Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of ____May__________ 2004
(Commission File No. 000-24876)
TELUS Corporation
(Translation of registrant's name into English)
21st Floor, 3777 Kingsway
Burnaby, British Columbia V5H 3Z7
Canada
(Address of principal registered offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
X
Form 20-F _____ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
X
Yes _____ No _____
This Form 6-K consists of the following:
News Release
Attention Business/Financial Editors:
TELUS Reports First Quarter Results
Strong wireless performance drives earnings and cash flow growth
VANCOUVER, May 5, 2004 - TELUS Corporation (TSX: T and T.A / NYSE: TU)
today reported for the first quarter of 2004 excellent wireless performance at
TELUS Mobility and a strong increase in free cash flow. Operating revenues of
$1.8 billion in the quarter increased 4% from a year ago. Overall operating
earnings (EBITDA) were up 9% due to strong performance at TELUS Mobility.
Reported earnings per share for the first quarter were 28 cents, compared to
26 cents for the same period a year ago. Free cash flow was $443 million this
quarter, a $176 million improvement from a year ago.
FINANCIAL HIGHLIGHTS
Rounded to nearest C$ Millions,
except per share amounts 3 months ended
March 31
(unaudited) 2004 2003 % Change
------------------------------------------------------------------------------
Operating revenues 1,803.8 1,740.9 3.6
EBITDA(1) 721.3 644.3 8.6
Net income 101.3 89.5 13.2
Earnings per share (EPS) 0.28 0.26 7.7
Capital expenditures 309.7 207.8 49.0
Cash provided by operating activities 588.1 404.7 45.3
Free cash flow (2) 443.3 267.6 65.7
------------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring and workforce reduction costs.
(2) See note 2 of the Consolidated highlights table in management's
discussion and analysis.
Darren Entwistle, president and CEO, commented that "Our strategy to
evolve the revenue mix of TELUS into the growth businesses of wireless and
data has driven consolidated top and bottom line growth. In addition, it has
better positioned TELUS in the face of a challenging wireline environment. In
this regard, our wireline business is focused on revitalizing revenue growth,
creating differentiated customer service and realizing continued cost
efficiency. Moreover, we continue to see strong growth in high-speed Internet
net additions, which now represent approximately two-thirds of our total
Internet subscriber base. TELUS Mobility stood out this quarter with 19%
revenue growth, 39% operating earnings growth, 14% increase in subscriber net
additions and low churn - a great reflection of our excellence in customer
service. Notably, on a consolidated basis, TELUS continues to generate strong
growth in EBITDA, net income, EPS and cash flow for the benefit of our equity
and debt holders."
Robert McFarlane, executive vice president and CFO, stated "TELUS
generated significant free cash flow of $443 million, up 66% this quarter from
a year ago. This was largely due to higher operating earnings, cash recovery
of prior years' taxes and lower restructuring payments this quarter, partially
offset by higher capital expenditures. As a result, we continue to delever our
balance sheet well ahead of plan. Given significant semi-annual interest
payments in the second and fourth quarters, combined with a strong
consolidated operating outlook, we expect 2004 free cash flow to exceed
$1.1 billion. Additionally, today we are revising our EPS guidance up five
cents per share to a range of $1.10 to $1.30. This positive outlook obviously
bodes well for TELUS' future financial health and market valuation."
CORPORATE DEVELOPMENTS
TELUS renews bank credit facilities for $1.6 billion
TELUS has received C$1.6 billion in commitments from a syndicate of 18
financial institutions. The new credit facilities consist of a C$800 million
(or U.S. dollar equivalent) revolving four-year credit facility (expiring in
2008) and a C$800 million (or U.S. dollar equivalent) 364-day revolving
stand-by credit facility extendible at TELUS' option for any amount
outstanding as at the one-year anniversary date for one year on a
non-revolving basis.
The new facilities will replace TELUS' existing C$2.1 billion of
committed credit facilities prior to their termination dates and have
substantially similar terms with the exception of more flexible reporting
requirements and covenant calculations. These new facilities are subject to
final documentation and are expected to be finalized shortly.
TELUS' credit rating upgraded to investment grade by Moody's
In March, Moody's Investors Services announced it had upgraded the Senior
Unsecured rating of TELUS Corporation to Baa3 from Ba1 with a stable outlook.
While this is investment grade, it remains one notch below the BBB-mid
investment grade ratings consistently maintained by the three other credit
rating agencies (Standard & Poor's, Dominion Bond Rating Services and Fitch
Ratings). The upgrade reflected Moody's belief that the company will, on
average, maintain free cash flow in 2004 and 2005.
TELUS wins six-year, $66 million data & IP contract with The
Co-operators
Continuing a national expansion effort focused on the provision of
superior data, IP and wireless solutions, TELUS Corporation today announced a
six-year, $66 million contract with The Co-operators, the largest
Canadian-owned, multi-product insurer. Through the term of the agreement,
TELUS will provide Wide Area Network (WAN) and Local Area Network (LAN) data
services to more than 600 Co-operators locations, as well as an extensive
portfolio of voice services.
Designed to deliver enhanced value to The Co-operators, the deal goes
beyond the provision of traditional products and services, positioning TELUS
as a partner in delivering IP solutions contributing to Co-operators strategic
and business drivers. The enhanced reach, speed, bandwidth and reliability
TELUS provides to businesses like The Co-operators, is increasingly recognized
as enabling the IP-based applications essential to business success.
TELUS signs multi-year deals with the Quebec government
TELUS recently signed two significant contracts, valued at $11.8 million,
with the Quebec government. The two deals provide information technology (IT)
solutions to the Quebec Building Authority (QBA) and the Quebec Pension and
Insurance Plan Administrative Commission. In the first contract, valued at
$9 million over 2 years, TELUS will be providing a customer relations
management tool to modernize the procedures and systems for the QBA. In the
second agreement, valued at $2.8 million over 2.5 years, TELUS will be
upgrading and maintaining the Quebec Pension and Insurance Plan Administrative
Commission's IT infrastructure. These are two of the largest government deals
that TELUS Quebec has signed to date and another example of TELUS' expansion
into Central Canada.
TELUS and O.N.Telcom form strategic alliance
TELUS and O.N.Telcom announced their intent to form a strategic alliance
that provides O.N.Telcom with resources to improve its competitiveness and
financial performance and offers TELUS access to an important market in
Northeastern Ontario. Under the terms of the agreement, TELUS will provide
management support services to O.N.Telcom, as well as access to its products
and services. The agreement provides O.N.Telcom with access to the TELUS
national IP backbone, technology and services while positioning the company
for improved customer service from TELUS' extensive product and market
development initiatives. The strategic alliance provides both parties with
unique marketing opportunities across O.N.Telcom's existing service area, as
well as larger urban centres like North Bay, Sudbury and Sault Ste. Marie.
TELUS committed to corporate social responsibility - 2003 report now
available
At TELUS, we are committed to the role we play in corporate citizenship
and our ability to make a positive difference in the communities where we
live, work and serve. TELUS' 2003 corporate social responsibility report
continues to build on global reporting standards and best practices for
sustainability reporting involving all aspects of an organization's
performance. The report represents an important step in our journey towards
triple bottom-line reporting through discussions on our economic,
environmental, and social performances. Detailed information on our commitment
to corporate social responsibility can be found in our 2003 corporate social
responsibility report, available online at: telus.com/socialresponsibility.
Canadian Business Magazine reported in March that TELUS Mobility's
approach to hiring the best and the brightest pays off in many ways, including
the promotion of workplace diversity. The magazine found TELUS Mobility was
among the Top 10 Canadian corporations in terms of hiring visible minorities
and aboriginal peoples, and is well ahead of the national corporate average.
TELUS expands services to Internet customers
TELUS continues to deliver on its commitment to provide a wide selection
of legal online music to customers with the launch of Pureradio(TM) from
TELUS. The new service provides high-speed Internet users the ability to
listen to high quality streaming music from 75 continuous play music channels
and the ability to quickly download songs. The launch of Pureradio follows the
recent launch of Puretracks(TM) from TELUS, which made TELUS Canada's first
Internet Service Provider (ISP) to offer a legal music download service. Both
services are based on a partnership with Moontaxi Media Inc., a leading North
American online music distributor dedicated to delivering high quality music
content in both streaming and download formats.
TELUS also launched TELUS Fast Dial-up to improve the speed of Internet
service for dial-up customers in B.C. and Alberta. Adding TELUS Fast Dial-up
to existing dial-up services provides customers with up to five times faster
Web browsing and downloading access and improved e-mail capabilities. This new
add-on service utilizes sophisticated Web accelerator technologies that
compress, optimize and streamline Web content. The TELUS Fast Dial-up service
is an additional $2.95 per month on existing dial-up plans.
TELUS Mobility expands Mike, 1X data networks
TELUS Mobility continued its ongoing expansion of its all-in-one Mike
iDEN network into rural and remote regions of Quebec, Ontario, Alberta and
B.C., including Kamloops, the Okanagan Valley, Merritt and sections of the
Coquihalla Highway. In March, TELUS Mobility announced a $4.5 million
expansion of its 1X digital wireless network across the Chaudiere-Appalaches
and Cote-Nord regions in Quebec.
New products and services from TELUS Mobility
TELUS Mobility, Nextel extend Direct Connect(TM) service across North
America
On May 4, TELUS Mobility and Nextel Communications, Inc. announced a
cross-border roaming partnership allowing Nextel and TELUS Mobility
Mike(R) clients to use their Direct Connect(TM) walkie-talkie service
to stay in instant contact with any other Mike or Nextel user across
North America. The roaming agreement also allows for cross-border data
services, including BlackBerry(R) and mobile e-mail, two-way messaging
and wireless Web access. The instant-contact power of the Direct
Connect Push To Talk(TM) (PTT) service - with its connection speeds of
less than a second - has made the Nextel and Mike networks the wireless
communications network of choice for business across the continent.
TELUS Mobility expects to extend Direct Connect roaming services to
countries such as Mexico and several South American countries later in
2004. TELUS Mobility had expanded Direct Connect service across Canada
in October 2003.
TELUS Mobility launches two new BlackBerry(R) devices
Also on May 4, TELUS Mobility and Research In Motion (RIM(R)) launched
two new BlackBerry(R) handhelds devices across Canada. The BlackBerry
7510(TM) operates on TELUS Mobility's Mike network and is the first
BlackBerry device equipped with Mike's Direct Connect walkie-talkie
service. The BlackBerry 7750(TM) operates on TELUS Mobility's national
1X wireless data network, which now includes North American wide
roaming, and is the first 1X BlackBerry equipped with a high-resolution
colour screen. Both BlackBerry models offer mobile professionals a one-
stop wireless solution that allows them to stay connected with secure,
wireless access to e-mail and corporate data, digital phone, wireless
Web access and organizer features.
TELUS Mobility announces production of first Fastap(TM) phone
At the CTIA Wireless 2004 conference in Atlanta in March, Digit
Wireless, consumer electronics giant LG Electronics and TELUS Mobility
announced an agreement to produce the world's first Fastap enabled
mobile phone. Digit's Fastap keypad technology allows mobile phone
users to quickly type text messages and other data using letter, number
and punctuation keys arranged neatly around a standard mobile phone
keypad. TELUS Mobility plans to offer Fastap enabled mobile phones
exclusively in Canada in 2004.
