february 13, 2009 q4 2008 telus investor conference call robert mcfarlane evp & chief financial...
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February 13, 2009
Q4 2008 TELUSinvestor conference call
Robert McFarlaneEVP & Chief Financial Officer
Darren EntwistlePresident & CEO
TELUS forward looking statements
Today's session and our answers to questions contain statements about expected future events and financial and operating results of TELUS that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results and events to differ materially from that expressed in the forward-looking statements. Accordingly our comments are subject to the disclaimer and qualified by the assumptions (including assumptions for 2009 targets and share purchases), qualifications and risk factors referred to in our Management’s discussion and analysis in the 2007 annual report, the 2008 first, second and third quarter reports, and the 2008 fourth quarter Management’s review of operations, and in other TELUS public disclosure documents and filings with securities commissions in Canada (on www.sedar.com) and in the United States (on EDGAR at www.sec.gov). Except as required by law, TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance.
Agenda
Wireless and wireline segment review Consolidated financial review Updates
Operating Efficiency Programs HSPA network build-out Business Solutions TELUS international Pensions
2009 corporate priorities Questions and Answers
3
Wireless segment – Q4 2008 financial results
($M) Q4-07 Q4-08 Change
Revenue 1,111 1,188 6.9%
EBITDA (as adj. excl. restr. costs)1 491 498 1.4%
Capital expenditures 135 236 75%
Margins compressed YoY due to higher costs Capex reflects start of investment in new HSPA network build
1 EBITDA (as adjusted) excludes net-cash settlement feature recovery of $1M in Q4/07. Restructuring costs were nil and $6M in Q4/07 and Q4/08, respectively.
4
Prepaid 20%
Wireless subscribers
Postpaid 80%
Net additions
6.1 million total
4.9M
1.2M
Wireless subscriber results
prepaid
postpaid
Postpaid net adds increased 11% over last year
66%
Q4-07 Q4-08
148K162K
80%
5
TELUS wireless subscriber additions
6
Gross additions (000s)
Net additions (000s)
1,017 987
1,121
1,279 1,2931,434
418 431512
584 535 515
2002 2003 2004 2005 2006 2007
Record annual digital subscriber additions in 2008 up 14%
1,655
588
2008
* Digital net adds were 588K, net of the impact from the analogue network turndown of 27.6K subscribers.
561*
Net digital additions (000s)
Wireless ARPU
Data
Q4-08
$62.16
Voice
$63.70
Q4-07
Strong data growth partially offsets competitive voice decline
7
Q4-08Q4-07
11%
% of ARPU
11.177.95 12% 18%
Smartphones driving data growth
8
New BlackBerry Storm and MIKE Curve
BlackBerry Storm BlackBerry Curve MIKE
Wireless data revenue ($M)
55% annualized data growth driven by smartphone adoption
9
Q4-07 Q1-08 Q2-08 Q3-08 Q4-08
131147
159181
203
12.514 15
1618
% of network revenue
Wireless marketing and retention
Q4-07 Q4-08 change
Gross adds 421K 441K 4.8%
Churn 1.59% 1.62% 3 bps
COA per gross add $352 $388 10%
COA expense $148M $172M 16%
Retention expense $89M $98M 10%
Gross adds, COA / COR up YoY
10
Next generation wireless network update*
Vendors: Nokia Siemens Networks and Huawei Technologies Planning complete & network build commenced HSPA mobile phone call, video telephony call and data call
completed HSPA network investments boosted Q4 capex and included in
2009 consolidated capex target On track for launch and service by early 2010 HSPA network overlay provides optimal path to 4G LTE
11
Joint next generation wireless network overlay on track
* See forward looking statement caution
Operating efficiency program (OEP) update
Significant acceleration of restructuring costs in Q4-08
$38M in Q4-08 compared to $6M in Q4-07
$59M in 2008 compared to $20M in 2007
Managing costs in legacy parts of our business to maintain performance and free up resources for growth areas of business
Multiple OEP initiatives are continuing into 2009:
Compensation frozen for management
2009 estimated restructuring costs of $50M to $75M*
12
Operating efficiency initiatives enhancing operating performance and funding growth investments
* See forward looking statement caution
Wireline segment - revenue profile
($M) Q4-07 Q4-08 Change
Voice – Local 505 480 (5.0)%
Voice – Long Distance 179 173 (3.4)%
Data 466 528 13%
Other 69 85 23%
External Revenue 1,219 1,266 3.9%
Revenue up due to strong growth in data offsetting moderate declines in local and LD
13
Wireline segment – Q4 2008 financial results
($M) Q4-07 Q4-08 Change
Revenue 1,219 1,266 3.9%
EBITDA (as adj. excl. restr. costs)1 469 477 1.7%
Capital expenditures 337 395 17%
14
Underlying EBITDA up 2% when excluding restructuring
1 EBITDA (as adjusted) excludes net-cash settlement feature exp of $2M in Q4/07. Restructuring costs were $6M and $32M in Q4/07 and Q4/08, respectively.
