q3 2010 telus investor conference call robert mcfarlane evp & chief financial officer darren...
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Q3 2010 TELUSinvestor conference call
Robert McFarlaneEVP & Chief Financial Officer
Darren EntwistlePresident & Chief Executive Officer
Joe NataleEVP & Chief Commercial Officer
November 5, 2010
2TELUS forward looking statements
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 2010 guidance), qualifications and risk factors referred to in the Management’s discussion and analysis in the 2009 annual report and in the 2010 first, second and third quarter 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 practice of updating annual targets and guidance.
3agenda
Wireless and wireline segment reviews
Consolidated financial review Updates
Regulatory IFRS Financing Dividend 2010 guidance
Question and answers
3
Q3 2010 wireless financial results 4
Wireless cash flow up significantly due to lower capex and EBITDA increase despite record subscriber loads
($M) Q3-09 Q3-10 change
Revenue (external) 1,206 1,282 6.3%
EBITDA 517 535 3.5%
EBITDA margins* (total revenue)
42.6% 41.5% (1.1) pts
Capex 193 113 (41)%
EBITDA less capex 324 422 30%
* Margins on network revenue in Q3/10 and Q3/09 are 45.1% and 45.9%, respectively.
subscriber results 5
Strong total net adds growth of 22% y/y with higher value postpaid representing 86% of net adds
prepaid18%
Wireless subscribers
postpaid82%
Postpaidnet adds
6.9M total
5.6M
1.3M
Q3-09
131K 132K
Q3-10
Totalnet adds
Q3-09
125K
153K
Q3-10
smartphone subscriber mix 6
Smartphone base increased 67% y/y to 1.6M and to be enhanced with suite of new exciting HSPA devices
Smartphone subs represent 28% of postpaid base compared to 18% a year ago
In Q3, 38% of all postpaid gross additions were on smartphones compared to 22% a year ago
BlackBerries and iPhones continue to dominate retention loading
HTC 7 Surround Samsung Galaxy Fascinate
LG Optimus 7
data revenue 7
Strong data growth of 29% driven by continued smartphone adoption
Q3-09
$226M
Q3-10
$291M
$178M
Q3-08BlackBerry Torch
marketing and retention 8
Record gross additions and stable churn reflect availability of new HSPA handsets and continued marketing success
Q3-09 Q3-10 change
Gross adds (000s) 420 466 11%
Churn 1.55% 1.54% (0.01) pts
COA per gross add $320 $339 5.9%
COA expense $135M $158M 17%
Retention expense $116M $127M 9.5%
blended ARPU analysis 9
Strong data growth continuing to help improve trend in overall ARPU down 1.2% y/y vs. 1.9% in Q2
Data
Q3-10
$58.75Voice
$59.45
Q3-09
% of ARPU
12.05
47.40 44.22
14.53
Q3-10Q3-09
20%
80% 75%
25%
Q3 2010 wireline financial results 10
Revenue decline slows and is offset by expense control and lower restructuring costs
($M) Q3-09 Q3-10 Change
Revenue (external) 1,205 1,173 (2.7)%
Operational expenses 804 795 (1.1)%
Restructuring costs 29 15 (48)%
EBITDA 406 402 (1)%
EBITDA margins(total revenue)
32.8% 33.2% 0.4 pts
Capex 365 336 (7.9)%
EBITDA less capex 41 66 61%
wireline data strategy reinforced 11
Wireline data revenue exceeds local & LD revenue for first time ever
Q3-2000 Q3-2010
78%Local &
LD
22%Data
49%Local &
LD
51%Data
$1,109M$1,165M
TELUS TV subscribers 12
Strong TV loading reflects June launch of Optik TV brand Net adds up 73% y/y and total TV subscribers up 94%
Q3-09
22K
38K
Q3-10
TELUS TV net additions*
TELUS TV subscribers*
* Includes both TELUS IP TV and TELUS Satellite TV subscribers
Q3-10Q3-09
137K
266K
improved wireline operating stats 13
Growth in TV & increased HSIA this quarter greater than NAL declines
Q3-10
-56K
Q3-09
* Historic NALs restated for prior periods starting in 2007 as a result of a periodic subscriber measurement review and correction.
31K
-51K
53KTELUS TV loading and HSIA
Total NAL losses*
Q3 2010 consolidated financial results 14
Strong cash flow expansion driven by improved profitability and capex decline
($M excl. EPS) Q3-09 Q3-10 change
Revenue (external) 2,411 2,455 1.8%
Operating expenses 1,456 1,501 3.1%
Restructuring costs 32 17 (47)%
EBITDA 923 937 1.5%
EPS (basic) 0.88 0.77 (13)%
Capex 558 449 (20)%
Free cash flow 266 339 27%
EPS continuity ($) 15
Reported EPS negatively impacted by debt redemption costs related to successful debt issue
0.88
0.84Excl. Tax Adj.
Q3-09 reported
Normalized EBITDA1
Restr.costs
Normalized Financing
costs2
Pension, Dep & Amort
1 Normalized EBITDA excludes restructuring and pension costs.2 Q3 Normalized Financing excludes early debt redemption penalty, CRTC deferral account Interest, and excludes interest income for Q3/09 identified in Q3/09 tax adjustment
Q3-10 reported
0.77
- 0.12 - 0.03
Lower tax rates &
other
+ 0.01
0.74Excl. Tax Adj.
