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Q4 2006 investor conference call - Darren Entwistle presentation
Thanks, John. Good morning and thank you for joining us.
Let's begin on slide 4. Today I will recap TELUS' full-year results for 2006 based on our excellent fourth quarter. I will also discuss our strategic uses of cash flow and unprecedented recent developments on the regulatory front. Bob will then review in detail our Q4 results.
In 2006 TELUS once again demonstrated the strength of our winning business strategy that focuses on the growth tenets of wireless and data in the domestic Canadian market. At the consolidated level TELUS delivered strong revenue growth of 7%. Not surprisingly, this was generated by wireless and data, the key drivers of which I will outline in a moment. EBITDA or operating profit was up 9% to $3.6 billion on the year driven by our wireless operations.
Focusing on TELUS' bottom-line earnings and cash generation, net income was a record $1.1 billion, up $422 million from the previous year. In addition, free cash flow was robust, up 9% to $1.6 billion. Importantly, TELUS achieved or exceeded four of five of the 2006 consolidated targets we set over a year ago, building on the distinguished track record we have in realizing our financial and operating targets. Indeed over the last seven years TELUS has met or exceeded 87% of the 38 targets that we have set for ourselves during that particular period.
Investors who've been involved with TELUS in recent years will know how important these results are as set out to the Company on slide 6. It is our belief that you can only truly judge a company to be superior if it can build and sustain consistent performance at a high-level. This four-year table demonstrates that we are accomplishing just that.
Our 2006 results demonstrate that we are on track for continuing our leading performance against our global telecom peers. Value creating growth in revenue, operating profit and EPS remain top quartile again this year while cash flow is in the top half due to our stepped up capital programs which I will talk about in more detail in just a minute.
I now turn your attention to slide 7 for highlights of the wireline segment of our business. TELUS has wireline results in 2006 that once again demonstrate our operating resiliency in a challenging industry. In fact, TELUS experienced several improving trends on the wireline front; data revenues continued to be robust, up 7% in 2006 and almost 9% in the fourth quarter, more than offsetting declining local and long distance revenues. This strong data result was based on exceptional high-speed Internet growth with 154,000 new connections, the best result for TELUS in this area in four years. Notably our high-speed Internet base is up 20% from a year ago. At the same time TELUS experienced moderate network access line losses at only 3%. The 5% decrease on the residential front was mitigated by a small gain in business lines. 2006 revenue and EBITDA were down less than 1%, this can be attributed to line losses and lower profit margins on legacy services offset by the absence of labor disruption costs in 2005.
Turning to slide 8 -- let's examine our strong wireless results for 2006. TELUS experienced substantial revenue growth up 17% on the wireless front. This was based on a 12% growth in wireless subscribers as well as a 3% increase in ARPU which notably was the 16th consecutive quarter of year-over-year increases on the ARPU front. Recent ARPU growth also reflects the 114% increase in wireless data revenue to $280 million. This is more than offsetting the competitive declines that we are experiencing in voice revenue.
TELUS also generated a 21% increase in wireless operating profit. Moreover, even with a 6% increase in capital expenditures, TELUS generated simple cash flow from our wireless business of $1.3 billion, up by $285 million from the previous year. With more than 20 years of capital investment and cash flow losses the economics have now turned decidedly positive in the wireless industry. TELUS' focus on profitable subscriber growth is also paying off.
For example, TELUS' current premium ARPU and load churn produce a lifetime average revenue per customer of $4850, an industry high. This performance combined with a responsible cost of acquisition is generating increasing markets, notably 45% for 2006. Factoring in a low capex intensity of 11%, the net result is expanding cash flow and a cash flow yield of 34%.
As shown on slide 9, this value driving metric at 34% compares very favorably with our peers across the global industry and is indicative of TELUS' strength traditionally in this area.
The Canadian wireless industry and indeed TELUS is a remarkable success story as shown on slides 10 and 11. The first slide shows TELUS' wireless subscriber growth and net additions since 2000. Notwithstanding marginally lower than expected additions this quarter, TELUS produced 535,000 net additions in total in 2006 which would represent the second-highest in terms of subscriber net loading for TELUS over the last seven years. Furthermore, growth additions were a record high. Indeed slide 10 illustrates that TELUS has consistently produced 500,000 or more net additions in each of the last three years and is again projecting strong growth in this area for 2007.
Slide 11 provides an overview of the Canadian wireless industry for the last four years including net additions, population penetration and the gain each year. It is insightful to note that TELUS continues to win its fair share of net additions at approximately 32% each year. This is solid progress given our long-standing strategic focus on profitable subscriber growth and maintaining a premium ARPU. Most encouraging for investors, there remains significant room for growth overall in the Canadian wireless industry.
In a global comparison Canada is relatively under penetrated at 56%. For example, the U.S. is at circa 75% penetration and growing. There are no fundamental reasons to indicate that Canada cannot achieve similar levels. With an expected growth of 450 to 500 basis points each year Canada can well achieve 80% penetration in the next five years. That's a lot of growth still ahead for our organization in particular and the Canadian wireless industry in general.
Let's now turn to slide 12. TELUS' superior asset mix generated significant free cash flow at $1.6 billion in 2006. We remain committed to creating long-term value for TELUS investors by continuing to balance their interests in the use of this cash. We demonstrated this commitment to debt holders by retaining early $1.6 billion of debt just over a year ago and by maintaining clear public financial policies and achieving them.
