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Q3 2006 investor conference call - Darren Entwistle presentation
Thanks John, good morning everyone.
Let's get started on Slide 4. I will begin today's discussion by addressing the surprising tax policy development in Ottawa this week and the implications for TELUS' proposal to convert to an income trust. I'll then move on to the highlights of TELUS' strong third quarter results, including developments on the regulatory front and TELUS' new partnership with the government of Ontario.
The government of Canada's decision to arbitrarily alter the tax regime affecting income trusts while TELUS is in the midst of our conversion to a trust is both disappointing and unexpected. TELUS' decision to proceed to an income trust was predicated on tax policy that the Canadian government had reviewed and reaffirmed twice in the last year. Clearly a consistent legislative framework is critical to making sound investment decisions. Companies should be able to rely on this continuity when in the process of implementing major strategic decisions.
To be blindsided by a policy change of this magnitude, without warning or due process, is disappointing. Our decision to proceed with an income trust was predicated on the effectiveness of our winning strategy that has been in place since 2000. TELUS' superior asset mix, strong and predictable growth and our track record of operational excellence make TELUS an attractive trust candidate, with the potential to set a new standard for income trust performance.
It is important to note that the benefits of tax efficiency within a trust structure simply accentuate the strategic value we create for our shareholders and augment the cash available for reinvestment into our core business. TELUS is assessing the implications of the federal government's tax plan before making a decision on whether to proceed or cancel the proposed income trust conversion.
TELUS believes we have the fiduciary responsibility to determine fully the feasibility of still proceeding on the income trust path before making any firm pronouncements in this regard. In any case, the fact remains, with or without the trust structure, TELUS' winning strategy, superior assets, operational excellence and strong growth profile, as demonstrated again this quarter, remain undiminished.
Moreover, TELUS remains committed to returning surplus cash flow to security holders in the most tax efficient way possible. Accordingly, our dividend growth model and our on-going share repurchase programs will continue to create value for investors. Let's turn now to Slide 6.
Consistent with our track record, TELUS is announcing a 36% increase in the quarterly dividend to $0.375. This is the third successive double-digit increase in as many years in our dividend. We will also continue to pursue our program of returning cash to our investors by way of our normal course issuer bid.
Under TELUS' two share buy back programs, we have thus far repurchased 35.7 million shares for $1.6 billion. Should TELUS not proceed with an income trust conversion, we plan to continue with significant repurchases into the future. Bob McFarlane will provide details of our next NCIB program at our 2007 guidance call in mid December.
Clearly TELUS will continue along the strategic journey that we began six years ago. Whether as a corporation or an income trust structure, TELUS is committee to continuing to create value for all of our investors.
Let me now comment on unfolding developments in telecommunications regulation, as set out on Slide 7. IP technology is collapsing distance, reducing costs and eradicating borders. The basic definitions and distinctions we have all relied upon for decades are no more within the telecommunications industry, which makes regulating the industry, based on the Telecommunications Act, from 1993, untenable.
In the IP world, we no longer need heavy regulation to ensure a competitive environment and affordable pricing. Robust competition is giving consumers virtually unlimited choice and diversity. Businesses like TELUS must be allowed to innovate freely to meet the growing demand. The landmark work of the telecommunications policy review, commissioned by the government, recognized the virtue of this approach. It's recommendation that we should rely first and foremost on market forces generated a rare consensus within the telecommunications industry and establishes a blueprint for effective regulatory reform.
TELUS supports the government taking two specific actions as quickly as possible. First, it should implement the recommendations of the Telecom policy review report in full and with immediate effect. Second, it should directly overturn the decisions on voice over IP and the deregulation of local services. These decisions create unfairness in the market place. These decisions restrict competition. These decisions delay the innovative products and services that consumers demand, indeed expect. In our view, substantive regulatory change is long overdue. The studies have been done and they are complete. The consensus has been forged. It is now time for the government to act and we are cautiously optimistic it will do so.
