events archive

2006 Targets investor conference call

John Wheeler:Good morning and thank you for joining us today for our investor call focused primarily on the key financial and operating targets for 2006. A news release was issued earlier this morning. The release and the slides for this call are available on the investor section of the TELUS website under TELUS.com/investors. The formats for today's call will be opening comments by Executive Vice President and CFO Robert McFarlane. This will be followed by a question and answer session.

Let me now direct your attention to slide 2. The forward-looking nature of this presentation, including statements about future financial and operational guidance and targets and answers to questions are subject to risks and uncertainties. Accordingly, TELUS' actual results could differ materially from the statements made today. I ask that you read our legal disclaimers and refer you to the risk factors and assumptions outlined in our public disclosure in Canada and the United States, including today's news release, interim quarterly reports and other TELUS filings with Securities Commissions in Canada and the United States. I will now turn the call over to Bob and refer you to slide three.

Bob McFarlane: Thanks, John, and thanks to everyone listening on the phone or on the Internet today, especially given this busy time of the year. As shown, the agenda today will provide an update on our existing 2005 guidance and several recent developments, a detailed review of the 2006 targets, and also I will make some summary comments to conclude.

Turning to slide 4, we are announcing five updates to our 2005 guidance today while reaffirming the other 10 items. Our guidance was last updated in the first part of November prior to the ratification of our collective agreement with the TWU. We are further tightening our 2005 consolidated EBITDA guidance range to $3.275 to 3.325 billion, which is consistent with the tightening of our wireline EBITDA which is now expected to be in the range of $1.84 to 1.865 billion. These changes reflect the certainty provided by the end of the labour disruption by the end of November, in addition to an updated estimate for restructuring costs this year of approximately $50 million.

We are also tightening the range for our non-incumbent revenues generated in Ontario and Québec and expecting this to be at the lower end of the previous range. In addition, we are positively revising our expectation for high-speed Internet subscriber growth to more than 65,000 net additions. Wireless net additions guidance has been adjusted upwards to greater than 550,000, reflecting our participation in the continued strength in the Canadian wireless market.

Beginning on slide 5, let me summarize for you the current updated guidance compared to the original targets for 2005, which I set out for you at this time last year, and let me highlight how we have done. As you can see, we rate across the board check marks for wireless with three out of four actually significantly exceeding our original targets, reflecting the accelerating growth and financial performance of both the Canadian wireless industry, and of course at TELUS. You also note the tremendous accomplishment of significantly exceeding both our wireless net adds, as well as our EBITDA targets, despite the higher associated costs of acquisition caused by such strong subscriber loading.

On slide 6, we compare our latest 2005 guidance for wireline versus the original targets. This is also notable with five out of six items either achieving or exceeding original targets despite the negative impact of the recently ended four-month labour disruption and growing competition. This shows the resilience of our wireline operation and the ongoing successful execution of our national data focus strategy. Although TELUS is striving to ramp up capital expenditures delayed due to the Labour disruption, we do not expect to expend the $950 million to $1 billion original originally anticipated number. While Capex for 2005 could be as high as $925 million, it remains to be seen if we can achieve this due to the limited amount of time between the resolution and return to work after the strike in western Canada, and of course the two weeks to the end of the year. So we are not now revising existing wireline Capex guidance, despite striving to exceed slightly more than the $900 million dollar number.

Slide 7 again compares original targets to our latest guidance on a consolidated basis. What is notable is that we are on track to exceed our original targets across the board based primarily on the strength of our wireless results. This is notable when you reflect that this has been accomplished despite incurring a four-month labour disruption.

Slide 8 lists our six corporate priorities for 2005 that were set publicly at the start of this year. Our wireless results remain truly world class and therefore easily deserve a checkmark. The notable improvement in profitability for a non-incumbent business ahead of plan in 2005 also qualifies for a check mark. With the recent ratification of the new negotiated collective agreement, we can finally put a solid checkmark down for what has been a difficult-to-achieve priority over the last several years. Perhaps more importantly is that we obtain an agreement which satisfies all objectives we originally set out to achieve in order to have the flexibility to provide superior service on a fully competitive footing in the future.

