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Q4 2003 investor conference call - Robert McFarlane presentation
Thanks, George. And congratulations on the excellent results for the quarter and year.
Turning to Slide 25, I'll begin my comments with a review of our Q4 results before discussing some recent developments and a brief review of the 2004 targets. Consolidated operating revenue increased 1.7% for the 4th Quarter of 2003, when compared with the same period last year. Consolidated EBITDA excluding restructuring work force reduction costs increased over 8%. In the case of both revenue and EBITDA, the driving engine behind the growth has been in the Mobility segment. Of particular note, 4th Quarter profits grew to $50 million in the quarter and earnings per share were up $0.54, both sharp turn-arounds from 2002's negative numbers. I'll return to this in terms of a discussion on EPS in a few moments.
Turning to Slide 26, it shows the strong margin expansion evident across both business segments. In Communications, our ongoing Operational Efficiency Program or OEP for short, has boosted margins to 42%. At Mobility, our EBITDA margin over total revenue has increased by six points to 29% in the past year, benefiting from strong revenue growth, coupled with disciplined cost containment and scale efficiencies. In terms of network revenue, Mobility posted a strong 32% margin, even in the traditionally heavy 4th Quarter selling season, representing a six-point year-over-year expansion. On a consolidated basis, TELUS delivered a solid two point increase in EBITDA margin from 36% in the same period last year to 38% this quarter.
Turning to Slide 27, we can see that EPS measure for the 4th Quarter of 2002 and 2003 normalized for certain one-time items. After backing out the impacts of the restructuring, the workforce reduction costs, receipt of investment tax credits in the Q4 of 2002 and increased price cap expense, normalized EPS was up $0.17. If you then include the impact of increased pension expense, normalized EPS growth would have been $0.19 on a base of $0.03 in the 4th Quarter of last year. Any way you slice it, TELUS had significant improvement in earnings in 2003.
Slide 28 depicts an overall downward trend in both consolidated capex and capital intensity. What a difference two years makes. 2002 represented the peak investment period for a number of major capital programs such as national network expansion, ADSL network deployment, analog to digital wireless network conversion, wireless PCS spectrum acquisition and so on. As a result, the ratio of capex to sales reached over 36%. TELUS ended 2003 at a 17.5% capex intensity level. Even after excluding the spectrum auction purchases of approximately $356 million made in 2001, annual capex have still decreased by approximately $1 billion, fuelling a significant element of our free cash flow expansion.
Now to Slide 29. Given the significant decline in annual capex experienced in 2003 and the similar level of capex inherent in our 2004 targets, the increase in Q4 capex was a natural by-product of some catch-up from earlier in the year and not indicative of expected future run rates. Regardless, we enjoyed yet another quarter of significant free cash flow growth with an $164 million improvement in Q4's free cash flow generation relative to that a year earlier. When one looks at the free cash flow generated after deducting restructuring payments incurred in both quarters, which is the way that TELUS will be reporting this figure going forward, free cash flow increased a tremendous $250 million year-over-year.
Slide 30 shows the components of the sizeable free cash flow generated in the three and 12 months ended December 2003. In Q4, the receipt of $130 million portion of a previously disclosed income tax settlement helped the generation of $84 million in positive free cash flow before restructuring payments. We have also modified our presentation in order to highlight cash restructuring payments as we transition to a definition of EBITDA in 2004 that is after deducting restructuring costs. Regardless of which definition of free cash flow is used, we are clearly generating significant cash flow well ahead of plan. In 2003, TELUS generated about $1 billion in cash, of which approximately $175 million was applied to a reduction in securitized accounts receivables.
Turning to Slide 31, you can see that free cash flow generation has led to a reduction in the net debt to EBITDA ratio from 3.3 times at Q4 2002 to 2.64 times at Q4 2003. Our significant cash flow generation enabled us to deliver results well ahead of original and revised leverage targets for 2003.
Slide 32 illustrates that we exceeded all five of the profitability and cash flow-related targets for 2003 first set on the December 16th, 2002 Targets call. While we did not meet the targeted revenue range, it should be noted that after normalizing for $21 million of revenue related to non-ILEC asset dispositions in 2003, we were close to the lower end of our consolidated revenue target range of $7.2 to $7.3 billion, but will resist the temptation to round up for a checkmark.
On Slide 33, you can see the results of our wireline segment, TELUS Communications. During the 4th Quarter, we continued to experience softness in wireline demand. Reported revenue is down 5%. After normalizing for the negative impacts of the price cap decision and reduced application development revenues as a result of the asset dispositions I previously mentioned, revenue declined 2.8%. This organic decline was due primarily to lower voice equipment sales and lower long distance revenues. Notwithstanding the fact that operational expenditures were down 7.2% over the same period, Communications' reported EBITDA decreased 1.5% as the revenue decline more than offset the opex benefit. Capex increased 4% year-over-year, largely due to the delayed timing of expenditures resulting from the OEP implementation and various exogenous events experienced earlier in 2003. Therefore, the Q4 capex intensity ratio, as mentioned, is not indicative of overall going forward annual rates. As a result of slightly lower EBITDA and the shifting of capex in the Q4, cash flow as measured by EBITDA less capex for Communications declined 8.7%.
