TELUS Reports Results for Fourth Quarter 2015 and Announces 2016 Financial Targets
VANCOUVER, BRITISH COLUMBIA
--(Marketwired - Feb. 11, 2016) - (TSX:T)(NYSE:TU) -
TELUS Corporation's consolidated operating revenue grew 2.8 per cent to
$3.2 billion in the fourth quarter of 2015, from a year earlier, as a result of higher data revenue in both wireless and wireline operations. Wireless data revenue increased 9.9 per cent from a year ago, leading to overall network revenue growth of 3.0 per cent, while wireline data revenue increased 8.8 per cent to generate 4.4 per cent growth in external wireline revenue. Earnings before interest, income taxes, depreciation and amortization (EBITDA) was impacted by significant restructuring and other costs of
$99 million. When excluding restructuring and other costs from both periods, EBITDA was higher by 4.9 per cent, increasing to
$1.1 billion. EBITDA including restructuring and other costs was lower by 2.2 per cent from a year ago.
"TELUS delivered solid fourth quarter revenue, EBITDA, and subscriber growth in both its wireless and wireline businesses despite economic challenges impacting some of our customers in
Alberta
," said Darren Entwistle, President and CEO. "Our continued strong performance was the result of our unwavering focus on putting customers first and the ongoing execution and success of a winning strategy that focuses on long-term capital investment to drive sustainable growth."
Mr. Entwistle added "We have established 2016 targets that reflect the diversity and strength of TELUS' multiple growth assets in both our wireless and wireline operating segments. These targets continue to support our dividend growth model and share repurchase initiatives while also demonstrating our confidence in our ability to successfully manage our efficiency programmes and growth-focussed investments in a highly competitive industry."
Mr. Entwistle further commented "TELUS has a successful track record for consistent and transparent investing for the long-term benefit of our customers and shareholders despite complicating exogenous factors and short-term economic volatility that will inevitably occur. We embrace the leadership role TELUS plays in
Canada's
domestic economy and will continue to invest prudently in our network technology and bandwidth to ensure Canadians maintains their global digital leadership position."
John Gossling, TELUS Executive Vice-President and CFO said, "I am very pleased with the TELUS team's balanced approach to effectively implementing efficiency investments without compromising our customer focus, strategic investments, or our strong shareholder friendly initiatives. Despite a more challenging environment, both our wireless and wireline results continued to deliver growth and facilitated the return of $1.6 billion to shareholders in dividend growth and share purchases in 2016."
Mr. Gossling added "We remain committed to the critical network investments that are essential to driving customer satisfaction, delivering balanced growth, and supporting our transparent shareholder initiatives. TELUS has effectively navigated this key investment period and maintained a strong financial position to ensure it can continue to make disciplined long-term investments in its core assets during the lowest cost of capital environment we have seen in our lifetime. Throughout this unique investment cycle, we have increased our wireless and wireline customer connections, consistently grown revenue and EBITDA, delivered the strongest lifetime revenue per customer and further enhanced the industry's already best customer loyalty. Importantly, during this elevated period of investing, we have extended our average term to maturity of TELUS' long-term debt to 11.1 years, as compared to 5.5 years in 2012, and reduced TELUS' weighted average cost of long-term debt to 4.32 per cent, as compared to 5.44 per cent at the end of 2012."
Net income and basic earnings per share (EPS) were affected by significant restructuring and other costs, as well as an increase in depreciation and amortization expense reflecting, in part, TELUS' higher asset base from ongoing investments in its fibre optic and 4G LTE networks. Adjusted net income decreased 1.2 per cent to $324 million, while adjusted EPS of $0.54 was up 1.9 per cent from the prior year. On a reported basis, net income decreased 16 per cent to $261 million, while basic earnings per share (EPS) decreased 14 per cent to $0.44 due to higher restructuring and other costs.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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C$ and in millions, except per share Three months ended Per cent
amounts December 31 change
(unaudited) 2015 2014
----------------------------------------------------------------------------
Operating revenues 3,217 3,128 2.8
Operating expenses before depreciation
and amortization 2,239 2,127 5.3
EBITDA(1) 978 1,001 (2.2)
EBITDA excluding restructuring and other
costs(1)(2) 1,077 1,027 4.9
Net income 261 312 (16.3)
Adjusted net income(3) 324 328 (1.2)
Basic earnings per share (EPS) 0.44 0.51 (13.7)
Adjusted EPS(3) 0.54 0.53 1.9
Capital expenditures 655 570 14.9
Free cash flow(4) 197 337 (41.5)
Total customer connections(5) 12.495 12.228 2.2
(1) EBITDA does not have any standardized meaning prescribed by IFRS-IASB.
TELUS issues guidance on and reports EBITDA because it is a key measure
used to evaluate performance at a consolidated and segmented level. For
further definition and explanation, see Section 4.1 in the accompanying
2015 fourth quarter Management's review of operations.
(2) For the fourth quarter of 2015 and 2014, restructuring and other costs
were $99 million and $26 million, respectively.
(3) Adjusted net income and Adjusted EPS do not have any standardized
meaning prescribed by IFRS-IASB. These terms are defined in this news
release as excluding (after income taxes): a) restructuring and other
costs; and b) favourable income tax-related adjustments. For further
analysis of the aforementioned items see Section 1.2 in the
accompanying 2015 fourth quarter Management's review of operations.
(4) Free cash flow does not have any standardized meaning prescribed by
IFRS-IASB. For definition and explanation, see Section 4.1 in the
accompanying 2015 fourth quarter Management's review of operations.
(5) The sum of active wireless subscribers, residential network access
lines (NALs), high-speed Internet access subscribers and TELUS TV
subscribers (Optik TV(TM) and TELUS Satellite TV(R) subscribers)
measured at the end of the respective periods based on information in
billing and other systems. Effective January 1, 2014, subscriber
connections have been restated to exclude 25,000 dial-up Internet
subscribers and include 222,000 Public Mobile prepaid subscribers in
the opening subscriber balances. TELUS acquired 100% of Public Mobile,
a Canadian wireless communications operator focused on the
Toronto
and
Montreal
markets, in November 2013. Also, effective December 31, 2015,
business NALs have been removed from the reported subscriber base due
to their diminishing relevance as a key performance indicator (for
example, the impact of migrations from voice lines to IP services has
led to business NAL losses without a similar decline in revenue).
