.

Our TELUS Communications wireline segment faced a tough operating environment in the 1st Quarter 2004 and that negatively impacted our revenue and our EBITDA in that segment. However, a strong point for Communications in the quarter was the high-speed internet growth, which generated 44,000 net additions and that's up 36% year-over-year. Notably, we once again exceeded the net additions of our primary cable competitor.

At the consolidated level, yesterday we announced a $0.05 increase to our EPS guidance for the year to $1.10-$1.30 due primarily to a favourable settlement concerning interest owed to TELUS related to last year's large tax settlement. And we are continuing to target significant 2004 free cash flow of more than $1.1 billion.

Turning to Slide 5, highlights of the consolidated results for the quarter. So briefly, revenue is up 3.6% year-over-year, our reported EBITDA is up 8.6%, net income up 13%, earnings per share up 7.7% and our free cash flow increased by two-thirds to $443 million.

Now, turning to the slide, "Consolidated - EPS continuity", if we look back to our earnings per share for a moment, we can see the EPS measure for the 1st Quarter of 2004 and 2003 normalize for certain one-time items. After backing out the impacts of share-based compensation which, of course, is a new Canadian GAAP charge with respect to expensing of options, as well as in our case restricted share units, as well as higher restructuring in workforce reduction costs incurred in the 1st Quarter of this year as compared to last year, and the impacts of the settlement of prior year's tax matters, which you can see was a $0.15 positive impact to our 1st Quarter in 2003, whereas a new settlement was $0.04 positive impact to our 1st Quarter in 2004. Taking all these normalization adjustments into account, you can see that our normalized consolidated EPS was really up 133% year-over-year.

Now let's try to analyze some of the less obvious aspects of our results, starting with the slide titled "Revenue Normalization", and what we can see in this slide is due to asset divestitures which occurred in 2003, we need to normalize, if you will, for the $10.8 million of revenue that was generated by those assets that is no longer in our results in the 1st Quarter of 2004, but were imbedded in the results in the same quarter a year ago. Now, these divestitures related to some small operations in our Communications segment, specifically in our non-ILEC area and from a product perspective are reported in our data line. Accordingly, if one adjusts for the $10.8 million, you can see on a consolidated level the annual growth rate increases slightly to 4.3%. On a segment basis, Communications growth rate improves to negative 2.2 as compared to 2.9. On a product basis, our data which is a subset of our Communications revenue, improved from a negative reported growth rate of 0.9% to a more reflective apple-to-apple growth rate of 2.3%. And lastly, of course, since the divestitures were in the Communications segment, there's no adjustment necessary to Mobility's 19% reported revenue growth.

Turning to the next slide, Slide 8 "Consolidated - underlying EBITDA growth", we make the same adjustments to show the impact on the consolidated EBITDA normalized amount. So we can see here that the reported EBITDA growth of 8.6% when normalized for the share-based compensation and the restructure in workforce reduction costs increases to 10.9%. Now, I've met various investors who either want or don't want pension expense to be normalized, so I'll show it here, so depending on your preference, you can concentrate on the line which you feel is most relevant. In particular, our most notable comparable firm reports their pension expense below the EBITDA line, and so from that facet, perhaps adjusting this is useful to facilitate some apple-to-apple comparisons. In any event, we have reduced pension expense in 2004, so that would bring the normalized EBITDA amount to 9.5%.

Turning to Slide 9 "Communications - underlying EBITDA growth", this is the first of three slides or so on our Communications segment, and we show the same adjustments with respect to the Communications segment itself. So the reported EBITDA negative 2.5% CAGR for Communications, when normalized for the share-based compensation and the restructuring in workforce reduction costs actually increases to a slight positive growth rate of 0.5%. Of course, if you wanted to adjust for the pension expense, then it would bring it back to a slight negative growth rate of 0.8%.

