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Q3 2006 investor conference call - Robert McFarlane presentation
Thanks Darren and good morning everyone. Let me begin with a review of our wireless results, referring to Slide 13. It seems logical to start here because, as Darren mentioned, wireless represented more than 50% of consolidated EBITDA this quarter. Wireless revenues, EBITDA and cash flow continued to deliver strong double digit growth. Revenue surpassed $1 billion, driven by strong subscriber growth and higher ARPU. EBITDA increased 17%, with industry leading wireless EBITDA margins of 47.5%. CapEx increased year-over-year, as expected, in the third quarter, but we nevertheless have lowered our guidance for full year 2006, as I'll outline a little later.
As shown on Slide 14, net subscriber addition growth continued to be robust and was relatively unchanged year-over-year, at 137,000. Postpaid subscriber growth was up slightly to 109,000, while prepaid additions of 29,000 were slightly lower than last year. Postpaid net adds as a percentage of total net adds increased to 79% in the third quarter. TELUS' prepaid offer continues to provide superior subscriber economics, with higher ARPU, relatively lower churn and a growing total base. Overall subscribers increased 14% to 4.9 million. So TELUS continues to experience solid growth and our overall subscriber mix remained at 81% postpaid.
Our revenue and EBITDA gains are being driven by more than just subscriber growth. As shown on Slide 15, ARPU continues to increase, up $2 year-over-year, driven by significant growth from adoption of new wireless data services, which has exceeded erosion in traditional voice services. TELUS' wireless data ARPU increased more than $2, or 79%, to $5.11 and accounted for almost 8% of ARPU this quarter. While this represents excellent momentum, there remains a great opportunity to catch up to other providers in this area to drive on-going future revenue growth from wireless data.
Slide 16 provides a breakdown of our profitable subscriber operating metrics. Our low blended prepaid and postpaid churn rate increased slightly to 1.36%. Coupled with higher ARPU, the average lifetime revenue per TELUS subscriber remained relatively flat at an industry leading $4,800. We recorded our third consecutive quarter of sequential COA declines in Q3 to $386, although it increased slightly from last year. In spite of this, we were able to keep our marketing efficiency metric, that is cost of acquisition over life time revenue, stable at 8%, as indicated on the last line of the slide. This is very close to our all-time best ever efficiency result of 7.7%, recorded last year.
To conclude the wireless segment update on Slide 17, today TELUS is updating our full year 2006 guidance. We are narrowing our wireless revenue guidance range by $50 million to the upper end of the previous guidance range. Our EBITDA guidance range also moves upward by raising the low end by $25 million. As mentioned earlier, our guidance for capex is expected to approximate $425 million, down $25 million. Our net addition guidance remains unchanged, and clearly the outlook for wireless remains very strong.
Now, let me turn to our wireline operations on Slide 18. Wireline margins improved as EBITDA increased 10% on a reported basis, while revenues were stable year-over-year. Normalized for higher restructuring costs incurred this quarter and $68 million in net wireline expenses from the labor disruption last year, EBITDA was down 3%. Importantly, excluding increased product costs of sales from significantly stronger ADSL loading, normalized year-over-year EBITDA was actually quite steady. Capital expenditures were higher this quarter, reflecting increased investments as well as an artificially low level last year due to the labor disruption.
Slide 19 provides TELUS' wireline revenue breakdown by product. The positive highlight for the wireline segment in Q3 was the strong revenue growth in data. We're encouraged by the results. Data revenue grew 9%, due to increased internet and enhanced data revenue, and growth in high speed subscribers, as I will describe on the next slide. Overall, revenues were held relatively stable as data growth fully offset the erosion in local, long distance and other revenue. Local and long distance revenue declines are reflective of the increased competitive environment from wireless and VoIP, whereas the decline in other revenue was in part due to the retroactive treatment of certain adverse regulatory decisions.
Turning to Slide 20, high speed internet net adds experienced another quarter of strong growth, increasing to 42,000 due to higher gross additions from effective marketing promotions, combined with lower customer churn rates. Our high speed internet subscriber base now totals 872,000, up 19% from a year ago, which represents 81% of our total internet subs, now at 1.1 million. Since the end of the labor disruption in mid Q4 2005, TELUS' marketing efforts have been quite successful in garnering the clear majority of high speed internet subscriber growth in our incumbent markets. We intend to maintain this pace to better balance our high speed internet market share, relative to cable internet, and accordingly have again raised our guidance for full year net additions.
Slide 21 provides a quick snapshot of our non-incumbent or non-ILEC operations in central Canada. This represents a sub-segment of our wireline results. Our focus here remains on generating quality, recurring data focus revenues, such as the government of Ontario contract that Darren mentioned. Non-ILEC margins continued to improve as EBITDA increase to nearly $10 million, on a $9 million, or 5.5% growth, in revenues to $160 million. Please note that EBITDA result included approximately $3 million in favorable non-recurring items. We remain on track to achieve our annual guidance for non-ILEC revenue and EBITDA.