Accordingly, December 31, 2014 has been retrospectively adjusted to
exclude 1,613,000 business NALs in the reported subscriber balances. As
of December 31, 2015, the business NAL subscriber base was 1,586,000
and business NAL losses in the fourth quarter and full year of 2015
were 5,000 and 27,000, respectively. Comparatively, business NAL losses
in the fourth quarter of 2014 were 5,000 and business NAL gains in the
full year of 2014 were 2,000.
In wireless, data revenue was driven by subscriber growth, an increased but moderating proportion of higher-rate two-year plans in the revenue mix, a more favourable postpaid subscriber mix, and increased data usage, partially offset by the effects of an economic slowdown, particularly in
Alberta
, and ongoing decline in voice revenue. Wireline data revenue growth was generated by an increase in
Internet and enhanced data service revenue from continued high-speed
Internet subscriber growth and higher revenue per customer, growth in
TELUS International's business process outsourcing services, TELUS TV subscriber growth and higher
TELUS Health revenues.
In the quarter, TELUS attracted 109,000 net wireless postpaid, high-speed Internet and TV customers. This included 62,000 wireless postpaid customers, 25,000 TELUS TV customers and 22,000 high-speed Internet subscribers. These gains were partially offset by the ongoing loss of traditional telephone network access lines. TELUS' total wireless subscriber base is up 2.1 per cent from a year ago to 8.5 million, high-speed Internet connections have increased 6.2 per cent to 1.6 million, and TELUS TV subscribers are higher by 9.7 per cent to 1 million.
Free cash flow of $197 million in the fourth quarter was lower by $140 million from a year ago, primarily due to higher share-based compensation, higher capital expenditures and lower EBITDA reflecting significant restructuring and other costs. For 2015, free cash flow of $1.1 billion was higher by $21 million or 2.0 per cent compared to 2014, primarily due to lower income tax payments, lower restructuring disbursements and EBITDA growth, partially offset by higher capital expenditures and share-based compensation.
In the fourth quarter of 2015, TELUS returned $486 million to shareholders including $252 million in dividends paid and $234 million in share purchases under the 2016 normal course issuer bid (NCIB) program. For 2015, TELUS returned more than $1.6 billion to shareholders, including $992 million in dividends paid and the purchase for cancellation of 15.6 million common shares for $635 million under its multi-year share purchase program.
This news release contains statements about financial and operating performance of TELUS (the Company) and future events, including with respect to future dividend increases and normal course issuer bids through 2016 and the 2016 annual targets and guidance that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and predictions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future performance and events to differ materially from those expressed in the forward-looking statements. Accordingly, this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for the 2016 annual targets and guidance, semi-annual dividend increases through 2016 and our ability to sustain and complete our multi-year share purchase program through 2016), qualifications and risk factors referred to in the accompanying fourth quarter Management's review of operations and in the 2015 annual Management's discussion and analysis, and in other TELUS public disclosure documents and filings with securities commissions in
Canada
(on SEDAR at
sedar.com) and in
the United States
(on EDGAR at
sec.gov). Except as required by law,
TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance.
Fourth Quarter 2015 Operating Highlights
TELUS wireless
-- Wireless network revenues increased by $46 million or 3.0 per cent to
$1.6 billion in the fourth quarter of 2015, when compared to the same
period a year ago. This growth was driven by a 9.9 per cent increase in
data revenue, reflecting subscriber growth, an increased but moderating
proportion of higher-rate two-year plans in the revenue mix, a more
favourable postpaid subscriber mix, and increased data roaming,
partially offset by the effects of an economic slowdown, particularly in
Alberta
, and ongoing decline in voice revenue.
-- Blended ARPU increased by 0.6 per cent to $63.74, reflecting TELUS'
twenty-first consecutive quarter of year-over-year growth.
-- Monthly postpaid subscriber churn of 1.01 per cent increased 7 basis
points year-over-year. The increase reflects increased competitive
intensity resulting from two-year and three-year customer contracts
expiring simultaneously starting in June 2015, as well as the effects of
the economic slowdown, particularly in
Alberta
. These trends are
expected to continue in 2016. Blended monthly churn improved 11 basis
points to 1.32 per cent reflecting TELUS' continued focus on customers
first initiatives and retention programs.
-- Postpaid net additions of 62,000 were lower year over year by 56,000 due
to lower gross additions resulting primarily from the economic slowdown,
particularly in
Alberta
, higher handset prices, and higher churn. Total
wireless net additions of 36,000 decreased by 50,000 over the same
period a year ago due to lower postpaid net additions and prepaid losses
of 26,000.
-- Wireless EBITDA excluding restructuring and other costs increased by $18
million or 2.8 per cent over last year to $653 million as network
revenue growth and operational efficiency initiatives were partially
offset by higher retention expenses. Retention costs as a percentage of
network revenue were 17.0 per cent, reflecting a $50 million increase
over the same period a year ago, arising from a 5.4 per cent increase in
retention volumes and more expensive smartphone devices in the sales
mix.
-- Wireless EBITDA excluding restructuring and other costs less capital
expenditures decreased slightly year over year by $3 million to $444
million, primarily due to higher capital expenditures.
TELUS wireline
-- External wireline revenues increased by $61 million or 4.4 per cent to
$1.4 billion in the fourth quarter of 2015, when compared with the same
period a year ago. This growth was generated by increased data service
revenue, partially offset by continued declines in legacy voice and
equipment revenues and lower business activity.
-- Data revenues increased by $80 million or 8.8 per cent, due to higher
Internet and enhanced data revenues from continued high-speed Internet
subscriber growth and higher revenue per customer, growth in business
process outsourcing services, higher TELUS TV revenues from continued
subscriber growth, and increased TELUS Health revenues.
-- High-speed Internet net additions of 22,000 were unchanged over the same
quarter a year ago, reflecting the ongoing expansion of TELUS' high-
speed broadband footprint in urban and rural communities, including
fibre to the premises, and the pull-through effect of bundling with
Optik TV.
-- Total TV net additions of 25,000 were lower by 3,000 over the same
quarter a year ago, as the expansion of TELUS' addressable high-speed
broadband footprint was offset by slower industry subscriber growth,
increasing competition from over-the-top services and an increase in the
customer churn rate.
-- Residential network access lines (NALs) declined by 24,000 in the
quarter compared to a loss of 20,000 in the same quarter a year ago.
Residential NAL losses continue to reflect the ongoing trend of wireless
and Internet substitution, partly offset by the success of TELUS'
bundling strategy.
