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Q3 2005 investor conference call - Robert McFarlane presentation
Thanks, Darren, and good morning, everyone. Let me begin my comments with a recap of TELUS Mobility's excellent results shown on slide 11. TELUS Mobility has again reported best in class results in the North American wireless industry. Mobility continues to deliver double-digit revenue, earnings and cash flow growth. Growth ain revenue of 16% and EBITDA of 28% were certainly impressive and, clearly, our operations were largely unaffected by the labor disruption in western Canada experienced in the quarter.
Turning to slide 12. TELUS Mobility experienced a record third quarter for net additions, adding 138,000 new subscribers. TELUS Mobility achieved a second successive quarter of positive growth and year-over-over pre-paid subscriber net additions as well. Our total subscriber base has increased by 14% year-over-year, with post paid subscribers, as a percentage of total subscribers, remaining relatively stable at an industry high 82% of our 4.3 million total subscribers.
Turning to slide 13 and given that TELUS is the last major Canadian carrier to report wireless additions, I thought I would take a moment to review the subscriber growth momentum in the Canadian wireless market. As you can see in the bottom of the slide, the Canadian wireless industry continues to grow at an accelerating pace. There were nearly 500,000 industry net additions in the third quarter 2005, a solid 1.6 point penetration gain in one quarter alone. Wireless penetration now exceeds 50% in Canada as at the end of the third quarter. This represents a 5-point expansion in the past 12 months and marks the second straight year of accelerating subscriber growth. Given these trends, it appears the Canadian industry is on track for another record year of subscriber additions.
The next slide shows that TELUS continues to maintain our industry leading average revenue per user, or ARPU, with a significant premium to our closest competitor. TELUS Mobility ARPU increased by $2 to $64 driven by growth in consumer and business data usage, a 4% increase in voice minutes of use, and continued pricing discipline in our operations. Of note, our post paid ARPU increased to over $71 in the third quarter and our pre-paid ARPU grew to about $27, approximately double that of our peers.
TELUS Mobility's positive operating trends are evident on slide 15. Blended churn remains relatively flat at a low 1.3% and the cost of acquisition per gross subscriber addition was down slightly to $371. These strong metrics, combined with our increasing ARPU, means that we are generating a lifetime revenue per average subscriber of $4,800. This is up 4% year-over-year. So with a declining COA and an already high and increasing level of lifetime revenue, we are driving improvement in our already excellent marketing efficiency metric, as indicated on the last line of this slide.
Turning to slide 16 you can see that the three national wireless carriers added 1.7 million new subscribers over the last 12 months, while industry EBITDA increased a healthy $800 million or by 26% to 3.9 billion. TELUS Mobility's disciplined execution continues to generate a disproportionately larger share of incremental EBITDA relative to our share of net additions. While TELUS Mobility accounted for 31% of net additions, we captured an estimated 44% of the incremental industry EBITDA growth, during the last 12 months. Certainly this has been a value enhancing outcome to the benefit of our TELUS shareholders.
Moving to slide 17. TELUS Mobility's excellent subscriber metrics translate into our North American leading wireless EBITDA margins. At 47.5%, TELUS Mobility's third quarter EBITDA margin is significantly better than our direct peers in Canada, as well as compared to US wireless carriers, whose margins range from 25% - 36%.
To wrap up the Mobility segment on slide 18, we've updated our full year 2005 guidance reflecting the increased ARPU experienced this year to date, ahead of expectations, we now expect higher levels of revenue and profitability for 2005 regardless of the labor disruption. So I'm pleased to inform that today we are raising the ranges for revenue and EBITDA by approximately 75 million and 50 million respectively. Meanwhile, Capex guidance remains unchanged. While the labor disruption has slowed down capital investments in the third quarter somewhat, we'll be attempting to catch up in the fourth quarter. So, we continue to believe that an approximate 400 million Capex estimate for the full year is appropriate. Clearly the outlook for Mobility continues to be very strong.
