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Q2 2004 investor conference call - Robert McFarlane presentation

Thanks, Darren, and good morning everyone.

Let me begin on Slide 13, which recaps some of the highlights in the 2nd Quarter. TELUS Mobility, our wireless segment, again reported outstanding operational and financial results across the board. Strong subscriber additions and retention, combined with increased ARPU and cost efficiency generated the excellent financial results. Meanwhile, TELUS Communications, our wireline segment, exhibited continued revenue softness in the 2nd Quarter, consistent with the trend of the sector. At the consolidated level, TELUS reported strong EBITDA, EPS and free cash flow growth.

The next slide highlights the significant consolidated growth reflected in the Q2 results. Revenue growth was 5.2% and EBITDA growth was 9.5%. In the case of both revenue and EBITDA, the driving engine behind the growth has been TELUS Mobility's excellent results. Of particular note, 2nd Quarter profits grew to $172 million in the quarter, which was aided in part by favourable tax and related interest settlements of $45 million. It is also noteworthy to observe that TELUS generated a sizeable $230 million of free cash flow, which is about 3.5 times that generated in Q2, 2003. Notably, all of these results are well ahead of consensus street expectations.

Taking a closer look at EPS on the next slide we can see that EPS for the 2nd Quarter of 2004 normalized for certain items. Favourable tax settlements and related interest contributed approximately $0.13 per share this quarter. After normalizing for the positive tax settlements and an approximate $0.01 impact from the share-based compensation not recorded last year, EPS is up 71% and after adjusting for restructuring and work force reduction costs, normalized EPS was up $0.14 or 64%. According to our tracking, consensus street expectations were $0.31 for Q2, so any way you measure it, TELUS produced excellent earnings growth, which exceeded expectations.

Now, let me turn to TELUS Mobility, which was the driving operational force behind the strong results reported today.

On Slide 16, you can see that Mobility continues to perform well across the board. Total revenue was up 20% from a year ago due to increased ARPU, combined with strong subscriber loading and retention results. Excellent top line growth combined with continued cost containment and enhanced operating economies of scale led to an impressive 42% EBITDA growth rate. With flat capex year-over-year, a tremendous $85 million increase in cash flow was generated.

Mobility enjoyed a strong quarter of subscriber growth with an industry-leading 114,000 net-additions, an 11% increase over the same period last year. With over 100,000 post-paid net-additions in the quarter, post-paid growth was particularly strong, up 28% year-over-year, and post-paid subscribers at June 30th represented 82% of the total subscriber base. While typically 60% of annual wireless industry subscriber loading is in the back half of the year, given that TELUS' mid-year subscriber growth is ahead of last year's pace, we appear to be on track to meet our 2004 guidance of 375-425,000 net-additions.

This next slide depicts TELUS Mobility's strong performance in wireless churn. TELUS' churn rate was 1.3%, flat compared to the same period last year. This continued excellent churn performance reflects the high levels of client satisfaction with our network and service experience, and indicates we were providing a future friendly experience for our clients.

Slide 19 illustrates the fact that TELUS Mobility continues to be the undisputed Canadian industry leader in terms of ARPU by a significant margin of $9 or roughly 18%. As a result of an overall 14% increase in average minutes of use per subscriber, an increase in roaming revenue, as well as an increased acceptance of data, internet-based products, including picture messaging, ARPU increased to a Canadian industry-leading $59 in the 2nd Quarter of 2004, as compared with $56 in 2003. This reflects the advantages of our innovative marketing, strong brand presence, differentiated product focus and effective distribution.

The next slide demonstrates an important facet of our Mobility business, the increased economies of scale that we are generating as the business continues to quickly grow. In the 2nd Quarter, 86% of the incremental $99 million in network revenue flowed to the EBITDA line - a tremendous achievement and a true indicator of the financial operating health of our strong Mobility business

Now, turning to TELUS Communications in Slide 21, you can see a summary of financial results for the wireline segment. 2nd Quarter results are consistent with a continued industry-wide softness in wireline demand. While reported revenue is down 1.7% year-over-year, it is interesting to note that Communications revenue of $1,189,000,000 was the best quarterly result in a year and we did experience improved trends for local and LD revenues. Expenses were down 0.6% as OEP-related savings of $27 million were partially offset by other expense increases. The revenue decline led to lower EBITDA of $499 million, a 3.2% decline. capex increased 18% year-over-year, largely due to increased ILEC network investments to improve customer service and reliability, as well as non-ILEC investments related to implementing new, large, complex IP contracts. As a result cash flow, as measured by EBITDA less capex, declined 20% to $231 million.

Driving towards leadership in high-speed internet is one of our top corporate priorities. On Slide 22 you can see that despite TELUS only adding 19,000 high-speed internet subscribers in Q2, the year-to-date total of 63,000 is ahead of last year's pace, and so we remain on track for the 125,000 net-addition target for the full year. We have also captured an estimated majority of the market's high-speed organic net-additions in our incumbent areas. However, as Darren mentioned, we were disappointed with the churn experienced in the 2nd Quarter and through focused effort, we should be able to improve on future results. At June 30th TELUS' total high-speed internet subscriber base now totals 624,000 which is a 33% increase year-over-year and represents over two-thirds of our total internet base.