Rugged wireless modems from Sierra Wireless and Cypress Solutions
Targeting the public safety, utility and heavy industry markets, TELUS
Mobility introduced rugged digital wireless data modems from Cypress
Solutions and Sierra Wireless that take advantage of TELUS Mobility's
national 1X wireless data network. The Sierra SWMP555 wireless modem is
a rugged 1X modem certified to both Society of Automotive Engineers and
US military standards for humidity, mechanical shock and vibration. The
embedded Trimble SQ module provides accurate reporting of position and
velocity with ultra-low power consumption. The five new 1X modems from
Cypress Solutions (CTM 100, 101, 102, 110 and 120) offer GPS capability
and have SAE, Oil and Gas and mil-spec certification.
Developments in Wi-Fi
Spotnik and TELUS Mobility extend Wi-Fi to VIA trains
In February, Spotnik Mobile and partner TELUS Mobility announced the
launch of Spotnik MobileSpot(TM) Wi-Fi service aboard high-speed VIA
Rail Canada trains traveling between Montreal and Quebec City. Designed
specifically for the transportation market, MobileSpot allows clients
to access broadband Internet service while in transit and beyond the
reach of conventional Wi-Fi Hotspots. TELUS Mobility and Spotnik have
rolled out hundreds of Hotspots in public locations nationwide.
Wireless industry announces Wi-Fi agreement
Canada's national wireless carriers signed an inter-carrier agreement
in March establishing common standards for roaming and interoperability
of public Wi-Fi Hotspots each operates. TELUS Mobility, Bell Mobility,
Rogers Wireless and Microcell Solutions have joined to create a common
brand identifier for Wi-Fi Hotspots in Canada and to offer a common
browser-based login to all clients to ensure a consistent and secure
experience for users in all Hotspot locations. The four carriers have
also committed to build more than 500 new Hotspot locations over the
next year, which will more than double their number in Canada.
TELUS continues significant support of amateur sport in Canada with new
sponsorships
TELUS and the Canadian Snowboard Federation announced that TELUS has
become the official telecommunications sponsor of the Canadian Snowboard
Federation. This significant agreement will extend to 2012, and provides TELUS
with sponsorship of several Canadian Snowboard Federation initiatives.
TELUS also announced its support for, and the opening of the TELUS Centre
for Sport, an operations headquarters that brings together key sport agencies
focused on improving Canada's athletic performance. The centre provides much
needed office and meeting space for several sport organizations to promote
amateur sport and prepare athletes and coaches for world-class performance.
This collaborative new environment will be a hub for management, training and
education for the B.C. sport system.
Dividend declaration
The Board of Directors declared a quarterly dividend of fifteen cents ($0.15)
per share on outstanding Common and Non-Voting Shares payable on July 1, 2004
to shareholders of record on the close of business on June 10, 2004.
For further information:
Media Relations: Nick Culo, (780) 493-7236,nick.culo(at)telus.com
Investor Relations: John Wheeler, (780) 493-7310,ir(at)telus.com
Forward-looking statements
==========================================================================
This document and the management's discussion and analysis contain
statements about expected future events and financial and operating
results of TELUS Corporation (TELUS or the Company) 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 predictions and other 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 results, conditions, actions or events to
differ materially from the targets, expectations, estimates or intentions
expressed in the forward-looking statements.
Factors that could cause actual results to differ materially include but
are not limited to: competition; economic fluctuations; financing and
debt requirements; tax matters; dividends; human resources (including the
outcome of outstanding labour relations issues); technology (including
reliance on systems and information technology); regulatory developments;
process risks; health and safety; strategic partners; litigation;
business continuity events and other risk factors discussed herein and
listed from time to time in TELUS' reports, comprehensive public
disclosure documents, including the Annual Information Form, and in other
filings with securities commissions in Canada and the United States.
See the Risks and uncertainties section in TELUS' 2003 Annual Report -
Management's discussion and analysis for further information.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
==========================================================================
Management's discussion and analysis - May 5, 2004
The following is a discussion of the consolidated financial condition and
results of operations of TELUS Corporation for the three-month periods ended
March 31, 2004 and 2003, and should be read together with TELUS' interim
consolidated financial statements. This discussion contains forward-looking
information that is qualified by reference to, and should be read together
with, the Company's discussion regarding forward-looking statements (see
Forward-looking statements). TELUS' interim consolidated financial statements
have been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"), which differ in certain respects from U.S. GAAP. See Note
20 to the interim consolidated financial statements for a summary of the
principal differences between Canadian and U.S. GAAP as they relate to TELUS.
The interim consolidated financial statements and Management's discussion and
analysis have been reviewed by TELUS' Audit Committee and approved by TELUS'
Board of Directors. All amounts are in Canadian dollars unless otherwise
specified.
The following discussion is comprised of significant updates since
Management's discussion and analysis in TELUS' 2003 Annual Report:
1. Core business, vision and strategy
2. Key performance drivers
3. Capability to deliver results
4. Results
5. Risks and uncertainties
1. Core business, vision and strategy
Strategic imperatives
TELUS continues to be guided by its six strategic imperatives established
four years ago that serve as a guideline for the Company's actions. Some
examples of TELUS' progress in 2004 against these imperatives follow:
Partnering, acquiring and divesting to accelerate the implementation of
TELUS' strategy and focus TELUS' resources on core business
On March 4, TELUS, O.N.Telcom, and the Province of Ontario announced
their intention to enter into a strategic alliance, in which TELUS will
provide O.N. Telcom with management support services and access to its
products and services. The agreement provides O.N.Telcom with access to the
TELUS national IP backbone, technology and services while positioning
O.N.Telcom for improved customer service from TELUS' extensive product and
market development initiatives. The agreement strengthens TELUS' relationship
with the Ontario provincial government.
2. Key performance drivers
Reaching a collective agreement
In February 2004, TELUS Communications Inc. ("TCI") filed applications
with both the Canadian Industrial Relations Board ("CIRB") and the Federal
Court of Appeal seeking a review of the CIRB's earlier decisions, which
imposed a communications ban and required TCI to offer binding arbitration to
the Telecommunications Workers Union ("TWU"). On April 8, 2004, the CIRB
rendered the full reasons regarding the complaints that led to its earlier
decisions. The CIRB imposed a further communications ban on TCI, prohibiting
communications with bargaining unit members on matters of employment and
collective interest until such time as the conditions of the Canada Labour
Code with respect to gaining the right to strike or lockout have been
satisfied. TCI will also be seeking reconsideration and a judicial review of
the CIRB's April 8, 2004 decision.
TCI and the TWU have had discussions, at times with the assistance of
each party's legal counsel, to agree on the binding arbitration process such
as the selection of an arbitrator, terms of reference/guiding principles that
an arbitrator would take into consideration, hearing location, dates, etc. The
parties have not made much progress.
On March 25, 2004, the TWU filed an application with the CIRB requesting
that the Vice-Chairperson name an arbitrator and specify that such arbitrator
would be responsible for setting the terms of reference/criteria and
procedures related to binding arbitration. On April 1, 2004, TCI requested
that the TWU's application be placed on hold pending the outcome of the CIRB's
reconsideration decision. On April 8, 2004, the CIRB issued a letter advising
both TCI and the union that the union's application would be placed in
abeyance until the CIRB renders a decision on the reconsideration application.
3. Capability to deliver results
Capabilities are discussed in the Company's 2003 annual Management's
discussion and analysis.
4. Results
Critical accounting estimates
-----------------------------
The Company's critical accounting estimates are discussed in the
Company's 2003 annual Management's discussion and analysis. The preparation of
financial statements in conformity with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting policy developments
------------------------------
Share-based compensation (Note 2(a) of the interim consolidated financial
statements)
Commencing with the Company's 2004 fiscal year, the amended
recommendations of the CICA for accounting for share-based compensation (such
amendments arising in 2003) (CICA Handbook Section 3870) apply to the Company.
The Company has selected the modified-prospective transition method (also
referred to as the retroactive application without restatement method),
implemented effective January 1, 2004. To reflect the fair value of options
granted subsequent to 2001, and vesting prior to 2004, certain components of
common equity in the December 31, 2003, Consolidated Balance Sheet balances
have been restated.
Equity settled obligations (Note 2(b) of the interim consolidated
financial statements)
Commencing with the Company's 2004 fiscal year, the Company early adopted
the amended recommendations of the CICA for the presentation and disclosures
of financial instruments (CICA Handbook Section 3860) specifically concerning
the classification of obligations that an issuer can settle with its own
equity instruments (such amendments arising in 2003). The amendments result in
the Company's convertible debentures being classified as a liability on the
consolidated balance sheets (previously classified as a component of equity)
and the associated interest expense correspondingly being classified with
financing costs on the consolidated statements of income (previously recorded
net of income taxes as an adjustment to retained earnings). The conversion
option embedded in the convertible debentures continues to be presented as a
component of shareholders' equity. As required, these amended recommendations
have been applied retroactively. As a result of the reclassification of
convertible debentures, minor changes were effected in historical Net debt to
EBITDA ratios, and historical Net debt to total capitalization ratios. The
reclassification of the associated interest expense resulted in minor changes
in historical EBITDA interest coverage ratios.
Financial impact of price cap decisions
---------------------------------------
As discussed in detail in TELUS' 2003 annual report management's
discussion and analysis, the price cap regulatory regime has been in place
since June of 2002. The incremental impact of these decisions on the
Communications segment Operating revenues and EBITDA are no longer expected to
be significant. The assumptions for 2004 annual guidance originally
anticipated about $24 million negative impact on revenues, and $20 million
negative impact on EBITDA. It is currently expected that the negative impact
on revenues and EBITDA will be approximately $10 million as a result of a
higher inflation rate of 3.4%, as measured by the 2003 chain-weighted Gross
Domestic Product Price Inflation ("GDP-PI"). See Risks and uncertainties -
Regulation for an update on CRTC proceedings that deal with the disposal of
amounts accumulated in price cap deferral accounts.
Results of operations
---------------------
Consolidated highlights
Quarters ended March 31 2004 2003 Change %
------------------------------------------------------------------------------
($ in millions except
per share amounts)
Operating revenues 1,803.8 1,740.9 62.9 3.6
EBITDA(1) 721.3 664.3 57.0 8.6
Net income 101.3 89.5 11.8 13.2
Earnings per share, basic
and diluted 0.28 0.26 0.02 7.7
Cash dividends declared per share 0.15 0.15 - -
Cash provided by operating
activities 588.1 404.7 183.4 45.3
Capital expenditures 309.7 207.8 101.9 49.0
Free cash flow(2) 443.3 267.6 175.7 65.7
----------------------------------------------------------------------
Non-GAAP measures used by management to evaluate performance of
business units and segments
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) is calculated as:
2004 Q1 2003 Q1
-------- --------
Operating revenues 1,803.8 1,740.9
Less Operations expense 1,066.6 1,070.1
Less Restructuring and workforce
reduction costs 15.9 6.5
-------- --------
EBITDA 721.3 664.3
The Company has issued guidance on and reports EBITDA because it
is a key measure used by management to evaluate performance of
business units and it is utilized in measuring compliance with
debt covenants. The Company also believes EBITDA is a measure
commonly reported and widely used by investors as an indicator
of a company's operating performance and ability to incur and
service debt. The Company believes EBITDA assists investors in
comparing a company's performance on a consistent basis without
regard to depreciation and amortization, which are non-cash in
nature and can vary significantly depending upon accounting
methods or non-operating factors such as historical cost. EBITDA
is not a calculation based on Canadian or U.S. GAAP and should
not be considered an alternative to Operating income or Net
income in measuring the Company's performance or used as an
exclusive measure of cash flow because it does not consider the
impact of working capital growth, capital expenditures, debt
principal reductions and other sources and uses of cash, which
are disclosed in the consolidated statements of cash flows.
