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Q3 2006 investor conference call - Robert McFarlane presentation
Thanks very much, Darren. Let's begin with a review of our wireless results on slide 16. Wireless revenues and EBITDA continued to deliver strong double-digit growth. Revenues surpassed $1 billion for the second straight quarter driven by continued subscriber growth and higher ARPU. EBITDA increased 33% to a fourth-quarter record of $432 million. Excluding cost of acquisition expenses, which were lower this quarter than a year ago due to a 10% decline in gross additions and a 3% decline in the cost of acquisition per gross add, EBITDA growth was 16%, in line with revenue growth. capex in the quarter decreased by 26% -- this was more of a timing issue as we had higher capex in the fourth quarter of 2005 when the labor disruption ended.
Slide 17 shows the pre and post paid composition of TELUS' 182,000 net subscriber additions in the fourth quarter of 2006 and 2005. The lower year-over-year result was predominantly due to a $40,000 decline in prepaid subscriber net additions in the face of aggressive prepaid offerings by certain of our competitors this year. Post paid net additions of 129,500 were down a more modest 10% from year ago and represented 71% of TELUS' total quarterly net adds, a 10 point improvement in the mix from the fourth quarter of '05.
The subscriber results reflect reduced share of net adds for TELUS associated with lower gross addition opportunities due to the reduction in overall industry churn and the resulting reduction in deactivations available from other carriers, as well as an overall slowing of industry penetration growth in the fourth quarter. In 2006 our total subscribers increased 12% to 5.1 million and we experienced record high annual gross additions despite the slowdown in the fourth quarter. So TELUS continues to experience solid growth and our overall subscriber mix remains strong with an industry-leading 81% being postpaid.
Our wireless revenue and EBITDA gains are being driven by more than just subscriber growth, as shown on slide 18. ARPU continues to increase, up $2.00 year-over-year driven by significant growth from adoption of new wireless data services which has exceeded the continued erosion in traditional voice service ARPU. TELUS' wireless data ARPU increased by $3.00 to just over $6.00 and accounted for just under 10% of ARPU this quarter. This is evidence that in a very competitive wireless voice market we've introduced value added data applications that have met with success and the tremendous adoption of these services is driving our overall ARPU increase despite reduced voice ARPUs.
Slide 19 shows that our profitable subscriber growth operating metrics are improving significantly. Our low blended prepaid and post paid churn rate decreased to 1.33%. Given lower churn and higher ARPU the average lifetime revenue per TELUS subscriber has increased 10% to an industry-leading $4,850. COA per gross add was down 3%, which is all the more impressive given the 10 point year-over-year lift in the post paid mix we generated this quarter. It led to a 120 point improvement in our best in class marketing efficiency metric which is COA over lifetime revenue which was 9% as shown on the last line in the slide. So we continue to generate attractive returns from our COA investment.
To conclude on the wireless segment please go to slide 20. TELUS met or exceeded all of its original financial targets set in December 2005 with notable out performance in wireless revenues. As mentioned, wireless net additions of 535,000 for the year were 3% lower than TELUS' original target, and our latest guidance, and was a result of reduced share, prepaid additions as well as lower seasonally adjusted market growth in the fourth quarter.
Now let's turn to our wireline operations on slide 21. Wireline revenues were very resilient in the quarter with overall revenues up 2% year-over-year. This slide shows the components of this growth. Local and long distance revenue declines are reflective of the increased competitive environment from wireless and VoIP; however, it's notable that TELUS experienced a slowing of long distance revenue decline to 6.7%. This reflects TELUS' success in partially offsetting competitive industry trends of lower volumes, declining prices and technological substitution.
The strong growth in high speed Internet, a pricing increase in the second quarter of the year, plus increased managed data revenues on the business side together led to a data revenue growth of 8.8%. Lower quality of service penalties and stronger CPE sales at the end of the year contributed to other revenue growth.
Moving to slide 22, we can see a key driver of data growth was high-speed Internet additions. TELUS finished the year with another strong quarter; net adds were up 64% to more than 44,000 as marketing promotions met with success in the fourth quarter of '06 whereas in the fourth quarter of '05 they were partially affected by the labor disruption. Our high-speed Internet subscriber base now totals 917,000, up 20% from a year ago which represents 83% of our total 1.1 million Internet connections when you include dial-up.
In 2006 TELUS' marketing efforts garnered the clear majority of high-speed Internet subscriber growth in our incumbent markets. Consistent with past statements we continue to target improving our high-speed Internet share relative to cable Internet, which is reflected in our target for 2007 net additions.
The balance of our wireline financials are on slide 23. Reported EBITDA was up 9.2% which I'll examine further in a few moments on the next slide. Capital expenditures were higher this quarter rising to $309 million reflecting increased investments in broadband, TELUS TV and network access growth as well as suppressed capex last year due to the labor disruption which impacted wireline much more than wireless.