Turning now to wireline results on slide 19. TELUS Communications revenue is remarkably stable, despite the labor disruption in western Canada that effected our ILEC operations for most of the third quarter. The third quarter revenue breakdown is shown here. Growth in local and data revenues were offset by declines in long distance and voice equipment sales. Data revenue growth was 5% on a reported basis, as mandated CDNS discounts have offset increased data revenues from acquisitions, while consumer data revenue growth slowed in the third quarter due to lower internet additions caused by the labor disruption. Underlying organic data growth was approximately 4% when excluding the impact of regulatory decisions and acquisitions made in the past year.
Slide 20 shows overall financial results for the wireline segment. We are quite pleased in the resilience of our wireline revenues, which remain stable year-over-year despite the labor disruption and competitive activity. This bodes well for our future. As expected, our EBITDA decreased during the third quarter as a result of costs associated with emergency operations activities, which has successfully maintained service levels during the labor disruption. We estimate that incremental expenses associated with the labor disruption in the Communications segment were approximately $68 million. Excluding cost for revenue impacts, adjusting our EBITDA for such non-recurring expenses means that our normalized Communications EBITDA would have been flat year-over-year. As expected, Capex declined due to constrained labor resources to deploy capital during the labor disruption.
Depicted on slide 21 are non-incumbent operations in central Canada were largely unaffected by the labor disruption in the west. Our focus here remains on generating quality recurring data focussed revenues in this business. Revenue of 151 million was up 4% and we had our fourth straight quarter of positive EBITDA. We remain on track to achieve our annual guidance for non-incumbent revenue and EBITDA.
Moving on to slide 22. We can see the high-speed internet results. TELUS added 7,100 new high speed internet subscribers in the third quarter. We experienced lower subscriber loading in this quarter as the labor disruption constrained our marketing and fulfillment capabilities. On a positive note, we are able to successfully maintain service levels during the labor disruption and as a result customer retention rates remain significantly better than experienced last year, despite challenges caused by the labor disruption. Including 250,000 dial-up subscribers, TELUS' total internet base now totals 986,000, with 75% being high speed.
Slide 23 highlights our network access line, or NAL, performance which declined 2.2% year-over-year. As expected, TELUS experienced increased residential line losses, down 3.2%. This reflects increased competitive activity for resellers and VoIP competitors, including a full quarter of cable telephony competition in Calgary and Edmonton, ongoing substitution to wireless, and the impact of the labor disruption which limited TELUS' ability to process new customer installations or port existing lines to competitors in the west. Business lines fell 0.6% year-over-year, but remains stable sequentially as growth in non-incumbent business lines offset a decrease in incumbent business lines.
To conclude on TELUS Communications, you can see on slide 24 that we are making changes to 2005 wireline guidance to reflect year-to-date results and expectations for the fourth quarter, including the estimated impact of the labor disruption, whether it is resolved latest this month or not. We are increasing revenue guidance by $50 million to a new range of 4.825 to 4.85 billion, reflecting ahead of plan execution in the first nine months of 2005. We are lowering guidance for EBITDA to 1.8 to 1.875 billion and widening the range to take into account the temporary increase in expenses and uncertainty related to labor disruption, which also includes a lower estimate for restructuring and work force reduction costs this year in a range of $20 to $50 million. Capex guidance is also being lowered by $100 million, as you would expect. We are also lowering guidance for high speed internet net adds to approximately 65,000, to take into account the weak third quarter result and the impact of a continued labor disruption.
Now let's turn to TELUS' consolidated results as shown on slide 25. Consolidated revenue was up 6% to just over $2 billion, driven by the strong revenue growth in wireless and stable revenues in wireline. EBITDA grew close to 3% due to significant growth at Mobility partly offset by lower EBITDA in Communications. I'll analyze earnings per share in the next slide. And capital expenditures, while they were down this quarter by 18%, as mentioned earlier, due to the labor disruption.