Investors should carefully consider the specific items included
in TELUS' computation of EBITDA. While EBITDA has been disclosed
herein to permit a more complete comparative analysis of the
Company's operating performance and debt servicing ability
relative to other companies, investors should be cautioned that
EBITDA as reported by TELUS may not be comparable in all
instances to EBITDA as reported by other companies.
(2) Free cash flow excludes certain working capital changes, and
other sources and uses of cash, which are disclosed in the
consolidated statements of cash flows. Free cash flow is not a
calculation based on Canadian or U.S. GAAP and should not be
considered an alternative to consolidated statements of cash
flows. Free cash flow is a measure that can be used to gauge
TELUS' performance over time. Investors should be cautioned that
Free cash flow as reported by TELUS may not be comparable in all
instances to Free cash flow as reported by other companies.
While the closest GAAP measure is Cash provided by operating
activities, Free cash flow is relevant because it provides an
indication of how much cash is available before changes in
working capital (such as trade payables, and trade receivables,
which can be significantly distorted by securitization changes
that do not reflect operating results) and after funding capital
expenditures. The following shows the calculation of Free Cash
Flow and reconciles EBITDA and Free cash flow with Cash provided
by operating activities:
2004 Q1 2003 Q1
-------- --------
EBITDA 721.3 664.3
Restructuring and workforce reduction
costs, net of cash payments (52.5) (147.4)
Excess of share compensation expense
over payments 5.0 -
Cash interest paid (22.8) (36.0)
Cash interest received 14.2 1.0
Income taxes received (paid) 104.6 (0.6)
Capital expenditures (capex) (309.7) (207.8)
Investment tax credits received
(included in EBITDA or capex and
Income taxes received (paid)) (16.8) (5.9)
-------- --------
Free cash flow 443.3 267.6
Deduct excess of share compensation
expense over payments (5.0) -
Add back capital expenditures 309.7 207.8
Share-based compensation 4.7 -
Net employee defined benefit plans
expense (credit) 4.9 13.1
Employer contributions to employee
defined benefit plans (28.6) (18.0)
Other net operating activities 6.1 6.9
Non-cash working capital changes
except changes in taxes and interest (147.0) (72.7)
-------- --------
Cash provided by operating activities 588.1 404.7
-------------------------------------------------------------------------
Consolidated Operating revenue and EBITDA increased significantly in the
first quarter of 2004, when compared with the same period in 2003, primarily
as a result of 20.4% growth in TELUS Mobility Network revenues, with only a
9.0% increase in TELUS Mobility operations expenses. TELUS' Communications
segment experienced a 2.9% decrease in Operating revenue, primarily in local
and long distance services, while reducing operations expenses by 4.5%.
Further detail is presented below by segment.
Consolidated Financing costs decreased by $19.3 million in the first
quarter of 2004, when compared with the same period in 2003, as a result of
lower interest on long-term and short-term debt, and increased interest income
including interest income from the settlement of tax matters. Income before
taxes and non-controlling interest increased by $81.4 million to
$164.7 million in the first quarter of 2004 as compared with the first quarter
of 2003, as a result of improved operating profitability and lower net
financing costs. Increased Income taxes were a result of this higher income
and a favourable $47.0 million income tax adjustment recorded in the first
quarter of 2003 for the settlement of tax matters relating to prior years,
which had higher tax rates. Consequently, Net income increased by
$11.8 million or 13.2%.
Basic and diluted earnings per share increased by two cents in the first
quarter of 2004, as compared with the same period last year as a result of
increased Net income, partly offset by a larger number of shares outstanding.
Basic earnings per share impacts of tax settlements and related interest for
the first quarters of 2004 and 2003 were approximately four cents and
15 cents, respectively. Excluding these impacts, basic earnings per share
increased by approximately 13 cents.
Significant growth in Cash provided by operating activities and Free cash
flow in the first quarter of 2004, when compared with the first quarter of
2003, included the cash recovery of income taxes, lower payments under
restructuring programs, improved operating profitability and lower interest
paid. Cash provided by operating activities was net of a $150 million
reduction in securitized receivables, while Free cash flow was net of an
increase in capital expenditures. Communications segment capital expenditures
increased significantly in the first quarter of 2004, due to investment in new
service development and infrastructure to improve customer service and support
new customers.
Communications segment
- Operating revenues decreased by 2.9% in the first quarter of 2004,
when compared with the same period in 2003. Normalized for the
divestiture of certain application development assets in 2003,
Operating revenues decreased by approximately $25.0 million or 2.0%.
- Network access lines decreased by 22,000 during the first quarter of
2004 as a result of competition and technological substitution.
- High speed Internet net additions were 43,600 in the first quarter of
2004, an increase of 35.8% over the first quarter of 2003.
- Operations expenses decreased by $33.0 million and included additional
Operational Efficiency Program salary and benefit savings of
$23.0 million.
- EBITDA decreased by $12.2 million from lower revenues and a
$9.4 million increase in restructuring charges, partly offset by lower
operations expenses. Restructuring charges were recorded for 2004
initiatives including geographical consolidation of an information
technology department from 15 locations to two primary locations.
- Cash flow (EBITDA less capital expenditures) decreased by
$118.1 million to $214.1 million in the first quarter of 2004, when
compared with the same period in 2003, primarily because of an
increase in capital spending.
Mobility segment
- Total revenue grew by 18.9% in the first quarter of 2004, when
compared with the same period in 2003. Network revenue grew by 20%
year-over-year for the second successive quarter including a record
increase of $100.3 million in the first quarter of 2004, when compared
with the same period last year.
- ARPU (average revenue per subscriber unit) increased $3 to $57,
representing a fifth consecutive quarter of year over year increases.
- Acquisition cost of acquisition ("Acquisition COA") improved to $383
from $425, a notable achievement when coupled with significant
subscriber growth.
- EBITDA increased by $69.2 million or 38.7% representing a Network
revenue flow through of 69%.
- EBITDA margin expanded by 5.5 percentage points to 41.8% of Network
revenue (38.9% of total revenue).
- Cash flow (EBITDA less capital expenditures) increased by
$73.2 million or 58.9% to a record $197.5 million.
- Net subscriber additions were 76,100 or 14.1% higher than the first
quarter of 2003. Notably, higher revenue-generating postpaid
subscriber net additions increased significantly by 49.4%,
representing a third successive quarter of positive growth. Postpaid
subscribers were 82.2% of total net subscriber additions in the first
quarter of 2004.
- Blended churn remained a healthy 1.5%.
The following discussion for Operating revenues, Operations expense,
Restructuring and workforce reduction costs, EBITDA and Capital expenditures
is presented on a segmented basis. All other discussion is presented for the
consolidated financial results.
Operating revenues - Communications segment
Quarters ended March 31 2004 2003 Change %
------------------------------------------------------------------------------
($ millions)
Voice local (and contribution) 528.9 538.8 (9.9) (1.8)
Voice long distance 229.6 251.1 (21.5) (8.6)
Data 339.8 342.8 (3.0) (0.9)
Other 72.8 75.8 (3.0) (4.0)
----------------------------------------------------------------------
External operating revenue 1,171.1 1,208.5 (37.4) (3.1)
Intersegment revenue 25.0 23.4 1.6 6.8
----------------------------------------------------------------------
Total operating revenue 1,196.1 1,231.9 (35.8) (2.9)
----------------------------------------------------------------------
Key operating indicators - Communications segment
(000s) 2004 2003 Change %
----------------------------------------------------------------------
As at March 31
---------------
Network access lines 4,848 4,913 (65) (1.3)
High-speed Internet subscribers 605.2 442.1 163.1 36.9
Dial-up Internet subscribers 309.1 372.1 (63.0) (16.9)
-------- --------- -------- --------
Total Internet subscribers(1) 914.3 814.2 100.1 12.3
Quarters ended March 31
------------------------
Change in network access lines (22) 2 (24) NM
High-speed Internet net additions 43.6 32.1 11.5 35.8
Dial-up Internet net reductions (10.7) (19.6) 8.9 45.4
-------- --------- --------
Total Internet subscriber net
additions(1) 32.9 12.5 20.4 163.2
----------------------------------------------------------------------
(1) As a result of a subscriber audit following a billing system
conversion in the third quarter of 2002, Internet subscriber
counts and net additions for the first quarter of 2003 are net of
reductions of approximately 6.4 dial-up subscribers and
approximately 3.0 high-speed Internet subscribers.
NM - not meaningful
The Communications segment continued to experience an industry-wide trend
of declining traditional revenues and softness in data revenue growth.
- Voice local revenue is generated from: (i) access to the Company's
network, which is provided to customers on a monthly subscription
basis; (ii) from the Company's optional and pay-per-use enhanced
services, and; (iii) the Company's share of contribution pool funds
for providing service in high cost rural service areas. Voice local
revenue decreased in the first quarter of 2004, when compared with the
first quarter of 2003, primarily as a result of fewer access lines,
partly offset by modest increases in interconnection and enhanced
services revenues.
Consumer network access lines decreased by 12,000 in the first quarter
of 2004 as compared with a decrease of 2,000 in the first quarter of
2003. Consumer line losses resulted from technological substitution,
including substitution to wireless, and competitive activity. Business
network access lines decreased by 10,000 in the first quarter of 2004
compared with an increase of 4,000 in the same period in 2003.
Business lines decreased primarily as a result of Centrex line losses
to competition (including Alberta Supernet) and migration to more
efficient ISDN services. The year-over-year decrease in total access
lines in the first quarter of 2004 was 1.3%.
- Voice long distance revenue decreased significantly in first quarter
of 2004, when compared with the same period in 2003. The decrease was
primarily as a result of fewer consumer minutes and price competition.
Wholesale settlement revenues were relatively unchanged as higher
volumes were offset by lower prices. Substitution to alternative
technologies such as e-mail, Internet and wireless contributed to long
distance revenue and minute erosion.
- Data revenues include Internet access, hosting and applications,
LAN/WAN, gateway service, internetworking and remote access, managed
information technology (IT) services and legacy data services such as
private line, switched data services, data local access, and data
equipment sales. Wireless data revenues are included in Mobility
segment Network revenues. Communications segment data revenue in the
first quarter of 2003 included approximately $10.8 million of
application development revenues from assets that were divested in the
second and fourth quarters last year. Data revenue growth normalized
for the disposal of assets was $7.9 million or 2.3% in the first
quarter of 2004, as compared with 2003. Internet service revenues
increased by $5.4 million in the first quarter of 2004, when compared
with the same period in 2003, primarily as a result of growth in the
Internet subscriber base. TELUS high-speed Internet subscriber net
additions increased by 35.8% in the first quarter of 2004, when
compared with the same period in 2003, bringing high-speed Internet
subscribers to 605,200 at March 31, 2004. Managed workplace revenues
increased by $12.3 million due to higher functional outsourcing
services. Partly offsetting growth in Internet and managed workplace
were lower legacy data services revenues.