-- Wireline EBITDA excluding restructuring and other costs of $424 million
increased by $32 million or 8.2 per cent year-over-year. The improvement
reflects improving margins in data services, including Internet, TELUS
TV, business process outsourcing services, and TELUS Health, as well as
ongoing operating efficiency initiatives. EBITDA growth also benefitted
from the gain on sale of certain real estate assets of approximately $13
million.
-- Wireline EBITDA excluding restructuring and other costs less capital
expenditures decreased by $32 million to $(22) million as higher EBITDA
was more than offset by higher capital expenditures that support TELUS'
long-term growth. Capital expenditures increased over the same period
last year due to continued strategic investments in broadband network
infrastructure, including connecting more homes and businesses directly
to TELUS' fibre optic network and investments in system and network
resiliency and reliability.
2015 Corporate Highlights
TELUS makes significant contributions and investments in the communities where team members live, work and serve and to the Canadian economy on behalf of customers, shareholders and team members by:
-- Paying, collecting and remitting a total of $1.8 billion in taxes during
2015 to federal, provincial and municipal governments in
Canada
consisting of corporate income taxes, sales taxes, property taxes,
employer portion of payroll taxes and various regulatory fees. Since
2002, the Company has remitted more than $17 billion in these taxes.
-- Purchasing 57 MHz of wireless spectrum nationally in three spectrum
auctions held by the Department of Innovation, Science and Economic
Development (formerly Industry Canada) in 2015 for approximately $2
billion. Since the beginning of 2014, TELUS has purchased 81 MHz of
wireless spectrum nationally for approximately $3.2 billion. In
addition, TELUS has paid annual spectrum renewal fees of more than $117
million to the Canadian federal government since the beginning of 2014.
Since 2002, TELUS' total tax and spectrum remittances to federal,
provincial and municipal governments in
Canada
have totaled over $22
billion.
-- Investing more than $2.5 billion in capital expenditures primarily in
communities across
Canada
in 2015 and more than $29 billion since 2000.
-- Spending $7.8 billion in total operating expenses in 2015, including
goods and service purchased of $5.3 billion. Since 2000, TELUS has spent
$91 billion and $60 billion respectively in these areas.
-- Generating a total team member payroll of $3.0 billion in 2015,
including payroll taxes of $826 million. Since 2000, total team member
payroll totals $37 billion.
-- Paying $992 million in dividends in 2015 to individual shareholders,
mutual fund owners, pensioners and institutional investors, and
purchasing 15.6 million shares for $635 million on behalf of
shareholders under TELUS' multi-year share purchase program.
-- Returning $12.7 billion to shareholders through TELUS' dividend and
share purchase programs from 2004 to the end of 2015, including $7.6
billion in dividends and $5.0 billion in share buybacks, representing
$21 per share.
TELUS sets 2016 financial targets
TELUS today announced its 2016 financial targets that reflect the benefits of the Company's ongoing strategic investments related to advanced broadband infrastructure, a focus on client service excellence and continued focus on cost efficiency. TELUS' long-standing growth strategy has consistently delivered profitable growth as well as strong free cash flow generation enabling TELUS to return significant amounts of capital to shareholders through its dividend growth and share purchase programs.
In 2016, TELUS plans to generate growth through modest subscriber expansion in wireless, high-speed Internet and TELUS TV. Wireless and Internet are expected to benefit from growing data usage and demand for higher speeds. TELUS also expects to benefit from continued growth in business process outsourcing services and increased TELUS Health revenues. This growth is expected to be underpinned by the significant investments TELUS continues to make in wireless and wireline broadband, including building out of fibre connecting directly to more homes and businesses as well as continued investments in cost efficiency.
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2016 Targets 2015 Results Growth
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Consolidated
$12.750 to $12.875
Revenues billion $12.502 billion 2 to 3%
EBITDA excluding
restructuring and $4.625 to $4.755
other costs(1) billion $4.488 billion 3 to 6%
Basic earnings per
share $2.40 to $2.56 $2.29 5 to 12%
Capital Approximately
expenditures(2) $2.65 billion $2.577 billion Approximately 3%
Wireless
Network Revenue $6.425 to $6.490
(external) billion $6.298 billion 2 to 3%
EBITDA excluding
restructuring and $2.975 to $3.060
other costs billion $2.887 billion 3 to 6%
Wireline
$5.680 to $5.735
Revenue (external) billion $5.569 billion 2 to 3%
EBITDA excluding
restructuring and $1.650 to $1.695
other costs billion $1.601 billion 3 to 6%
(1) In 2016, total restructuring costs are expected to be approximately
$175 million, as compared to $226 million in 2015.
(2) Capital expenditure targets and results exclude expenditures for
spectrum licences and exclude non-monetary transactions.
For 2016, TELUS is targeting consolidated year-over-year revenue growth of between 2 and 3 per cent, while EBITDA excluding restructuring and other costs is targeted to be higher by 3 to 6 per cent. Revenue and EBITDA excluding restructuring and other costs are expected to continue benefitting from ongoing growth in both wireless and wireline data services, and savings from cost efficiency initiatives. Basic earnings per share (EPS) is targeted to be higher by 5 to 12 per cent, due to EBITDA growth combined with lower shares outstanding due to our share purchase program.
Wireless network revenue is targeted to increase between 2 and 3 per cent in 2016 reflecting modest growth in both subscribers and blended ARPU. We also expect growth in data and roaming revenues will offset lower voice revenue. Wireless EBITDA excluding restructuring and other costs is targeted to be higher by between 3 and 6 per cent, as a result of anticipated growth in wireless network revenue, savings from cost efficiency initiatives and stable retention costs.
In wireline, revenue is targeted to increase between 2 and 3 per cent in 2016, as we anticipate continued data revenue growth from high-speed Internet, Optik TV services, business process outsourcing and TELUS Health services, partially offset by continued decreases in legacy voice revenues and continued effects of the economic slowdown. Wireline EBITDA excluding restructuring and other costs is targeted to increase by between 3 and 6 per cent. We anticipate margin improvements from our high-speed Internet and Optik TV services, business outsourcing and TELUS Health services, as well as our ongoing efficiency initiatives, partially offset by the ongoing industry trend of revenue losses from higher-margin legacy voice services.