Turning to Slide number 10 on the high-speed internet subscriber growth, we highlight our strong execution, as it's one of our priorities to drive towards leadership in high-speed internet. TELUS' high-speed internet net additions of 44,000 are up by 36% compared with the 32,000 net-adds in the 1st Quarter of last year. Total high-speed internet subscribers now total 605,000, which is a 37% increase year-over-year. High-speed internet subs, as I mentioned in yesterday's AGM presentation, now represent over two-thirds of TELUS' total internet subscriber base, and this is in stark contrast to just over two years ago, when two-thirds of our base consisted of lower revenue-generating dial-up subscribers.

Turning to Slide 11, "Non-ILEC normalized revenue & EBITDA", we show the performance of our non-ILEC operation in Central Canada when normalized for the sale of certain assets last year that I mentioned in my normalizing adjustments earlier in my comments. Clearly, we are somewhat disappointed with this performance, but we attribute the performance to a continued soft market, plus a focus on recurring revenue sources from larger long-term contracts, plus reliance on non-recurring customer premise equipment sales. This approach entails higher up-front expense and capital on the launches of contracts such as the Toronto Dominion Bank, and as announced yesterday, the new $66 million six-year deal with The Co-Operators group. This latter deal involves wide area network and local area network data and IP applications for over 600 branches across Canada. As one can see on this slide, the revenue year-over-year when normalized for the divestitures was down slightly by $2 million, whereas the profitability improved by $10 million or over 50% annually.

Turning to Slide 12 "Mobility's share of Canadian wireless industry", this slide shows the significant EBITDA growth on the right-hand side of the slide of the wireless industry for the quarter ended March 31st and in particular, the enormous share of profitability that TELUS is reaping of the industry total, as compared to our share of subscriber growth. So in the 1st Quarter we estimate, based on announced results, that we captured approximately 31% of the total industry subscriber growth in the 1st Quarter; whereas on an EBITDA basis, we captured 42%. That's been a consistent trend for our company and remains a remarkable result and certainly a shareholder-friendly one.

Turning to Slide 13, this next slide illustrates the fact that TELUS Mobility continues to be the industry-leader in terms of ARPU by a significant margin of $10 or roughly 20%. As shown here, there are four national wireless providers in Canada, all of which, the three national operators, were up year-over-year; however Microcell on the far right I notice was the only company that actually went down.

Turning to Slide number 14, this slide highlights firstly the tremendous revenue expansion that Mobility is benefiting from as measured at the network revenue line. This is the relevant revenue line in Mobility from the standpoint of valuation because it's the recurring revenue where profits grow from, and we had a remarkable $100 million year-over-year increase in our network revenues. With EBITDA increasing $69 million, obviously the percentage of revenues that flowed through to EBITDA is a very healthy 69% and that reflects the economies of scale that we're reaping in our Mobility segment as almost $0.70 of every incremental dollar of network revenue is flowing through to the profit line.

Turning to Slide 15, this slide shows Mobility's significant contribution to TELUS' consolidated results for both EBITDA and EBITDA less capex year-over-year. Mobility's 39% increase in EBITDA in the 1st Quarter of 2004 means that this growing segment comprised 34% of 2003 consolidated EBITDA. Combined with Mobility's seasonally low capex over the same period, its EBITDA less capex contribution also increased to a remarkable 48% of consolidated cash flow in the 1st Quarter of this year. This is notable, given that only two years ago in the 1st Quarter of 2002, the Mobility segment achieved EBITDA less capex break-even for the first time. I believe this has important valuation implications. A high-growth Mobility business is now also generating meaningful cash flow after capex, and since it represents such a high and increasing proportion of our overall business, this would logically attract a higher valuation multiple for TELUS relative to other telecom stocks.