- Other revenue decreased in the first quarter of 2004, when compared
with the same period in 2003, primarily as a result of lower voice
equipment rental and sales and the conclusion in the first quarter of
2004 of amortization of deferred individual line service grant
revenues. The annual impact of the conclusion of individual line
service grants will be lower revenues of $6.7 million in 2004.
Individual line service grants were provided in respect of the
conversion of multi-party lines to single lines in high cost rural
areas in Alberta in the early 1990s.
- Intersegment revenues represent services provided by the
Communications segment to the Mobility segment. These revenues are
eliminated upon consolidation together with the associated expense in
TELUS Mobility.
Total external operating revenue discussed above included non-incumbent
local exchange carrier (non-ILEC) revenues of $128.4 million for the first
quarter of 2004, compared with $140.7 million for the same period in 2003, a
decrease of $12.3 million or 8.7%. Growth in non-ILEC application development
revenues was affected by the disposal of certain assets discussed in data
revenues above, reducing the revenues by approximately $10.8 million in the
first quarter of 2004, when compared with the same period one year ago.
Normalized for such asset disposals, non-ILEC revenues decreased by
approximately $1.5 million or 1.2% as a result of lower wholesale traffic and
prices, partly offset by higher recurring revenue streams.
The following is a discussion of TELUS Mobility revenues and key
operating indicators.
Operating revenues - Mobility segment
Quarters ended March 31 2004 2003 Change %
------------------------------------------------------------------------------
($ millions)
Network revenue 592.4 492.1 100.3 20.4
Equipment revenue 40.3 40.3 - -
----------------------------------------------------------------------
External operating revenue 632.7 532.4 100.3 18.8
Intersegment revenue 4.6 3.7 0.9 24.3
----------------------------------------------------------------------
Total operating revenue 637.3 536.1 101.2 18.9
----------------------------------------------------------------------
Key operating indicators - Mobility segment
(000s for subscribers
and additions) 2004 2003 Change %
----------------------------------------------------------------------
As at March 31
---------------
Subscribers - postpaid 2,876.5 2,533.9 342.6 13.5
Subscribers - prepaid 623.6 528.3 95.3 18.0
-------- -------- -------- --------
Subscribers - total 3,500.1 3,062.2 437.9 14.3
Digital POPs(1) covered including
roaming/resale (millions)(2) 29.5 27.9 1.6 5.7
Quarters ended March 31
------------------------
Net subscriber additions -
postpaid 64.7 43.3 21.4 49.4
Net subscriber additions -
prepaid 11.4 23.4 (12.0) (51.3)
-------- -------- -------- --------
Net subscriber additions - total 76.1 66.7 9.4 14.1
Churn, per month (%)(3a) 1.5 1.5 - -
Acquisition COA(3b)
per gross subscriber
addition ($)(3c) 383 425 (42) (9.9)
ARPU ($)(3d) 57 54 3 5.6
Average minutes of use
per subscriber per month ("MOU") 362 315 47 14.9
EBITDA to network revenue (%) 41.8 36.3 5.5 -
Retention COA to network
revenue (%) 5.0 3.4 1.6 -
EBITDA excluding
Acquisition COA ($ millions)(3e) 336.1 266.1 70.0 26.3
----------------------------------------------------------------------
(1) POPs is an acronym for population. A POP refers to one person
living in a population area, which in whole or substantial part
is included in the coverage areas.
(2) TELUS Mobility has not activated all digital-roaming areas. As at
March 31, 2004, TELUS Mobility PCS digital population coverage
was 22.2 million and 29.5 million including the roaming/resale
agreements principally with Bell Mobility and Aliant Telecom
Wireless.
(3) The following are not measures under accounting principles
generally accepted in Canada and the U.S. These measures are
industry metrics and are useful in assessing the operating
performance of a wireless company. The definitions of these
measures are as follows:
a. Churn is calculated as the number of subscriber units
disconnected during the period divided by the average
number of units on the network, expressed as a rate per
month.
b. Acquisition COA consists of the total of handset
subsidies, commissions, and advertising and promotion
expenses related to the initial customer acquisition
during a given period.
c. Acquisition COA per gross subscriber addition is
Acquisition COA divided by gross subscriber activations
during the period.
d. ARPU is calculated as network service revenue divided by
the average number of units on the network during the
period, expressed as a rate per month.
e. EBITDA excluding Acquisition COA is a measure for
operational profitability normalized for the period costs
of adding new customers.
-------------------------------------------------------------
- TELUS Mobility Network revenue is generated from monthly billings for
access fees, incremental airtime charges, prepaid time consumed or
expired, wireless Internet services and fees for value-added services.
Network revenue increased 20.4% for the quarter ended March 31, 2004
as compared with the same period in 2003. This growth was a result of
the continued expansion of the cumulative subscriber base by 14.3% to
approximately 3.5 million subscribers from 3.1 million subscribers one
year ago. In addition, ARPU increased to a Canadian industry-leading
$57 in the first quarter of 2004 as compared with $54 in 2003,
representing a fifth successive quarter of year over year increases.
TELUS Mobility's execution of its strategic focus on profitable
revenue growth and subscriber retention resulted in a higher ARPU and
slightly improved year over year churn. The improved ARPU was a result
of increased usage, increased acceptance of data and Internet based
products and pricing discipline. Average minutes of use (MOU) per
subscriber per month were 362 in the first quarter 2004 as compared
with 315 in the same period last year. At March 31, 2004, postpaid
subscribers accounted for 82.2% of the total cumulative subscriber
base as compared with 82.7% one-year earlier, remaining relatively
stable, and contributing to the significant ARPU premium TELUS
Mobility enjoys over its competitors. Net postpaid subscriber
additions of 64,700 for the first quarter of 2004 represented 85.0% of
all net additions as compared with 43,300 (64.9%) for the
corresponding period in 2003, representing a significant increase of
49.4%. This was the third consecutive quarter of positive net postpaid
subscriber growth. Moreover, total net subscriber additions for the
first quarter of 2004 improved by 14.1% over the same quarter in 2003.
This overall positive trend was driven in part by the continued
successful advertising campaign initiated in the fourth quarter of
2003 that highlighted TELUS' new camera phones and picture messaging
service. The campaign helped to establish a market leadership position
for TELUS Mobility in the camera phone marketplace.
Blended postpaid and prepaid churn rate slightly improved to 1.49% in
the first quarter of 2004 as compared with 1.53% in the first quarter
of 2003. Deactivations increased slightly by 10.9% to 154,200 for the
first quarter of 2004 as compared with 139,000 for the same period
last year. This was a notable accomplishment considering a 14.3%
increase in the cumulative subscriber base in the face of aggressive
competition. The low churn rate can be attributed to improved network
quality and coverage, excellent client service levels, client
contracts for one to three years as part of loyalty and retention
programs and specific grandfathered rate plans.
- Equipment sales, rental and service revenue in the first quarter of
2004 remained unchanged at $40.3 million when compared with the
corresponding quarter in 2003 despite a 12% growth in gross subscriber
additions from 205,700 to 230,300, caused mainly by increased
promotional and contracting activity and improved vendor pricing
including favourable foreign exchange rates passed on to the client.
Handset revenues associated with gross subscriber activations are
included in acquisition COA.
- Intersegment revenues represent services provided by the Mobility
segment to the Communications segment and are eliminated upon
consolidation along with the associated expense in TELUS
Communications.
The following is a discussion of Communications segment expenses.
Operations expense - Communications segment
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Salaries, benefits and
other employee-related costs 390.5 400.7 (10.2) (2.5)
Other operations expenses 316.2 339.0 (22.8) (6.7)
----------------------------------------------------------------------
Total operations expense 706.7 739.7 (33.0) (4.5)
----------------------------------------------------------------------
Operations expense for the Communications segment decreased in first
quarter of 2004, when compared with the first quarter of 2003, primarily due
to Operational Efficiency Program savings and reduced Intercarrier facilities,
transit and termination costs. There were 18,522 full-time equivalent
employees at the end of March 2004, a decrease of 693 when compared with
19,215 at the end of March 2003.
- Salaries, benefits and employee-related expenses decreased in the
first quarter of 2004, when compared with the same period in 2003.
Incremental savings in salaries, benefits and employee-related
overhead costs under the Operational Efficiency Program (duration from
2001 to 2003) were $23.0 million in the first quarter of 2004. The
final staff departures in 2004 under this program were approximately
50. In addition, pension expense for defined benefit and defined
contribution plans decreased by $6.3 million primarily as a result of
increased investment returns in 2003. Consequently, TELUS'
Communications segment annual pension expense is expected to decrease
by approximately $25.0 million for 2004, when compared with 2003.
These reductions were partly offset by a $5.2 million share-based
compensation expense, recognized commencing January 1, 2004, as
discussed in Accounting policy developments. Overtime expenses in the
first quarter of 2004 increased by $3.0 million when compared with the
first quarter of 2003, but were $6.0 million lower when compared with
the fourth quarter of 2003. The increase as compared with the same
period in 2003 was incurred primarily to continue to improve customer
service. Additional costs for the new partnership with the Calgary
Health Authority and establishment of the Montreal call centre were
$6.1 million in the first quarter of 2004. This increased cost was
partly offset by savings on outsourcing of approximately $1.8 million
included in Other operations expense. Staff increased by 107 for these
two functions since the beginning of 2004. All other costs
collectively increased in line with inflation rates.
- Other operations expenses decreased in the first quarter of 2004, when
compared with the same period in 2003, principally due to: (i) reduced
facilities, transit and termination costs, which decreased by
$19.6 million as a result of lower outbound traffic volumes and lower
rates for U.S. and international traffic termination, as well as
migration of off-net costs to on-net facilities; (ii) lower bad debt
expense that decreased by $5.3 million as a result of tightened credit
policies, more effective collection practices and reduced loss
experience; and (iii) increased capitalized labour of $5.1 million due
to higher capital investment activity in the first quarter of 2004,
when compared with the same period in 2003. Partially offsetting these
lower costs were $4.1 million increased contract and consulting
expenses incurred for improvement of internal systems and processes,
and $3.0 million increased brand and consumer advertising and
promotions expense.
Included in the total segment expenses discussed above are non-ILEC
operations expenses for the first quarter of 2004 of $137.5 million, as
compared with $155.2 million for the same period in 2003. This represented a
decrease of $17.7 million or 11.4% as a result of asset disposals in 2004 and
lower wholesale transit and termination costs associated with lower long
distance revenues. Normalized for asset disposals, non-ILEC operations
expenses for the first quarter of 2004 decreased by $9.1 million or 6.2%.
