events archive
events archive
2004 Targets investor conference call
John Wheeler: Good morning, everyone, and thanks for joining us today for our Investor call on key financial and operating targets for 2004. A news release on this was issued earlier this morning. The news release and the slides are available on the Investor section of the TELUS website, telus.com. The format for today's call will be comments with reference to the slides by the Executive Vice-President and CFO, Robert McFarlane. This will be followed by a question and answer session based on the guidance set today. Our next scheduled conference call, by the way, is for the 4th Quarter and year-end results which will be held on February 13th, 2004.
John Wheeler: On Slide 2 we have noted for all participants that the 2004 Targets presented today and in the question and answer session contain forward-looking statements about expected future events that are subject to risks and uncertainties. We ask you to read this statement and the disclosure statements on the news release. We disclaim any intention or obligation to update or revise any forward-looking statement as a result of new information. With that, I will turn the call over to Bob.
Great. Thanks, John, and good morning, everyone, and thanks for joining us at this busy time of the holiday season. I'll start by providing a review of our 2003 guidance and a quick operational update, followed by a presentation of TELUS' 2004 consolidated and segmented financial and operating targets, before turning it over for Q and A.
So let's get started on Slide 3 which shows that there are no major changes to our previous consolidated guidance last provided on October 31st. As noted on the slide, we do expect that our capex will come in at the high end of the range. Of course, the EBITDA impact from the cost of acquisition from various levels of subscriber loading that may or may not occur in the remaining couple of weeks of December is somewhat of a variable. Regardless, we continue to expect revenue, EBITDA, EPS, capex and free cash flow to be within the ranges shown. So clearly, we're quite pleased with how the results are trending.
Now turning to Slide 4, looking on a segmented level, we see the latest guidance for our wireline TELUS Communications segment. As a result of continued softness in wireline demand, overall Communications revenue is expected to be close to the lower end of existing $4.8-$4.85 billion range. There is some possibility that we may slightly miss the lower target range, but any such gap should be very minor. Within Communications revenue we are heading to approximately $555 million for non-ILEC revenue. This is due to the impact of divestitures made earlier this year that have reduced 2003 non-ILEC revenues by about $20 million. Non-ILEC EBITDA remains on track with previously provided guidance, despite the divestiture of these positive EBITDA-generating assets. Capex in Communications is now planned to be at the high end of previous guidance. Finally, the existing guidance for high-speed Velocity, Internet net-additions of approximately 150,000 remains unchanged.
Slide 5 provides the updated guidance for our wireless segment, TELUS Mobility. TELUS Mobility continues to perform well. We are making no changes to existing guidance, but the outlook is towards the higher end of the ranges provided for revenue, EBITDA and capex. As for subscriber growth, it's very difficult to predict an exact figure, since so much of the Q4 loading comes from the last couple of weeks of the year, but we're optimistic that we can meet or exceed the 400,000 net-addition target for the year.
Slide 6 illustrates our six corporate priorities for 2003 that were set publicly at the start of the year and continue to provide focus for our efforts. We continue to expect to achieve all of our operational efficiency targets for 2003. As for wireless performance, the prior slide tells the story. We not only have enhanced our wireless results, but we're heading to report world-class performance in 2003. As for our financial position, I could provide much analysis and commentary, but let me merely point out the obvious. $900 million to $1 billion of annual free cash flow, no bank debt, leverage well below any level previously forecasted since I became CFO at TELUS and public debt trading at historic highs with spreads well below those at original issuance. A checkmark seems like an understatement, given all of that.
I'll now provide a quick update on the final two priorities in the next few slides. On the customer service front, TELUS is continuing to improve customer levels of service and overcome challenges caused by a confluence of external and internal factors late last summer. These factors included power outages, computer viruses, the massive electricity outage, forest fires and floods in B.C. and the worst accidental cable cut in B.C.'s history. At the same time, Operational Efficiency Program staff reductions and other efficiency measures were being implemented. In fact, in 2001 and 2002, we did not need to activate our internal emergency operations command centre (EOC), whereas in 2003 there were eight separate disruptions which warranted activation of our EOC. In fact, during the summer, it seemed to be normal to be experiencing concurrent abnormal events. We've committed to superior levels of service by year-end and customer feedback is improving, with complaints declining rapidly.
