Robert McFarlane EVP & Chief Financial Officer Joe Natale EVP & Chief Commercial Officer
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Transcript of Robert McFarlane EVP & Chief Financial Officer Joe Natale EVP & Chief Commercial Officer
Robert McFarlaneEVP & Chief Financial Officer
Joe NataleEVP & Chief Commercial Officer
Darren EntwistlePresident & Chief Executive Officer
May 5, 2011
Q1 2011 TELUSinvestor conference call
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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 2011 annual guidance), qualifications and risk factors (including those for semi-annual dividend increases to 2013) referred to in the Management’s discussion and analysis in the 2010 annual report and in the 2011 first quarter report. 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.
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Agenda
Wireless and wireline segment review
Consolidated financial review
Updates
Regulatory
Operations
Dividend
Questions and Answers
Q1 2011 wireless financial results
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Strong revenue and EBITDA growth of over 11% driving strong cash flow growth of 9%
($M) Q1-10 Q1-11 change
Revenue (external) 1,177 1,308 11%
EBITDA 495 551 11%
EBITDA margins1
(total revenue)41.8% 41.8% no change
Capex 59 76 29%
EBITDA less capex 436 475 8.9%
1 Margins on network revenue in Q1/11 and Q1/10 were 45.8% and 45.5%, respectively
Wireless subscriber results
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Net additions impacted by loss ofFederal Government subscribers
prepaid18%
Wireless subscribers
postpaid82%
Postpaidnet adds
7M total
5.8M
1.2M
Q1-10
65K
52K
Q1-11
Totalnet adds
Q1-10
51K
32K
Q1-11
Wireless data revenue
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Data revenue growth accelerated to 44% driven by strong smartphone adoption
Q1-10
$254M
Q1-11
$366M
$204M
Q1-09
Marketing and retention
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Record gross addsHigher churn and COA/COR expense reflect increased
competition and increased smartphone loading
Q1-10 Q1-11 change
Gross adds (000s) 356 388 9.0%
Churn 1.55% 1.70% 0.15 pts
COA per gross add $322 $348 8.1%
COA expense $114M $135M 18%
Retention expense $123M $147M 20%
Blended ARPU analysis
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ARPU up 3.7% y/y as strong datagrowth more than offsets voice decline
Data
Q1-11
$57.89 Voice$55.80
Q1-10
% of ARPU
Q1-11Q1-10
24%
76% 69%
31%13.14
42.66 40.18
17.71
Q1 2011 wireline financial results
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Wireline results reflect Transactel transaction, continued erosion of legacy services and strong growth in Optik TV
($M) Q1-10 Q1-11 change
Revenue (external) 1,200 1,223 1.9%
EBITDA1 448 435 (2.9)%
EBITDA margins(total revenue)
36.2% 34.4% (1.8) pts
Capex 252 333 32%
EBITDA less capex 196 102 (48)%
1 Q1-11 Adjusted EBITDA of $419M excludes $16M non-cash gain from TELUS’ acquisition of Transactel
TELUS’ acquisition of Transactel
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Acquisition complements and diversifies contact centre capabilities
TELUS increased its economic interest from approx 30 to 51% of Transactel, a business process outsourcing and call centre company with facilities in Central America
Enhances TELUS International’s business process outsourcing capacity, particularly Spanish / English-language capabilities
Allows for multi-site redundancy Clients include variety of third party MNOs in various industries
Financial results included in wireline segment effective Feb. 1 Recognized a gain of $16 million on pre-existing minority interest in Q1-11 in
“Other operating income” Economic interest to be increased to 95% in Q2-11
Normalized wireline EBITDA
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Normalized wireline EBITDA down 4%
($M) Q1-10 Q1-11 change
EBITDA 448 435 (2.9)%
Gain on Transactel acquisition
- (16)
Adjusted EBITDA 448 419 (6.5)%
One-time benefits (10) -
Normalized EBITDA 438 419 (4.3)%
TELUS TV subscribers