Operations expense - Mobility segment
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Equipment sales expenses 89.2 83.8 5.4 6.4
Network operating expenses 102.5 86.1 16.4 19.0
Marketing expenses 61.4 55.8 5.6 10.0
General and administration
expenses 136.4 131.8 4.6 3.5
----------------------------------------------------------------------
Total operations expense 389.5 357.5 32.0 9.0
----------------------------------------------------------------------
TELUS Mobility operations expense increased in the first quarter 2004,
when compared with the same period last year. TELUS Mobility has been able to
achieve significant economies of scale as evidenced by 14.3% growth in
subscribers and 20.4% growth in Network revenue, with only a 9.0% increase in
operating expenses year-over-year.
- Expenses related to equipment sales increased in the first quarter of
2004 when compared with the same period in 2003, principally due to an
increase in gross subscriber activations and higher retention
activity. The increase related in part to continued marketing
promotions including the camera phones and picture messaging service.
Handset costs associated with gross subscriber activations are
included in acquisition COA.
- Network operating expenses consist of site-related expenses,
transmission costs, spectrum licence fees, contribution revenue taxes,
and other direct costs related to network operations. Transmission and
site-related expenses increased to support the greater number of cell
sites, a larger subscriber base, and improved network quality and
coverage. In addition, Industry Canada spectrum licence fees were
higher in the first quarter of 2004 principally due to a $5 million
credit, related to years prior to 2003, received in first quarter of
2003 as part of a retroactive filing with Industry Canada. Network
Costs once normalized for this event increased 12.5% year-over-year.
Further, Network roaming costs increased $7.6 million in the first
quarter as compared to the same period in 2003 largely due to
successful marketing efforts in non-urban roaming/resale areas. TELUS
Mobility believes this variable cost increase is reflective of the
overall positive industry trend of subscriber growth and increased
subscriber usage evidenced in the continued strength of Network
revenue growth. TELUS Mobility has focused efforts on containing
network costs through negotiating improved leased transmission rates,
roaming rates and maintenance rates with a number of
telecommunications carriers and key vendors. TELUS Mobility also
continues to build out microwave facilities aimed at reducing future
leased line transmission costs. TELUS Mobility's digital population
coverage grew by 1.6 million to 29.5 million since March 31, 2003, as
a result of continued activation of digital roaming regions and
network expansion.
- Marketing expenses increased primarily due to higher advertising
expenses and dealer compensation costs associated with the expanded
subscriber base and increased re-contracting activity. Despite the
higher marketing expenses and significant subscriber growth,
acquisition COA improved considerably in the first quarter of 2004 at
$383 as compared with $425 for the same period last year. Combined
with the higher ARPU and steady churn, this indicates COA over the
lifetime revenue of the subscriber continued to improve significantly
in the first quarter of 2004 as compared with 2003.
- General and administration expenses consist of employee compensation
and benefits, facilities, client services, bad debt and various other
expenses. General and administration expenses increased only by 3.5%
in the first quarter of 2004 despite subscriber base growth of 14.3%
and Network revenue growth of 20.4%. TELUS Mobility increased full-
time equivalent employees (FTEs) by 7.0% to 5,370 from 5,021 one year
earlier to support the significant growth in the subscriber base and
continued expansion of its company-owned retail stores.
Restructuring and workforce reduction costs
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Communications segment 15.9 6.5 9.4 144.6
Mobility segment - - - -
----------------------------------------------------------------------
TELUS consolidated 15.9 6.5 9.4 144.6
----------------------------------------------------------------------
Restructuring costs recorded in 2004 were for a departmental
reorganization in the Communications segment that is to result in the
geographical consolidation of an information technology department from 15
locations to 2 primary locations. This reorganization, which is planned for
completion in 2004, is expected to enable greater efficiencies.
As at March 31, 2004, no future costs remain to be recorded under the
Operational Efficiency Program, but variances from estimates currently
recorded may impact amounts ultimately recorded. In 2003, Restructuring and
workforce reduction costs were recorded for initiatives under the Company's
Operational Efficiency Program, which is now completed. Approximately 50 staff
departures occurred under the program occurred during the first quarter of
2004, for which the related costs were recorded in the fourth quarter of 2003.
Cumulative net staff reductions under the Operational Efficiency Program from
its inception in 2001 to its conclusion were approximately 7,550 comprised of
5,500 bargaining unit positions and 2,050 management positions. Cumulative
cost structure reductions in the Communications segment since inception of the
Operational Efficiency Program have increased to approximately $477 million by
March 31, 2004. TELUS believes that the previously announced estimated annual
recurring savings of $550 million from this program will be achieved in 2004.
EBITDA by segment
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Communications segment 473.5 485.7 (12.2) (2.5)
Mobility segment 247.8 178.6 69.2 38.7
----------------------------------------------------------------------
TELUS consolidated 721.3 664.3 57.0 8.6
----------------------------------------------------------------------
EBITDA margin percentage(1) by segment
Quarters ended March 31 2004 2003 Change
-------------------------------------------------------------
%
Communications segment 39.6 39.4 0.2 pts
Mobility segment(2) 38.9 33.3 5.6 pts
TELUS consolidated 40.0 38.2 1.8 pts
-------------------------------------------------------------
(1) EBITDA divided by total revenue.
(2) EBITDA as a percentage of network revenue was 41.8% for 2004, as
compared with 36.3% for 2003.
pts - percentage points
When normalized for share-based compensation expense first recorded in
2004 and non-cash restructuring costs recorded in both 2004 and 2003,
Communications segment EBITDA increased by $2.4 million or 0.5% in the first
quarter of 2004 as compared with the first quarter of 2003, as the decrease in
operations costs slightly exceeded the decrease in revenues.
Significant growth in TELUS Mobility EBITDA and the related margin was
attributed to strong ARPU and subscriber growth combined with a slightly
improved churn rate and cost containment efforts. Consequently, EBITDA grew by
38.7% and the EBITDA margin improved by 5.6 percentage points in the first
quarter of 2004 over the same period last year. The EBITDA margin, when
calculated as a percentage of network revenue, improved to 41.8% for the first
quarter of 2004 as compared with 36.3% for the same quarter in 2003,
representing a positive spread of 5.5 percentage points.
Depreciation and amortization
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Depreciation 321.7 318.6 3.1 1.0
Amortization of intangible assets 88.7 92.5 (3.8) (4.1)
---------------------------------------------------------------------
410.4 411.1 (0.7) (0.2)
---------------------------------------------------------------------
Depreciation and amortization expenses were not significantly changed in
first quarter of 2004, when compared with the same period in 2003. Increased
depreciation and amortization for growth in data network and wireless capital
assets was largely matched by write-offs of certain software assets, which
occurred throughout 2003.
Other expense
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 1.2 5.6 (4.4) (78.6)
----------------------------------------------------------------------
Other expense includes accounts receivable securitization expense, income
(loss) or impairments in portfolio investments, gains and losses on disposal
of property, and charitable donations.
Accounts receivable securitization expense decreased by $2.5 million to
$1.0 million in the first quarter of 2004, when compared with the same period
in 2003. The decrease resulted from the continued reduction in the amount of
securitized receivables. See Liquidity and capital resources - Accounts
receivable sale. Net gains of $2.1 million were recorded in the first quarter
of 2004 for the disposal of property, including the sale of several buildings.
Losses from portfolio investments of $0.8 million and charitable donations
expense of $1.4 million recorded in the first quarter of 2004 were not
significantly changed from the same period last year.
Financing costs
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 145.0 164.3 (19.3) (11.7)
----------------------------------------------------------------------
Financing costs consist of interest expense on long-term and short-term
debt (including interest on convertible debentures), interest income, foreign
exchange gains and losses and amortization of debt issue costs. See Note 5 of
the interim consolidated financial statements.
Interest on long-term and short-term debt was $165.4 million in the first
quarter of 2004, a decrease of $8.9 million when compared with the same period
in 2003. The decrease was primarily a result of repaying bank facilities,
medium-term notes and First mortgage bonds after the first quarter of 2003.
TELUS maintains a hedging program using cross currency swaps, and as a result,
long-term financing costs were generally unaffected by fluctuations in the
value of the Canadian dollar against the U.S. dollar. Debt, including long-
term debt, current maturities and the deferred hedging liability, decreased to
$7,571 million at March 31, 2004, when compared with $7,577 million at
December 31, 2003 and $8,223 million at March 31, 2003. The average debt
outstanding in the first quarter of 2004 was $7,572 million, as compared with
$8,362 million in the same period in 2003.
Interest income, which has the effect of reducing financing costs, was
$19.8 million in the first quarter of 2004, an increase of $9.4 million, when
compared with the same period in 2003. Interest income in both periods was
recognized primarily as a result of tax refunds from the settlement of various
tax matters dating back to prior years.
Income taxes (recovery)
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 62.6 (6.9) 69.5 NM
----------------------------------------------------------------------
The increase in Income taxes in 2004, when compared with 2003, was
primarily related to the $81.4 million increase in income before taxes. The
effective tax rate in 2003 was significantly impacted by a positive
$47.0 million income tax adjustment for the settlement of tax matters relating
to prior years, which had higher tax rates. See Note 6 of the interim
consolidated financial statements.
Non-controlling interest
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 0.8 0.7 0.1 14.3
----------------------------------------------------------------------
Non-controlling interest primarily represents partners' interests in
several small subsidiaries.
Preferred dividends
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 0.9 0.9 - -
----------------------------------------------------------------------
There were no changes to quarterly dividends on preferred shares. On
March 25, 2004, TELUS Communications Inc. mailed notices of redemption to the
holders of its publicly issued preference and preferred shares. The intention
to redeem its publicly issued preference and preferred shares was previously
announced on February 12, 2004. General corporate funds will be used to redeem
nine classes of preference and preferred shares for total consideration of
approximately $72.8 million.
Liquidity and capital resources
-------------------------------
Cash provided by operating activities
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 588.1 404.7 183.4 45.3
----------------------------------------------------------------------
Cash provided by operating activities increased in the first quarter of
2004, when compared with 2003, principally due to the recovery of income taxes
associated with settlement of tax matters (including interest income), lower
payments under restructuring programs, improved operating profitability, lower
interest expense and a smaller decrease in accounts payable and accrued
liabilities, partly offset by the reduction in securitized account receivables
and an increase in contributions to defined benefit plans.
- Cash recovery of income taxes associated with settlement of prior
years' tax matters was $111.1 million or $104.6 million net of tax
installments in the first quarter of 2004, compared with net tax
installments of $0.6 million in the first quarter of 2003.
- Payments under restructuring and workforce reduction initiatives were
$68.4 million in the first quarter of 2004, compared with payments of
$153.9 million in the same period in 2003.
- EBITDA increased by $57.0 million in the first quarter of 2004, when
compared with the same period in 2003.
- Interest paid decreased by $13.2 million to $22.8 million in the first
quarter of 2004, when compared with the same period in 2003, as a
result of debt reduction.
- Interest received increased by $13.2 million to $14.2 million in the
first quarter of 2004, when compared with the same period in 2003,
primarily from the settlement of tax matters.
- Non-cash working capital changes for Accounts payable and accrued
liabilities, excluding changes in accrued interest, increased by
$58.2 million, and is reflective of smaller decrease in sequential
quarterly activity levels in the first quarter of 2004, when compared
with the same period in 2003.
