events archive

Q3 2004 investor conference call - Robert McFarlane presentation

Great, thanks, George, and good morning, everybody.

Let's begin on slide 16, which recaps the highlights from the third quarter, and there were many. TELUS Mobility, as George just outlined, again reported outstanding operational and financial results across the board this quarter. Strong subscriber additions and retention, combined with increase ARPU and cost efficiency, generated the excellent financial results. Meanwhile, TELUS Communications, our wireline segment performed very well in the quarter with positive revenue growth, based on improved performance in both our incumbent and non-incumbent operations.

At the consolidated level, an area of interest is that normalized EPS is even higher than our basic EPS, which I'll detail for you shortly.

The next slide highlights the significant consolidated growth across all third quarter financial metrics. Revenue growth year-over-year was 8%, significantly higher than the 5% growth generated in the second quarter. EBITDA growth was 9%. And net income grew to $157 million in the quarter, up 37%. Reported EPS of 44 cents is up 38% year-over-year, reflecting the excellent improvement in consolidated profitability in the past year.

Particularly noteworthy is that TELUS produced a sizable $503 million of free cash flow, and after three quarters we have produced 1.2 billion of cash flow, already hitting our year-end guidance.

All of these results are well ahead of consensus street expectations.

Turning to side 18, and taking a closer look at EPS, we can see the EPS growth rate for the third quarter normalized for certain items. Interest related to favorable tax settlements contributed approximately five cents per share last year. Also normalizing for the one cent impact from the share base compensation not recorded last year and adjusting for restructuring and workforce reduction cost of three cents, EPS is up 77%.

According to our tracking, consensus street expectations were 38 cents for the third quarter, so any way you measure it, TELUS produced excellent bottom line earnings.

Now let's look at a recap of TELUS Mobility's across-the-board outstanding results in slide 19. Revenue was up 21%, due to increased ARPU combined with very strong subscriber loading and retention results.

Excellent top line growth combined with continued cost containment and lower cost of acquisition, per gross addition, especially in light of the 21% increase in gross subscriber loading and operating economies of scale led to an impressive 32% increase in EBITDA.

While Capex was up slightly mainly due to timing, capital intensity declined by one point, to 14%. Mobility generated a record $220 million in simple cash flow, representing a 46% increase.

Turning to slide 20, and as George pointed out, TELUS Mobility enjoyed a very strong quarter of subscriber net additions. We're particularly pleased with the 51% increase in net new post paid subscribers, bringing our post paid subscribers to 83% of our total base. Given the strength of our subscriber loading in the first three quarters of the year, we are raising guidance for 2004 net additions by 50,000, to a new range of 425 to 475,000.

Now, turning to a recap of TELUS Communications results in slide 21. Wireline posted positive revenue growth for the first time since the first quarter of 2002. Reported EBITDA, which is after restructuring costs, totaled 494 million, a 2.4% decline. However, we incurred restructuring costs this quarter of $16 million, largely to do with the business solutions consolidation. Excluding these costs, EBITDA was flat year-over-year 511 million. Capex increased marginally year-over-year largely due to non-ILEC investments related to implementing new large complex IP contracts and continued ILEC investments to strengthen customer service, and network reliability.

Turning to slide 22, relative to the general industry trend of declining traditional revenues, the communication segment performed well in the quarter with positive 1.1% growth. Voice long distance revenue continued to decrease, but the rate of decline in the third quarter, at 2.1%, was the lowest since the first quarter of 2001. This was primarily as a result of increased wholesale revenues. While we're pleased with this performance, price competition remains fierce, and substitution to alternative technologies is expected to continue.

Data service revenues increased by $26 million, or 7.9%. Driven by higher Internet and enhanced data service revenues, and by a $7.5 million increase in data equipment sales.

As Darren indicated, we are pleased with this result, but remain cautious about projecting similar results into the future, given general industry softness and expected future competitive activity.

Turning to slide 23, driving towards leadership in high speed Internet is one of our top corporate priorities. On this slide you can see that TELUS added 31,000 high-speed internet subscribers in the quarter, bringing the year-to-date total to 93,000. We remain on track for the 125,000 net additions target for the full year. We estimate that we continue to capture the majority of the market's high speed net additions in our incumbent areas. TELUS' high-speed internet subscriber base up to 655,000, is up 27% year-over-year, and presents almost 70% of our total Internet base.

Turning to slide 24, we show the improving performance of our non-incumbent business in central Canada. Revenue increased 5%, while EBITDA improved to negative 3 million. More importantly, this is a significant improvement from the negative 14 million reported last quarter.

We continue to transition our non-ILEC business to higher quality, recurring revenue sources. This often entails significant expense and upfront Capex prior to the ramp up of meaningful long term recurring revenues when implementing large, complex solutions.

Turning to slide 25, we show the performance of our non-incumbent business in central Canada for the last 11 quarters. Please note that our updated and improved 2004 guidance range for non-ILEC EBITDA indicates that we expect at the top end of the range a similar result for the fourth quarter, and not another large uptick similar to the one we enjoyed this quarter.

Turning to slide 26, we also continue to focus on our corporate priority to deliver operational efficiency. With respect to our 2001 to 2003 operational efficiency program, we are tracking to achieve year-end cumulative annual savings of 530 to 535 million.

Looking at our current initiatives, this quarter we incurred $16 million in restructuring costs, bringing the year-to-date total to $33 million, and estimate that we'll incur 50 million in 2004. This is up from our previous guidance of 30 million.

