Q earnings and 2016 targets investor conference call February 11, PDF

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Q earnings and 2016 targets investor conference call February 11, 2016, President & CEO John Gossling, EVP & CFO 1 of 16 CORPORATE PARTICIPANTS Paul Carpino, VP, Investor Relations, President and
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Q earnings and 2016 targets investor conference call February 11, 2016, President & CEO John Gossling, EVP & CFO 1 of 16 CORPORATE PARTICIPANTS Paul Carpino, VP, Investor Relations, President and CEO John Gossling, EVP and CFO CONFERENCE CALL PARTICIPANTS Vince Valentini, TD Securities Philip Huang, Barclays Simon Flannery, Morgan Stanley Maher Yaghi, Desjardins Securities Jeff Fan, Scotiabank PRESENTATION Check against delivery Operator Good morning, ladies and gentlemen, welcome to the TELUS 2015 Q4 earnings conference call. I would like to introduce your speaker, Mr. Paul Carpino. Please go ahead. Paul Carpino Great. Thank you, Peter. Good morning, everyone, and thank you for joining us today. The fourth quarter 2015 and 2016 targets news release and detailed supplemental investor information are posted on our website at TELUS.com. On the call today will be President and CEO, who will provide opening comments followed by a review of the fourth quarter operational and financial highlights as well as the presentation of our 2016 targets by John Gossling, our CFO. After our prepared remarks, we will conclude with a question-and-answer session. In consideration of your day, we're going to try and keep this call to under an hour. Let me direct your attention to slide two. This presentation, answers to questions and statements about future events such as 2016 annual targets and guidance, intentions for dividend growth and future share purchases are subject to risk and uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made today so do not place undo-reliance on them. We also disclaim any obligation to update forward-looking statements expect as required by law. I ask that you read our legal disclaimers and refer you to the risk and assumptions outlined in our public disclosures. In particular, in section 10 of TELUS' annual MD&A and filings with securities commissions in Canada and the United States. Let me now turn the call over to Darren to start. Thanks, Paul, and good morning, everyone. Despite a period of heightened customer activity and a tempered economy in key markets, TELUS posted solid results across numerous financial, operating and growth metrics in the fourth quarter, including the most overall net RGUs, the most wireline net RGUs and the highest wireless lifetime revenue supported by our leading positions in client loyalty and ARPU. Reflective of the consistency and the quality of wireless and wireline assets, TELUS also led these metrics for the full year, despite the noted pressures. Cumulatively our strong asset mix delivered solid net additions in both wireline and wireless in the fourth quarter with net RGUs increasing 53,000 outperforming all our competitors. Full the full year, we recorded net RGUs of 267,000, which represented nine times more RGUs than our next closest competitor. Impressively for 2015, TELUS returned more than $1.6 billion to shareholders and completed its fifth consecutive year of delivering a dividend growth rate of 10% or higher under our multi-year dividend growth programs. This track record 2 of 16 clearly distinguishes us from our peers and will be further enhanced by our commitment to an additional 10% dividend increase in Let me now take you through some additional Q4 highlights and provide an overview as well of our 2016 targets. In wireless, TELUS reported postpaid wireless net additions of 62,000 in the fourth quarter. Our results in Q4 also reflect the resiliency of our business in the face of continuing economic and operational pressures. This is of course most notable in the Alberta market where we experience just 4,400 net adds in the second half of 2015, compared to 50,000 in the second half of We continue to earn the best customer loyalty amongst our national peers in the fourth quarter achieving a churn rate of 1.01%, despite facing the most competitive December in recent memory. For the full year, our postpaid churn was 0.94%. Our second straight year recording a churn rate below the 1% level. Customer retention in the quarter was 17% of network revenue and reflective of the higher activity associated with the double cohort environment and the seasonally busy fourth quarter. The significant $50 million year-over-year increase in COR in Q4 is a strategic investment aligned with maintaining our leadership in lifetime revenue per client. In this regard at $4,820, our current lifetime revenue per subscriber is 19% and 34% higher than our peers. Blended ARPU in Q4 was $63.74, the best amongst the national telcos. We achieved this ARPU level by year-end despite pressures associated with the declining proportion of subscribers moving from three year to two-year contracts. The