1.2 million total
Internet subscribers
Dial-up10%
High-speed Internet net additions
Q4-07 Q4-08
1.1M
124K
Internet subscribers
26K
19K
15
High-speed90%
Net adds improved sequentially but down YoY
Q3-08
13K
Business Solutions wireline update
Continued success of industry vertical strategy and consultative customer approach
16
TELUS selected by Government of Quebec to deliver and manage province’s next generation data network Up to $900M contract for a term of seven to 10 years
Network will provide connections to 160 ministries and agencies and 350 health network institutions
Dilutive to earnings and FCF upfront / typical J Curve investment
Deployment planning underway
TELUS Health Solutions progressing well Successful integration of Emergis
2009 Federal budget provides $500M to Canada Health Infoway for greater use of e.health records
Budget goal is 50% of Canadians with e.health record by 2010
TELUS well positioned to compete on this opportunity
Moderate Network Access Line losses vs. peers
17
-3.2%
-5.0%
-7.4%
-3.6%
-9.7%
Q4 2007
Q4 2008
Other
1 Includes a weighted average of Bell, MTS and Bell Aliant.
TELUS compares favourably to North American peers due to business line growth
1
-8.1%
-9.3%
-6.6%
Consolidated – Q4 2008 financial results
($M excluding EPS) Q4-07 Q4-08 Change
Revenue 2,330 2,454 5.3%
EBITDA (as adj. excl. restr. costs)1 960 975 1.6%
EPS (reported) 1.23 0.90 (27)%
EPS (excl. income-tax related impacts) 0.79 0.80 1.3%
Capital Expenditures 472 631 34%
Underlying EBITDA up 1.6%, excluding restructuring costsCapex increase represents investments for l-t growth
18
1 EBITDA (as adjusted) excludes net-cash settlement feature expense of $1M in Q4/07. Restructuring costs were $6M and $38M in Q4/07 and Q4/08, respectively, or $0.02 and $0.08 per share.
$1.23
$0.04 $0.03
($0.06)($0.03)
$0.90
Lower 2008 Tax
Rates
Q4-07 Reported
Lower o/s shares & Dep’n
and Amort
Restr. costs
Financing costs & other
$0.10 Tax Adj.
$0.80Excl. Tax Adj.
EPS continuity
Underlying EPS up slightly
Q4-08 Reported
19
$0.44 Tax Adj.
$0.79Excl. Tax Adj.
$0.03
EBITDA (excl restr.