Consolidated capital expenditures, excluding the purchase of spectrum licences and non-monetary transactions, in 2016 are targeted to be approximately $2.65 billion. TELUS plans to continue broadband infrastructure expansion and upgrades, including bringing fibre-optic cable deeper into the network and connecting more homes and businesses to the fibre-optic network, to support high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. We intend to continue investing in our wireless network for 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
TELUS' cash income tax payments are estimated to be between $570 million and $630 million (2015 - $256 million). Cash tax payments are increasing in 2016 primarily as a result of the impact of the use of the Public Mobile losses in 2014 which has the effect of: i) deferring a portion of our 2015 current taxes payable to February 2016 and ii) increasing, relative to 2015, the 2016 instalments payable, which ultimately is expected to reduce the 2017 cash income tax payments by approximately $150 million.
The preceding disclosure respecting TELUS' 2016 financial targets contains forward-looking information and is fully qualified by the 'Caution regarding forward-looking statements' at the beginning of the accompanying Management's review of operations for the fourth quarter of 2015 and in the full year 2015 Management's discussion and analysis filed on the date hereof on SEDAR, especially Section 10 entitled 'Risks and Risk Management' thereof which is hereby incorporated by reference, and is based on management's expectations and assumptions as set out in Section 1.7 entitled 'Financial and operating targets for 2016' in the accompanying Management's review of operations for the fourth quarter of 2015.
Dividend Declaration
The TELUS Board of Directors has declared a quarterly dividend of 44 cents ($0.44) Canadian per share on the issued and outstanding Common Shares of the Company payable on April 1, 2016 to holders of record at the close of business on March 11, 2016.
About TELUS
TELUS (TSX:T)(NYSE:TU) is
Canada's
fastest-growing national telecommunications company, with
$12.5 billion of annual revenue and 12.5 million customer connections, including 8.5 million wireless subscribers, 1.5 million residential network access lines, 1.6 million high-speed
Internet subscribers and 1.0 million TELUS TV customers.
TELUS provides a wide range of communications products and services, including wireless, data,
Internet protocol (IP), voice, television, entertainment and video, and is
Canada's
largest healthcare IT provider.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed $440 million to charitable and not-for-profit organizations and volunteered more than 6.8 million hours of service to local communities since 2000. Created in 2005 by President and CEO Darren Entwistle, TELUS' 11 Canadian community boards and 4 International boards have led the Company's support of grassroots charities and have contributed more than $54 million in support of over 4,900 local charitable projects, enriching the lives of more than 2 million children and youth, annually. TELUS was honoured to be named the most outstanding philanthropic corporation globally for 2010 by the Association of Fundraising Professionals, becoming the first Canadian company to receive this prestigious international recognition.
For more information about TELUS, please visit telus.com.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings news release, management's discussion and analysis, quarterly results slides, audio and transcript of the investor webcast call, supplementary financial information, the 2015 annual Management's discussion and analysis and financial statements, and our full 2014 annual report at telus.com/investors.
TELUS' fourth quarter 2015 and 2016 targets conference call is scheduled for February 11, 2016 at 11:00am ET (8:00am PT) and will feature a presentation followed by a question and answer period with investment analysts. Interested parties can access the webcast at telus.com/investors. A telephone playback will be available on February 11 until March 15, 2016 at 1-855-201-2300. Please use reference number 1191995# and access code 77377#. An archive of the webcast will also be available at telus.com/investors and a transcript will be posted on the website within a few business days.
TELUS CORPORATION
Management's review of operations
2015 Q4
Caution regarding forward-looking statements
This document contains forward-looking statements about expected events and the financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us and our refer to TELUS Corporation and where the context of the narrative permits or requires, its subsidiaries. Forward-looking statements include statements relating to annual targets, outlook, guidance and updates, our multi-year dividend growth program, our multi-year share purchase program, and trends. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, predict, could, expect, intend, may, plan, seek, should, strive and will. By their nature, forward-looking statements do not refer to historical facts, are subject to inherent risks and require us to make assumptions. There is significant risk that forward-looking statements will not prove to be accurate. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements. Annual targets for 2016 and related assumptions are described in Sections 1.6 and 1.7.
Factors that could cause actual performance to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following:
-- Competition including: continued intense rivalry across all services
among wireless and wireline telecommunications companies, cable-TV
providers, other communications companies and over-the-top (OTT)
services, which, among other things, places pressures on average revenue
per subscriber unit per month (ARPU) and churn for all services; mergers
and acquisitions of industry competitors, including the integration of
cable-TV and wireless companies; the potential entry of new competitors;
competition from global players for international roaming services; our
ability to continue to retain customers through an enhanced customer
service experience; pressures on wireless ARPU and churn from market
conditions and government actions, customer usage patterns, flat-rate
pricing trends for voice and data, inclusive long distance plans for
voice, moderating growth in postpaid market penetration and increasing
availability of Wi-Fi networks for data; pressures on high-speed
Internet and TV ARPU and churn resulting from market conditions,
government actions and customer usage patterns; residential network
access line (NAL) losses; subscriber additions and retention volumes and
associated costs for wireless, TV and high-speed Internet services;
competition for wireless spectrum; and our ability to obtain and offer
content on a timely basis across multiple devices on wireless and TV
platforms at a reasonable cost.
-- Technological substitution including: reduced utilization and increased
commoditization of traditional wireline voice local and long distance
services from impacts of OTT applications and wireless substitution, and
overall slower subscriber growth in the wireline segment; the increasing
number of households that have only wireless and/or Internet-based
telephone services; continuation of wireless voice ARPU declines as a
result of, among other factors, substitution to messaging and OTT
applications; substitution to increasingly available Wi-Fi services from
wireless services; and OTT Internet protocol (IP) services that may
displace TV and entertainment services, and impact revenue.