Turning to Slide 16, we show you an analysis of EBITDA margins, both at the business segments and at the consolidated level. We can see in our Communications segment while we reaped tremendous productivity gains in the 2002 and 2003 period from the Operational Efficiency Plan, we continue to improve productivity in that segment with a one point improvement in the Communications EBITDA margin in the 1st Quarter of 2004. The tremendous profitability expansion in Mobility, as mentioned through the significant ratio of revenue flow through to EBITDA is reflected in the tremendous expansion in EBITDA margin in the Mobility segment by six points to 39% in the 1st Quarter of 2004. On a consolidated level, we have a healthy two-point improvement to a 40% overall EBITDA margin.

Turning to Slide 17, let's look at our free cash flow components, and I'll comment on some of the major changes. Firstly, obviously we've had healthy operating profitability improvement as our EBITDA improved from $664 million last year to $721 million in the 1st Quarter. We had increased capex of approximately $102 million on a consolidated level, but despite that, we had free cash flow which increased to $443 million. The reason for the increase, aside from the improved EBITDA was significantly lower cash restructuring payments which were well in excess of expenses and you can see that there is approximately a $90 million reduced outflow of restructuring payments, principally related to severance on our Operational Efficiency Plan from the past two years.

Meanwhile, net cash interest was reduced $9 million; our non-cash share-based compensation was a new expense, as mentioned, but it was a non-cash one and therefore, we adjust for it here in this slide. And then, of course, in terms of a cash tax recovery, we received approximately $88 million of cash taxes in the 1st Quarter of 2004 related to last year's tax settlement which was booked on an accrued basis. So the $0.15 per share improvement last year in the 1st Quarter was reflective of a tax settlement where the proceeds of which were not received until the 1st Quarter of this year, so therefore, it improves the free cash flow in the 1st Quarter of 2004 and the earnings per share improvement which we received of $0.04 per share in the 1st Quarter relates to accrued interest, which the revenue agency has agreed that they owe us relating to that settlement, which we have therefore booked and improved our earnings in this quarter by $0.04, yet the actual cash from that settlement will be received in a future time period.

Moving down below the free cash flow line, you can see the share issuances, the cash dividends, roughly comparable to last year. I think the notable line item is the accounts receivable securitization program wherein we applied surplus cash flow generated to repay $150 million on that program so that our outstanding amounts were $150 million at quarter end. All in all, we generated approximately $274 million of cash that either went to pay down debt or increase our cash balances on top of the $150 million to pay down the receivable line. So all told that means we generated approximately $424 million of cash to pay down debt or receivable lines or increase our cash position.

Turning to Slide 18, yesterday I announced that we are in the final documentation phase for renewed bank credit facilities for $1.6 million and these will replace the old ones which were going to expire later this month. The new credit facilities will include a 364-day standby bank facility for $800 million with a one-year term-out, and a new four-year $800 million credit facility expiring in 2008. While our strong free cash flow generation and consequent leverage reduction has meant that we're currently not borrowing on our bank facilities, yesterday's announcement is another positive development. The new facilities provide improvements such as longer data term facility, improved pricing and more flexible reporting and other covenants. In short, we are demonstrating the strong support that we receive in the financial community and like to acknowledge the 18 financial institutions who have helped us yet again renew our credit facilities.

Now, turning to Slide 19, we can see on this slide updates to our guidance that we announced yesterday. Firstly, at our wireline Communications segment, we revised a revenue and EBITDA guidance ranges down slightly to reflect the tough operating environment that I have outlined earlier in my comments; however, that is largely offset by better than expected Mobility performance where we increased the EBITDA guidance. On a consolidated basis, I'm pleased to say that we're announcing an increase in our EPS by $0.05 to a new range of $1.10-$1.30 per share, largely as a result of the favourable tax settlement in the quarter.

As you can see on Slide 20, where we summarize our updated consolidated guidance, we do expect TELUS to perform extremely well in 2004. We are expecting revenue to increase by 4-6%, EBITDA to be up by 5-8%, earnings per share to increase by 20-40% and free cash flow of over $1.1 billion.

That concludes my presentation this morning. I'm going to hand it back to John and then we'll open the lines up for questions.

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Q1 2004 investor conference call - presentations

John Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
Back to Q1 overview