The additional restructuring charges relate to a number of activities, including the consolidation of our business and client solutions teams into one customer-facing business unit, under the leadership of Joe Natale. This integration should enhance both the operating efficiency and effectiveness of this group.

During 2004, we have also reorganized our information technology resources area, consolidating from 15 locations to two primary locations to enable greater efficiencies of scale and effectiveness in IT program delivery. We view the successful implementation of the OEP over the past three years as a platform for further necessary cost improvements at TELUS Communications. To this end, we expect to have restructuring costs next year in excess of those this year in our continuing efforts to maintain strong wireline margins.

On the next slide, we show how our free cash flow is being generated. TELUS' higher EBITDA and lower cash restructuring payment more than offset a slight increase in Capex. Higher net cash interest and lower cash tax recoveries, resulting in a 14% increase in free cash flow to 503 million this quarter. After factoring in shares issued, deducting cash dividends, and changes in working capital, TELUS had $513 million in cash available. In the quarter, TELUS used approximately 210 million to redeem maturing debt, and used 37 million of cash to redeem the remainder of our preference and preferred shares. Notably, TELUS' cash position increased by $265 million to total $622 million at the end of the quarter.

As you can see on the next slide, TELUS has achieved two of its long-term de-leveraging targets, 15 months ahead of plan. Including our net debt to total capitalization target of 45% to 50%. In addition, our net debt to EBITDA ratio now stands at 2.2 times, which is below our revised 2004 year-end target of 2.3 times or less, and in line with our long-term policy objective.

With TELUS' de-leveraging clearly well ahead of plan, we are demonstrating strong financial performance to our debt investors, and the rating agencies, and as a result, we are now in a position to consider other uses of our strong free cash flow.

Given this situation, with reference to slide 29, TELUS is maintaining our board-approved long-term financial policy targets. This means continuing to pay down debt to improve our ratios in order to achieve our third long-term target, which is a debt ratings in the range of BBB plus to A minus. In addition, given the very positive strides that have been made with respect to our debt holders, we can now also focus on the interest of our shareholders and take a balanced approach to both stakeholders. To that end, today we are pleased to announce four shareholder value enhancing initiatives.

The first announcement is an increase to our quarterly dividend of 5 cents, representing a 33% increase. This dividend increase will move TELUS into the top quartile among dividend-paying companies on the S&P/ TSX Index, in terms of both dividend yield and payout ratio.

Second, TELUS is also establishing a going-forward public dividend guideline, targeting a dividend payout ratio of 45% to 55% of net earnings. This is designed to provide clarity to investors of our intention to consider future dividend increases as appropriate.

Turning to slide 31, we're also announcing the intention to repurchase up to 10% of the public float of TELUS shares though a normal course issuer bid subject to regulatory approval. For TELUS, 10% of the float represents about 25.5 million shares, or 14 million common shares and 11.5 million non-voting shares. Under a normal course issuer bid, the maximum amount of shares that can be re-purchased over a rolling 30 day period is 2% of the outstanding shares. It's important to note that if this repurchase is completed, we still expect to de-lever as a result of TELUS' continuing strong free cash flow generation.

This third initiative of a normal course issuer bid can be an effective step in decreasing shareholder dilution and maximizing shareholder returns.

Turning to slide 32, in another step to limit dilution, TELUS will be amending the dividend reinvestment plan (DRIP). The DRIP will be amended to allow for the purchases of shares in the open market, as opposed to solely issuing shares through treasury. Effective January 1, 2005, all shares under the DRIP are expected to be purchased in the open market. In addition, the current 3% discount on the drip will be discontinued, as TELUS has been the only North American telco offering such a discount. This brings TELUS in line with our North American peers. Clearly all four new initiatives are very focused on enhancing the return, and creation of value, for our shareholders.

Turning to slide 33, and to wrap up, let me 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 due to strong subscriber growth year-to-date, and robust ARPU trends. We now expect revenue of up to $2.8 billion. Our guidance for EBITDA is now 1.1 to 1.125 billion, our third upward revision this year. Our guidance for net additions has increased by 50,000 as mentioned earlier.

Turning to slide 34, you can see the updates to our communications guidance for 2004. Our revenue guidance has been narrowed to a range of up to 4.775 billion. We're lowering slightly the top end of the EBITDA guidance range to 1.95 billion, primarily as a result of 20 million in additional restructuring and workforce reduction costs.

The outlook for profitability in our non-ILEC operations has improved, and we now expect non-ILEC EBITDA to be in the negative $30 to $35 million range.

The TELUS consolidated updated 2004 guidance is shown on slide 35. Almost all items are improving. The outlook for revenue has increased to a new range of 7.5 to 7.575 billion. We have increased lower end of our annual EBITDA guidance to be in the range of 3.025 to 3.075 billion. As a result, the EPS outlook is being adjusted upwards for the third time this year, to a higher end of our most recent range. The new outlook of $1.40 to $1.50 includes 17 cents of favorable impacts from the settlement of tax related matters earlier in the year.

Free cash flow, is now expected to exceed our previous guidance, and we're now forecasting 1.25 to $1.3 billion. Clearly, we see continued strong financial performance at TELUS, and it is this performance that has made possible that series of share value-enhancing initiatives announced today. On that note, let me hand the call back to John to open the lines up for your questions for Darren, George or myself. John, over to you.

next >

Q3 2004 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
Back to Q3 overview