-- Technology including: subscriber demand for data that challenges
wireless networks and spectrum capacity levels; our reliance on legacy
systems and information technology; technology options, evolution paths
and roll-out plans for wireline and wireless networks (including
broadband initiatives, such as fibre-to-the-premises (FTTP) and wireless
small-cell deployment); our reliance on wireless network access
agreements; choice of suppliers and those suppliers' ability to maintain
and service their product lines; supplier concentration and market power
for network equipment, TELUS TV(R) and wireless handsets; the
performance of long-term evolution (LTE) wireless technology; our
expected long-term need to acquire additional spectrum capacity through
future spectrum auctions and from third parties to address increasing
demand for data; deployment and operation of new wireless networks and
success of new products, new services and supporting systems, including
the Internet of Things (IoT) services for Internet-connected devices;
deployment and operation of new wireline broadband networks at a
reasonable cost and availability, and success of new products and
services to be rolled out on such networks; availability of resources
and ability to build out adequate broadband capacity; network
reliability and change management (including migration risks related to
technology and customer retention, to new, more efficient Internet data
centres (IDCs) and realizing the expected benefits); timing of
decommissioning of certain legacy wireline networks, systems and
services to reduce operating costs; timing of decommissioning of CDMA
and iDEN wireless networks to redeploy spectrum and reduce operating
costs, and the associated subscriber migration costs and customer
retention risks; and success of upgrades and evolution of TELUS TV
technology, which depend on third-party suppliers.
-- Regulatory decisions and developments including: potential of government
intervention to further increase wireless competition; the Canadian
Radio-television and Telecommunications Commission (CRTC) wireless
wholesale services review, in which it was determined that the CRTC will
regulate wholesale GSM-based domestic roaming rates and the setting of
such rates; future spectrum auctions (including limitations on
established wireless providers, spectrum set-aside favouring certain
carriers and other advantages provided to new and foreign participants,
and the amount and cost of spectrum acquired); restrictions on the
purchase, sale and transfer of spectrum licences; the undetermined long-
term impact of the CRTC's wireline wholesale services review, which
concluded that wholesale competitors shall receive regulated access to
FTTP facilities owned by incumbent Internet service providers; increased
subsidy requirements for telecommunications facilities in
Yukon
,
Nunavut
and the
Northwest Territories
, and possible changes to the scope and
nature of basic service obligations, including higher minimum Internet
access speeds; the CRTC's new code of conduct for TV services; vertical
integration by competitors moving into broadcast content ownership and
timely and effective enforcement of related regulatory safeguards;
ongoing monitoring and compliance with restrictions on non-Canadian
ownership of TELUS Common Shares; modification, interpretation and
application of tower sharing and roaming rules; and the non-
harmonization of provincial consumer protection legislation,
particularly in light of the CRTC's mandatory national Wireless Code
(the Code) in effect since December 2, 2013, and pressures on retention
costs and other operational challenges resulting from the retroactive
application of the Code, which led to two-year and three-year customer
contracts ending coterminously starting in June 2015.
-- Economic growth and fluctuations including: the state of the economy in
Canada
, which may be influenced by economic developments outside of
Canada
; future interest rates; inflation; unemployment levels; effects
of low oil prices; effects of low business spend (reducing investments
and cost structure); pension investment returns, funding and discount
rates; and
Canada
:
U.S.
dollar exchange rates.
-- Capital expenditure levels and potential outlays for spectrum licences
in spectrum auctions or from third parties, due to: our ongoing
deployment of wireless LTE and future technologies; utilizing newly
acquired spectrum; our wireline broadband initiatives, including
connecting more homes and businesses directly to fibre; investments in
network resiliency and reliability; subscriber demand for data; evolving
systems and business processes; implementing efficiency initiatives;
supporting large complex deals; and future wireless spectrum auctions
held by the Department of Innovation, Science and Economic Development.
Our capital expenditure levels could be impacted by the achievement of
our targeted operational and financial results.
-- Ability to successfully implement cost reduction initiatives and realize
planned savings, net of restructuring and other costs, without losing
customer service focus or negatively affecting business operations.
Initiatives include: our earnings enhancement program to drive
improvements in earnings before interest, income taxes, depreciation and
amortization (EBITDA), including the initiative announced in November
2015; business integrations; business process outsourcing; offshoring
and reorganizations, including any full-time equivalent (FTE) employee
reduction programs; procurement initiatives; and real estate
rationalization. Additional cost reduction initiatives may be needed if
we do not achieve our targeted operational and financial results.
-- Financing and debt requirements including our ability to carry out
financing activities and our ability to maintain investment grade credit
ratings in the range of BBB+ or the equivalent.
-- Ability to sustain our dividend growth program of circa 10% per annum
through 2016 and our ability to sustain and complete our multi-year
share purchase program through 2016. These programs may be affected by
factors such as regulatory decisions and developments, our earnings and
free cash flow, our levels of capital expenditures and spectrum licence
purchases, the competitive environment and economic performance in
Canada
. Quarterly dividend decisions are subject to assessment and
determination by our Board of Directors (Board), based on the Company's
financial position and outlook. The share purchase program may be
affected by a change in our intention to purchase shares, and the
assessment and determination of our Board from time to time.
Consequently, there can be no assurance that these programs will be
maintained through 2016 and/or renewed thereafter.
-- Human resource matters including: recruitment, retention and appropriate
training in a highly competitive industry; the future outcome of
collective bargaining for an agreement with the Telecommunications
Workers Union (TWU), United Steel Workers Local Union 1944, which
expired at the end of 2015; and the level of employee engagement.
-- Process risks including: our reliance on legacy systems and ability to
implement and support new products and services and business operations;
our ability to implement effective change management for system
replacements and upgrades, process redesigns and business integrations;
implementation of complex large enterprise deals that may be adversely
impacted by available resources, system limitations and degree of co-
operation from other service providers; our ability to successfully
manage operations in foreign jurisdictions; information security and
privacy breaches, including data loss or theft of data; intentional
threats to our infrastructure and business operations; and real estate
joint venture re-development risks.
-- Tax matters including: complex tax laws that may be subject to
interpretation by the tax authorities that may differ from our
interpretations; changes in tax laws, including tax rates; elimination
of income tax deferrals through the use of different tax year-ends for
operating partnerships and corporate partners; and international tax
complexity and compliance.
-- Business continuity events including: our ability to maintain customer
service and operate our networks in the event of human error or human-
caused threats, such as electronic attacks and equipment failures that
could cause various degrees of network outages; supply chain
disruptions; natural disaster threats; epidemics and pandemics; and the
completeness and effectiveness of business continuity and disaster
recovery plans and responses.
-- Litigation and legal matters including: our ability to defend
successfully against investigations, claims and lawsuits, including
class actions pending against us and possible class actions based on
consumer claims, data or security breaches and secondary market
liability; and the complexity of legal compliance in domestic and
foreign jurisdictions.
-- Acquisitions or divestitures including: our ability to successfully
integrate acquisitions or complete divestitures in a timely manner, and
realize expected strategic benefits.
