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Q1 2005 investor conference call - Robert McFarlane presentation
Thanks, John, and good morning everyone. Given my AGM presentation yesterday, I'm going to summarize our first-quarter results, in particular, try to provide some additional color rather than just repeating yesterday's presentation. So with that, let's begin on slide 4, which recaps the financial results released yesterday.
TELUS's first-quarter results were simply outstanding -- would be fair to say. Consolidated revenue was up nearly 10%, notably driven by revenue growth in both wireless and wireline. Revenue strength across both segments and continued expense control led to an outstanding 19% growth in consolidated EBITDA. Reported EPS rose by 139% in part due to a $0.15 per share positive impact from a tax settlement, and I will return to that topic in a few moments.
TELUS again delivered strong free cash flow with a 28% increase over last year. And it should be noted that there are a number of non-recurring or unusual items in the quarter, and I will try to elaborate on them as we go through this presentation.
Turning to slide 5. Firstly, TELUS benefited from the settlement of tax matters in the first quarter, which led to a favorable impact of $54 million in net income or about $0.15 per share. This reflects a change in tax estimates for available temporary differences, a tax rate differential on consequential adjustments from the favorable reassessment of prior year's tax issues and related interest income. The majority of these positive adjustments relate to the termination of payments to Verizon as a result of the restructuring of a former Verizon relationship agreement. Please note that in the corresponding period last year, TELUS also had favorable tax settlements totaling about $0.04 per share.
Turning to slide 6. Secondly, there were regulatory decisions during the quarter that impacted financial results. Given the past conservative -- and as it turns out, appropriate -- accounting treatment adopted by TELUS, I will expect a positive consolidated impact in 2005 as a result of mandated wireline discounts. Mandated CDNS discounts in our ILEC territories are offset by deferral account adjustments recorded in local revenue, which I will detail in a moment. Furthermore, as these discounts are now available to us on leased facilities for both our non-incumbent operations as well as TELUS Mobility, we anticipate a net favorable impact on EBITDA of about $25 million in 2005. Of this amount, approximately $18 million is expected in the communications segment and $7 million in TELUS Mobility. The positive impact for the CDNS decision to EBITDA in Q1 '05 was $5 million.
Separately, TELUS Québec benefits from the finalization of the subsidy requirement for high-cost serving areas in its eastern Québec territory. The positive impact EBITDA for TELUS Québec and therefore in our communications segment is about $10 million in 2005.
Turning to slide 7. Normalizing for the previously described positive income tax settlements in both periods and the $6.5 million retroactive portion of the positive impact in Q1 '05 of the TELUS Québec Portable Subsidy decision, as well as a $0.5 million positive retroactive portion of the CDNS regulatory decisions benefiting Q1 '05, EPS was still up $0.27 to $0.51 in the quarter or an impressive growth rate of 113%.
Turning to slide 8. Before I get into our segmented results, slide 8 shows how the $567 million in free cash flow was generated this quarter. After factoring in shares issued and a reduction in working capital primarily due to the payment of 2004 variable pay, the payment of mobility license fees to Industry Canada and a cash outlay associated with an acquisition, TELUS had $510 million in cash available for debt reduction and share repurchases. Keep in mind that cash interest on our $5.3 billion of long-term notes is payable in the second and fourth quarters, which therefore was not a cash item in the first quarter of 2005. Also, dividends were payable but not paid out as of March 31, 2005; whereas, the Q4 dividend was paid out by December 31st. So the $42 million payment was not a use of cash in the first quarter of 2005.
During the quarter, TELUS used $158 million to repurchase voting and non-voting shares under a Normal Course Issuer Bid. With no significant debt maturities until 2006, we continued to build our cash position by $351 million in the quarter to total $1.2 billion at March 31st.
Now turning to slide 9. In our wireless segment, slide 9 briefly recaps TELUS Mobility results, which were outstanding across the board. Mobility clearly continues to deliver impressive revenue, earnings, and cash flow growth that are best-in-class. Not only is this reflective of the growing wireless market, but it is also due to performance, which is greatly superior to that being reported elsewhere in the wireless industry. While Capex was up slightly, it actually remained flat at 8%, which is a very low ratio on a global basis. Consequently, wireless EBITDA less Capex grew at an outstanding 41% year-over-year.
Turning to slide 10. TELUS Mobility net additions led the Canadian industry and were up over 5% year-over-year. Importantly, our good subscriber growth results were dominated by post-paid subscriber additions, which bodes well for our ARPU and revenue growth profile going forward. In fact, post-paid net adds were 16% higher than for the first quarter of 2004. As a result, our subscriber mix remains industry-leading at 83% post-paid.
Turning to slide 11. This strong subscriber mix contributes to TELUS Mobility's significant 20% ARPU premium relative to our closest competitor. TELUS's $1.00 ARPU increase year-over-year for the quarter was driven by continued pricing discipline, increased usage, and particularly, with significant growth in data and Internet products, as our wireless customers continued to use their phones more and more. As you can see, ARPUs in the industry have been up year-over-year. However, the increase has not been uniformed. So while we have a significant 20% ARPU premium, we see Rogers is improving significantly, and they should be commended for that improvement. However, that does not extend to the far right side of the bar, which is evidence of price discounting that unfortunately is still taking place in the market.
