events archive

2005 Targets investor conference call

John Wheeler: Good morning and thank you for joining us today for our investor call on the key financial and operating targets for 2005. A news release was issued earlier this morning; the release as well as slides for this call are available on the investors section of the TELUS website, TELUS.com.
The format for today's call will be comments on the slides by Executive Vice President and CFO, Bob McFarlane. This will be followed by a question-and-answer session.

On slide two we have noted for all participants that the 2005 targets presented today as well as discussion within the question-and-answer session contain forward-looking statements about expected future events that are subject to risks and uncertainties. We ask that you read this statement as well as the disclosure statement on the news release and in recent filings with Security regulators in Canada and the U.S.

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.

Bob McFarlane: Great, thanks John, and thanks, everyone listening and taking time during this busy time of year to join us today. I'd especially like to welcome those new shareholders that participated in the very successful secondary offering of our shares formerly owned by Verizon, and of course, that transaction closed earlier this week. So let me begin with an update of TELUS' consolidated guidance for 2004 and then I'll move on to the targets for 2005.

Today we're revising upwards our guidance for 2004 EBITDA to a higher range of $3.05 to $3.1 billion due to an upward revision in our Mobility EBITDA. We are also on track to exceed our EPS guidance, and now expect EPS to be in the range of $1.50 to $1.55 per share. Please note that the 2004 EPS includes a 17-cent September year to date favorable settlement of tax related matters.

The remainder of our consolidated guidance remains unchanged. Based on our consistent definition of free cash flow, our guidance of $1.25 to $1.3 billion does not include the U.S. $125 million payment that we received from Verizon relating to the sale of their ownership possession in TELUS. Our current expectation is that the Verizon payment will not have a material impact on our income statement, but rather it will be applied directly to the balance sheet principally through the contributed surplus component of our shareholders' equity.

Now looking at slide 4. We provide the latest 2004 guidance for our wireline segment, TELUS Communications. While our overall guidance remains unchanged, we are making positive revisions for our non-incumbent operations in central Canada. Non-ILEC revenue is now expected to be in the range of $545 to $555 million. The outlook for Non-ILEC EBITDA has also improved; guidance is now for EBITDA in the range of -20 to -25 million.

Slide 5 provides the updated guidance for our wireless segment, TELUS Mobility. TELUS Mobility continues to perform above expectation. Today we are yet again increasing Mobility's EBITDA guidance by $25 million to 1.125 to 1.15 billion. Remarkably this represents the fourth positive change in Mobility's EBITDA guidance in 2004.

Slide 6 illustrates our six corporate priorities for 2004 that were set publicly at the start of the year and continue to provide focus for our efforts since that time. Over the next few slides I'll do a quick review of our progress against these priorities.

When it comes to enhancing our leadership position in wireless, this next slide tells the story very simply. TELUS Mobility has been ranked as the No. 1 wireless operator in North America by independent research firm N. Moore Capital for all three quarters of 2004. N. Moore Capital's quarterly survey is based on financial and operating results of the top 22 North American wireless carriers.

In the most recent third-quarter rankings, we finished ahead of both our strategic partners and U.S. wireless leaders, Verizon wireless and Nextel. George Cope and his team at TELUS Mobility continue their strong focus on value creation and we remain very bullish on the outlook for the Canadian wireless industry over the next several years.

Moving on to slide 8, it's hard to ignore the tremendous success of the TELUS brand which has become one of the most recognized in all of Canada. Of course, this quarter you can enjoy one of our rising stars, the Chameleon, who is currently starring in both TV and in print. In regards to the corporate priority to provide superior customer service, we've had considerable success improving the wireline service levels in the past 12 months.

And on the wireless side TELUS Mobility continues to provide best in class customer service as evidenced by our excellent year to date blended customer churn rate of only 1.4 percent. While we have achieved this important corporate priority for 2004, we believe there remains much scope for continued improvement in regards to both efficiency and effectiveness of our customer service operations, particularly in the communication segment.

Given the realities of the marketplace and the legacy of some of our wireline operations, a key focus for TELUS continues to be on delivering operational efficiency. As shown on slide 9, with respect to our 2001 to 2003 operational efficiency program we are tracking to achieve year end cumulative annual cost savings of $530 to $535 million.

Our more current efficiency initiatives in 2004 are listed on this slide which are focused on consolidation of operations in our business units including information technology. We expect to incur $50 million in restructuring costs in total in 2004 and we'll continue to relentlessly focus on additional opportunities for efficiency improvement in 2005.

