Transcript Q4-11 - About TELUS

Q4 2011 TELUS
investor conference call
Robert McFarlane
EVP & Chief Financial Officer
Joe Natale
EVP & Chief Commercial Officer
Darren Entwistle
President & Chief Executive Officer
February 10, 2012
TELUS Forward Looking Statement
Today's presentation and answers to questions contain statements about
expected future events and financial and operating performance of TELUS that
are forward-looking. By their nature, forward-looking statements require the
Company to make assumptions and predictions 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 performance 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 2012 annual targets and LTE roll out plan), qualifications and
risk factors (including the ability over time to sustain dividend growth of circa
10% per annum with semi-annual dividend increases to 2013, and CEO three
year goals for EPS and free cash flow growth to 2013) referred to in the
Management’s discussion and analysis in the 2010 annual report, and in the
2011 quarterly reports. 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
2
practice of updating annual targets and guidance.
Agenda
 Wireless and wireline segment review
 Consolidated financial review
 Updates
 Divestiture of TELSK and acquisition of Wolf
 Pension update
 4G LTE launch
 Operational highlights
 Questions and Answers
3
TELUS 2012 corporate priorities
1. Deliver on TELUS’ future friendly brand promise by putting
customers first
2. Increase our competitive advantage through technology leadership
3. Drive TELUS’ leadership position in its chosen business and public
sector markets
4. Accelerate TELUS’ leadership position in healthcare information
technology
5. Strive to further improve our operational efficiency and effectiveness
6. Build our culture for sustained competitive advantage
Priorities consistent with national
growth strategy focused on wireless and data
4
2011 Consolidated scorecard
($B,
except EPS)
Revenue
(external)
Latest
guidance
Original
targets
Actual
results
Result to
original
$10.225 to
10.425
$9.925 to
10.225
$10.397

EBITDA
Unchanged
$3.675 to
3.875
$3.778

EPS – basic
Unchanged
$3.50 to 3.90
$3.76

Approx. $1.8
Approx. $1.7
$1.847

Capex
Actual results consistent to recent revenue and earnings guidance
Achieved 3 of 4 original consolidated targets and all 4 segment targets
Capex higher due to success of Optik TV and LTE build-out
5
Q4 2011 wireless financial results
($M)
Q4-10
Q4-11
Revenue (external)
1,337
1,424 
6.5%
471
500 
6.2%
EBITDA
EBITDA margins1
35.0%
34.9%

(0.1) pts
Capex
192
168

(13)%
EBITDA less capex
279
332 
19%
(total revenue)
1
change
Margins on network revenue in Q4/11 & Q4/10 were 39.2% and 39.3%, respectively
Revenue and EBITDA up more than 6%
Strong increase in cash flow despite LTE investments
6
Wireless subscriber results
Total
net adds
Postpaid
net adds
Wireless
subscribers
1.2M
119K
prepaid
16%
148K
129K
109K
postpaid
84%
6.1M
Q4-10 Q4-11
Q4-10 Q4-11
7.3M total
Postpaid net adds grow 36% y/y
Smartphones 53% of postpaid base up from 33% year ago
7
Marketing and retention
Q4-11
475
491
1.72%
change

3.4%
1.67%1

(0.05) pts
$388
$421

8.5%
COA expense
$184M
$207M

13%
Retention expense
$172M
$174M

1.2%
Gross adds (000s)
Churn
COA per gross add
1
Q4-10
Q4/11 churn of 1.60% when normalized for loss of Government of Canada contract
COA as percentage of lifetime revenue steady
at 11.9% due to ARPU growth and low churn
8
Blended ARPU analysis
Data
Voice
% of ARPU
$58.48
$59.08
16.01
21.65
27%
37%
42.47
37.43
73%
63%
Q4-10
Q4-11
Q4-10
Q4-11
ARPU increase of 1% led by data
Fifth consecutive quarter of ARPU growth
9
Wireless data revenue
$466M
$326M
$239M
Q4-09
Q4-10
Q4-11
Strong data revenue growth of 43%
Q4 data has increased to 36% of network revenue
10
Q4 2011 wireline financial results
($M)
Q4-10
Q4-11
Revenue (external)
1,217
1,266 
4.0%
370
374 
1.1%
Capex
EBITDA less capex
1
29.4%
28.6%
(0.8) pts
372
344