- Employer contributions to employee defined benefit plans, increased by
10.6 million to $28.6 million primarily as a result of different
timing of contributions.
- The Company made accounts receivable securitization reduction payments
of $150 million in the first quarter of 2004, compared with
$21.0 million net reduction payments in the same period in 2003.
Cash used by investing activities
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 298.6 182.6 116.0 63.5
----------------------------------------------------------------------
Cash used by investing activities increased in the first quarter of 2004,
when compared with the same period in 2003, primarily as a result of increased
capital expenditures, partly offset by $12.1 million proceeds from the sale of
non-core assets, including several properties. Results for the first quarter
of 2003 included $19.3 million cash proceeds from the sale of an
administrative property under the terms of a sale and leaseback transaction,
on which an $8.2 million pre-tax gain was deferred and is being amortized over
the term of the lease.
Capital expenditures by segment
Quarters ended March 31 2004 2003 Change %
----------------------------------------------------------------------
($ millions)
Communications segment 259.4 153.5 105.9 69.0
Mobility segment 50.3 54.3 (4.0) (7.4)
----------------------------------------------------------------------
Total capital expenditures 309.7 207.8 101.9 49.0
----------------------------------------------------------------------
-------------------------------------------------------------
Capital expenditure
intensity(1) (%) 17.2 11.9 5.3
-------------------------------------------------------------
(1) Capital intensity is measured by dividing capital expenditures
into operating revenues, expressed as a percentage. This
measure provides a method of comparing the level of capital
expenditures to other companies within the same industry.
- Communications segment capital expenditures increased in the first
quarter of 2004, when compared with the first quarter of 2003. First
quarter expenditures last year were uncharacteristically low as a
result of peak impacts from Operational Efficiency Program
initiatives, which resulted in approximately 2,500 staff reductions
in the fourth quarter of 2002. Non-ILEC capital expenditures
increased by $23.7 million to $42.3 million primarily to support the
Company's IP strategy and delivery of services to new customers. ILEC
capital expenditures increased by $82.2 million to $217.1 million in
the first quarter of 2004, when compared with the same period in
2003, due to significant investments in network infrastructure to
improve customer service and network reliability, as well as
investments in internal systems and processes, and the development of
new services. High-speed Internet (ADSL) network facilities and
systems expenditures increased by $16.1 million to $36.6 million to
support subscriber growth.
The Communications segment capital expenditure intensity ratios were
21.7% and 12.5%, respectively for the first quarters of 2004 and
2003. Cash flow (EBITDA less capital expenditures) decreased by
$118.1 million to $214.1 million in the first quarter of 2004, when
compared with the same period in 2003, because of the increase in
capital spending and, to a lesser extent, an increased restructuring
charge of $9.4 million.
- Mobility segment capital expenditures decreased slightly in the first
quarter of 2004 when compared with same period in 2003. TELUS
Mobility continued the enhancement of digital wireless coverage and
continued its microwave build in the first quarter of 2004 aimed at
reducing future leased line transmission costs. Capital spending
declined slightly over last year principally as a result of lower
infrastructure equipment costs, a stronger Canadian dollar and the
timing of network capital expenditures.
Capital expenditure intensity for TELUS Mobility decreased to 7.9% in
the first quarter of 2004 from 10.1% in the first quarter of 2003,
due primarily to significant growth in Network revenues. Capital
expenditures are generally lower in the first quarter; however,
Mobility still expects to achieve capital expenditure intensity of
approximately 13% for the full year. As a result of continued strong
growth in EBITDA and reduced capital expenditure intensity, Mobility
generated a record cash flow of $197.5 million or 31.0% of total
revenue in the first quarter 2004, as compared with $124.3 million or
23.2% in the same period last year.
Consolidated cash flow decreased by $44.9 million to $411.6 million in
the first quarter of 2004, when compared with the same period in 2003, as
increased Communications segment capital expenditures, were partly offset by
improvement in Mobility segment EBITDA.
Cash used by financing activities
($ millions) 2004 2003 Change %
----------------------------------------------------------------------
Quarters ended March 31 22.2 205.7 (183.5) (89.2)
----------------------------------------------------------------------
Cash used by financing activities decreased in the first quarter of 2004,
when compared with the same period in 2003, as a result of the following:
- Common Shares and Non-Voting Shares issued - Proceeds received from
shares issued from Treasury under the employee share purchase plan,
from share-based compensation plans and from warrants were
$27.0 million for 2004, compared with proceeds of $20.1 million for
2003 under the employee share purchase plan and share-based
compensation plans.
- Dividends to shareholders - Cash dividends paid to shareholders
decreased by $2.5 million to $42.3 million in the first quarter of
2004, when compared with same period in 2003. The decrease in cash
dividends arose from higher enrolment in dividend reinvestment plans
(approximately 24% for the dividend paid in January 2004, compared
with approximately 17% one year earlier), partly offset by an
increased number of shares outstanding. The 15-cent quarterly
dividend paid per Common Share and Non-Voting Share remained
unchanged from one year earlier. The rate of participation in
dividend reinvestment plans decreased to approximately 13% in early
April 2004, which is expected to increase cash dividend payments in
the second quarter of 2004 by approximately $6 million, as compared
with the payment in the first quarter of 2004.
- Net debt redemptions (Long-term debt issued net of Redemptions and
repayment of long-term debt and Change in short-term obligations)
were $6.9 million in the first quarter of 2004, compared with
$182.6 million in the same period in 2003. Net debt redemptions in
the first quarter of 2004 were primarily bank facilities, for which
the maximum outstanding balance reached $34.0 million during the
period, prior to being repaid in full. Debt redemptions expected for
the remainder of 2004 include: $189.5 million of TELUS Communications
Inc. Series A debentures due August 24, 2004, $20 million of TELUS
Communications Inc. Medium Term Notes due August 25, 2004 and capital
leases.
Liquidity and capital resource measures
March 31, March 31, Dec. 31,
Period ended 2004 2003 Change 2003
-------------------------------------------------------------------------
Components of debt and
coverage ratios
----------------------
Net debt(1) ($ millions) 7,360.6 8,337.7 (977.1) 7,658.6
Total capitalization(2)
- book value ($ millions) 13,910.5 14,705.5 (795.0) 14,190.9
EBITDA (excluding
restructuring)(3)
(12-month trailing)
($ millions) 2,910.5 2,600.1 310.4 2,844.1
Net interest cost(4)
(12-month trailing)
($ millions) 617.2 678.1 (60.9) 636.5
Debt ratios
-----------
Fixed rate debt as a proportion
of total indebtedness (%) 95.4 95.1 0.3 100.0
Average term to maturity
of debt (years) 6.0 6.5 (0.5) 6.2
Net debt to total
capitalization (%) 52.9 56.7 (3.8) 54.0
Net debt to EBITDA(5) 2.5 3.2 (0.7) 2.7
Coverage ratios
---------------
Earnings coverage(6) 1.9 0.7 1.2 0.7
EBITDA interest coverage(7) 4.7 3.8 0.9 4.4
Other measures
--------------
Free cash flow(8) (three-month
$ millions) 443.3 267.6 175.7 71.5
Free cash flow (12-month
trailing, $ millions) 1,020.6 42.9 977.7 844.9
-------------------------------------------------------------------------
(1) Net debt is defined as Long-term debt (including convertible
debentures) plus current maturities of long-term debt and cheques
outstanding less Cash and temporary investments plus cross currency
foreign exchange hedge liability (less cross currency foreign
exchange hedge asset) related to U.S. dollar notes. The cross
currency foreign exchange hedge liability was $700.0 million as at
March 31, 2004 (compared with deferred hedge liabilities of
$204.6 million as at March 31, 2003 and $745.8 million at
December 31, 2003). Net debt as calculated herein, includes a
notional amount related to accounts receivable securitization of
approximately $62.8 million at March 31, 2004 (as compared with
$121.5 million at March 31, 2003 and $88.1 million at December 31,
2003), which is required to be included in the numerator of the
Leverage Ratio covenant calculation in TELUS' credit facilities. Net
debt is unaffected by foreign exchange fluctuations because it
includes (deducts) the net deferred hedging liability (asset).
(2) Total capitalization is defined as net debt plus Non-controlling
interest and Shareholders' equity.
(3) EBITDA (excluding Restructuring and workforce reduction costs of
$37.7 million, $563.9 million and $28.3 million, respectively, for
the 12-month periods ended March 31, 2004, March 31, 2003, and
December 31, 2003). EBITDA (excluding restructuring) is used for the
calculation of Net debt to EBITDA and EBITDA interest coverage,
consistent with the calculation of the Leverage Ratio and the
Coverage Ratio in credit facility covenants.
(4) Net interest cost is defined as Net financing cost before gains on
redemption and repayment of debt, calculated on a 12-month trailing
basis. Gains on redemption and repayment of debt were recorded in the
third and fourth quarters of 2002. Excluding interest income, net
interest costs for the 12-month periods ended March 31, 2004 and
2003, respectively, were $669.9 million and $714.1 million, and
$679.8 million for the year ended December 31, 2003.
(5) Net debt to EBITDA is defined as net debt as at the end of the period
divided by 12-month trailing EBITDA (excluding restructuring). This
measure is substantially the same as the Leverage Ratio covenant in
TELUS' credit facilities.
(6) Earnings coverage ratio is calculated on a 12-month trailing basis as
Net income before interest expense on total debt and income tax
expense divided by interest expense on total debt.
(7) EBITDA interest coverage is defined as EBITDA (excluding
restructuring) divided by Net interest cost (including interest on
convertible debentures). When interest income is excluded from the
calculation, the ratios were 4.3 and 3.6, respectively, for the
12-month periods ended March 31, 2004 and 2003, and 4.2 for the year
ended December 31, 2003. This measure is substantially the same as
the Coverage Ratio covenant in TELUS' credit facilities.
(8) See Note 2 of the Financial highlights table.
-------------------------------------------------------------------------
The long-term debt balance, including current maturities, was
$6,871 million as at March 31, 2004, an increase of $40 million from
December 31, 2003. This increase in the debt balance included a $45.8 million
appreciation in the Canadian dollar value of U.S. dollar denominated Notes as
a result of an approximate 1% depreciation of the Canadian dollar during the
first quarter of 2004. TELUS' U.S. dollar debt is fully hedged, resulting in a
corresponding decrease of $45.8 million being recorded in the net Deferred
hedging liability.
The proportion of debt with fixed interest rates was relatively unchanged
at March 31, 2004, when compared with one year earlier. While the amount of
utilized bank facilities decreased to $nil from $504 million one year earlier,
TELUS converted $350 million of debt from a fixed rate to a floating rate
basis during the quarter through a fixed to floating interest rate swap.
Subsequent to March 31, 2004, TELUS converted and additional $150 million of
debt from a fixed rate to a floating rate basis, reducing the proportion of
fixed rate debt to 93.4%. The net debt to total capitalization ratio measured
at March 31, 2004 decreased, when compared with one year earlier, as result of
debt repayments and increased in retained earnings since the first quarter of
2003. The net debt to EBITDA ratio measured at March 31, 2004 improved
significantly, when compared with one year earlier, as a result of debt
reduction and an increase in 12-month trailing EBITDA (excluding
restructuring). The earnings coverage ratio improved significantly because of
the improvement in income before interest and taxes in 2004. The EBITDA
interest coverage ratio improved as a result of higher EBITDA (excluding
restructuring) and lower net interest costs, including significant interest
income.