Again, for investors and the media on the phone this morning, I would ask you how much of a risk is it for the current government to implement a major change in regulatory policy that was commissioned by the previous government? Certainly there should be a consensus in this regard and it should drive a bias for action and deliver the long necessary change that will ensure Canadian competitiveness for our industry going forward.
Let's now turn our focus to TELUS' third quarter results, as outlined on Slide 8. Our investments and our execution of our national growth strategy has resulted in a distinct shift in our wireless revenue. As well, it's resulted in a distinct shift in earnings and cash flow streams. It now reflects a more robust balance between our mature voice business and our higher growth wireless and data businesses.
Indeed, for the first time, TELUS generated more than 50% of our operating profit from our wireless operations. At 51%, this is fourfold higher today that it was six years ago and this is a testament to the efficacy of a strategy that we embarked upon back in 2000.
Turning to Slide 9, solid subscriber growth, coupled with a 15th consecutive quarter of year-over-year growth in ARPU produced a 17% growth in TELUS' wireless revenue. This enabled TELUS to realize a significant milestone by achieving a record $1 billion of wireless revenue in the quarter. Similarly, EBITDA also increased by 17%, supported in part by a third consecutive quarter of improved efficiency in the cost of acquiring customers. The net result is a healthy wireless margin of 47.5%.
Let me now turn your attention to Slide 10 for the highlights in the wireline side of our business. TELUS' third quarter results demonstrate once again our resiliency in a tough industry and place TELUS ahead of many North American telcos. To begin, TELUS experienced several improving trends, including stable revenue and a double digit increase in operating profit. Notably in particular, data revenues were very robust this quarter, up 9% across an array of services, including hosting, outsourcing and our solid high speed internet growth this quarter, at 41,500 new clients. At the same time TELUS experienced only moderate network access line losses at 2.8%.
From an investment perspective, wireline capital expenditures were up $135 million this quarter due to two factors. First, this obviously reflects TELUS' extremely low level of CapEx last year, owing in principle to the labor disruption. Secondly, TELUS is in the midst of a cyclically high investment cycle, with the enhancement of our broadband network, the implementation of TELUS TV and as well our obligations in servicing the vibrant housing industry here in western Canada.
An important development in September that advances materially our growth strategy into central Canada was the major new partnership that we are embarking upon with the government of Ontario. Under this agreement, TELUS will provide, TELUS will manage, and we will supply a portfolio of network services, including IP security, for the entire Ontario government network. This five year contract, and our partnership, is valued at $140 million. This agreement demonstrates that the government of Ontario has recognized the value of our investment in IP technology that provides unprecedented robust network connectivity, services, functionality and flexibility, and as well, once again, our implementation with the government of Ontario will build upon our strong IP technology implementation track record that began a while back with the TD Bank.
All in all, it was a strong third quarter for TELUS. Based on our wireless and wireline results, let me conclude on Slide 11 by reviewing a few note worthy consolidated highlights. Owing to our accelerating revenue and earnings this quarter, we are making a number of mainly positive revisions to our full year consolidated guidance.
Based on the solid performance of our ADSL service, TELUS is revising upward our annual internet guidance by some 8%. Additionally TELUS has tightened the ranges on all of the consolidated guidance factors, including revenue, EBITDA, earnings per share and free cash flow. Indeed, in respect of earnings per share, we are announcing today that we are increasing the range to $3.15 to $3.25. As I mentioned earlier, TELUS is also announced today a substantial increase in our dividend to $1.50 per annum.
There is no doubt that this has been a difficult week for TELUS and our investors and on behalf of the entire TELUS leadership team and our board, I commit to you that TELUS will proceed, as it always has, in the best interest of our security holders. I can tell you unequivocally, TELUS remains committed to our winning strategy and we pledge to continue to execute our plan with unparalleled excellence. I appreciate sincerely the support and as well the constructive advice that you've extended to our company during this challenging period.
Let me now turn the call over to Bob and he can brief you in more detail on TELUS third quarter results.
Q3 2006 investor conference call - presentationsJohn Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
Question period
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