Now looking at EPS on slide 26. Reported EPS was up 20% this quarter, which included a favorable $0.05 adjustment for tax related matters, primarily due to the revaluation of deferred tax liabilities caused by a reduction in B.C. provincial income tax rates effective July 1, 2005. If we normalize for restructuring and work force reduction costs taken in the third quarter last year versus none this year due to the labor disruption, the actual underlying growth rate is 2.1%, despite the temporary effects of the labor disruption. If we further normalize for the $0.12 per share impact of the labor disruption in the third quarter of this year, the actual underlying growth rate would have been an even more favorable 28%.
Slide 27 shows how the $581 million in reported free cash flow was generated this quarter. We've ended the quarter with $1.3 billion in cash and temporary investments. Clearly this puts us in a strong position to redeem early the $1.6 billion of notes on December 1st, repay the remaining balance of the approximate $200 million of lump sum and retroactive payments owing to employees on ratification, and continue with the share repurchase program.
Slide 28 gives you further details with regards to our share buyback program activity. TELUS is authorized to repurchase up to 25.5 million shares over a one-year period ending December 19, 2005. In the third quarter we were active in the market, purchasing 5.1 million shares for $233 million at an average price of $45.84. We have now repurchased a total of 17.9 million shares or 70% of the authorized program. We intend to continue out share repurchases in the fourth quarter.
Let me now turn to slide 29 and discuss another important aspect of returning capital to shareholders. Consistent with our dividend growth approach, TELUS last year set a payout ratio target guideline of 45% to 55% of sustainable net earnings on a perspective basis. As Darren mentioned earlier, the board has approved a 37.5% increase in the quarterly dividend to $0.275 per share from $0.20 effective for the January 1, 2006 payment. The decision to significantly increase our dividend reflects our confidence in TELUS' ability to continue to grow EPS on a sustainable basis and our ongoing commitment to return capital and create value for shareholders.
As shown on slide 30, TELUS has issued a notice of early redemption on its 1.6 billion 7.5% coupon notes due June 1, 2006. The redemption price, which is payable on December 1st, will be set on November 28th based on the yield for a government of Canada bond with the equivalent maturity plus 35 basis points, but in no case, will be less than par.
TELUS plans to finance the redemption and the regular coupon interest payment through a combination of our large cash balances, proceeds from our accounts receivable securitization program and/or from our revolving credit facilities. This early redemption has a modestly positive NPV to TELUS, but will result in an estimated after tax accounting charge of $0.06 to $0.07 per share, to be recorded in the fourth quarter of 2005.
As you can see in slide 31, following TELUS' September 26th announcement of its intention to early redeem the 1.6 billion in notes, three of four credit rating agencies issued positive upgrades taking us to the BBB+ or the equivalent BBB high rating level for TELUS Corporation. And with DBRS rating our wholly owned operating subsidiary TELUS Communications, Inc. one notch higher at A low. In addition, TELUS is today announcing an amended long-term financial policy leverage target for net debt to EBITDA. The new targeted range is 1.5 to 2.0 times, changed from the previous target of 2.2 to 1 or less. As of September 30th, TELUS' 2005 net debt to EBITDA was 1.8, which is consistent with the newly updated long-term targeted leverage range.
Finally, as you can see in this last slide, we're making changes to our consolidated guidance. Revenue guidance has been adjusted upwards due to positive revisions in both our wireless and wireline businesses. Our EPS guidance range has been tightened to $1.90 to $2, which includes the $0.06 to $0.07 financing charge impact in Q4 that I just mentioned. Capex guidance has been lowered by $100 million, as noted earlier, and free cash flow is being revised upwards by $150 million, primarily reflecting the reduced Capex guidance and restructuring costs.
To close out, I'd like to remind everyone that TELUS intends to release its 2006 targets on December 16th in conjunction with my 2006 guidance call. Darren and I would now be happy to take your questions, so I will turn the call back to John to moderate the Q&A portion of today's call.
Q3 2005 investor conference call - presentations
John Wheeler, vice-president, 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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