implementation of TELUS' customer friendly initiative to provide clients with frequent, real-time notifications as they reach the upper echelon of their monthly data plan allowance and as well the challenging economic environment in Alberta where ARPU declined more than 4.5% in the second half of 2015, compared to the second half of Whilst these factors moderated ARPU growth in 2015, the Alberta economy will ultimately improve and customers who continually bump up against the data plan limits will move to more appropriate data plan sizes, particularly with the increasing proportion of our customers using LTE devices. Turning to wireline, TELUS delivered a strong performance on both revenue and as well EBITDA growth. TELUS continues to be one of the only major telecommunications company globally to consistently report ongoing growth and wireline revenue, wireline EBITDA and wireline customer connections. External wireline revenues increased an impressive 4.4% in the fourth quarter. Data revenue grew 8.8% with high-speed Internet net additions increasing by 22,000 and total TV net additions growing by 25,000. This growth reflects the ongoing enhancement of TELUS' high-speed broadband footprint in urban and rural communities, including fibre to the premise and the strong pull-through effect of Optik TV bundling. Residential NAL losses of 24,000 continue to reflect the trend of wireless and Internet substitution and of course the pressures coming from competition. However, indicative of the quality of our asset mix, our combined TV and high-speed net additions exceeded our residential network access line losses by a factor of two times. Wireline EBITDA, excluding restructuring and other items, increased 4.9% on a year-over-year basis. The margin increase also benefited from improvements and data services including high speed Internet, TELUS TV, business process outsourcing services, TELUS Health, ongoing process improvements and of course importantly operating efficiency initiatives. Today we announced our 2016 targets that reflect the diversity and strength of TELUS' multiple growth assets in both wireless and our wireline operating segments. We met three of our four public objectives in 2015 and have achieved 76% of our total consolidated financial targets since Our 2016 targets are indicative of the benefits of the Company's ongoing strategic investments related to advanced broadband infrastructure and technology and as well as unwavering focus on client service excellence and cost-efficiency. Indeed, we are targeting balanced growth in 2016 with revenue up to 3% higher and EBITDA up to 6% higher in both our wireless and wireline operations. We anticipate wireless network revenue to reflect continued growth in both subscribers and blended ARPU, driven by strong demand for data services. Additionally, wireless EBITDA is expected to benefit from growth and wireless network revenue as well as savings from cost-efficiency initiatives and moderating retention costs. 3 of 16 In wireline, TELUS anticipates continued data revenue growth from high-speed Internet, Optik TV services and business process outsourcing and increasingly TELUS Health Services. Wireline EBITDA, excluding restructuring should also benefit from margin improvements from these growth opportunities as well as important traction from our ongoing efficiency initiatives. Our growth in revenue and EBITDA has been consistently underpinned by the significant and targeted generational investments TELUS continues to make in its core wireline and wireless broadband networks. This includes building out fibre directly to more homes, businesses, small cell sites and the like and this investment will continue in 2016 and beyond. Consolidated capital expenditures, excluding the purchase of spectrum licenses and non-monetary transactions, are targeted to be approximately $2.65 billion in These are generational investments. And the technological and service advancements for customers as well as the future long-term cash flow for investors will be meaningful. We will continue our highly successful broadband infrastructure expansion and upgrades. This includes bringing fibre optic cables deeper into the access network and connecting more homes, businesses and health care facilities to TELUS Fibre to support the evolving demands of our customers and our country. We will also continue investing in the expansion of 4G LTE wireless network technology including the ongoing deployment of 700 MHz and 2.5 GHz spectrum. Importantly, the value of these investments drives share economies of scope in supporting all of our businesses. From the business market, to consumer, to government clients, and they reach across the full breadth of our wireless and wireline products and services. Shareholders will see the benefits of these investments through the long-term fueling of topline growth and EBITDA expansion from ARPU and AMPU enhancement opportunities and then eventually through to free cash flow. Importantly, these investments will drive efficiency improvements and processes, lower