-- Health, safety and environmental developments and other risk factors
discussed herein and listed from time to time in our reports and public
disclosure documents, including our annual report, annual information
form, and other filings with securities commissions or similar
regulatory authorities in
Canada
(on SEDAR at sedar.com) and in our
filings with the Securities and Exchange Commission (SEC) in
the United States
, including Form 40-F (on EDGAR at sec.gov). Section 10: Risks and
risk management in our annual 2015 Management's discussion and analysis
(MD&A), which will be filed concurrently, is incorporated by reference
in this cautionary statement.
Management's review of operations
February 11, 2016
Contents
----------------------------------------------------------------------------
Section Description
----------------------------------------------------------------------------
1. Discussion of operations 1.1 Preparation of Management's review of
operations
1.2 Consolidated operations
1.3 Wireless segment
1.4 Wireline segment
1.5 Summary of consolidated quarterly results
and trends
1.6 Performance scorecard (key performance
measures)
1.7 Financial and operating targets for 2016
----------------------------------------------------------------------------
2. Changes in financial
position
----------------------------------------------------------------------------
3. Discussion of cash flow 3.1 Overview of cash flow results
results 3.2 Cash provided by operating activities
3.3 Cash used by investing activities
3.4 Cash provided (used) by financing
activities
----------------------------------------------------------------------------
4. Definitions and 4.1 Non-GAAP and other financial measures
reconciliations 4.2 Operating indicators
----------------------------------------------------------------------------
1. Discussion of operations
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the Management's review of operations.
1.1 Preparation of Management's review of operations
The following sections are a discussion of the consolidated financial position and financial performance of TELUS for the three-month period and year ended December 31, 2015, and should be read together with the accompanying summary financial information. Our operating and reportable segments are wireless and wireline. Segmented information is regularly reported to our Chief Executive Officer (the chief operating decision-maker).
The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our use of the term IFRS in this Management's review of operations is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures, such as earnings before interest, income taxes, depreciation and amortization (EBITDA), to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 4.1. All currency amounts are in Canadian dollars, unless otherwise specified.
Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This document was reviewed by TELUS' Audit Committee and approved by our Board of Directors for issuance on February 11, 2016.
1.2 Consolidated operations
The following is a discussion of our consolidated financial performance. Segmented discussion is provided in Section 1.3 Wireless segment,Section 1.4 Wireline segment and in Section 3.3 Cash used by investing activities - capital expenditures.
Consolidated highlights
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-----------------------------------------------------------
($ millions,
unless noted
otherwise) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Consolidated
statements of
income
----------------------------------------------------------------------------
Operating
revenues 3,217 3,128 2.8% 12,502 12,002 4.2%
Operating
expenses 2,757 2,595 6.2% 10,149 9,620 5.5%
Operating income 460 533 (13.7)% 2,353 2,382 (1.2)%
Financing costs 114 115 (0.9)% 447 456 (2.0)%
Income before
income taxes 346 418 (17.2)% 1,906 1,926 (1.0)%
Income taxes 85 106 (19.8)% 524 501 4.6%
Net income 261 312 (16.3)% 1,382 1,425 (3.0)%
Earnings per
share (EPS) ($)
Basic EPS 0.44 0.51 (13.7)% 2.29 2.31 (0.9)%
Adjusted basic
EPS (1) 0.54 0.53 1.9% 2.58 2.41 6.8%
Diluted EPS 0.44 0.51 (13.7)% 2.29 2.31 (0.9)%
Basic weighted-
average Common
Shares
outstanding
(millions) 598 611 (2.1)% 603 616 (2.1)%
----------------------------------------------------------------------------
Other operating
highlights
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-----------------------------------------------------------
($ millions,
unless noted
otherwise) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Subscriber
connections (2)
(thousands) 12,495 12,228 2.2%
EBITDA(1) 978 1,001 (2.2)% 4,262 4,216 1.1%
Restructuring and
other costs
included in
EBITDA(1) 99 26 n/m 226 75 n/m
EBITDA -
excluding
restructuring
and other
costs(1) 1,077 1,027 4.9% 4,488 4,291 4.6%
EBITDA -
excluding
restructuring
and other costs
margin(1,3) (%) 33.5 32.8 0.7 pts. 35.9 35.8 0.1 pts.
Dividends
declared per
Common Share ($) 0.44 0.40 10.0% 1.68 1.52 10.5%
Free cash flow(1) 197 337 (41.5)% 1,078 1,057 2.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notations used in Management's review of operations: n/m - Not meaningful;
pts. - Percentage points.
1 Non-GAAP and other financial measures. See Section 4.1.
2 The sum of active wireless subscribers, residential network access
lines (NALs), high-speed Internet access subscribers and TELUS TV
subscribers (Optik TV(TM) and TELUS Satellite TV(R) subscribers)
measured at the end of the respective periods based on information in
billing and other systems. Effective January 1, 2014, subscriber
connections have been restated to exclude 25,000 dial-up Internet
subscribers and include 222,000 Public Mobile prepaid subscribers in
the opening subscriber balances. TELUS acquired 100% of Public Mobile,
a Canadian wireless communications operator focused on the
Toronto
and
Montreal
markets, in November 2013. Also, effective December 31, 2015,
business NALs has been removed from the reported subscriber base due to
its diminishing relevance as a key performance indicator (for example,
the impact of migrations from voice lines to IP services has led to
business NAL losses without a similar decline in revenue). Accordingly,
December 31, 2014 has been retrospectively adjusted to exclude
1,613,000 business NALs in the reported subscriber balances. As of
December 31, 2015, the business NAL subscriber base was 1,586,000 and
business NAL losses in the fourth quarter and full year of 2015 were
5,000 and 27,000, respectively. Comparatively, business NAL losses in
the fourth quarter of 2014 were 5,000 and business NAL gains in the
full year of 2014 were 2,000. Total subscriber connections, if business
NALs were included, would have been 14,081,000 in 2015, or an increase
of 1.7% from 2014.
3 EBITDA - excluding restructuring and other costs, as a percentage of
operating revenues.