On Slide 7 it shows an interesting story. 6-1-1 repair calls were answered at a better rate after reducing our number of call centres from four to two and reducing staff by 22%; however, we see that following a poor implementation of a new trouble ticketing system in July, combined with the various natural disasters experienced in the August to September period together caused a dramatic but short-lived drop in repair call answers. The good news is that this has been followed by an equally dramatic restoration of service levels during November, well above CRTC standard.
Slide 8 shows the dip and, again, the restoration of service levels, this time in regard to operator service calls being answered in 20 seconds or less. As you can see, we are above the standard for operator services which includes directory assistance. We expect to remain above the standard with continued improvements going forward. As shown on the bottom of this slide, these improvements have been achieved with major efficiency initiatives underway over the last year. As in this case, we consolidated the number of operator service contact centres from 19 to 5, reduced the workforce by 30% and reaped a 40% increase in productivity. This is quite a success story.
As you can see on Slide 9, TELUS' November results show a strong upward trend in CRTC indicators where we were below standard. In fact, the indicators here and generally show overall improvement relative to 2002 pre-OEP levels. The improving quality of service trends are clear, so we remain optimistic that we will satisfy all CRTC standards by year-end and, if not, then shortly thereafter.
In terms of our priority of reaching a collective agreement, we continue to work with two federal conciliators in a process that began in mid-November and will run for 60 days. At the conclusion of the conciliation process, there are two possible outcomes: if an agreement is reached, there is an employee opportunity to ratify it; if no agreement is reached, we enter a 21-day cooling off period. Our next meeting with the TWU is scheduled for January 5th. The federal conciliators have recommended that the two parties extend their communications black-out until January 12th, the end of the 60-day conciliation period. And TELUS intends to abide by the recommendation, subject to responding as may be appropriate to developments. The TWU has announced its intention to seek another strike mandate in January, as the old one expired quite awhile ago. This is typical of these situations. TELUS remains committed to achieving an agreement that balances the needs of all parties and reflects the competitive marketplace. Investors should consider that our guidance for 2004 does not reflect any improvement from productivity or efficiency gains or better flexibility which may arise from a new collective agreement.
Now let's turn to TELUS' priorities and targets for 2004, starting on Slide 12. Some key priorities for TELUS in 2004 are to reach a new collective agreement reflecting competitive dynamics, ensure the sustainment and enhancement of our Operational Efficiency Program benefits, preserve and grow brand value by demonstrating superiority in customer service and reliability, excel in delivery of national deals such as the recent landmark Toronto Dominion Bank managed IP Solution for the conversion of over 1200 branches. We plan to continue our drive towards a leadership position in Internet access and continue to develop building blocks for accelerating growth in IP Solutions. It should be noted that this strategic thrust to grow in data and IP has remained constant for the last three years at TELUS. And finally, and importantly, we are intent on maintaining our leadership position at TELUS Mobility.
Turning to Slide 13, I'd like to highlight the following considerations as context for our 2004 targets. No impact is assumed for the possibility of a work stoppage resulting from ongoing negotiations I just updated you on. We expect continued softness in wireline demand, high-speed Internet industry subscriber growth of about 15% or circa 200,000, wireless penetration growth of 3.5-4%, recently-confirmed accounting rules under Canadian GAAP which require income statement expensing of stock option compensation in 2004. The expensing of such stock options and restricted share units will result in a $45 million accounting expense in 2004 versus an expense for RSUs only of about $3 million in 2003. There is also an estimated $30 million of restructuring and workforce reduction costs in 2004 and we're assuming pension expense remains flat year-over-year. And lastly, an average tax rate of approximately 35%.
Let's now turn to the 2004 targets starting on Slide 14. We're targeting 2004 revenue of $7.45-$7.55 billion, up 5% year-over-year. The 2004 EBITDA, after about $30 million of restructuring and workforce reduction cost is expected to be approximately $3 billion. When defined on the same basis, this represents annual growth of 7%. We are also targeting EPS of $1.05-$1.25 in 2004, an impressive 28% increase which actually understates the normalized operational increase as I'll show in a moment.