Free cash flow for the three-month period ended March 31, 2004, increased
when compared with one year earlier primarily because of improved EBITDA, cash
tax recoveries, lower payments under restructuring programs and lower interest
payments, partly offset by increased capital expenditures. Free cash flow for
the twelve-month period ended March 31, 2004 increased, when compared with one
year earlier, for the same reasons and significantly reduced capital
expenditures.
Outstanding share data
National Instrument 51-102, Section 5.4, requires disclosure of
information relating to the outstanding securities of the reporting issuer as
of the latest practicable date. Under this Section, the following must be
disclosed:
- the number of shares for each class and series of voting or equity
securities for which there are securities outstanding.
- the number of shares that are issuable on the conversion, exercise or
exchange of outstanding securities of the reporting issuer for each
class and series of securities outstanding that are convertible into,
or exercisable or exchangeable for, voting or equity securities of
the reporting issuer.
The following is a summary of the outstanding shares for each class of
equity at March 31, 2004 and at April 26, 2004. In addition, for April 26,
2004, the total number of outstanding and issuable shares is presented,
assuming full conversion of convertible debentures, options and warrants.
Class of equity security Common Non-Voting Total
Shares Shares Shares
outstanding outstanding outstanding
At March 31, 2004
Common equity - Common
Shares outstanding 191,573,384 - 191,573,384
Common equity - Non-Voting
Shares outstanding - 162,088,340 162,088,340
------------ ------------ ------------
191,573,384 162,088,340 353,661,724(1)
------------ ------------ ------------
At April 26, 2004
Common equity - Common
Shares outstanding 191,801,627 - 191,801,627
Common equity - Non-Voting
Shares outstanding - 162,361,327 162,361,327
------------ ------------ ------------
191,801,627 162,361,327 354,162,954
------------ ------------ ------------
Outstanding and issuable
shares(2) at April 26, 2004
Common Shares and Non-Voting
Shares outstanding 191,801,627 162,361,327 354,162,954
TELUS Corporation convertible
debentures - 3,765,819 3,765,819
Options 3,309,508 23,307,042 26,616,550
Warrants - 677,412 677,412
------------ ------------ ------------
195,111,135 190,111,600 385,222,735
-------------------------------------------------------------------------
(1) For the purposes of calculating diluted earnings per share for the
first quarter of 2004, the number of shares outstanding at March 31,
2004 was 355,631,524.
(2) Assuming full conversion and ignoring exercise prices.
Credit facilities
TELUS' credit facilities at March 31, 2004 consisted of a $1.5 billion
(or U.S. dollar equivalent) revolving credit facility expiring on May 30, 2004
($nil drawn along with $98.2 million in outstanding undrawn letters of
credit), an undrawn $600 million (or the U.S. dollar equivalent) 364 day
revolving credit facility extendible at TELUS' option for any amount
outstanding as at May 26, 2004 for one year on a non-revolving basis, and
approximately $74 million in other bank facilities ($2 million drawn and
approximately $4.3 million in committed and outstanding undrawn letters of
credit).
TELUS has received $1.6 billion in commitments from a syndicate of
financial institutions. The new credit facilities will consist of: (i) an
$800 million (or U.S. Dollar equivalent) revolving credit facility with a
four-year term, and (ii) a 364-day facility with $800 million (or U.S. Dollar
equivalent) in available credit on a revolving basis and which is extendible
at the Company's option on a non-revolving basis for one year for any amounts
outstanding on the anniversary date. These new facilities are expected to
replace the existing committed credit facilities prior to the availability
termination dates of such facilities. The commitments are subject to review of
final documentation.
At March 31, 2004, TELUS had unutilized available liquidity well in
excess of $1 billion. TELUS' credit facilities contain customary covenants
including a requirement that TELUS not permit its consolidated Leverage Ratio
(Funded Debt and Asset Securitization Amount to trailing 12-month EBITDA) to
exceed 4.0:1 (approximately 2.5:1 as at March 31, 2004) and not permit its
consolidated Coverage Ratio (EBITDA to Interest Expense and Asset
Securitization Charges on a trailing 12-month basis) to be less than 2.5:1
(approximately 4.8:1 as at March 31, 2004) at the end of any financial
quarter. There are certain minor differences in the calculation of the
Leverage Ratio and Coverage Ratio under the credit agreement as compared with
the calculation of net debt to EBITDA and EBITDA interest coverage. The
calculations are not expected to be materially different. The covenants are
not impacted by revaluation of capital assets, intangible assets and goodwill
for accounting purposes, and continued access to TELUS' credit facilities is
not contingent on the maintenance by TELUS of a specific credit rating.
Accounts receivable sale
TELUS Communications Inc., a wholly-owned subsidiary of TELUS, is able to
sell an interest in certain of its receivables up to a maximum of $650 million
and is required to maintain at least a BBB(low) credit rating by Dominion Bond
Rating Service (DBRS), or the purchaser may require the sale program to be
wound down. The necessary credit rating was exceeded by two levels at
BBB(high) as of April 26, 2004. The proceeds of securitized receivables were
reduced to $150 million at March 31, 2004, as compared with $454 million one
year earlier and $300 million at December 31, 2003. Average proceeds from
securitization were $275 million in the first quarter of 2004, compared with
$467 million in the same period in 2003.
TELUS' credit facilities require that a portion of sold accounts
receivable be added to debt for purposes of calculating the Leverage Ratio
covenant under the credit agreement. This portion is calculated on a monthly
basis and is a function of the ongoing collection performance of the
receivables pool. At March 31, 2004, this amount, defined as the Asset
Securitization Amount, was $62.8 million.
Credit ratings
On April 5, 2004, Dominion Bond Rating Service announced that it placed
the credit ratings of TELUS Communications (Quebec) Inc. "under review with
positive implications". On March 2, 2004, as disclosed in TELUS 2003 Annual
Report, Moody's Investors Service upgraded the credit rating on TELUS' senior
notes to Baa3 (investment grade) with a stable outlook. In addition, in March
2004, Standard & Poor's (S&P) affirmed the 'BBB' long-term corporate ratings
on TELUS and TELUS Communications Inc. with a 'stable' outlook. S&P also
affirmed the respective 'BBB' and 'A-' ratings for TELUS Communications
(Quebec) Inc.'s $70 million Notes due February 2007 and $30 million First
mortgage bonds due July 2010. S&P otherwise withdrew the ratings for TELUS
Communications (Quebec) Inc. as a result of announced plans to transfer
substantially all the assets and business of TELUS Communications (Quebec)
Inc. to TELUS Communications Inc. TELUS has an objective to preserve access to
capital markets at a reasonable cost by maintaining investment grade credit
ratings.
Off-balance sheet arrangements and contractual liabilities
Financial instruments (Note 3 of the interim consolidated financial
statements)
During the first quarter of 2004, the Company entered into two series of
hedging relationships to which hedge accounting has been applied: one series
of hedging relationships results in fixing the Company's compensation cost
arising from a specific grant of restricted share units and the other series
of hedging relationships results in the notional conversion of $350 million of
the 2006 (Canadian Dollar) Notes from a fixed interest rate of 7.5% to a
floating interest rate based upon the three-month Bankers' Acceptance Canadian
Dollar Offered Rate plus a spread. In early April 2004, the Company entered
into additional hedging relationships that resulted in bringing the total
notional conversion of the 2006 (Canadian Dollar) Notes to $500 million with a
floating interest rate based upon the three-month Bankers' Acceptance Canadian
Dollar Offered Rate plus a spread.
As at March 31, 2004, the Company had entered into foreign currency
forward contracts that have the effect of fixing the exchange rates on
U.S.$60 million of fiscal 2004 purchase commitments; hedge accounting has been
applied to these foreign currency forward contracts, all of which relate to
the Mobility segment.
Fair value: The fair value of the Company's long-term debt, including the
convertible debentures, is estimated based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same maturity as well as the use of discounted future cash flows using
current rates for similar financial instruments subject to similar risks and
maturities. The fair values of the Company's derivative financial instruments
used to manage exposure to interest rate and currency risks are estimated
similarly.
Commitments and contingent liabilities (Note 15 of the interim
consolidated financial statements)
The Company has a number of commitments and contingent liabilities. In
accordance with CRTC Price Cap Decisions 2002-34 and 2002-43, the Company
defers a portion of revenues in a deferral account, which at March 31, 2004,
was $93 million. The mechanism for disposing of balance of this deferral
account, other than as already approved by the CRTC, is currently the subject
of a CRTC proceeding, as discussed further in Risks and uncertainties -
Regulation. The Company has $88.5 million in outstanding commitments for its
restructuring programs as at March 31, 2004. The maximum, undiscounted
guarantee amounts for the balance of 2004, without regard for the likelihood
of having to make such payment, is $22.3 million.
Revised Guidance for 2004
-------------------------
Management has revised guidance for 2004 as follows:
- Guidance for basic earnings per share has been increased to reflect
the receipt of additional interest income from the settlement of tax
matters.
- TELUS' Communications segment revenue has been revised downward as a
result of weakness in traditional incumbent local exchange carrier
("ILEC") revenues and softness in non-ILEC data revenue growth.
- Guidance for consolidated EBITDA is unchanged as an increase in
TELUS Mobility EBITDA is expected to be offset by a reduced
Communications segment EBITDA, for which guidance has been revised to
reflect slower revenue growth.
--------------------------------------------------
2004 Revised 2004 Targets Change
Guidance
-------------------------------------------------------------------------
Consolidated
Revenues $7.45 to $7.45 to -
$7.55 billion $7.55 billion
-------------------------------------------------------------------------
EBITDA(1) $2.95 to $2.95 to -
$3.05 billion $3.05 billion
-------------------------------------------------------------------------
Earnings per share
- basic $1.10 to $1.05 to five cents
$1.30 $1.25
-------------------------------------------------------------------------
Capital expenditures Approx. Approx. -
$1.225 billion $1.225 billion
-------------------------------------------------------------------------
Free cash flow(2) $1.13 to $1.13 to -
$1.23 billion $1.23 billion
-------------------------------------------------------------------------
Net debt to EBITDA(3) 2.5 times 2.5 times -
or less or less
-------------------------------------------------------------------------
Communications segment
Revenue (external) $4.7 to $4.8 to $(50) to
$4.8 billion $4.85 billion $(100) million
-------------------------------------------------------------------------
Non-ILEC revenue $550 to Approx. $(35) to
$575 million $610 million $(60) million
-------------------------------------------------------------------------
EBITDA $1.925 to $1.975 to $(50) million
$1.975 billion $2.025 billion
-------------------------------------------------------------------------
Non-ILEC EBITDA $(20) to Approx. $(25) to
$(30) million $5 million $(35) million
-------------------------------------------------------------------------
Capital expenditures Approx. Approx. -
$875 million $875 million
-------------------------------------------------------------------------
High-speed Internet
net additions Approx. Approx. -
125,000 125,000
-------------------------------------------------------------------------
Mobility segment
Revenue (external) $2.65 to $2.65 to -
$2.7 billion $2.7 billion
-------------------------------------------------------------------------
EBITDA $1.0 to $975 million to $25 million
1.05 billion $1.025 billion
-------------------------------------------------------------------------
Capital expenditures Approx. Approx. -
$350 million $350 million
-------------------------------------------------------------------------
Wireless subscriber
net additions 375,000 to 375,000 to -
425,000 425,000
-------------------------------------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization as
calculated below. The 2004 target also reflects adoption of CICA
Handbook Section 3870 for share-based compensation and other
share-based payments, which is expected to be approximately
$45 million in 2004.