Slide 24 helps to show the underlying wireline EBITDA. Reported EBITDA growth for the quarter of 9.2% overstates the underlying trend. Taking into consideration $50 million in net expenses from the labor disruption in 2005 as well as for restructuring costs in both quarters, adjusted EBITDA shows an apparent decline to $452 million.
It should be noted that the Q4 '06 wireline EBITDA was affected by the cost of sales from successful broadband loading in both high-speed Internet and TELUS TV, collectively what we call our future friendly home initiatives or abbreviated as FFH on the slide, which, as already mentioned, was up significantly year-over-year. Excluding 21 million in increased cost of sales from the stronger loading a more representative underlying EBITDA trend is a decline of just over 4% before one takes into consideration certain regulatory events during the year.
Slide 25 provides a snapshot of our nonincumbent operations in Ontario and Quebec focused on the business market. This is a subset of our wireline segment. We saw continued moderate growth in revenue, an EBITDA increase and improved margins, so all in all good going in central Canada, particularly with new business in the pipeline such as that associated with large contract wins like the Government of Ontario.
Slide 26 highlights our network access line performance. Residential line losses in the fourth quarter were 34,000 or 5.2% on a year-over-year basis reflecting increased competitive activity from resellers and VoIP competitors, particularly cable TV, as well as second line losses and of course from wireless substitution. However, this decline in residential lines was partially offset by a 0.6% increase in business lines resulting in an overall line loss of 3% from a year ago. As Darren noted, this is a relatively moderate loss compared to those experienced by most other North American telcos.
Slide 27 shows the growth trajectory and changing mix of TELUS' overall total subscriber connections. It shows that on a consolidated basis continued growth in wireless and high-speed Internet subscribers is significantly outpacing declines in residential network access lines and dial-up Internet. Interestingly TELUS has 1 million more total connections than it did two years ago despite competitive pressures in the Wireline business. This slide clearly shows the continued execution of our strategy focused on growth in wireless and data.
To conclude for the wireline segment, you can see on slide 28 our wireline results compared to our original 2006 targets. At $4.823 billion we just missed the lower end of our original revenue target range by $2 million or less than half of a percent. So being technically precise, we gave ourselves an X in that category, as you can see. EBITDA came in closer to the top end of the range at $1.84 billion and our non-ILEC operations had a successful year led by Joe Natale and his business solutions team, meeting targets for both revenue and EBITDA. We slightly exceeded the top end of original target for capex reflecting a commitment to significant investments for the longer-term in the areas that Darren has already covered.
Finally, a big highlight for John Watson's consumer team was the strong 154,000 high-speed net adds in 2006. We raised guidance twice during the year for high-speed adds and exceeded our original target by more than 50%.
Turning now to look at TELUS on a consolidated basis on slide 29, revenue growth in the fourth quarter was 8%, reported EBITDA increased 20%, while reported EPS increased 218% to $0.70. Now let me elaborate on these two items in the next few slides.
As shown on slide 30, this analysis is to again help investors understand the true underlying trends, adjusting for $52 million in net consolidated expenses incurred for the labor disruption last year as well as restructuring costs in both years underlying EBITDA grew 7.8%. Furthermore, adjusting for wireless cost of acquisition expenses which were lower, as well as wireline cost of sales related to our future friendly home initiatives which were higher in the quarter, underlying EBITDA growth was about 6%. This is consistent with and actually towards the upper end of our 2007 target for EBITDA growth of 4 to 7%. This indicates that we're entering 2007 with good momentum.
In a similar manner, slide 31 shows EPS adjusted for the labor disruption and excluding the $0.06 of positive tax related impacts this quarter as well as $0.01 negative impact in Q4 '05, as well as backing out the $0.06 charge taken in the fourth quarter last year related to the early redemption of the 2006 notes. As you can see, underlying organic EPS growth was still very significant at 64%.
Slide 32 gives analysts a detailed breakdown of the positive contributors to the significant increase in EPS. I must say I like this chart as all the arrows are pointing in the up direction, as you can see. EBITDA growth generated the biggest impact of $0.17 including $0.05 of lower restructuring costs, a further $0.10 contribution was related to net expense's from the labor disruption last year that were not incurred this year; lower financing costs due to the retirement of debt at the end of 2005 added $0.08 while tax related adjustments represented a $0.07 delta. A decrease in the average number of outstanding shares due to share repurchases represented another $0.03 while lower depreciation and amortization and other items contributed the remaining $0.03. All in EPS growth was significant any way you cut it.
Turning to the next slide. On a consolidated basis TELUS achieved four out of five of its original targets for 2006 driven by wireless and data. The exception was increased capital expenditures associated with prudent long-term investments, as Darren has already discussed. With fourth-quarter free cash flow up $100 million, TELUS hit the middle of our original target with $1.6 billion of total free cash flow in 2006. So a key point for investors is that although capex increased it did not come at the expense of our targeted free cash flow and instead reflects TELUS' strong asset mix and ability to reinvest in the business.