Slide 34 attempts to provide a better understanding of the underlying organic EBITDA improvements in our Communications business. On a reported basis, our Communications EBITDA decreased by 1.5%; however, normalizing for the $11 million in ITCs received in Q4 of 2002 and for about $21 million in negative impacts from the price cap decision, our underlying EBITDA growth rate was actually 4.7%. If one normalizes further for the increase in pension expense in 2003, we can see that the underlying EBITDA year-over-year growth rate driven largely by the Operational Efficiency Program was 6.8%, which corresponds to a five point normalized EBITDA margin improvement.
Slide 35 provides a summary of the OEP during the 4th Quarter. We reduced a further 700 positions and closed or consolidated an additional five customer contact centres. Since the program's inception in July of 2001, we have reduced 7500 positions, that's 200 more than most recently targeted, and closed and/or consolidated 44 customer contact centres, and 33 phone stores respectively. During the quarter, we achieved incremental savings of $25 million, bringing our total cost base improvement for 2003 to $304 million and $454 million since inception, which is about $4 million more than targeted. As a result, we have clearly met or exceeded all of our OEP targets for 2003.
Slide 36 shows the labour productivity of our TELUS Communications segment as measured by annual EBITDA per full-time equivalent employee. As you can see, in the past year Communications segment's annual labour productivity has improved by a dramatic 23% as a result of the OEP program's success.
Now on to Slide 37, let's look at our non-ILEC operations. The focus for 2003 for Ontario/Quebec non-ILEC operations was profitability improvement. This was a good news story in 2003 and the 4th Quarter added to the progress made throughout the year, as it represented the ninth consecutive quarter of profitability improvement. In the 4th Quarter of 2003, non-ILEC negative EBITDA was only $2 million on $138 million of revenue. The non-ILEC revenue growth rate is somewhat understated due to the asset dispositions earlier in the year which I mentioned which reduced quarterly revenues by approximately $7 million. The negative $2 million EBITDA result in Q4 was actually close to negative $4 million after including the impact of some favourable one-time items. Even so, this still represents a healthy improvement in the underlying non-ILEC EBITDA sequential run-rate and puts the non-ILEC operations on track to achieve positive EBITDA in 2004.
Slide 38 illustrates that the Communications segment exceeded four of its six initial targets. While overall Communications revenues fell short of target, after normalizing for $21 million in non-ILEC asset dispositions, reported revenues would have been $576 million, just ahead of our $575 million target. Similarly, overall communications EBITDA fell short of target, despite EBITDA at the non-ILEC segment of negative $29 million being substantially better than the negative $60 million initially targeted. Despite the slight increase in Q4, Communications capex were over $150 million favourable to the initial 2003 target.
Turning to Slide 39, TELUS' 46,000 high-speed net-adds in the 4th Quarter of 2003 marked an acceleration in quarterly loading, reflecting strong overall market demand. This brought TELUS' high-speed internet subscriber base to 562,000 at year-end and for the second straight year TELUS captured the majority of high-speed, shall I say high-end low speed or light speed net-additions in 2003 by exceeding those of our cable competitor.
Next, on Slide 40, you can see that TELUS Mobility continued to perform well across the board. Total revenue, as George mentioned, up 17% a year ago, network revenue up 20%, EBITDA increased an impressive 48% and so on and so forth. So I won't repeat George's achievements. I think they are obvious when you look at the results.
Turning to Slide 41, we observe Mobility's significant contribution to TELUS' consolidated results for both EBITDA and EBITDA less capex over the past two years. Mobility's increase in EBITDA of over $280 million in 2003 means that this growing segment comprised 29% of 2003 consolidated EBITDA. Combined with Mobility's $100 million decrease in capital expenditures over the same period, its EBITDA less capex contribution, if you will, also increased to 29% of consolidated cash flow for 2003. I believe this adds important valuation implications. The high-growth Mobility business is now also generating meaningful cash flow after capex, and since it represents such a high and increasing proportion of TELUS' overall business, this should logically attract a higher valuation multiple for TELUS relative to other telco stocks.
Turning to Slide 42, Mobility exceeded all three of its initial financial targets, as well as achieving the initial subscriber target. Of particular note is the substantial $815 million of EBITDA, approximately $165 million or 25% higher than the top end of our initial target range.
On Slide 43, I summarize 2003 results. During the 4th Quarter of 2003, despite revenue softness, TELUS Communications attained a 7% normalized EBITDA growth rate, driven by a successful OEP. TELUS Mobility continued to post excellent results across the board, well ahead of plan, a significant value creator for shareholders. And strong consolidated profitability increases were reported in terms of both operating margins and for bottom line EPS. During the 4th Quarter of 2003, we met or exceeded all 2003 OEP, profitability, cash flow and leverage targets, a good record of achievement that bodes well for our prospects in 2004.
Now skipping to Slide 45, I'll finish by summarizing TELUS' key 2004 consolidated financial targets as publicly disclosed this past December. As previously announced, we are targeting revenue to increase by 4 to 6%, EBITDA to increase 5 to 8%, EPS to increase between 14 and 36% to $1.05 to $1.25 per share, capex to remain flat to down slightly, and in terms of free cash flow we have restated our 2004 free cash flow guidance to henceforth be defined prior to dividend payments, which is a more traditional shareholder-focused definition. The underlying targeted cash flows remain unchanged from prior guidance. On our December 18th Targets call, dividends were estimated at $180 million for the year. We have added this back to our initial range of $950 million to $1.05 billion in order to more properly reflect cash available to all security holders. The resulting range of $1.13 to $1.23 billion implies an increase of 34 to 46% over the prior year after making a similar adjustment for the $172 million in dividends paid in 2003.
That closes my comments and back to John Wheeler.
Q4 2003 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
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