Transcript Q4 2008 TELUS investor conference call Robert McFarlane Darren Entwistle

Q4 2008 TELUS
investor conference call
Robert McFarlane
EVP & Chief Financial Officer
Darren Entwistle
President & CEO
February 13, 2009
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 forwardlooking 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
1,111
1,188 
6.9%
EBITDA (as adj. excl. restr. costs)1
491
498 
1.4%
Capital expenditures
135
236 
75%
Revenue
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.
Margins compressed YoY due to higher costs
Capex reflects start of investment in new HSPA network build
4
Wireless subscriber results
Wireless subscribers
Net additions
prepaid
162K
148K
1.2M
Prepaid
20%
postpaid
80%
Postpaid
80%
66%
4.9M
Q4-07
Q4-08
6.1 million total
Postpaid net adds increased 11% over last year
5
TELUS wireless subscriber additions
Gross additions (000s)
1,655
Net additions (000s)
1,434
Net digital additions (000s)
1,279
1,293
1,121
1,017
418
2002
987
431
2003
512
2004
584
2005
535
2006
515
2007
588
561*
2008
* Digital net adds were 588K, net of the impact from the analogue network turndown of 27.6K subscribers.
Record annual digital subscriber additions in 2008 up 14%
6
Wireless ARPU
Data
Voice
% of ARPU
$63.70
$62.16
7.95
11.17
12%
11%
18%
Q4-07
Q4-08
Q4-07
Q4-08
Strong data growth partially offsets
competitive voice decline
7
Smartphones driving data growth
BlackBerry Storm
BlackBerry Curve MIKE
New BlackBerry Storm and MIKE Curve
8
Wireless data revenue ($M)
% of network revenue
203
181
131
147
159
18
12.5
Q4-07
14
Q1-08
15
Q2-08
16
Q3-08
Q4-08
55% annualized data growth driven by smartphone adoption
9
Wireless marketing and retention
Q4-07
Gross adds
Churn
COA per gross add
COA expense
Retention expense
Q4-08
change
421K
441K

4.8%
1.59%
1.62%

3 bps
$352
$388

10%
$148M
$172M

16%
$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
Joint next generation wireless network overlay on track
* See forward looking statement caution
11
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 $75M*
Operating efficiency initiatives enhancing operating
performance and funding growth investments
* See forward looking statement caution
12
Wireline segment - revenue profile
($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%
1,219
1,266

3.9%
External Revenue
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
1,219
1,266 
3.9%
EBITDA (as adj. excl. restr. costs)1
469
477 
1.7%
Capital expenditures
337
395 
17%
Revenue
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.
Underlying EBITDA up 2% when excluding restructuring
14
Internet subscribers
High-speed Internet
net additions
Internet subscribers
Dial-up
10%
26K
124K
19K
13K
Q4-07
Q3-08 Q4-08
1.1M
High-speed
90%
1.2 million total
Net adds improved sequentially but down YoY
15
Business Solutions wireline update
 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 $500M to Canada Health Infoway for greater
use of e.health records
 Budget goal is 50% of Canadians with e.health record by 2010
 TELUS well positioned to compete on this opportunity
Continued success of industry vertical strategy
and consultative customer approach
16
Moderate Network Access Line losses vs. peers
1
Other
-3.2%
-3.6%
-5.0%
-6.6%
-7.4%
Q4 2007
Q4 2008
1 Includes
-9.7%
-8.1%
-9.3%
a weighted average of Bell, MTS and Bell Aliant.
TELUS compares favourably to North American
peers due to business line growth
17
Consolidated – Q4 2008 financial results
($M excluding EPS)
Q4-07
Q4-08
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%
Revenue
Change
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.
Underlying EBITDA up 1.6%, excluding restructuring costs
Capex increase represents investments for l-t growth
18
EPS continuity
$1.23
$0.44
Tax Adj.
 $0.03
 $0.03
$0.90
 $0.04
($0.06)
$0.10
Tax Adj.
($0.03)
$0.80
Excl.
Tax
Adj.
$0.79
Excl.
Tax
Adj.
Q4-07
Reported
EBITDA
(excl restr.
costs)
Lower
2008 Tax
Rates
Lower o/s
shares & Dep’n
and Amort
Restr.
costs
Financing
costs & other
Q4-08
Reported
Underlying EPS up slightly
19
2008 consol. results compared to original targets
($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

1 Provided on December 13, 2007
Plus achieved 3 of 4 wireless and wireline segmented targets
20
2009 consolidated guidance unchanged
($B except EPS)
2009 targets*
Revenue
$10.025 to 10.275
4 to 6%
$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%
EBITDA
Change
* Provided on December 16, 2008 / See forward looking statement caution
2009 consolidated and segmented targets unchanged
21
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
Investments meet needs of U.S. corporate customers
22
TELUS’ funding position
 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
TELUS’ strong balance sheet a result of longstanding
commitment to prudent financial policies
23
Pension assumptions update*
Defined Benefit (DB)
Discount rate
Long-term expected return
Pension expense/(recovery)
Pension funding
2008A
2009E
5.5%
7.25%
7.25%
no change
$(100M)
$18M
$102M
$211M
Minor year-end updates to 2009 pension assumptions
Pension funding fully tax deductible
* See forward looking statement caution
24
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 > $1B maintained
 Strong balance sheet and longstanding adherence to prudent financial
policies underpins credit ratings
 No change to 2009 consolidated and segmented guidance
25
2009 corporate priorities
 Execute on TELUS’ broadband strategy, leveraging our
investments in leading wireline and wireless networks to deliver
winning solutions for our customers
 Increase the efficiency of our operations to improve TELUS’ cost
structure and economic performance
 Outpace the competition and earn the patronage of clients
through an engaged TELUS team
Building on strength to create future growth and value
26
Questions?
investor relations
1-800-667-4871
telus.com
[email protected]
Appendix – Free cash flow
C$ millions
EBITDA
2007
Q4
2008
Q4
953
937
Capex
(472)
(631)
Interest expense paid (includes income tax interest income)
(138)
(192)
120
(2)
11
13
3
30
Net employee defined benefit plans expense (recovery)
(23)
(27)
Employer contributions to employee defined benefit plans
(25)
(9)
(26)
(8)
420
(41)
379
(147)
(270)
94
(33)
Cash income taxes; and other
Non-cash portion of share based compensation
Restructuring payments (net of expense)
Donations and securitization fees included in other expense
Free Cash Flow (before share based comp payment)
Share based compensation paid
Free Cash Flow
Purchase of shares for cancellation (NCIB)
Dividends
Working Capital and Other
Funds Available for debt redemption
A/R Securitization
Net Issuance (Repayment) of debt
Increase (Decrease) in cash
17
61
(5)
(144)
(8)
(21)
(50)
90
19
(96)
50
14
(32)
Appendix - definitions
 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
TELUS definitions for non-GAAP measures