Turning to slide 10, revitalizing wireline growth remains a priority in progress with a number of major initiatives underway in both the residential and business markets. We've made progress in our push toward the future friendly home with continued growth in our high-speed Internet base.

We launched two new products, wireless home networking, in-home security monitoring services, and we continue to try our IP TV with employees. We believe that the future friendly home initiative provides TELUS with new and attractive revenue streams that reflect a natural extension of our existing DSL investments and products, and enhances our differentiation and competitive position.

We've also taken a slightly different tact on bundling than what we have seen from certain peers in order to protect our legacy revenues such a long distance. To that end we've promoted high-speed bundles with LD and increased monthly LD administration charges by $1.00 at midyear. Our biggest wireline revenue growth opportunity is in our non-incumbent operations in central Canada. Recent results and today's increased guidance both indicate that our refocus on high-quality, recurring IP based revenues is paying off.

You can see that the progress we've made in terms of driving towards a leadership position in high-speed Internet on slide 11. In the past 2 years we've captured 7 points of market share in our incumbent areas. TELUS' high-speed Internet subscriber base of 655,000 is up 27 percent year-over-year and now represents almost 70 percent of our total Internet base.

Turning to slide 12, the corporate priority of reaching a fair collective agreement has been deferred to 2005. There's really little to report since the last update at the end of October. We continue to wait for a decision from the Canada Industrial Relations Board, or CIRB for short. The CIRB needs to rule on our rate consideration appeal which asks that the binding arbitration order and communication band be lifted to allow the parties to resume negotiations on a new collective agreement covering some 11,000 unionized employees in western Canada. So we'll have to stay tuned here.

Now let's turn to TELUS' targets and priorities for 2005 starting on slide 14. Before we start with the 2005 targets, let me first mention some important considerations regarding our guidance. We expect economic growth to be consistent with the conference Board of Canada. No impact is assumed for any workforce disruption resulting from negotiations. We do expect increased competitive activity from IP telephony players in both the business and consumer markets. We assume wireless industry penetration growth of about 4 percentage points or approximately 1.3 to 1.4 million net additions. We assume $100 million of restructuring and workforce reduction costs in 2005 which would be a $50 million increase over 2004's level.

Pension expense is to increase by about $15 to $25 million due to updated actuarial assumptions as indicated on this slide. An effective tax rate of approximately 36 percent plus $15 to $20 million in large corporations tax. And lastly, we assume average shares outstanding of 340 to 360 million depending on the number of shares repurchased and share price fluctuations over the next 12 months as part of our normal course issuer bid. In this regard, on Wednesday we announced that our filing of a normal course bid was accepted by the TSX putting TELUS in position to begin repurchasing shares as early as Monday, December 20th.

So given these considerations let's begin with the targets for 2005 for our communications segment on slide 16. We're expecting 2005 wireline revenue of $4.7 to $4.75 billion, close to the estimated result per this year's guidance. New revenue streams from our future friendly home initiatives and Non-ILEC growth are expected to be offset by increased competition in both consumer and business and the continuing trend of wireless and Internet technological substitution of traditional wireline voice services.

On slide 17 you can see TELUS Communications' EBITDA before accounting for restructuring and workforce reduction costs. In 2005 we're expecting EBITDA before restructuring costs of between $1.95 and $2 billion which is roughly flat with 2004. While TELUS' official definition of EBITDA includes restructuring and workforce reduction costs, this slide illustrates that despite the competitive regulatory challenges we face, TELUS' management is working to take costs out of the business and maintain our future profitability in wireline operations.

Our communications EBITDA target, after restructuring and workforce reduction costs of $100 million, is shown on slide 18. We are targeting EBITDA between $1.85 and $1.9 billion down 2 to 5 percent. It is too early to provide an estimate for the exact savings expected from various new efficiency initiatives in 2005, although they would not generally become accretive until 2006.

Note that in addition to the $50 million in additional restructuring charges, the 2005 EBITDA also takes into account higher pension expense by the previously mentioned $15 to $25 million range on a GAAP basis; however, on a cash basis pension contributions are expected to decline in 2005. Absent these two items communications EBITDA would be flat to up slightly.

Turning to slide 19, embedded within TELUS Communications' guidance is our growing out of region non-incumbent operation focused on providing data and IP services to businesses in the Ontario and Qu?bec marketplace. We are targeting revenue growth of 9 to 18 percent which corresponds to a range of $600 to $650 million in 2005. This includes some non-incumbent revenues from the recently announced acquisition of videoconferencing provider, ADCOM. The expected revenue growth rate picks up on our recent momentum in the non-incumbent business market as evidenced by the positive 2004 guidance changes we announced today.