maintenance costs and benefit the client experience in a typical TELUS fashion. Furthermore, these generational investments are synergistic with our long-term dividend growth model. Importantly, over the past 16 years, we maintained the industry's most consistent and transparent approach to capital allocation, investing in our core business while simultaneously returning significant capital to our shareholders. Indeed, we established an enviable track record with our penchant for investing for the long-term notwithstanding the inevitable and exogenous factors and short-term economic volatility that frequently occur along the way. Similar to the circumstances of 2000 and 2009 when we made game-changing strategic investments despite economic uncertainty, our current investments reflect the continuation of our consistent approach to managing TELUS for today and for the future. Clearly the investments made during those periods and the significant performance of those assets thereafter have driven meaningful long-term benefits for customers, shareholders, and widely, the Canadian economy. Our 2016 targets also continue to buttress our dividend growth model and share repurchase initiatives. As I've already noted, we are targeting our sixth consecutive year of a 10% dividend increase in As a result, our shareholder friendly initiatives, our capital investments and our balance sheet structure are prudently aligned with our long-term decision making and they're not based on quarterly short-term results. I am exceptionally proud and sincerely appreciative of our team's unwavering commitment to our customers and to delivering on our strategy regardless of the challenges that we face and answer along the way. Indeed, I'm consistently impressed with what we achieve as a team and importantly how this translates into strong results for our customers, our investors, our team members and the communities we serve. This is the strength put into practice of our world-leading team engagement. Now let me turn the call over to John. John Gossling Thanks very much, Darren. Good morning, everyone, I'm on slide 11, the Q4 wireless results. Fourth quarter wireless results continued to reflect strong operational execution in a competitive double cohort and a slower economic environment. 4 of 16 Network revenue growth of 3% was driven by data revenue growth of 10%, reflecting subscriber growth, increased adoption of higher-rate two-year plans, a favourable postpaid mix, and increased data roaming. This was partly offset by the impact in the economic slowdown, particularly in Alberta as we have mentioned, which affected both subscriber growth and usage behavior, as well as the ongoing decline in voice revenue. When excluding restructuring and other costs, EBITDA increased by 2.8% based on higher network revenue, partly offset by the $50 million higher retention spend, some higher bad debt provisions, as well as increased customer service and distribution channel expenses. Retention volumes were up 5% to 609,000 units in the quarter, driving higher associated commissions, while per unit subsidy costs increased due to continued preference for higher value smartphones and lower device upgrade fees. The resulting cost of retention represented 17% of network revenues in the quarter, up from 14.3% a year ago. Capital expenditures increased year-over-year by 11%, representing capital intensity of 12%. This reflects ongoing investments in wireless broadband infrastructure to enhance our network coverage, speed and capacity, and includes the ongoing deployment of 700 MHz spectrum. Moving over to slide 12. In wireline, revenues increased year-over-year by $50 million or 3.6%, excluding the one-time recurring, sorry, nonrecurring real estate gain of approximately $13 million and other operating income. This solid increase was driven by data revenue growth of 9%, reflecting high speed Internet subscriber growth and higher revenue per customer; growth in business process resourcing services from TELUS International; a higher TELUS TV subscriber base; and increased TELUS Health revenues. This was partially offset by continued legacy voice and equipment revenue declines. Reported wireline EBITDA decreased by 5.9%, primarily due to a $54 million increase in restructuring and other costs. When we exclude these costs from both periods, wireline EBITDA increased by 8.2% with a margin of 25.8%. That's up 110 basis points year-over-year. Underlying EBITDA growth was 4.9% when you exclude both restructuring as well as the non-recurring gain on the sale of certain real estate assets. This EBITDA growth reflected improving margins in data services, including Internet, TELUS TV, business process outsourcing as well as ongoing operational efficiency initiatives and was offset by high margin legacy revenue declines. Capital expenditures increased 17% over the same period last year due to continued investments in our broadband network infrastructure. This included connecting more homes and businesses directly to our fibre optic broadband network. As