On the customer service side, we continue to maintain a world-class low churn rate, reflecting the superior service experience which our wireless subscribers enjoy. We also made notable improvements in our high-speed Internet churn rate and progress was maintained despite the four-month labour disruption. While our incumbent wireline service levels in Alberta and B.C. were obviously challenged by the four-month labour disruption and we were resource-constrained in our ability for some installation and repair, the commitment of team TELUS members across the country meant that customer service levels were significantly better than expected during the disruption. In fact, many of our call center service metrics were above pre-strike levels. The TELUS experience in this regard may be unprecedented for just how well service levels were maintained during a major labour disruption.

While somewhat delayed by the Labour disruption, with the recent announcement of a phased launch of TELUS TV, we have made progress of pushing new applications and solutions to customers to support data growth by leveraging our investment in high-speed Internet. And while we have made some successes in improving productivity as evidenced by continued consolidated margin improvement, with the flexibility afforded to us in the new collective agreement, we are now in a much better position to drive ongoing improvements in productivity and customer service.

Turning to slide 9, at the end of November, we announced the merger of wireless and wireline operations -- TELUS Mobility and TELUS Communications - into a single operating structure. This merger was consistent with TELUS' national growth strategy to provide integrated solution that differentiate TELUS in a meaningful and sustainable fashion from our competitors. The change positions TELUS to leverage the ongoing convergence between wireless and wireline technology and TELUS' continual focus on operating efficiency and effectiveness. TELUS Mobility and TELUS Communications are in the process of merging into a structure that incorporates TELUS' customer-facing business units, technology infrastructure and operations, and shared services. We have a significant opportunity to harness our broad capabilities to more effectively compete and differentiate ourselves from our telecommunications and cable TV competitors. This merger will help ensure that we are more than ever one team united behind one strategy and defined by one brand. However, we recognize the importance from a management perspective and investor valuation, of the need for separate operational and financial reporting, so this capability is going to be maintained.

On slide 10, you can see the structure and identity of the executive leadership team we announced last month. We are simplifying our structure, consistent with our strategic imperative to go to the market with one brand as one team. We now have three customer-facing units focused on the consumer, business and wholesale markets in terms of providing integrated wireless and wireline solutions. As a result, the number of direct executive vice president reports to Darren has now been reduced from twelve to nine.

Now let's turn to TELUS' targets for 2006, starting on slide 12. Let me begin by covering some important considerations and assumptions that underlie the TELUS 2006 targets on these next two slides. We expect economic growth to be consistent with the Conference Board of Canada projections -- that is, GDP growth -- of 3.1% for Canada with provincial growth rates ranging between 2.8 to 3.2% in the four main provinces in which we operate -- B.C., Alberta, Ontario and Québec. We expect increased competitive activity from cable TV and IP telephony players in both the consumer and business markets. We expect the Canadian wireless industry penetration growth to remain strong and to be similar to that expected for all of 2005. We also assume that the CRTC's price cap regulatory regime will continue for all of 2006.

We're projecting that we will have approximately $100 million of restructuring and work force reduction costs in 2006, and this compares to approximately $50 million expected for 2005. With the actuarial pension assumption on a discount rate for our pension liabilities being reduced to 5.25% from this year's 6%, the accounting GAAP pension expense is expected to increase by approximately $40 million in 2006.

Continuing to slide 13, we are expecting an effective tax rate of approximately 35% in 2006. Depending on the number of options exercised and the number of shares repurchased as part of our new normal course issuer bid, we expect average shares outstanding of somewhere between 340 to 350 million next year. I will update you on the status of our share repurchase activity and future plans in a few minutes.

And lastly, a review of TELUS' tax position indicates that cash income tax payments are now expected to commence in 2008 rather than 2007. This provides us with improved free cash flow in 2006 than previously expected.

Based on these considerations and assumptions, which are of course subject to some risks and uncertainties as John highlighted at the outset of our presentation, let's turn to slide 14 and begin looking in detail at our 2006 targets.