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Strong momentum continues with TV net adds up 52% y/yand total subscribers up 80%
Q1-10
29K
44K
Q1-11
TELUS TV net additions*
TELUS TV subscribers*
* Includes both IP TV and TELUS Satellite TV subscribers
Q1-11Q1-10
199K
358K
TELUS high-speed Internet results
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Strong growth in HSIA net adds reflects success of enhanced Optik service bundle since launch in June 2010
Q1-10
3K 3K
Q2-10
15K
Q3-10 Q4-10 Q1-11
18K16K
TELUS network access lines
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Residential line losses improved 34% y/yBusiness line increase reflects gain in wholesale customers
Q1-11
Q1-11
-50K
-33K
-8K
2KQ1-10Q1-10
BusinessResidential
Q1 2011 consolidated financial results
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Strong revenue and earnings growth driven by wireless
($M) Q1-10 Q1-11 change
Revenue (external) 2,377 2,531 6.5%
EBITDA1 943 986 4.6%
EPS (basic) 2 0.85 1.01 19%
Capex 311 409 32%
EBITDA less capex 632 577 (8.7)%
2 Q1-11 Adjusted EPS of $0.97 for Q1-11 excludes after-tax Transactel gain of $0.04 per share
1 Q1-11 Adjusted EBITDA of $970M, up 2.9% excl. $16M non-cash gain from acquisition of Transactel
EPS continuity analysis ($)
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Excluding one-time Transactel gain, underlying EPS up 14%
0.85
Normalized EBITDA1
Pension & Restr.
costs
Financing costs
1 Normalized EBITDA excludes pension and restructuring costs, and Transactel gain
Q1-11 reported
1.01
Lower tax rates
0.97Excl. Trans.gain
0.04
Transactel gain
Dep & Amort
0.020.03 0.03
- 0.02
Q1-10 reported
0.02
Higher O/S
shares
Tentative collective agreement reached with TWU
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Tentative agreement is a progressive contract that reflects competitive marketplace and balances needs of team
members, customers and shareholders
TELUS and TWU agreed to terms of a tentative collective agreement on April 11
TWU recommending ratification to their membership and will be holding ratification meetings across country until early June
Tentative agreement includes compensation increases of 1.5% in year one, 2% in years two through four and 2.5% in year five
A ratified agreement will enable our team to focus on continued execution of our strategy and corporate priorities for 2011
TELUS to deploy 4G+ wireless LTE
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Investment in LTE urban build is consistent with TELUS' consolidated capital expenditure targets for 2011
Consistent with our strategy on technology evolution, TELUS announced the planned launch of its wireless 4G+ long-term evolution (LTE) network in 2012
Construction on TELUS‘ 4G+ LTE network will begin in latter half of 2011 in major urban markets across Canada
TELUS' LTE deployment will use AWS spectrum purchased for $882 million in Industry Canada's auction in 2008 for this purpose
Potential rollout into rural Canada will be dependent on Industry Canada auction of frequencies in 700 MHz spectrum band
700 MHz spectrum auction
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To ensure that 700 MHz is utilized outside of urban areas there must be a “use it or lose it” build out requirement
700 MHz spectrum consultation process ongoing – TELUS and other parties filed reply comments on April 6
Access to 700 MHz for TELUS would support truly innovative broadband applications throughout Canada & bridge digital divide
TELUS most spectrally efficient major carrier in North America on a MHz per pop basis and has need for more capacity to support data growth
Cable companies and regional carriers have financial resources to bid and be successful in an open auction and should not be advantaged by access to any set aside spectrum
2500/2600 MHz spectrum auction
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Access to 2500/2600 MHz spectrum would allow TELUS to meet anticipated data demand in urban locations
First round comments filed by TELUS and other parties on April 19 Industry Canada to auction 60 MHz of clawed back spectrum plus additional