noted on slide 13, on a consolidated basis, revenue was up 2.8% while EBITDA excluding restructuring and other costs, increased by 4.9%. Basic earnings per share of $0.44 decreased by 14% reflecting significantly higher restructuring and other costs, as well as higher depreciation and amortization expense from ongoing investments in our fibre optic and 4G LTE networks. EPS drivers can be found in the appendix. Free cash flow of $197 million decreased by 42%, primarily due to higher share-based compensation, higher CapEx and lower reported EBITDA reflecting the significant restructuring and other costs. Let's move to guidance now. I am on slide targets reflect revenue growth of up to 3% and EBITDA growth of up to 6% in both wireless and wireline. TELUS wireless network revenue should benefit from modest growth in both subscribers and blended ARPU. ARPU is expected to benefit from increasing data usage as our 4G LTE and LTE-advanced network investments enhance coverage resulting in continued growth in data and roaming revenues. This should help offset lower voice revenues and the impacts from the economic slowdown in certain parts of the country, especially in Alberta. Wireless EBITDA is targeted to be higher as result of the anticipated growth in wireless revenue, savings from cost efficiency initiatives and stable retention costs. Reflecting the diversity and strength of our asset mix, wireline should see continued data revenue growth from high speed Internet, Optik TV, TELUS Health as well as growth in our business process outsourcing through TELUS International. This growth is expected to be partially offset by continued decreases in legacy voice revenues and the impact of the economic slowdown. 5 of 16 Wireline EBITDA growth is supported by revenue increases, continued margin improvements in our growth products, as well as our ongoing efficiency initiatives, partially offset by the ongoing industry trends of losses from higher margin legacy voice services. Combining our operating segments, I am now on slide 16, basic earnings per share is expected to be higher year-overyear by 5% to 12% reflecting EBITDA growth combined with a reduction in shares outstanding from our ongoing share purchase program. As Darren referenced earlier, consolidated capital expenditures in 2016, excluding spectrum licenses and non-monetary transactions, are targeted to be approximately to be $2.65 billion. This equates to capital intensity as a percentage of consolidated revenue of approximately 20%. On slide 17, we have outlined our notable assumptions for Total defined benefit pension expense for 2016 is estimated to be approximately $94 million, of which approximately $89 million will be recorded employee benefits expense and $5 million in financing costs. Defined benefit pension plan cash funding is planned to be approximately $57 million. Restructuring and other costs are expected to be approximately $175 million as we continue to invest in operational efficiency. Cash income tax payments are estimated to be between $570 and $630 million. This significant increase over 2015 is primarily a result of the impact of the use of the Public Mobile losses in 2014 which has had the effect of: one, deferring a portion of our 2015 current taxes payable to early 2016; and two, increasing relative to 2015, the 2016 installment base which ultimately is expected to reduce the 2017 cash income tax payments by approximately $150 million. Other key assumptions are listed in section 1.7 in our fourth quarter management's review of operations. Before I conclude I'd like to highlight some balance sheet considerations as we head into Now, on slide 18. At the end of 2015, our net debt to EBITDA ratio was 2.66 times. The year-over-year increase reflects, in part, the three wireless spectrum auctions that occurred during 2015, where TELUS successfully acquired 57 MHz of spectrum for $2 billion. Since 2014, TELUS has made total spectrum investments of $3.6 billion. We are in a period of elevated investment as we execute our long term strategy focused on data and wireless growth consistent with our investments over the past 16 years. However, we remain committed to our long-term objective for net debt to EBITDA to be in the range of 2.0 to 2.5 times and we'll work towards returning to our objective range in the medium term as we believe this range is supportive of our long-term strategy. Throughout this unique investment cycle, we have increased our wireless and wireline customer connections, consistently grown revenue and EBITDA, delivered the strongest wireless lifetime revenue per customer and further enhanced the industry-leading customer loyalty. Importantly over this period, we have extended our average term to maturity of TELUS long-term debt to 11.1 years, as compared to 5.5 years at the end of 2012, and reduced our weighted average cost of long-term debt to 4.32% as compared to 5.44% at the end of Reflective of our excellent debt maturity schedule, we only have $600 million, of lon
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