Turning now to our wireless operations starting on slide 14, the wireless revenue target for 2006 is $3.775 to 3.825 billion, representing excellent growth of 15 to 16%. 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. Strong expected wireless data revenue growth supports our robust outlook for ARPU.

As highlighted on slide 15, we are targeting to add more than 550,000 new subscribers in 2006, or approximately the same outlook as we have for all of 2005. This would represent an expected 12% increase in our wireless subscriber base to more than 5 million subscribers. With the acceleration of the Canadian wireless market growth in 2005, we see the industry on track for another year of strong subscriber net additions of which we will ensure we get our fair share. However, it's apparent from recent developments that competition remains fierce as new reseller and MVNO operators enter the market and the established players continue to compete vigorously.

On slide 16, you can see that we are again expecting significant profitability growth for wireless in 2005. The EBITDA target of $1.7 to 1.75 billion implies growth of 18 to 22%. EBITDA is being driven by network revenue growth, continued low churn and increased scale efficiencies. This target again reflects our long-standing focus on profitable subscriber growth and cash flow generation with an overriding focus on generating a superior return on our significant wireless investments, and thereby create considerable shareholder value.

Turning to slide 17, we are targeting wireless Capex of approximately $450 million in 2006. This represents maintaining a best-in-class Capex intensity of about 12% measured as a percent of total revenue.

Slide 18 further illustrates the continued expansion of wireless profitability. Strong expected margins in the 45 to 46% range based on total revenue, combined with stable Capex intensity are expected to lead to an impressive cash flow yield of 33 to 34%. This would represent a solid 5- to 6-point cash flow yield improvement in the last two years.

Finally on this subject, you can see on slide 19 that TELUS' 2006 expected wireless cash flow yield is best in class when compared against our large North American peers. This is a very important valuation consideration for TELUS investors given the high proportion of wireless to overall consolidated TELUS results.

On slide 20 we show the 2006 wireless share consolidated EBITDA and cash flow -- TELUS mobility is expected to generate roughly half of consolidated EBITDA next year as shown on the left. And more impressively, due to the high-growth profile and lower capital requirements in our wireless business, the wireless operation is expected to generate increasing and significant simple cash flow of $1.25 to 1.3 billion. As shown in the pie on the right, this means that approximately 63% of the cash flow generated at TELUS should be coming from our high-growth wireless business in 2006. Again, this has significant valuation implications for TELUS' securities when compared with many of our telco peers and certain cable TV companies.

Let's now turn to our wireline operations, starting on slide 21. Consistent with our business model, we are targeting 2006 wireline revenue of $4.825 to 4.875 billion. That's flat to slightly higher than the range estimated for this year's guidance. New revenue streams from our Future Friendly home initiatives and non-incumbent growth are expected to be offset by increased competition, particularly in the consumer segment, as well as the continuing trend of wireless and Internet technological substitution for traditional wireline voice services. This later trend does not help our wireline results, although it should be emphasized, we derive a net benefit from wireless substitution on a consolidated basis.

On slide 22, you can see TELUS' wireline EBITDA both before and after restructuring and work force reduction costs. Our official wireline EBITDA target after these restructuring and work force reduction costs of $100 million is $1.8 to 1.85 billion; flat to down 3%. This is shown in the chart on the left. Keep in mind that these restructuring charges are akin to investments which generally have paybacks in an 18 to 24 month time frame. Note that in addition to the $50 million in higher restructuring charges, the 2006 wireline EBITDA target is impacted by approximately $40 million of increased pension expenses in 2006 due to the discount assumption change mentioned earlier. The chart on the right-hand side of the page shows that in 2006, if one excludes restructuring costs, the wireline business is generating between $1.9 and 1.95 billion, which is roughly flat to up $50 million over 2005.

Let's now go to slide 23. Embedded within TELUS' wireline guidance is our growing out-of-reach and non-incumbent operation focused on providing data and IP services to businesses in the Ontario and Québec marketplace. We are targeting non-incumbent revenue growth of 3 to 11%, which corresponds to a range of $650 to 700 million in 2006. More importantly, EBITDA is targeted to improve to a range of $25 to 40 million, which represents a significant increase over an estimated $18 million in 2005. 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 offers.