+ 0.03 + 0.02
Tax adjustment
2010 debt redemption
- 0.02
CRTC Deferral
Acc’t charge
+ 0.01
EPS normalization 16
Normalized EPS up 6% to $0.89 per share
Q3-09 Q3-10 Change
EPS - basic $0.88 $0.77 (13)%
Early debt redemption + 0.12
Deferral Acc’t Interest + 0.03
Income-tax related adjs (0.04) (0.03)
EPS normalized $0.84 $0.89 6.0%
TELUS’ strategy is to aggregate, integrate and make accessible content and applications for customers’ enjoyment
Not necessary to own content to make it accessible to customers on economically attractive basis
Not clear to TELUS that synergies of ownership for carriers outweigh negative synergies of limiting audience through exclusives and impact on other supplier relationship
Caution warranted based on past transactions, execution risk related to different expertise requirement, and legacy nature of content assets in play
TELUS’ vertical integration strategy
Consistent with our strategy to “unleash the power of the Internet to Canadians at home, in workplace and on the move”
17
TELUS pleased with CRTC’s Shaw / Canwest decision to support the pre-existing principle of programming content non- exclusivity on reasonable commercial terms
Public policy hearing called for May 2011 on effects of consolidation and vertical integration in Canadian broadcasting industry
TELUS believes CRTC needs regulatory tools and measures to effectively address and deter any anti-competitive behaviour
Industry vertical integration update
CRTC’s Shaw / Canwest decision reinforces pre-exisitng principle that consumers need protection from undue preference by carriers who own content
18
TELUS update on Cdn GAAP to IFRS transition 19
Comprehensive IFRS disclosure in section 8.2 of Q3-10 MD&A
Quantified impacts on key financial statement line items and other measures in Q3-10 MD&A including
Pro forma Q3-10 YTD net income and EPS per IFRS higher by $15M or $0.05
Statement of Financial Position (i.e. Balance Sheet) impacts including recognition of cumulative unamortized gains and losses for employee defined benefit plans and asset impairment reversal are set out
Net impact of $220M or 3% reduction in Owners’ Equity
2011 guidance in mid-December to be provided according to IFRS
TELUS well prepared for IFRS conversion as outlined in comprehensive disclosure in section 8.2 of MD&A
TELUS financing update 20
In August, TELUS cancelled its unused $300M, 364-day revolving credit facility set to expire December 31, 2010
Available liquidity of $1.7B exceeds $1B objective
In September, TELUS successfully completed its early partial redemption of notes due in June 2011 following successful $1B 5.05%10-year debt issue in July
Redeemed US$607M of 8% US$1.3615B notes due June 2011
As expected, recorded pre-tax charge of $52M or after-tax impact of $37M or 12 cents per share
Average maturity of long-term debt 5.9 years at end of Q3-10, up from 4.0 years a year ago
Another very successful debt refinancing, lowering future interest rate expense by circa 350 bps
TELUS raises dividend
Based on management confidence in mid-term outlook Quarterly dividend increased 5% to $0.525 per share for
January 4, 2011 (from $0.50 cents) Second dividend increase in 2010 and reflects 11% increase
over January 2010 dividend payment TELUS to change dividend reinvestment program to open
market purchases at full price Dividend reinvestment program (DRIP) to purchase
shares on open market rather than issue from treasury Will no longer offer 3% discount from avg. market price Changes come into effect March 1, 2011 after dividend
payment on January 4, 2011
Dividend increase of 5% reflects our confidence in prospect for continued future earnings and free cash flow growth
21
2010 annual guidance* update 22
2010 earnings guidance increased on raised wireless EBITDA
Consolidated 2010 guidance change y/y growth
Revenue(external)
$9.7 to 9.95B no change 1 to 4%
EBITDA $3.6 to 3.7Bup $100M on
low end3 to 6%
EPS – basic 1 $3.10 to 3.30up $0.20 on
low end(1) to 5%
Capex Approx. $1.7B no change (19)%
1 Normalized EPS y/y growth of 9 to 16%. See appendix. * See forward looking statement caution
Q3 2010 summary 23
Good Q3 results build on positive momentum
Wireless Strong wireless subscriber growth and stable churn ARPU trend continuing to improve Continued revenue and EBITDA growth despite record
loading activity Wireline
Record TELUS TV subscriber growth Improved residential and business NAL losses and
HSIA loading Cost control offsetting continued legacy declines
Dividend increased by 5% Positive changes to 2010 earnings guidance
appendix – free cash flow
2010Q3
2009Q3
C$ millions
EBITDA 923 937
Capex (558) (449)
Net Employee Defined Benefit Plans Expense (Recovery) 3 7
Employer Contributions to Employee Defined Benefit Plans (31) (21)
Interest expense paid (includes income tax interest income) (19) (106)
Cash Income Taxes and Other (48) (30)
Non-cash portion of share-based compensation 5 10
Restructuring payments (net of expense) 3 5
Donations and securitization fees included in other expense (4) (7)
Free Cash Flow (before share-based compensation payment) 274 346
Share Based Compensation Paid (8) (7)
Free Cash Flow (per current public guidance methodology) 266 339
(149) (162)Dividends
Working Capital and Other (13) 120
Funds Available for debt redemption 78 348
A/R Securitization
Net Issuance (Repayment) of debt (70) (339)
Increase (Decrease) in cash 8 9
Issuance of non-voting shares* - 46
* Non-voting share issuance from treasury for shareholders in the DRIP
-
Issuance of common shares - 5
Proceeds from sale of property and other assets (acquisitions) (26) -
-
appendix – definitions
TELUS definitions for non-GAAP measures
EBITDA: earnings, after restructuring and workforce reduction costs, 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 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
EPS normalized: growth rates are based on 2010 expected EPS ($3.10 to $3.30) compared with 2009 actual results when excluding 52 cents of positive income tax-related adjustments and a 22 cent loss on early partial redemption of long-term debt
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