EBITDA margins
(total revenue)

EBITDA1
change
(7.5)%
(2)
30
n.m.
Q4/11 Adjusted EBITDA of $373M excludes $1M gain on purchase of control of Transactel
Revenue growth reflects strong subscriber growth
Lower capex due to reduced broadband expansion investments
11
TELUS TV subscribers
TELUS TV
net additions*
TELUS TV
subscribers*
509K
48K
Q4-10
56K
Q4-11
314K
Q4-10
Q4-11
Momentum continues with TV net adds up 17% y/y
Total subscribers up 62% surpassing 500,000
12
*
Includes both IP TV and TELUS Satellite TV subscribers
TELUS high-speed Internet net additions
75K
24K
39K
18K
Q4-10
Q4-11
2010
2011
Strong growth in HSIA reflects success of Optik brand
Net adds grow 33% in Q4 and 92% in 2011
13
TELUS network access line losses
Residential
Business
Q4-10 Q4-11
Q4-10 Q4-11
Total NAL Losses
2010
2011
-11K
-18K
-146K
-37K
-37K
-227K
Lowest total NAL losses since 2007
reflects success of bundling Optik services
14
TELUS total wireline subscriber* growth
107K
2005
2006
2007
2008
2009
2010
2011
-18K
-59K
-89K
* Includes NALs, Internet and TV
-69K
-69K
-123K
Total wireline subscriber net adds
positive for first time in 7 years
15
Q4 2011 consolidated financial results
($M, except EPS)
Q4-10
Q4-11
Revenue (external)
2,554
2,690

5.3%
EBITDA1
841
874

3.9%
EPS (basic)
0.70
0.76

8.6%
Capex
564
512

(9.2)%
EBITDA less capex
277
362

31%
Free cash flow
115
204

77%
1
change
Q4/11 Adjusted EBITDA of $373M excludes $1M gain on purchase of control of Transactel
Revenue growth and lower interest costs drive earnings
Increased FCF driven by increased EBITDA and lower capex
16
EPS continuity analysis ($)
Positive income tax-related adjustments
0.70
0.06
0.04
0.01
0.01
- 0.03
0.76
- 0.02
- 0.01
0.67
Excl.
Tax Adj.
Q4-10
reported
Lower
Lower
Pension Financing
& Restr.
costs
costs
Higher
Normalized
EBITDA1
Lower
Tax
Rates
Higher
Dep &
Amort
TELSK
write-down
Higher
O/S
shares
0.73
Excl.
Tax Adj.
Q4-11
reported
EPS growth reflects lower pension,
restructuring, and financing costs
1 Normalized
EBITDA excludes $0.06 combined for restructuring and pension costs.
17
TELUS International to divest non-core asset in Korea