To assist analysts on the puts and takes of various EBITDA incremental items, Slide 15 reflects the changes between 2003 and 2004. Using the midpoint of our 2003 guidance as a starting point, we first normalized for the $25 million in restructuring and workforce reduction costs, not included in the 2003 EBITDA as formerly defined. This gives an adjusted and more comparable starting point of $2.8 billion for 2003. TELUS is targeting at $217-$317 million increase in EBITDA from growth and productivity. Normalizing for the expected $20 million in negative impacts from the price cap in 2004, incremental share compensation expense of $42 million and about $5 million in higher restructuring costs results in a 2004 EBITDA target of $2.95 -- excuse me, $2.95 billion to $3.05 billion. That would have been quite a reduction if it turned into cents on me.
Okay. Moving to Slide 16, it gives detail on the incremental line items affecting EPS. The midpoint of TELUS' outlook for EPS for 2003 is $0.90, which includes approximately $0.20 related to the settlement of tax matters in 2003. This means the normalized base EPS for TELUS in 2003 is about $0.70. Our projected EBITDA growth of about $150-$250 million in 2004 provides $0.23 to $0.43 after-tax EPS growth. The outlook is for lower amortization expenses in the amount of about $0.07 per share. Lower financing costs are projected to increase EPS by about $0.05 and the end result is our 2004 EPS range of $1.05 to $1.25. This is a significant 50% to 79% increase in earnings from our normalized EPS this year.
On Slide 17, the chart is derived by multiplying the EPS midpoint of $0.90 for 2003 by 349 million shares and $1.15 midpoint for 2004 by 354 million shares. The targeted EPS corresponds to about a 29% increase in net income to about $405 million in 2004.
As shown on Slide 18, our consolidated capex target for 2004 is approximately $1.225 billion, down slightly from this year's guidance. This represents 16% of total revenues, a notable decrease in capital intensity as compared to prior years.
Turning to Slide 19, we can see a detailed breakdown of the components of free cash flow in 2004. Using the same definition as last year for all items except for EBITDA, which for 2004 includes restructuring and workforce reduction costs, generates a free cash flow as per our 2003 methodology of $1 billion to $1.1 billion. We are slightly adjusting the cash flow definition this year to reflect cash restructuring and stock-based compensation expense. After funding $85 million in cash restructuring and workforce reduction payments, in excess of a $30 million expense included in 2004 EBITDA which was associated with the Operational Efficiency Program implemented in 2002 and 2003, and adding back the $35 million non-cash portion of share compensation expense, we expect between $950 million to $1.05 billion of free cash flow. Then adjusting for changes and working capital, share issuance and other items, it leaves TELUS with funds available for net debt and accounts receivable securitization reductions of $750-$850 million. TELUS has been reducing its accounts receivable securitization program and anticipates that at year-end, about $300 million will remain outstanding, which will likely be reduced by about half in 2004.
Now turning to Slide 20, let me update our debt leverage targets. Today we're reflecting certain financial policy changes recently adopted by TELUS' board. Our new long-term net debt to total capital target is now in the range of 45% to 50%, which we believe will provide us with an optimal weighted average cost of capital. Formerly, our longer-term target was 50%. Our new net debt to EBITDA ratio target for December 2004 is less than or equal to 2.5 times. Longer-term, we are targeting a net debt to EBITDA ratio of less than or equal to 2.2 times, so our revised leverage policy targets reflect even greater leverage reductions than previously expected.
And turning to Slide 21, you can see a comparison based on a free cash flow definition of EBITDA before restructuring costs less capex, cash interest, cash taxes and cash dividends. TELUS expects to generate free cash flow of over $1 billion which approaches that for a larger Canadian telco rival in 2004, before deducting the Bell West put liability. Remarkably, TELUS is expected to generate significantly more free cash flow in 2004 than BCE after consideration of the Bell West put. In fact, when you consider that our competitor has roughly three times more revenues, it means that TELUS expects to have a very attractive cash flow yield in 2004. The growth in free cash flow generation by TELUS is, in fact, strong on a global basis.
Turning to Slide 22, you can see that TELUS' expected cash flow growth in 2004 ranks best in a class amongst global telecom peers.
Turning to our wireline Communications segment on Slide 23, we're expecting 2004 revenue of $4.8-$4.85 billion, flat with this year's guidance. We're also targeting EBITDA between $1.975 billion and $2.025 billion, which is almost flat with 2003. We'll be working hard to improve our Communications EBITDA year-over-year; however, we'll be challenged by increased stock compensation expense and a further negative impact from price cap regulation.