Slide 24 shows that we're targeting high-speed Internet net additions of more than 100,000 next year, which is integral to our Future Friendly home strategy. This represents an anticipated 13% increase in our high-speed subscriber base. We intend to regain our fair share of the new Internet loadings in 2006 as we rebuild momentum following a slowdown in part of 2005 due to the impacts of our four-month labour disruption which limited our marketing and fulfillment capacities.

As shown on the next slide, wireline capital expenditures are expected to be $1.05 to 1.1 billion in 2006, which is a 17 to 22% increase. The increase largely reflects the deferral of capital investments originally intended for 2005 which were delayed due to the labour disruption in Western Canada. Normalizing for the $100 million or so in deferred Capex, Capex would be roughly with last year, which implies a stable Capex intensity ratio. TELUS continues to make significant investments in network infrastructure to improve our broadband capability, enhance our customer service and network reliability, develop new applications and make investments in our internal processes and systems.

So what does this all mean for TELUS on a consolidated basis? Our consolidated 2006 targets start on slide 26. We're targeting 2006 revenue of $8.6 to 8.7 billion, a jump of roughly $50 million, or a robust 6 to 7% year-over-year. 2006 EBITDA after restructuring and work force reduction costs is expected to be the $3.5 to 3.6 billion. This represents healthy annual growth of 6 to 9%, driven by wireless. This slide illustrates the upward trajectory on both consolidated revenue and EBITDA over the last four years. As you can see, we are building an attractive record for growth.

Let's look at the EPS trend, starting on slide 27. In 2006, good EBITDA growth, combined with lower financing costs as a result of reduced debt levels, generates a targeted earnings-per-share in a range of $2.40 to 2.60 per share. This results in an impressive 23 to 33% increase at the bottom line over that expected for 2005. However, due to some fairly significant non-recurring events in 2005, I will try to provide a better indication of the normalized growth rates on the next slide.

Slide 28 is meant to provide some detail on the incremental line items affecting 2006 EPS. Guidance for 2005 EPS is $1.90 to 2.00, which includes an estimated $0.09 of non-recurring unfavorable financing costs due to an approximate $0.06 in the fourth quarter for the early redemption of TELUS' 7.5% 2006 notes on December 1, and an earlier $0.03 charge for adverse litigation exposure related to an old predecessor, B.C. Tel, bond lawsuit. 2005 EPS also benefited from $0.21 related to the favorable settlement of tax matters in the first nine months of the year. Our 2005 guidance also includes the estimated unfavorable impact from the labour disruption of about $0.22, which I'm sure we'll all agree, should be a non-recurring event. This means the normalized base EPS in 2005 is roughly $2.00 to 2.10 as shown by the $2.05 green bar.

Our projected 2006 EBITDA growth provides $0.32 to 0.50 of after-tax EPS growth. We expect lower financing costs due to lower debt balances to provide a positive 17% impact in EPS in 2006. In addition, I have separated out the $0.09 after-tax EPS impact of the incremental $50 million from restructuring costs anticipated in 2006, and $0.07 for the pension expense increase. The change from other items is 0 to $0.07 primarily reflects variability related to average shares outstanding which in turn is dependent on the timing and extent of the normal course issuer bid, lower large corporation taxes, offset by higher depreciation and amortization charges and higher other expenses principally due to nonrecurring gains realized in 2005. The end result is our 2006 EPS range of $2.40 to 2.60. This end result still represents a significant 17 to 27% expected increase in EPS on such a normalized basis.

Turning to slide 29, let's look at TELUS' free cash flow track record. This is defined as after Capex, but before payment of dividends. 2006 clearly keeps the positive trend in free cash flow intact. Despite higher Capex, free cash flow is expected to increase 7 to 14%. Some additional detail on free cash flow is provided in the appendix to this presentation for those interested.

Slide 30 provides an overall summary of our 2006 targets. When you scan these growth rates, I believe it's fair to say that the 2006 targets build upon our track record of outstanding growth and compare favorably on a global basis for telecom companies.