Our intention is to continue to focus on winning high-quality, recurring, IP based revenues and leveraging the technology leadership and service differentiation that TELUS' next generation network provides to continue to win new business in 2005.

Turning to slide 20, the focus on profitable non-incumbent growth increased on network traffic and the transition to recurring versus onetime revenues is reflected in the EBITDA improvements made in the past few years. We intend to continue this profitable growth focus and are targeting breakeven to positive EBITDA in 2005, an approximate $20 to $35 million improvement.

As shown on the next slide, communications capital expenditures are expected to be $950 million to $1 billion in 2005, a flat to small increase. We continue to make significant investments in network infrastructure to improve customer service and network reliability and investments in our internal systems and processes. This target encompasses investment in new IT systems and capabilities and delivery of continued network investment and the development of new services in both our incumbent and non-incumbent regions causing a slight increase in capital intensity.

Slide 22 shows that we are targeting high-speed Internet net additions of 100,000 next year, which is integral to our future friendly home strategy. This represents an anticipated 15 percent increase in our high-speed subscriber base. While we intend to capture a majority of the new loadings in 2005, as expected, growth in the high-speed Internet market in Western Canada appears to be slowing. As shown in the pie chart, by the end of 2005 we expect to have more than 1 million total Internet subscribers which is a sizable platform for targeted marketing efforts to grow additional revenues.

Now let's turn to our TELUS Mobility segment beginning on slide 24. The Mobility revenue target for 2005 is $3.2 to $3.25 billion representing excellent growth of 15 to 17 percent. This revenue target reflects continued strong subscriber growth and the maintenance of our industry leading ARPU by providing a value added customer proposition while continuing our long-standing commitment to pricing discipline.

As highlighted on slide 25, we are targeting to add between 425,000 to 475,000 new subscribers, the same range as in 2004. This represents an expected 11 to 12 percent increase in our wireless subscriber base. While the consolidation to three national players has long-term benefits for the industry, an overall net industry addition should remain robust. It is apparent from developments this quarter that competition remains fierce for subscribers, and irrational behavior by certain of our competitors can still occur.

On slide 26 you can see that we are again expecting significant profitability growth for TELUS Mobility in 2005. The EBITDA target of $1.35 to $1.4 billion implies growth of 19 to 23 percent after significant growth of over 35 percent in 2004. EBITDA is being driven by network revenue growth and increased scale efficiencies as our subscriber base moves past the 4 million number. This target again reflects our long-standing focus on profitable subscriber growth and cash flow generation focused on an overriding imperative to generate shareholder value.

Turning to slide 27, we are targeting Mobility Capex of approximately $350 to $400 million in 2005, which represents a new record low Capex intensity of 11 to 12 percent. If we incur Capex for 3G technology then it would be accommodated within this target. Capital expenditures in the wireless networks continue to benefit from the network sharing agreements with Bell and Aliant as well as improved capacity efficiencies from our 1X data deployment.

The reduced capital intensity along with strong EBITDA growth means that the plan for the TELUS Mobility segment alone entails simple cash flow, measured as EBITDA less Capex, of approximately $1 billion. This represents a significant 27 percent increase over 2004 and would represent a tremendous achievement for TELUS.

As shown on the next slide, strong expected margins in the 42 to 43 percent range based on total revenue combined with stable Capex intensity is expected to lead to an impressive cash flow yield of approximately 31 percent.

Slide 29 shows that TELUS Mobility's implied 2005 cash flow yield is well ahead of other major North American wireless players. This is noteworthy given the significant scale advantages which many of these large U.S. firms enjoy.

As you can see on slide 30, in 2005 TELUS Mobility is expected to generate roughly 42 percent of consolidated EBITDA. And more impressively, due to the high-growth profile and lower capital requirements in our wireless business, well over 50 percent of the simple cash flow generated at TELUS should be coming from our high-growth wireless business in 2005. This has significant valuation implications for TELUS' securities when compared with many of our Telco peers and certain cable TV companies.

So what does this all mean for TELUS on a consolidated basis? Our consolidated 2005 targets start on slide 32. We are targeting 2005 revenue of $7.9 to $8 billion, a jump of roughly 400 million or 5 to 6 percent year-over-year. The 2005 EBITDA after restructuring and workforce reduction costs is expected to be 3.2 to 3.3 billion; this represents annual growth of 4 to 7 percent.