Turning to Slide 24, TELUS intends to continue to grow its out-of-region non-ILEC business focused on data and IP in the Ontario and Quebec marketplace, targeting revenue growth of 10% to approximately $610 million in 2004. It's noteworthy that the expected growth rate in 2004 is quite similar to that experienced this year, when adjusted for divestitures.
Turning to Slide 25, the focus on profitable non-ILEC growth and increased on-network traffic is reflected in the large improvements made in the past two years. We intend to continue this profitable growth focus and are targeting positive EBITDA of $5 million in 2004, a significant $35 million improvement. This would represent achievement of a notable milestone of positive full year EBITDA.
On Slide 26 we see that when the non-ILEC is combined with our incumbent operations in Eastern Quebec, the scale and overall profitability of TELUS in Central Canada is significant.
As shown on Slide 27, we expect Communications capital expenditures to be $875 million, which is flat with this year and corresponds to continued capital intensity of about 18%. So, as a result, the implied level of cash defined as EBITDA less capex remains very substantial at between $1.1-$1.15 billion.
On Slide 28, we show our 2004 target of approximately 125,000 high-speed Internet additions, as compared to the approximate 150,000 guidance level for 2003. This would take our high-speed Internet base to approximately 685,000 or a 22% increase. The lower level of targeted net additions in 2004 reflects an expectation for slightly reduced market demand for adoption of high-speed Internet service. We are assuming that TELUS captures a majority share of the roughly 15% Internet market growth in our incumbent territory.
Now let's look at our fast-growing TELUS Mobility segment, starting on Slide 29. The Mobility revenue target for 2004 is $2.65-$2.7 billion, representing strong growth of 15%. This revenue target reflects continued strong subscriber growth and the maintenance of our industry-leading ARPU.
As highlighted on Slide 30, we are targeting to add between 375,000-425,000 new subscribers, an annual growth of 11-12%.
On Slide 31, we can see that we're again expecting a significant profitability growth for TELUS Mobility in 2004. The EBITDA target for 2004 is $975 million to $1.025 billion, which implies growth of 27%. This is being driven by network revenue growth and increased scale efficiencies, as the subscriber base approaches $3.8 million.
The plan for yet another year of significant Mobility EBITDA growth reflects our longstanding focus and profitable subscriber growth and cash flow generation focused on the overriding imperative to generate shareholder value.
And as you can see on Slide 32, TELUS Mobility's 2004 EBITDA growth target puts TELUS as best in class by a wide margin among North American wireless providers.
On the next slide TELUS Mobility's implied EBITDA margin at 37% of total revenue is also near the top of the comparable North American wireless carriers.
Turning to Slide 34, we are targeting Mobility capex of approximately $350 million in 2004, which represents a capex intensity of only 13%. Capital expenditures on the wireless networks continue to benefit from the network sharing agreements with Bell and Aliant, as well as improved capital efficiencies from our 1-X deployment. The reduced capital intensity, along with strong EBITDA growth, means that our plan entails EBITDA less capex cash generation of $625-$675 million, a significant 58% increase.
As shown on the next slide at 13%, TELUS Mobility's expected capital intensity level is the lowest amongst the large North American carriers.
Slide 36 shows that combined with TELUS Mobility's projected EBITDA margins, TELUS' implied 2004 cash flow yield at 24% is tied for first amongst the North American wireless players. This is remarkable, given the significant scale advantages which many of these large U.S. firms enjoy.
In wrapping up today's formal presentation, on Slide 37 we show a summary of TELUS' key 2004 financial targets on a consolidated basis. We are targeting revenue and EBITDA to increase by 5% and 7% respectively; EPS to increase 28% to $1.05-$1.25 per share or on a normalized basis by 64%, as I demonstrated earlier; capex to remain roughly flat; and free cash flow after restructuring cash payments to increase by 56%.
In conclusion, on Slide 38, our 2003 outlook for earnings and cash flow remain on track. Our 2004 targets reflect healthy wireless and high-speed Internet subscriber expansion, good EBITDA growth despite negative accounting and regulatory impacts, very strong EPS growth and global telecom-leading cash flow growth which enables the setting of new leverage policy targets and continued strong leverage reduction in 2004 and beyond.
Thanks for your attention. I will now turn the call back to John to conduct the Q and A period.
Question period
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