Now before I turn the call over to questions, I thought we would take a few moments to provide a return of capital update and provide our new corporate priorities for 2006. Slide 31 gives you further details with regard to our recent share buyback program activity. Since the last time we spoke on November 10 as part of our third-quarter conference call, we've continued to be active in the market, purchasing some 3.6 million shares for $159 million at an average price of $44.74. As of December 15, we have repurchased a total of 21.5 million shares, or 84% of the authorized program which was to end on December 19 of this year. But as announced earlier today, we are renewing our NCIB and intend to continue with significant share repurchases in 2006.

Turning to slide 32, with all the focus on dividend yield in the telecom space, I thought it would be insightful to compare the implied return of capital in 2005 for TELUS to that of some of our telecom peers. Looking at share repurchases during the trailing 12-month period in combination with the most recent dividend on an annualized basis, you can see that at 8.3%, TELUS is well ahead of even its closest telecom peer, MTS, in total shareholder return. Keep in mind that in 2005, we also redeemed our 7.5% notes in the approximate amount of $1.6 billion. So we have made tremendous progress in both return in capital to our shareholders, while improving our debt positions.

Slide 33 summarizes TELUS' ongoing initiatives to return capital and create value for investors. As just mentioned, TELUS early redeemed $1.6 billion in notes on December 1. This is modestly NPV accretive to TELUS and has coincided with three recent credit rating upgrades to BBB+ or the equivalent. TELUS has financed the bond redemption predominantly through cash-on-hand, but also with proceeds from additional accounts receivable securitization. At our third quarter earnings release, we announced a 37.5% increase for the quarterly dividend to $0.275 per share effective for the January 1, 2006 payment. This is consistent with our dividend growth approach. Last year, TELUS set a payout ratio target guideline of 45 to 55% of sustainable net earnings on a prospective basis. This is our second dividend increase since establishing that guideline and it reflects our confidence in TELUS' ability to continue to grow EPS on a sustainable basis.

Year-to-date, we have also been very active under our normal course issuer bid, as I just explained earlier. And today, we announced the new NCIB effective December 20, which authorizes TELUS to repurchase up to 12 million common and 12 million non-voting shares, or up to slightly more than 7% of the total shares outstanding.

The next slide, slide 34, outlines the 2006 corporate priorities that we believe will continue to focus TELUS in executing our growth strategy for continued success. They are as follows. Firstly, to advance TELUS' leadership position in the consumer market through initiatives including TELUS' Future Friendly suite of data applications for the home and our customers on the move, and best-in-class customer loyalty from an unparalleled customer experience that is cost-effective. Secondly, to advance TELUS' position in the business market by, amongst other actions, providing innovative solutions for our chosen verticals that enhance the competitiveness of our customers and their commitment to TELUS. To advance TELUS' position in the wholesale market by initiatives such as strengthening our North American reach and success by enhancing our IP leadership position. The next priority is to drive improvements and productivity, and service excellence by capturing value from TELUS' investments in technology leadership and in systems and processes that streamline our operations. The third priority is to strengthen the spirit of the TELUS team and the brand by continuing to build our business ownership culture by leveraging best practice across our company and embrace a philosophy of our business, our customers, our team, my responsibility. And finally, to develop the best talent in the global communications industry and ensure that TELUS is the best place in Canada to work.

Now, finally, let me conclude on slide 35. In summary, TELUS' 2005 outlook has been tightened for non-incumbent revenue, wireline and consolidated EBITDA, an increase for wireless and Internet net adds primarily reflecting the end of the labour disruption in western Canada. The 2006 targets announced today reflect strong revenue growth, EBITDA growth driven by wireless, significant EPS growth driven by strong EBITDA growth and lower financing costs, significant free cash flow generation, as well as continued subscriber growth. With the labour disruption in western Canada we experienced in 2005 now behind us, and the ratification of a best-in-class labour agreement, TELUS intends to execute on our targets and priorities for 2006, consistent with our growth model for profits and return on capital.

Now I would be happy to take your questions, so I'll turn the call back to John to moderate the Q&A portion of today's call.

Question period
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