----------------------------------------------------------------------------
Operating revenues
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Service 2,943 2,856 3.0% 11,590 11,108 4.3%
Equipment 243 259 (6.2)% 840 819 2.6%
----------------------------------------------------------------------------
Revenues arising
from contracts
with customers 3,186 3,115 2.3% 12,430 11,927 4.2%
Other operating
income 31 13 138.5% 72 75 (4.0)%
----------------------------------------------------------------------------
3,217 3,128 2.8% 12,502 12,002 4.2%
----------------------------------------------------------------------------
-- Service revenue increased year over year by $87 million in the fourth
quarter of 2015 and $482 million in the full year of 2015, reflecting
growth in the wireless subscriber base and an increased wireless blended
average revenue per subscriber unit per month (ARPU); higher wireline
Internet and enhanced data services revenue due to subscriber growth and
higher revenue per customer; and increased wireline business process
outsourcing, TELUS TV and TELUS Health services revenues. This growth
was partly offset by ongoing declines in wireline voice, continued
competitive pressures, product substitution, the impacts of the economic
slowdown, particularly in
Alberta
, and the full year also included a
decline in other services revenue.
-- Equipment revenue decreased year over year by $16 million in the fourth
quarter of 2015 as a result of lower wireless equipment revenue from
lower gross additions and lower Black's Photography revenue from the
closure of stores in August 2015, partly offset by higher retention
volumes. For the full year of 2015, Equipment revenue increased year
over year by $21 million due to higher wireless equipment revenue of $61
million from greater retention volumes and higher-priced smartphones in
the sales mix, partly offset by lower gross additions and lower Black's
Photography revenue from the closure of stores in August 2015, as well
as lower wireline equipment revenues of $40 million largely due to
declines in business spending.
-- Other operating income increased year over year by $18 million in the
fourth quarter of 2015, mainly due to non-recurring gains from the sale
of certain real estate assets. For the full year of 2015, Other
operating income declined year over year by $3 million, primarily from a
decrease in the current period amortization of deferred revenue in
respect of the regulatory price cap deferral account for provisioning
broadband Internet services to eligible rural and remote communities, as
well as lower investment income, partly offset by higher gains from the
sale of certain real estate assets in 2015.
Operating expenses
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Goods and services
purchased 1,482 1,476 0.4% 5,532 5,299 4.4%
Employee benefits
expense 757 651 16.3% 2,708 2,487 8.9%
Depreciation 406 366 10.9% 1,475 1,423 3.7%
Amortization of
intangible assets 112 102 9.8% 434 411 5.6%
----------------------------------------------------------------------------
2,757 2,595 6.2% 10,149 9,620 5.5%
----------------------------------------------------------------------------
-- Goods and services purchased increased year over year by $6 million in
the fourth quarter of 2015 and $233 million in the full year of 2015.
The increases reflect higher wireless subscriber retention costs, which
increased to 17.0% of wireless network revenue in the fourth quarter and
13.9% in the full year of 2015, as compared with 14.3% in the fourth
quarter and 11.8% in the full year of 2014. The year over year increases
also reflected higher non-labour restructuring and other costs mainly
from real estate rationalization and an increase in our wireless
customer service and distribution channel expenses. These year over year
increases were partially offset by lower wireline equipment cost of
sales associated with lower equipment revenues, a decline in advertising
and promotions expenses, lower wireless network operating costs and, the
full year period also included, a retroactive assessment of additional
TV revenue contribution expensed in the third quarter of 2014 for
approximately $15 million towards our Canadian programming funding
requirements.
-- Employee benefits expense increased year over year by $106 million in
the fourth quarter of 2015 and $221 million in the full year of 2015,
primarily driven by higher labour restructuring expenses largely from
the reduction of full-time positions announced in November 2015 (see
Section 4.1), increased wages and salaries mainly from higher full-time
equivalent (FTE) employees to support growth in business process
outsourcing revenue, and increased employee defined benefit pension plan
costs. These increases were partially offset by higher capitalized
labour costs associated with increased capital expenditures and the
fourth quarter also included lower share-based compensation expenses.
-- Depreciation increased year over year by $40 million in the fourth
quarter of 2015 and by $52 million in the full year of 2015 due to
growth in capital assets (such as the broadband network, the wireless
LTE network, and TELUS TV-related assets), as well as the impact of our
continuing program of asset life studies.
-- Amortization of intangible assets increased year over year by $10
million in the fourth quarter and by $23 million in the full year of
2015. The increase in the quarter and full year periods reflect growth
in the intangible asset base, partially offset by software asset life
adjustments arising from our continuing program of asset life studies.
Operating income
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Operating income 460 533 (13.7)% 2,353 2,382 (1.2)%
----------------------------------------------------------------------------
Operating income decreased year over year by $73 million in the fourth quarter of 2015, reflecting relatively flat wireless EBITDA for the quarter (see Section 1.3), a decline in wireline EBITDA of $22 million (see Section 1.4) and increases in depreciation and amortization expenses of $50 million discussed above. In the full year of 2015, Operating income decreased year over year by $29 million from a decline in wireline EBITDA of $33 million and increases in total depreciation and amortization expenses of $75 million discussed above, partly offset by growth in wireless EBITDA of $79 million. Year-over-year wireless EBITDA growth for the quarter and full year was restricted primarily due to higher retention spend and restructuring and other costs, when compared to similar periods in 2014 (see Section 1.3).The year over year decline in wireline EBITDA for the quarter and full year was driven by higher restructuring and other costs (see Section 1.4).
Financing costs
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Gross Interest
expense 133 117 13.7% 515 446 15.5%
Capitalized
long-term
debt interest (18) - n/m (45) - n/m
Long-term debt
prepayment
premium,
before income
taxes - - n/m - 13 (100.0)%
Employee
defined
benefit plans
net interest 7 1 n/m 27 3 n/m
Interest
income and
foreign
exchange net
gains (8) (3) 166.7% (50) (6) n/m
----------------------------------------------------------------------------
114 115 (0.9)% 447 456 (2.0)%
----------------------------------------------------------------------------
-- Gross Interest expense, excluding capitalized long-term debt interest
and long-term debt prepayment premiums, increased year over year by $16
million in the fourth quarter of 2015 and $69 million in the full year
of 2015, primarily due to growth in the average long-term debt balances
outstanding arising mainly from the purchase of spectrum licences,
partly offset by a reduction in the effective interest rate. As a result
of our 2015 financing activities, our weighted-average interest rate on
long-term debt (excluding commercial paper) was 4.32% at December 31,
2015, as compared to 4.72% one year earlier. For additional details, see
Long-term debtissues and repayments in Section 3.4.