Slide 22 highlights our network access line performance. TELUS saw increased residential line losses year-over-year, at -4.8%, reflecting increased competitive activity from retailers and VoIP competitors and, of course, from on-going wireless substitution. This was somewhat offset by business lines increasing 0.7% year-over-year, resulting in an overall line loss of 2.8%.
Slide 23 shows TELUS' total subscriber connections. This graph shows that on a consolidated basis continued growth in wireless and high speed internet subscribers is more than offsetting the secular declines in residential network access lines that I just mentioned. Interestingly TELUS has 10%, or about 1 million more total connections than it did two years ago, despite increased competitive pressures in the wireline environment.
To conclude for the wireline segment, you can see on Slide 24 that we're making minor revisions to our 2006 guidance to reflect year to date results, and our expectations for the rest of the year. Reflecting improved margin expectations, we are increasing the bottom end of our EBITDA guidance by $25 million, despite lowering the range for total wireline revenues by $25 million. Capex is increasing by $25 million, reflecting significant investments in local access, broadband deployment and new system and service development. Finally, due to continued momentum and year to date results, we are increasing our high speed internet net additions guidance to 135,000 or more, as mentioned earlier.
Now, turning to Slide 25 to look at TELUS on a consolidated basis, revenue growth in the third quarter was 7%. Reported EBITDA increased 13%, while reported EPS increased 77%. I will elaborate on both of these figures on the next few slides.
Turning to Slide 26, we can see that normalizing for $65 million in net consolidated expenses incurred for the labor disruption last year, as well as an $11 million increase in restructuring costs this year, underlying EBITDA grew 6.5%.
In a similar manner Slide 27 shows EPS this quarter, normalized for positive tax-related adjustments in both quarters and the labor disruption impact. As you can see, underlying EPS growth was still very significant at 42%.
Slide 28 gives analysts a further breakdown of the positive contributors to the 77% increase in earnings per share. While $0.12 were related to the labor disruption last year, EBITDA growth generated $0.09. Lower depreciation and amortization contributed $0.05. Lower financing costs, due to the retirement of debt at the end of 2005 and lower rates, added $0.04, while tax related adjustments and a decrease in the average number of outstanding shares, due to share repurchases, represented another $0.04 each. All in all, EPS growth was significant anyway you cut it.
Now let me turn to Slide 29 and discuss an important component of returning capital to shareholders. Establishing our dividend growth model approach two years ago, TELUS set a target pay out ratio guideline of 45% to 55% of sustainable net earnings on a prospective basis. Given TELUS' strong financial results to date, positive prospects for future growth and operation cash flows, and consistent with our dividend growth model approach, as Darren mentioned earlier, today we announced a significant 36% increase in our dividend, effective for the January 1st 2007 payment. The decision to once again 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.
Turning to Slide 30, in the third quarter we remained active in the market, but at reduced levels from what we had witnessed recently, as repurchase activities were curtailed ahead of our September 11th income trust announcement. Even so, TELUS purchased a total of 2.1 million TELUS shares for $120 million in the quarter. In total to September 30, TELUS has repurchased for cancellation a total of 14 million shares since December of 2005 for $658 million. TELUS's current NCIB repurchase program expires mid-December 2006. Subject to attaining customary regulatory approvals, we intend to renew in December our NCIB share repurchase program for 2007.
Slide 31 shows the trend in return of capital to shareholders since 2003. In 2005, when one aggregates dividends and share repurchases, we returned $3.30 per share in capital. In 2006, this number is on its way to the neighborhood of $3.45 per share, when one adds dividends to projected full year share repurchases, based on annualizing our year to date run rate. In the event TELUS does not pursue an income trust conversion, then in 2007 the combination of the higher dividend and significant share repurchases at an amount consistent with our existing year to date run rate would result in a total return of capital to shareholders of approximately $3.85 per share. You should note that this approaches the level of cash distributions per unit previously announced in the event TELUS converts to an income trust. So while I put up the 2007 figures for illustrative purposes, what is clear is that regardless of corporate structure, TELUS intends to deliver on our commitment to return a significant amount of capital to investors.
Let me conclude on Slide 32. Today we are making minor changes to our consolidated guidance to reflect revisions to our outlook for both wireless and wireline guidance, previously mentioned. Consolidated revenue guidance is being narrowed, with no change to mid-point. We're also narrowing and raising the low end of our EBITDA guidance range. Restructuring and work force reductions costs are expected to total up to $80 million, as compared to up to $100 million previously. Our EPS guidance range has increased by $0.15, which reflects the $0.09 positive tax impact recognized this quarter, as explained earlier, and an improved earnings before tax outlook. Consolidated CapEx remains unchanged, while our free cash flow guidance range has been revised to the higher end. We now expect more than $1.6 billion in free cash flow in 2006.
And with that Darren and I would be pleased to answer your questions. So I'll turn the call back over to John Wheeler to moderate this part of the call.
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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