costs)
2008 consol. results compared to original targets
($B except EPS)2008 original
targets1
2008 results
result
Revenue 9.6 to 9.8 9.653
EBITDA 3.8 to 3.95 3.779
EPS (excl income-tax related impacts) 3.50 to 3.80 3.37
Capex Approx. 1.9 1.859
20
1 Provided on December 13, 2007
Plus achieved 3 of 4 wireless and wireline segmented targets
2009 consolidated guidance unchanged
($B except EPS) 2009 targets* Change
Revenue $10.025 to 10.275 4 to 6%
EBITDA $3.75 to 3.9 up to 3%
EPS (excl. income-tax related adj.) $3.40 to $3.70 up to 10%
Capex Approx. $2.05 10%
* Provided on December 16, 2008 / See forward looking statement caution
21
2009 consolidated and segmented targets unchanged
TELUS international update
Opening call centre in Nevada in Q2-09 to support call centre and business process outsourcing services to U.S. based clients
Adds Spanish language capability, which is increasingly prerequisite for U.S. accounts
Provides geographic diversity Complements TELUS’ recent minority investment in other
Spanish/English call centre operations in three Central American countries
Investments provide ability to serve U.S. corporate customers in multiple languages and in multiple time zones
22
Investments meet needs of U.S. corporate customers
TELUS’ funding position
TELUS’ strong balance sheet a result of longstanding commitment to prudent financial policies
23
Committed $2B credit facility does not expire until May 2012
Extended $700M 364-day bank facility to 2010
Strong position with sustainable cash flows and ample liquidity
Could term-out some existing short-term financing if conditions become advantageous
Strong investment grade credit ratings (BBB+/A-) with stable outlook
Set the industry standard for capital structure optimization
Pension assumptions update*
Minor year-end updates to 2009 pension assumptionsPension funding fully tax deductible
24
Defined Benefit (DB) 2008A 2009E
Discount rate 5.5% 7.25%
Long-term expected return 7.25% no change
Pension expense/(recovery) $(100M) $18M
Pension funding $102M $211M
* See forward looking statement caution
Q4 summary
Consolidated revenue growth driven by wireless and wireline data Postpaid net adds increased 11% and represented 80% of net adds Continued wireline business traction with large public sector contracts
and health opportunities As promised, demonstrated cost control & accelerated wireless and
wireline restructuring investments Capex increase due to HSPA and broadband investments Extended 364-day bank facility to 2010 / liquidity > $1B maintained Strong balance sheet and longstanding adherence to prudent financial
policies underpins credit ratings No change to 2009 consolidated and segmented guidance
25
2009 corporate priorities
Execute on TELUS’ broadband strategy, leveraging our investments in leading wireline and wireless networks to deliver winning solutions for our customers
Increase the efficiency of our operations to improve TELUS’ cost structure and economic performance
Outpace the competition and earn the patronage of clients through an engaged TELUS team
26
Building on strength to create future growth and value
Questions?
investor relations 1-800-667-4871telus.com ir@telus.com
Appendix – Free cash flow2008Q4
2007Q4C$ millions
EBITDA 953 937Capex (472) (631)Interest expense paid (includes income tax interest income) (138) (192)Cash income taxes; and other 120 (2)Non-cash portion of share based compensation 11 13
Restructuring payments (net of expense) 3 30Net employee defined benefit plans expense (recovery) (23) (27)Employer contributions to employee defined benefit plans (25) (26)Donations and securitization fees included in other expense (9) (8)Free Cash Flow (before share based comp payment) 420 94Share based compensation paid (41) (33)Free Cash Flow 379 61Purchase of shares for cancellation (NCIB) (147) (5)Dividends (270) (144)
Working Capital and Other 17 (8)Funds Available for debt redemption (21) (96)A/R Securitization (50) 50Net Issuance (Repayment) of debt 90 14Increase (Decrease) in cash 19 (32)
EBITDA: earnings, after restructuring and workforce reduction costs, before
interest, taxes, depreciation and amortization
Capital intensity: capex divided by total revenue
Cash flow: EBITDA less capex
Free cash flow: EBITDA, adding Restructuring and workforce reduction costs, net
employee defined benefit plans expense, cash interest received and excess of
share compensation expense over share compensation payments, subtracting
cash interest paid, cash taxes, capital expenditures, cash restructuring payments,
employer contributions to employee defined benefit plans, and cash related to
Other expenses such as charitable donations and securitization fees
Cost of retention (COR): total costs to retain existing subscribers, often presented
as a percentage of network revenue
Appendix - definitions
TELUS definitions for non-GAAP measures
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