Of course the strong free cash flow allowed TELUS to continue its considerable efforts in retuning capital to share owners, as we can see on the next slide. Slide 34 summarizes our normal course issuer bids with the first one beginning in December of '04. In the fourth quarter of 2007 we remained active in the market, repurchasing a total of 3.6 million TELUS shares for just under $200 million. In total in 2006 TELUS repurchased a total of 16.4 million shares for about $800 million. This brings TELUS' aggregate share repurchases since December of '04 to 39.4 million shares or $1.77 billion.
More importantly for investors is that this has led to a 6% or 20.6 million reduction in the total shares down standing in the past two years despite shares issued for option exercises, etc. So as you'll recall, TELUS renewed a third NCIB share repurchase program for up to 24 million shares expiring in the middle of December of 2007. TELUS' decision to move to a cash settlement program for options exercised beginning in 2007 will also reduce dilution going forward.
Slide 35 shows our strong track record in returning capital to shareholders since 2003 expressed on a per share basis. In 2006 we returned $3.43 per share when one adds dividends to our full-year share repurchases. In 2007 the combination of our higher dividend and estimated significant share repurchases at an amount assumed to be consistent with 2006 would result in a total return of capital to shareholders of approximately $3.90 per average share outstanding. Ironically this is a level of cash distributions per share previously associated with TELUS when the possibility of converting to an income trust was considered.
While I put up the 2007 figures for illustrative purposes only, what is clear is that TELUS' strong free cash flow profile is allowing TELUS to deliver on our commitment of returning a significant and growing amount of capital to investors.
Turning to slide 36, a reminder, as mentioned in December in our targets call, that in 2007 we are introducing the cash settlement method for all outstanding vested options. This innovative approach has several advantages. Settling the in the money value of options for cash when exercised in the future is both more tax efficient and avoids shareholder dilution. The cash payment will be tax-deductible for TELUS yielding potential cash savings of up to $70 million over three years. The accounting result is estimated to be increased non-cash compensation expense of between 150 to $200 million before tax and an EPS impact after-tax of course of $0.30 to $0.40, substantially all of which will be recorded in the first quarter of 2007.
Turning to slide 37, while not as hot a topic as it's been over the past several years, pension funding has been a tough issue for many corporations. In our case TELUS ended the year with strong investment performance in our pension plans leaving them more than 100% funded in aggregate and in a going concerned surplus position. This stems from strong investment performance in the past several years as well as conservative and prudent management. We currently expect to contribute approximately $112 million in pension funding in 2007 to our defined benefit plans as compared to 123 million in 2006. For 2007 all of our major pension assumptions remain unchanged including a 5% discount rate and a 7.25% long-term rate of return.
Today I'm pleased to announce on slide 38 that TELUS has received commitments from 18 financials institutions for a new $2 billion credit facility to replace our existing $1.6 billion facilities. The new facility is more favorable terms reflecting our strong leverage metrics and extends the maturity to 2012. The use of proceeds is for general corporate purposes and may be used to back up commercial paper, or CP for short, issuance. In addition, TELUS also extended its existing accounts receivable securitization agreement by one year to July 18, 2008. As a result TELUS is well positioned to take advantage of the refinancing opportunity provided by the 1.5 billion of 7.5% coupon debt coming due in mid 2007. The refinancing will likely be through a combination of long-term debt issuance and a new commercial paper program.
Slide 39 highlights more corporate governance developments. In mid 2006 given the frequency of alleged stock option backdating issues in the market TELUS management voluntarily initiated an internal audit of our stock option and long-term incentive compensation practices. I'm pleased to report this audit concluded with a well controlled rating, our highest rating for internal audits.
As far as SOX goes, TELUS has successfully completed all necessary work for compliance with section 404 of the U.S. Sarbanes-Oxley Act. This organization has addressed approximately 90 processes and 740 key controls. Darren and I in our capacities as CEO and CFO have assessed the effectiveness of the Company's internal control of our financial reporting as at December 31, 2006. Based on this assessment we've determined that our controls are effective and expect to certify TELUS' annual filings with the U.S. Securities and Exchange Commission in the near future. This is a credit to the entire TELUS team. Feedback from external parties that we've been working with is that our project management and approach to the SOX 404 project has been at a best in class level.
And to conclude on slide 40, we present a summary of TELUS' 2007 consolidated targets. These are unchanged from those resented in mid-December. For comparability purposes EBITDA and EPS targets are adjusted to exclude the impact of the non-cash accounting expense for the newly introduced cash settlement of option so regardless of the amount recorded for the cash settled option expense in 2007, there will be no impact on their 2007 targets for either EBITDA or EPS which have been normalized for this occurrence.
When looking at these growth rates on an organic basis, it's evident that we expect solid performance in the upcoming year which builds on the momentum of 2006 and our track record of operational excellence. With that Darren and I would be pleased to answer your questions. So I'll turn the call over to John Wheeler to moderate the next part of the call.
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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