Turning to slide 33, as a result of the lower capital intensity experienced in recent years as well as reduced debt levels, we are expecting lower future depreciation and interest expense. When one combines these positive below the line trends with our EBITDA growth we are targeting EPS of $1.65 to $1.85 in 2005, an impressive 8 to 21 percent increase which actually understates the normalized operational increase as I will show on the next slide.

Slide 34 gives detail on incremental line items affecting EPS. The new guidance for 2004 EPS is $1.50 to $1.55, which includes a total of 17 cents related to the favorable settlement of tax matters that impacted tax expense by 12 cents and financing costs by about 5 cents. This latter amount relates to interest income of $27 million from tax settlements received in 2004. This means the normalized base EPS in 2004 is $1.33 to $1.38. Our projected EBITDA 2005 growth provides 36 to 45 cents of after-tax EPS growth.

Let me remind you that this includes increased pension expense of approximately 4 cents per share. Unlike some of our peers, we account for this item above the EBITDA line rather than below. I've separated out the 9-cent after-tax EPS impact of the incremental $50 million in restructuring costs anticipated in 2005. Normalized for interest income from tax settlements in 2004, we expect lower financing costs due to lower debt balances to provide a positive 4-cent impact in EPS for 2005.

The change from other items of 1 to 7 cents primarily reflects variability related to the timing and extent of the normal course issuer bid and lower depreciation charges being partially offset by lower other expenses principally due to non-recurring gains realized on property sales in 2004. The end result is our 2005 EPS range of $1.65 to $1.85. This is a significant 22 to 37 percent increase in EPS from our 2004 normalized EPS.

At shown on slide 35, our consolidated Capex target is 1.3 to 1.4 billion for 2005, and that's up slightly from 2004. The consolidated Capex target represents approximately 16 to 18 percent of total revenues, a similar capital intensity compared to prior years.

Slide 36 provides a straightforward detailed breakdown of the inputs into TELUS' consolidated free cash flow as we define it. This free cash flow of more than $1.2 billion would be available for any changes in working capital; pension contributions that are in excess of pension expense; debt repurchase and redemptions; paying dividends; and of course, share repurchases under our normal course issuer bid.

Now turning to the next slide you can see the excellent progress we have made in the past 2 years towards meeting our leverage targets. Our long-term net debt to total capital target is in the range of 45 to 50 percent which we believe will provide us with an optimal weighted average cost of capital. Our net debt to EBITDA ratio target is less than or equal to 2.2 times. Because TELUS' current leverage measures are within our long-term policy guidelines this allows us to consider other uses for cash flow as outlined on the next slide.

TELUS recently announced an increase to our quarterly dividend to 20 cents, a 5-cent jump or a 33 percent increase. TELUS also established a going forward public dividend guideline targeting a dividend payout ratio of 45 to 55 percent of net earnings. This is designed to provide clarity to investors of our intention to consider future dividend increases as appropriate.

Yesterday we announced that TELUS has received regulatory approval from the Toronto stock exchange to allow purchasing up to 25.5 million TELUS shares under the normal course issuer bid commencing on Monday, December 20th. TELUS has also announced changes to the dividend reinvestment plan to bring it more into line with our peers and avoid dilution. Finally, as a result of the successful Verizon transaction, the liquidity of TELUS shares in the public market is up approximately 26 percent.

So to recap today's target presentation, on slide 38, we show a summary of TELUS' key 2005 financial targets on a consolidated basis. This shows revenue increasing 5 to 6 percent, EBITDA increasing 4 to 7 percent, EPS to increase 8 to 21 percent or even higher on a normalized basis as outlined earlier, Capex flat to an increase of 8 percent and free cash flow after restructuring payments to remain healthy at more than $1.2 billion.

These financial targets are consistent with and will be driven by our key priorities for TELUS in 2005 as outlined in slide 39. These are to enhance our leadership position in wireless, grow brand value through superior customer experience, embrace continual improvement in productivity, continue to leverage our investments in high-speed Internet through future friendly home services, accelerate our operational and financial performance in central Canada, and finally, to obtain a new collective agreement that reflects competitive industry dynamics.

In summary, on slide 41, our 2004 outlook for earnings has been revised upwards while all other measures remain on track. Our 2005 targets reflect strong revenue growth driven by TELUS Mobility, healthy wireless and high-speed Internet subscriber expansion, good EBITDA growth despite increased pension expenses and restructuring charges which TELUS accounts for above the EBITDA line, very strong EPS growth, and continued strong cash flows which allow TELUS to pursue shareholder value enhancing initiatives.

I'd now be happy to answer your questions so I'll turn the call back over to John. Thanks.

Question period
Back to 2005 Targets overview