spectrum in regions (Alberta, Atlantic Canada) where Rogers and Bell, through Inukshuk partnership, did not obtain 2600 MHz spectrum
2500/2600 MHz spectrum aligns with 3GPP standards for LTE Rogers and Bell
Currently have a de facto Canadian monopoly and head start in launching mobile services in this band
Should be restricted from bidding on clawed back spectrum to allow entry Should be capped individually and/or together due to co-owned Inukshuk
holdings
Industry vertical integration update
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CRTC’s recent decisions reinforce pre-existing principle that consumers need protection from undue preference
by carriers who own content
Recent CRTC decisions support pre-existing principle of programming content non-exclusivity on reasonable commercial terms
Regulatory measures taken in U.S. for Comcast acquisition of NBC Universal set a good precedent
June 2011 public policy hearing on effects of consolidation and vertical integration in Canadian broadcasting industry
TELUS and the public believe CRTC needs to implement measures to effectively address and deter any anti-competitive behaviour by carriers from content ownership in a timely manner
Safeguards prohibiting carriage exclusivity and ensuring access to content on fair terms (price and packaging conditions) are essential to ensure sustainable competition
Q1 2011 summary
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Revenue and earnings growth of 6.5% and 19% driven by wireless.Annualized dividend raised 4.8% to $2.20 per share
Wireless
Double digit revenue and EBITDA growth reflecting outstanding ARPU growth of 3.7%
Accelerating smartphone adoption driving data revenue growth of 44%
Wireline
Revenue growth driven by strong data growth of 11%
Continued strong TV and HSIA adds and improving residential NAL losses reflecting success of Optik services and marketing
Strong smartphone adoption driving data growth
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Smartphone base increased 76% y/y to 2.2MData revenue growth increased by 44% y/y
33%46%
54%
1Q10 4Q10 1Q11
Smartphone gross sales(as % of postpaid gross sales)
22%33%
38%
1Q10 4Q10 1Q11
Smartphone penetration(% of postpaid cumulative base)
Smartphone adoption continues to accelerate Now represents 54% of postpaid gross loads Represents over 70% of postpaid retention
units compared to less than 1/2 a year ago
16K
29K
15K
Continued Optik momentum, Future Friendly Home
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Q4-10Q3-10
66K
53K 18K
38K
48K
Q1-11
44K
Q2-10
32K
Q1-10
32K
29K
60K
3K
TELUS TVResidential NALs
High-speed Internet
TV & HSIA loading more than offsetresidential NAL losses for third consecutive quarter
-50K -51K -39K -37K -33K
Providing shareholder clarity on dividend growth model*
25* See forward looking statement caution.
Over last eight years, TELUS has delivered eight increases in the dividend and paid out $4 billion
4.8% dividend increase to 55 cents quarterly – July 4, 2011 Consistent dividend payout guideline of 55-65% of sustainable
earnings Announce intention to continue semi-annual declarations to
2013 – May and November Expectation of circa 10% annual increase in dividend through
2013
Subject to board decisions takinginto account financial outlook
Appendix – free cash flow
2011Q1
2010Q1
C$ millions
Adjusted EBITDA (excludes Transactel gain) 943 970Capex (311) (409)
Net Employee Defined Benefit Plans Expense (Recovery) (3) (9)
Employer Contributions to Employee Defined Benefit Plans (45) (235)
Interest expense paid (38) (61)
Cash Income Taxes and Other (251) (66)
Non-cash portion of share-based compensation 8 3
Restructuring payments (net of expense) (49) (23)
Free Cash Flow (before share-based compensation payment) 254 170
Share Based Compensation Paid (7) (8)
Free Cash Flow (per current public guidance methodology) 247 162
(150) (169)Dividends
Working Capital and Other (41) (178)
Funds Available for debt redemption 77 (164)
Net Issuance (Repayment) of debt (72) 170
Increase (Decrease) in cash 5 6
Dividends reinvested (DRIP) 21 54
Non-voting shares issued - 17
Acquisitions and other - (50)
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