Turning to Slide 23, we show the performance of our non-ILEC business in Central Canada normalized for the sale of certain assets last year. As Darren mentioned, the recent profitability declines are believed to be short-term in nature and a by-product of our transition to higher quality recurring revenue sources, which often entails significant expense in capex recorded prior to the ramp-up of meaningful, longer-term recurring revenues when implementing large, complex contracts. As shown later, we are revising down the 2004 non-ILEC guidance.

The margins from both business segments are depicted on this next slide. On Slide 24, as you can see, the strong 6.6 point EBITDA margin improvement in our Mobility business has driven a consolidated EBITDA margin of 42%, a two-point improvement from last year. This marks the sixth consecutive quarter of increase year-over-year of consolidated margin improvements.

Slide 25 illustrates Mobility's increasing contribution to TELUS' consolidated results for both EBITDA and cash flow measured by EBITDA less capex. Mobility's 42% increase in EBITDA this quarter means that this segment now comprises 36% of consolidated EBITDA. Combined with Mobility's flat capex over the same period, its EBITDA less capex contribution also increased almost half of TELUS' consolidated cash flow. Consider that it was only two years ago that our Mobility segment achieved break-even cash flow. I continue to believe this has important valuation implications. The high-growth TELUS Mobility business now generating meaningful cash flow should logically attract a higher valuation multiple for TELUS, relative to other telco stocks.

This next slide shows free cash flow generation for the 2nd Quarter of 2004 and 2003. Notably, we had a positive $81 million impact from net cash tax recoveries in the quarter, which combined with higher EBITDA less capex, lower cash restructuring payments and lower cash interest resulted in an impressive $164 million increase in free cash flow, with TELUS generating about $230 million this quarter. TELUS also utilized $36 million of cash to redeem approximately half of its preference and preferred shares during the 2nd Quarter with the balance to be paid out in July and August. After factoring in the impacts of changes in working capital and other, and the net change in long-term debt, TELUS increased its cash position by $84 million in the 2nd Quarter.

As you can see on Slide 27, TELUS is well ahead of plan on deleveraging, having reduced net debt by $933 million over the past 12 months. Our net debt to EBITDA ratio now stands at 2.4 times, which is below our original 2004 year-end target of 2.5 times or less. As a result, we are providing new guidance for December 2004 net debt to EBITDA of 2.3 times or less which, of course, for now does not assume the potential impact of our Microcell bid. Clearly, TELUS is demonstrating strong financial performance to our debt investors and rating agencies.

I will now briefly comment on the status of our outstanding bid for all the outstanding public securities of Microcell Communications. At the end of June, we entered a confidentiality agreement and subsequently met with Microcell's management. We have extended the offers twice with our bid currently set to expire on August 20th. We are working constructively with regulators whose reviews are well underway. You may recall that our bid represented a 37% premium to the pre-offer trading price. As such, it's clearly a fair and reasonable offer. In this context, given that TELUS' bid has now been outstanding for almost three months and still no competing offer has emerged, is therefore irrational for the trading price of Microcell securities to trade above the offer price. It seems it's taking some time for the market to be efficient in pricing Microcell securities in the context of our offer. In any event, we will be looking with interest at the 2nd Quarter results of Microcell scheduled for August 10th.

On the next few slides, we provide you with updates to our annual 2004 guidance based on our outlook for the rest of the year. We are pleased to be able to revise upward our Mobility guidance for revenue by $25 million and for EBITDA by $50 million. This is in addition to the raised guidance made last quarter. Of course, this guidance excludes any potential impact from the possible Microcell acquisition.

Turning to Slide 30, you can see the updates to our Communications guidance for 2004. Although we are making downward adjustments to the guidance for our non-ILEC operations, for reasons discussed earlier, we believe our revenue and EBITDA guidance for our overall Communications segment remains appropriate. Meanwhile, we are now expecting capex to be approximately $950 million.

The consolidated updated '04 guidance appears in Slide 31. It is important to note that this guidance does not take into account any prospective acquisition of Microcell. While the outlook for revenue remains unchanged, we have increased our annual EBITDA guidance by $25 million, reflecting further improvements in our Mobility operations. The EPS outlook is being adjusted upwards to $1.30 to $1.50 from $1.10 to $1.30 due to the tax settlement received this quarter, plus our improved EBITDA outlook. While overall, consolidated capex should edge up to about $1.3 billion, free cash flow is nevertheless expected to increase by $20 million to a new range of $1.15-$1.25 billion. Overall, these guidance revisions reflect continued strong financial performance at TELUS this quarter and an improved positive outlook for the balance of 2004.

On that note, let me hand the call back to Robert to open the lines up for your questions for Darren, George and myself. Robert, over to you.

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Q2 2004 investor conference call - presentations

Robert Mitchell, director, investor relations
Darren Entwistle, president and chief executive officer, TELUS Corporation
Robert McFarlane, executive vice-president and chief financial officer
Question period
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