($ millions) 2004 target range
------------------
Operating revenues 7,450 to 7,550
Less Operations expense 4,470 4,470
Less Restructuring and workforce
reduction costs 30 30
------- -------
EBITDA 2,950 to 3,050
(2) Defined as EBITDA, adding Restructuring and workforce reduction
costs, cash interest received and excess of share compensation
expense over share compensation payments, subtracting cash interest
paid, cash taxes, capital expenditures, and cash restructuring
payments. The definition of free cash flow was amended for 2004 to
reflect a change in how the Company measures operating performance,
as restructuring payments are anticipated to occur for the
foreseeable future, and the level of dividend payments is set after
consideration of cash flows before dividends are paid out.
($ millions) 2004 target range
------------------
EBITDA 2,950 to 3,050
Restructuring and workforce reduction
costs, net of cash payments (85) (85)
Excess of share compensation expense
over payments 35 35
Cash interest paid net of cash
interest received (650) (650)
Income taxes received (paid) including
investment tax credits 105 105
Capital expenditures (capex) (1,225) (1,225)
------- -------
Free cash flow 1,130 1,230
(3) Net Debt to EBITDA, where EBITDA excludes Restructuring and workforce
reduction costs. This measure is substantially the same as the
Leverage Ratio covenant in TELUS' credit facilities.
5. Risks and uncertainties
The following are updates to the risks and uncertainties described in
Management's discussion and analysis in TELUS' 2003 Annual Report, filings on
SEDAR (www.sedar.com) and filings on EDGAR (www.sec.gov).
Competition
Increased competition may adversely affect market shares, volumes and
pricing in certain TELUS business segments
On March 18, 2004, Manitoba Telecom Services Inc. announced that it had
agreed to purchase all of the shares of an existing national competitor
Allstream. This transaction, if concluded, could affect the competitive
landscape in Canada, particularly for business local, long distance, data, and
other services.
In March 2004, Bell Mobility and The Virgin Group announced a joint
marketing alliance to offer wireless communication services (on a resale
basis) aimed at the Canadian youth market. Virgin Mobile Canada expects to
launch its services through a nation-wide rollout later this year using Bell
Mobility's 1X digital wireless network.
Regulation
Price cap regulation - Telecom Public Notice CRTC 2004-1
On March 24, 2004, the CRTC initiated a public proceeding, inviting
proposals for disposing of the amounts accumulated in the incumbent local
exchange carriers' (ILECs') deferral accounts during the first two years of
the second price cap period (June 2002 through May 2004, except for TELUS
Communications (Quebec) Inc., which is August 2002 through July 2004). The
CRTC has already determined that ILECs can recover from their deferral
accounts certain mandated reductions in competitor services rates, service
improvement plan costs and competitive digital network access discounts. The
scope of the proceeding will address the remaining balance of the deferral
accounts. The CRTC indicated that possible outcomes include:
- Adjustments to the deferral account could be made if the Commission
approved rate reductions for residential local services as a result
of competitive pressures;
- The deferral account could be drawn down to mitigate rate increases
for residential services that could result from the approval of
exogenous factors when inflation exceeded productivity; and
- Other draw downs could occur such as subscriber rebates or the
funding of initiatives that would benefit residential customers in
other ways.
Proceedings under this Public Notice are expected to continue through to
the autumn 2004. TELUS is participating in these proceedings.
Regulatory framework for voice communication services using Internet
protocol - Telecom Public Notice CRTC 2004-2
On April 7, 2004, the CRTC initiated a public proceeding and expressed
its preliminary views regarding regulatory requirements for the provision of
voice communication services using Internet protocol. A summary of the CRTC's
preliminary view follows.
- Voice communication services that provide access to and/or from the
public switched telephone network and generally use telephone numbers
that conform to the North American Numbering Plan, are not retail
Internet services and will be regulated as local exchange services.
Revenues from such services are contribution-eligible.
- Peer-to-peer Internet services, that do not connect to the public
switched telephone network, and do not use telephone numbers that
conform to the North American Numbering Plan, are retail Internet
services and will not be regulated as local exchange services.
Revenues from such services are not contribution-eligible.
The CRTC invited comments on its preliminary views and related matters
to be filed by June 18, 2004, followed by an interrogatory process and a
public consultation on September 21-22, 2004. This proceeding will
conclude on October 13, 2004 with the filing of reply comments. TELUS is
participating in this process.
TELUS Corporation
Consolidated statements of income
Three months
Periods ended March 31 (unaudited) (millions) 2004 2003
-------------------------------------------------------------------------
(restated)
OPERATING REVENUES $ 1,803.8 $ 1,740.9
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,066.6 1,070.1
Restructuring and workforce reduction costs 15.9 6.5
Depreciation 321.7 318.6
Amortization of intangible assets 88.7 92.5
-------------------------------------------------------------------------
1,492.9 1,487.7
-------------------------------------------------------------------------
OPERATING INCOME 310.9 253.2
Other expense, net 1.2 5.6
Financing costs 145.0 164.3
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING
INTEREST 164.7 83.3
Income taxes (recovery) 62.6 (6.9)
Non-controlling interest 0.8 0.7
-------------------------------------------------------------------------
NET INCOME 101.3 89.5
Preference and preferred share dividends 0.9 0.9
-------------------------------------------------------------------------
COMMON SHARE AND NON-VOTING SHARE INCOME $ 100.4 $ 88.6
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INCOME PER COMMON SHARE AND NON-VOTING SHARE ($)
- Basic 0.28 0.26
- Diluted 0.28 0.26
DIVIDENDS DECLARED PER COMMON SHARE
AND NON-VOTING SHARE ($) 0.15 0.15
TOTAL WEIGHTED AVERAGE COMMON SHARES
AND NON-VOTING SHARES OUTSTANDING (millions)
- Basic 353.1 346.8
- Diluted 355.6 347.0
==========================================================================
TELUS Corporation
Consolidated balance sheets
As at As at
March 31, December 31,
(unaudited) (millions) 2004 2003
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(restated)
ASSETS
Current Assets
Cash and temporary investments, net $ 273.5 $ 6.2
Accounts receivable 762.7 723.8
Income and other taxes receivable 117.5 187.4
Inventories 117.8 123.5
Prepaid expenses and other 208.0 172.4
Current portion of future income taxes 303.8 304.0
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1,783.3 1,517.3
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Capital Assets, Net
Property, plant, equipment and other 7,710.4 7,764.3
Intangible assets subject to amortization 790.8 844.7
Intangible assets with indefinite lives 2,954.6 2,954.6
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11,455.8 11,563.6
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Other Assets
Deferred charges 632.3 610.7
Future income taxes 532.5 626.0
Investments 41.6 41.9
Goodwill 3,118.0 3,118.0
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4,324.4 4,396.6
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$ 17,563.5 $ 17,477.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,332.8 $ 1,294.5
Restructuring and workforce reduction
accounts payable and accrued liabilities 88.5 141.0
Dividends payable 53.8 53.5
Accrual for redemption of preference
and preferred shares 72.8 -
Advance billings and customer deposits 454.9 445.0
Current maturities of long-term debt 213.1 221.1
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2,215.9 2,155.1
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Long-Term Debt 6,658.2 6,609.8
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Other Long-Term Liabilities 1,134.4 1,173.7
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Future Income Taxes 1,005.1 1,007.0
-------------------------------------------------------------------------
Non-Controlling Interest 9.7 10.7
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Shareholders' Equity
Convertible debentures conversion option 8.8 8.8
Preference and preferred shares - 69.7
Common equity 6,531.4 6,442.7
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6,540.2 6,521.2
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$ 17,563.5 $ 17,477.5
=========================================================================
TELUS Corporation
Consolidated statements of cash flows
Three months
Periods ended March 31 (unaudited) (millions) 2004 2003
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OPERATING ACTIVITIES
Net income $ 101.3 $ 89.5
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 410.4 411.1
Future income taxes 91.8 193.9
Share-based compensation 4.7 -
Net employee defined benefit plans expense 4.9 13.1
Employer contributions to employee defined
benefit plans (28.6) (18.0)
Restructuring and workforce reduction costs,
net of cash payments (52.5) (147.4)
Other, net 6.1 6.9
Net change in non-cash working capital 50.0 (144.4)
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Cash provided by operating activities 588.1 404.7
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INVESTING ACTIVITIES
Capital expenditures (309.7) (207.8)
Proceeds from the sale of property
and other assets 12.1 19.3
Other (1.0) 5.9
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Cash used by investing activities (298.6) (182.6)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting Shares issued 27.0 20.1
Dividends to shareholders (42.3) (44.8)
Long-term debt issued 27.3 17.5
Redemptions and repayment of long-term debt (34.2) (200.1)
Other - 1.6
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Cash used by financing activities (22.2) (205.7)
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CASH POSITION
Increase in cash and temporary investments, net 267.3 16.4
Cash and temporary investments, net,
beginning of period 6.2 (9.0)
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Cash and temporary investments, net,
end of period $ 273.5 $ 7.4
=========================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Interest paid $ 22.8 $ 36.0
=========================================================================
Interest received 14.2 1.0
=========================================================================
Income taxes
(inclusive of Investment Tax Credits) received
(paid) $ 104.6 $ (0.6)
=========================================================================
TELUS Corporation
Segmented Information
Periods
ended
March 31 Communications Mobility Eliminations Consolidated
(millions) 2004 2003 2004 2003 2004 2003 2004 2003
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External
revenue $1,171.1 $1,208.5 $632.7 $532.4 $ - $ - $1,803.8 $1,740.9
Inter-
segment
revenue 25.0 23.4 4.6 3.7 (29.6) (27.1) - -
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Total
operating
revenue 1,196.1 1,231.9 637.3 536.1 (29.6) (27.1) 1,803.8 1,740.9
Operations
expense 706.7 739.7 389.5 357.5 (29.6) (27.1) 1,066.6 1,070.1
Restruc-
turing and
work-force
reduction
costs 15.9 6.5 - - - - 15.9 6.5
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EBITDA(1)$ 473.5 $ 485.7 $247.8 $178.6 $ - $ - $ 721.3 $ 664.3
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CAPEX(2) $ 259.4 $ 153.5 $ 50.3 $ 54.3 $ - $ - $ 309.7 $ 207.8
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EBITDA
less
CAPEX $ 214.1 $ 332.2 $197.5 $124.3 $ - $ - $ 411.6 $ 456.5
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(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is defined by the Company as operating revenues less
operations expense and restructuring and workforce reduction
costs. The Company has issued guidance on, and reports, EBITDA
because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 5, 2004
TELUS Corporation
/s/ James W. Peters
_____________________________
Name: James W. Peters
Title: Corporate Secretary