TELUS International to divest TELSK, a 51% joint venture in Korea
TELSK is a specialized IT outsourcing company
Divestiture allows TELUS to efficiently repatriate cash from JV
Investment in TELSK has been profitable and successful investment
 2011 revenue of +$40M & contributed nearly $10M EBITDA
 Investment ~$14M in 2001, generated cumulative IRR of ~26%
 In expectation of sale:
 $19M write-down of assets in Q4 and selling price of approx $15M
 $9M offsetting credit to “Non-controlling Interest” with net loss of
$10M or 2 cents per share
Decision consistent with TI focus on
core outsourcing contact center businesses
18
TELUS acquires Wolf Medical Systems
 TELUS is committing to physician Electronic Medical Record
(EMR) market with acquisition of Wolf Medical Systems
 Addition of Wolf EMR (for physicians) rounds out TELUS’ portfolio
of world class health record solutions
 TELUS uniquely positioned to facilitate integration of health
records from the home, to the doctor’s office and to the hospital
 Acquisition consistent with 2012 corporate priorities
Wolf offers best-in-class EMR solutions and is aligned with TELUS’
healthcare vision of deploying technology for better healthcare
19
Defined Benefit pension assumptions update
2011
2012E*
5.25%
4.5%
7%
6.75%
Pension Expense / (Recovery)
$(34)M
$(12)M
Pension Funding
$298M
$172M
Discount rate
Long-term expected return
 Pension funding includes $200M and $100M discretionary
contributions made in January 2011 and 2012, respectively
Cash pension funding to decline by $126M, or 43% y/y
*See forward looking statement caution
20
Q4 2011 summary
 Consolidated revenue and EBITDA growth driven by both
wireless and wireline
 Continued strong subscriber growth in wireless and
wireline
 Strong free cash flow growth aided by reduced capex and
interest costs and higher EBITDA
 2012 targets reaffirmed
Strong finish to 2011 sets stage for
continued earnings and free cash flow growth
21
Evolution of wireless network with launch of 4G LTE
Broad urban coverage
 4G LTE services launched in major markets
 Vancouver, Edmonton, Calgary, Toronto (GTA), Montreal,
Ottawa, Quebec City, Kitchener, Waterloo, Hamilton,
Guelph, Belleville, Halifax, Yellowknife
 Leverages investments made in 4G HSPA+ network
 To reach more than 15 million Canadians by end of Q1, and
more than 25 million POPs by end of 2012
 Rural network build dependent on acquiring 700 MHz
spectrum in upcoming auctions
4G LTE services launched in 14 urban areas
with coverage expansion throughout 2012
22
Customer benefits of TELUS 4G LTE
Faster Speeds
 Expected average 12 to 25 Mbps (manufacturer’s rated
peak download speeds of up to 75 Mbps)
 Seamless transition to 4G DC-HSPA+/HSPA+ network
Advanced Devices
 Launching with complete range of device types
Clear & Simple data pricing
 Same range of rate plans on TELUS’ 4G networks
23
Future Friendly Home generating Optik momentum
High-speed Internet
TELUS TV
Residential NALs
80K
66K
44K
11K
24K
18K
38K
48K
56K
33K
-45K
-37K
Q4-09
Q4-10
-37K
Q4-11
TV and High-Speed Internet loading significantly exceeding
residential NAL losses for sixth consecutive quarter
24
New innovations for Optik TV
Optik TV for Xbox 360
 TELUS Optik TV first in world to offer customers
gesture & voice control ability with Kinect
 Xbox 360 as set top box
Optik on the go
 View select TV On Demand content on your
mobile device, anywhere in Canada
 Content library to grow throughout 2012
 Supported by TELUS’ 4G LTE network
25
Appendix – free cash flow
C$ millions
EBITDA
EBITDA adjustment – Transactel gain
Capex
Net Employee Defined Benefit Plans Expense (Recovery)
Employer Contributions to Employee Defined Benefit Plans
Interest expense paid, net
Income taxes received (paid), net
Share-based compensation
Restructuring payments (net of expense)
Free Cash Flow
Common and Non-voting shares issued
Dividends reinvested (DRIP)
Dividends
Acquisitions
2010
Q4
2011
Q4
841
-
874
(564)
(1)
(512)
-
(8)
(30)
(35)
(143)
(109)
28
9
(40)
(20)
23
115
8
52
6
204
(160)
-
5
-
Working Capital and Other
22
(179)
(31)
21
Funds Available for debt redemption
37
20
(70)
(30)
(33)
(10)
Net Issuance (Repayment) of debt
Decrease in cash
Appendix – definitions
 EBITDA: Earnings before interest, taxes, depreciation and amortization
 Capital intensity: capital expenditures divided by total revenue
 Cash flow: EBITDA less capex
 Free cash flow: EBITDA, adding Restructuring costs, net employee defined
benefit plans expense, cash interest received and excess of share-based
compensation expense over share-based compensation payments,
subtracting the non-cash gain on Transactel, cash interest paid, cash taxes,
capital expenditures, restructuring payments and employer contributions to
employee defined benefit plans.
 Cost of retention (COR): total costs to retain existing subscribers, often
presented as a percentage of network revenue