Slide 12. Mobility's continued profitable growth strategy is evident on slide 12. Our already low churn reduced by 4 basis points, now leads the industry. While at the same time, costs of acquisition per gross addition again improved to $355. This is important, as it means our industry-leading subscriber growth was achieved at a lower marketing cost than ever before. Clearly with increasing ARPU and decreasing cost of acquisition per gross add and a lower churn rate, TELUS Mobility is garnering its leading subscriber growth results through superior execution and not by means of rudimentary tactics of either price discounting or extensive promotion.
Turning to slide 13. While TELUS attracted 44% of the net additions in the first quarter of 2005, our focus on profitable subscriber growth is paramount. And it is evident, as we look at the cash flow this year of 40% of the industry in the far right hand pie. That is really our primary objective. And our objective isn't necessarily to increase the size of our slice of the pie. But hopefully, the pie will expand and therefore be a win-win for all industry participants.
Turning to slide 14. Based on TELUS Mobility's first-quarter results and our outlook for the rest of the year, we made positive revisions to our public guidance for 2005 yesterday, as outlined on this slide. However, we should remain cautious, given it is only early May and the fourth quarter has a dominant impact on annual wireless results.
Turning now to our wireline business segment, TELUS Communications is shown on slide 15. What was particularly encouraging was that in addition to TELUS Mobility's strength, our wireline business contributed its best quarter in 3 years. First-quarter revenue rose 4.4%, the highest wireline result in North America this quarter. This was led by double-digit growth in data revenues and continued expansion of our non-incumbent operations in Central Canada, offset in part by continued competitive pressures in our local and long distance operations. Strong EBITDA growth of nearly 10% reflects the ongoing focus on enhanced efficiency and cost containment. Capex fell by 18%, resulting in a Capex intensity ratio of 17% of sales. EBITDA growth combined with lower Capex resulted in a strong 43% improvement in wireline cash flow.
Slide 16 provides TELUS Communications' revenue profile by component product. The regulatory impact of the CDNS decision has somewhat distorted reported local and data revenues, which we will look at it in just a moment. However, once again, we have experienced very modest long distance revenue erosion in the quarter at only 1.4%. This contrast with substantially higher decline rates reported by other telcos and clearly reflects TELUS's differentiated strategy to protect legacy long distance revenues.
As I alluded to earlier, TELUS Communications' revenues were affected by some positive non-recurring items, which we outline in slide 17. Normalizing for the non-recurring retroactive impact of the regulatory decision affecting TELUS Québec, revenue growth was closer to 3.8%. In addition, acquisitions including one made midway in the first quarter of 2005 added roughly $19 million to revenues. Excluding these items, affecting a year-over-year comparison, TELUS's underlying wireline business still generated growth of about 2.2%, which was the most impressive in 13 quarters, particularly given the relative growth in the industry.
Slide 18 highlights the underlying growth rates for local and data revenue components. Given that TELUS employs a liability method in accounting for price cap deferrals, an $18 million recovery from the price cap deferral count was recorded in local revenue in the first quarter of 2005 related to the CDNS decision. This favorable recovering offset the newly mandated additional discounts for competitor digital network services. So, local revenue was basically flat, excluding the positive CDNS impact as well as a retroactive impact of the TELUS Québec regulatory decision. The additional discounts for CDNS mandated by the CRTC coincidentally almost offset the increased data revenues coming from acquisitions. As a result, TELUS's reported and normalized data revenue growth were both 11%.
Slide 19 highlights our network access line, or NAL for short, performance during the quarter, where we saw improvement in total network access line erosion. At -1.1% this quarter, TELUS experienced the strongest result in 5 quarters, dating back to the fourth quarter of 2003. TELUS is benefiting from the strong economies in B.C. and Alberta and some temporary gains, as lines were added in advance of the May provincial election in British Columbia. The result is believed to be the best of any telco in North America. However, while we are pleased with this performance, given Shaw's launch of cable telephony in March in Calgary and roll out to other markets subsequently, we expect it will be difficult to maintain similar results in the future in light of the increasing competitive situation.
Turning to slide 20. The EBITDA impact of these non-recurring items and acquisitions is shown. You can see that on a normalized basis, excluding the year-over-year impact of acquisitions, the underlying organic EBITDA growth rate was still an impressive 5.7%.
Another notable strength for TELUS in the first quarter of 2005 was our non-incumbent operations in Central Canada, shown on slide 21. Our focus on quality recurring revenues is continuing to pay off. For the first quarter, we reported record revenue of $160 million and recorded our second quarter of positive EBITDA at $8 million. In looking at the EBITDA run rate, Q1 is a seasonally strong quarter for one of the acquisitions we made last year. The first quarter was also impacted positively by the CDNS decision, and there were a number of smaller non-recurring items. Taking these factors into consideration, we estimate our normalized non-incumbent EBITDA was about 3, perhaps $4 million in the quarter.