We've demonstrated our commitment to shareholders by returning surplus cash in two ways -- number one, through consistent dividend increases; and number two, through significant share repurchase programs. Equally important, we are also using our cash to make responsible and prudent capital investments in our core business in our domestic market. Let me address each of these uses of cash.
First, we established and are continuing to pursue a dividend growth model by which investors can clearly assess the potential for future dividend increases. TELUS has delivered three successive dividend increases over the past three years of 33, 38 and 36% respectively. Second, TELUS has also embarked on three consecutive normal course issuer bids to repurchase TELUS shares. Many companies announce these programs, but not very many realize them. At TELUS we've repurchased nearly 40 million shares for $1.8 billion.
Finally, TELUS has been rigorously investing for seven years exclusively in our core business based on our national growth imperatives. Our track record for creating value for our shareholders has been exemplary and this disciplined approach has paid dividends literally and it should continue to do so.
Slide 13 reflects TELUS' 2007 capital investment program. On the wireless side the approximate $125 million increase in capital in 2007 is directed to meeting the demands of the fast-growing wireless business. It includes coverage infrastructure, new technology like wireless high-speed, EVDO Rev A as well as new value added mobile services. These investments imply a capex intensity of 12.6%, consistent with the modest 11 to 13% range that we have long indicated as an appropriate range for our wireless business.
On the Wireline front TELUS is making the necessary investments that support the exciting evolution of our heritage business. We are thereby maintaining 2007 wireline capital expenditures at circa $1.2 billion and recognize that this is cyclically high at a capex intensity of 24.6%. Our Wireline investments are directed at four main initiatives. First, we are continuing to service the vibrant housing market in Western Canada where provincial economies are outpacing national GDP growth. We are investing in new technology to capture value by serving these new customers' communications needs across voice, wireless, data and entertainment services.
Second, we are investing $600 million in a three-year broadband network enhancement program to drive revenue growth still further. TELUS is continuing to rollout high-speed ADSL services to our customers and we've again set a challenging net addition target of greater than 135,000 net subscriber additions for 2007. Moreover, through our future friendly home strategy TELUS is investing in the continued rollout of TELUS TV and the addition of high-definition capability.
Third, after a successful pilot with more than 20,000 customers in 2006, TELUS is implementing a multiyear initiative in information technology to consolidate the multiple legacy order entry and billing systems down to one customer care platform which is the last vestiges of the post acquisition integration following the merger of BC TEL and TELUS Alberta some six years ago. The long-term benefits are significant from the IT investments including cost efficiencies, differentiated customer service and improved customer retention. We know from our experience in the wireless side that these IT benefits are real and achievable.
Finally, in terms of our investments on the wireline front, our infrastructure investments support our IP technology leadership across key industry verticals of energy, financial services, healthcare and the public sector. We are investing for the benefit of our enterprise customers and the public sector.
We continue to be successful in the West and are making new inroads in Ontario and Quebec. For example, winning a $140 million five-year Government of Ontario contract triggers a success-based commitment to build out the wide area network that will generate future revenues and profits for years to come. TELUS has a continuing responsibility to accept J curve investment opportunities in our core business.
Our capex is affordable due to the significant and differentiated exposure TELUS realizes from our wireless cash flow. This affords us the opportunity to invest for the future in both wireless and in our heritage wireline business ensuring that TELUS remains the growth story in perpetuity. As mentioned, TELUS is also in the enviable position to be able to consistently return capital to investors along the way without undermining our strong financial performance.
Let me now conclude by commenting on two regulatory developments in Canada as outlined on slide 14. We believe at TELUS that these benefits have been underestimated by investors. To begin, last December the federal government took significant steps towards the expeditious deregulation of the wireline industry. The Federal Industry Minister issued a proposed order on local forbearance that would significantly change the CRTC's restrictive decision issued earlier in the year.
Once in force by early April 2007 the order would eliminate regulation of local phone services in markets where consumers have competitive choice. It would also eliminate the archaic marketing restrictions on win back activities when we lose a customer to a competitor. The federal government also issued an unprecedented directive instructing the CRTC to rely -- and I quote -- "on market forces to the maximum extent feasible which insures technological and competitive neutrality and allows the regulatory environment to begin streamlining its regulatory processes". The government's approach will afford incumbent telcos more competitive flexibility, provide the full benefits of competition to our customers and foster enhanced innovation and investment in the Canadian economy. In a word, it's good for Canadians.
The second regulatory development is the impending implementation of wireless number portability in March of 2007. The U.S. experience with number portability showed that the impacts were not as large as initially feared and that companies with the lowest churn rates fared the best. Additionally, the Canadian market today uses extensively one-, two- and three-year contracts providing significant retention benefits. In fact, TELUS considers number portability to be an opportunity because it is one of the biggest impediments that we face in growing our relatively low market share within the business market in central Canada.
To summarize, with the imminent liberalization of local pricing and marketing as well as wireless number portability, TELUS is gaining competitive tools that were not formally in the repertoire of our company. This will allow us judiciously over time to secure a more balanced approach to the market based on the quality of our comprehensive communications solutions. We applaud the federal government for taking the necessary steps to ensure a sustainable business model for our industry in Canada that is now going to be governed by free market forces rather than onerous regulation that can sometimes frustrate sustainable competition. Now over to Bob to brief you on TELUS' strong Q4 results.
Q4 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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