We are pleased with this momentum and yesterday announced positive changes to our non-incumbent guidance. We now expect 625 to $650 million in revenues for the full year 2005, yielding EBITDA between 15 and $20 million. The extent of the improvement may ironically be held back to the extent that we win other new large business contracts, which typically are dilutive during their start-up phase.
Turning to slide 22. About the only disappointment in the first quarter, it is a relatively weak 22,000 net high-speed Internet additions. While the market is maturing and our churn rates are encouraging, we obviously lost share in the market, and we will have to do better in the future. In any event, the 22,000 net high-speed adds represent an 18% growth from last year. And Internet subscribers now total 982,000.
Turning to slide 23. Revitalizing wireline growth remains a priority with a number of major initiatives in both the residential and business markets. We have discussed progress at our non-incumbent operations in Central Canada, so I won't repeat those. But also on the business side, in April, we renewed a 7-year contract for $245 million with the province of B.C. to consolidate existing telecommunications service contracts for the province and related Crown Corporations. This agreement will also bring TELUS Internet access to many more rural communities in British Columbia.
Meanwhile, we continue our roll out of Future Friendly Home initiative. We launched wireless home networking and home security monitoring services in 2004 and continue to trial IPTV with employees for a possible future commercial launch. We believe that the Future Friendly Home initiative provides TELUS with new and attractive revenue streams that reflect a natural extension of our existing DSL investments and products and at the same time enhances our differentiation and competitive position. In addition, our differentiated strategy with regard to bundling is designed to protect our legacy revenues rather than cannibalize them. In this regard, you can see the impact of the strategy on our long distance revenue erosion rate, which is about one-tenth of the Canadian industry average.
Referring to slide 24, we also continued to focus on our corporate priority of driving continual improvements in productivity. The success of past programs is serving as a platform for continued cost improvements at TELUS Communications in our efforts to protect wireline margins. We have allocated $100 million to support further restructuring initiatives in 2005. Although we recorded only $9 million of restructuring and workforce reduction costs in the first quarter, we continue to expect these costs to ramp up, as I said on the last conference call, for the remainder of the year, as we identify opportunities and approve new initiatives -- total $100 million for the full year.
Based on positive regulatory developments and year-to-date results, we have announced positive revisions to our full year guidance, as shown on slide 25. Although we are encouraged by the quarter, we remain somewhat cautious due to the competitive uncertainties in our businesses and the heightened state of labor relations challenges.
Turning to slide 26, I would now like to update you on a couple of key developments before I wrap up. Beginning with the current labor situations, in summary, we tabled our comprehensive offer on April 13th to the TWU. However, we have reached an impasse. TELUS undertook an escalating sequence of lawful measures provided for by the Canadian Labor Code to bring pressure to bear and encourage the parties to negotiate. Although certain law code measures were implemented on April 25th, our business continues to operate normally, and we continue to negotiate with the TWU and are hopeful of a near-term settlement.
Next, in regard to our share buyback program, in the first quarter, we were active in the market purchasing 4.1 million TELUS shares for $158 million. Under our buyback program, TELUS is permitted to repurchase up to 25.5 million shares. As of the end of the first quarter, TELUS has repurchased for cancellation a total of approximately 6.3 million shares since we began the program in December, representing 25% of the authorized annual program total. TELUS believes that these share repurchases constitute an attractive investment opportunity and a desirable use of TELUS's cash that should enhance the value of remaining shares.
Turning to slide 28, yesterday, we announced that TELUS has entered into new credit facilities totaling $1.6 billion. The facilities consist of two tranches -- one $800 million, 5-year revolving term facility expiring on May 4, 2010 and a 3 year, $800 million revolving term facility expiring on May 7, 2008. These facilities replace TELUS's existing $1.6 billion of committed credit facilities. Our 364-day facility was replaced with a 3-year term facility. And our previous 3-year facility was replaced with a 5-year term facility at favorable prices, with substantially the same terms, improved pricing and extended terms. Notably, these facilities mature subsequent to the '06, '07 debt maturities. The renewal of the credit facilities reflects TELUS's very strong financial position and reinforces our solid liquidity position.
As you can see on the last slide, slide 29, which summarizes revised consolidated guidance, TELUS expects 2005 to be another strong year. Reflecting year-to-date results as well as regulatory and tax settlement impacts, we are making positive revisions to consolidated guidance. We are revising our ranges for consolidated revenues upward by $50 million, EBITDA upward by$25 million, EPS upward by $0.20, free cash flow guidance upward by $50 million, and narrowing our Capex guidance range toward the upper end.
The theme of our recently released Annual Report is "The Future is Friendly," which most of you know, as our long-standing brand promise. With outstanding first-quarter results and positive outlook for the year, the future does indeed look friendly.
With that, Darren, George and I would be happy to take questions. So Don, I will turn the call back over to you to begin the Q&A session.
Q1 2005 investor conference call - presentations
John Wheeler, vice-president, investor relations
Robert McFarlane, executive vice-president and chief financial officer
Question period
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