-- Capitalized long-term debt interest is in respect of debt incurred for
the purchase of spectrum licences during spectrum auctions held by the
Department of Innovation, Science and Economic Development (formerly
Industry Canada), which we expect to deploy in our existing network in
future periods. Capitalization of long-term debt interest will continue
until such spectrum is deployed in our network. (Following the Federal
election in
Canada
in October 2015, the new government announced that
the responsibilities of the former Industry Canada would fall under the
new Department of Innovation, Science and Economic Development.)
-- Long-term debt prepayment premium decreased by $13 million in the full
year of 2015. The 2014 premium of $13 million before income taxes was
related to the early redemption of $500 million of 5.95% Series CE Notes
in September 2014.
-- Employee defined benefit plans net interest is calculated for each year
based on the net defined benefit plan surplus (deficit) at December 31
of the previous year. Employee defined benefit plans net interest
expense increased year over year by $6 million in the fourth quarter of
2015 and $24 million in the full year of 2015, primarily due to the
increase in the defined benefit plan deficit at December 31, 2014, as
compared to the defined benefit plan surplus at December 31, 2013.
-- Interest income and foreign exchange net gains fluctuate from period to
period. Interest income was $4 million in the fourth quarter and $25
million in the full year of 2015, primarily due to the settlement of
prior years' income-tax related matters, as compared to $1 million in
the fourth quarter and $2 million in the full year of 2014. The balances
of amounts were foreign exchange net gains. For the full year of 2015,
foreign exchange net gains increased by $21 million, mainly due to the
positive effects of foreign exchange derivatives contracts.
Income taxes
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
---------------------------------------------------------
($ millions, except
tax rates) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Income tax computed
at applicable
statutory rates 93 109 (14.7)% 505 504 0.2%
Revaluation of
deferred income
tax liability to
reflect future
statutory income
tax rates - - - 48 - n/m
Adjustments
recognized in the
current period for
income tax of
prior periods (7) (4) (75.0)% (30) (6) n/m
Other (1) 1 n/m 1 3 (66.7)%
----------------------------------------------------------------------------
Income taxes 85 106 (19.8)% 524 501 4.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income taxes
computed at
applicable
statutory rates
(%) 26.7 26.0 0.7 pts. 26.5 26.2 0.3 pts.
Effective tax rates
(%) 24.6 25.4 (0.8)pts. 27.5 26.0 1.5 pts.
----------------------------------------------------------------------------
The total income tax expense decreased year over year by $21 million in the fourth quarter of 2015, primarily due to a decline in income before income taxes arising from higher restructuring and other costs and higher retention spend. In the full year of 2015, income tax expense increased year over year by $23 million, mainly due to a $48 million non-cash adjustment in the second quarter of 2015 to revalue deferred income tax liabilities for an increase to the
Alberta
provincial corporate tax rate from 10% to 12% effective July 1, 2015, partly offset by higher recoveries from the settlement of prior years' income tax-related matters and lower income before income taxes.
Analysis of Net income
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-----------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Net income 261 312 (51) 1,382 1,425 (43)
Add back
(deduct):
Restructuring
and other
costs, after
income taxes 72 20 52 166 56 110
Long-term debt
prepayment
premium, after
income taxes - - - - 10 (10)
Unfavourable
(favourable)
income tax-
related
adjustments (9) (4) (5) 1 (6) 7
Asset
retirement
from closure
of Black's
Photography,
after income
taxes - - - 6 - 6
----------------------------------------------------------------------------
Adjusted net
income 324 328 (4) 1,555 1,485 70
----------------------------------------------------------------------------
Net income decreased year over year by $51 million or 16% in the fourth quarter of 2015 mainly from increased depreciation and amortization expenses and a decline in EBITDA, partially offset by lower income tax expense. In the full year of 2015, Net income decreased year over year by $43 million or 3.0% as a result of increased depreciation and amortization expenses and higher income tax expenses, partly offset by growth in EBITDA and lower Financing costs. Excluding the effects of restructuring and other costs, long-term debt prepayment premiums, income tax-related adjustments and asset retirement from the closure of Black's Photography stores, Net income decreased year over year by $4 million or 1.2% in the fourth quarter of 2015 and increased by $70 million or 4.7% in the full year of 2015.
Analysis of basic EPS ($)
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Basic EPS 0.44 0.51 (0.07) 2.29 2.31 (0.02)
Add back (deduct):
Restructuring and
other costs after
income taxes, per
share 0.12 0.03 0.09 0.28 0.09 0.19
Long-term debt
prepayment premium
after income taxes,
per share - - - - 0.02 (0.02)
Unfavourable
(favourable) income
tax related
adjustments, per
share (0.02) (0.01) (0.01) - (0.01) 0.01
Asset retirement
from closure of
Black's
Photography, after
income taxes, per
share - - - 0.01 - 0.01
----------------------------------------------------------------------------
Adjusted basic EPS 0.54 0.53 0.01 2.58 2.41 0.17
----------------------------------------------------------------------------
Basic EPS decreased year over year by $0.07 or 14% in the fourth quarter of 2015 and by $0.02 or 0.9% in the full year of 2015. The reduction in the number of shares that resulted from our completed 2015 and advanced 2016 normal course issuer bid (NCIB) programs, net of share option exercises, contributed approximately $0.01 and $0.05 year over year in basic EPS in the fourth quarter and in the full year of 2015, respectively. Excluding the effects of restructuring and other costs, long-term debt prepayment premium, income tax-related adjustments and asset retirement from the closure of Black's Photography stores, basic EPS increased year over year by $0.01 or 1.9% in the fourth quarter of 2015 and by $0.17 or 6.8% in the full year of 2015.
Comprehensive income
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Net income 261 312 (16.3)% 1,382 1,425 (3.0)%
Other comprehensive
income (loss) (net of
income taxes):
Items that may be
subsequently
reclassified to
income 7 9 (22.2)% 21 7 n/m
Item never
subsequently
reclassified to
income - Employee
defined benefit
plans re-
measurements 486 (652) 174.5% 445 (445) n/m
----------------------------------------------------------------------------
Comprehensive income 754 (331) n/m 1,848 987 87.2%
----------------------------------------------------------------------------
Comprehensive income increased by $1.1 billion in the fourth quarter and $861 million in the full year of 2015, when compared to the same periods in 2014. This was primarily due to positive increases in employee defined benefit plan re-measurements from changes to estimates regarding actuarial assumptions, including an increased discount rate and adjustments in the cost of living allowance indexing assumption, partly offset by declines in Net income. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.
Other operating highlights
-- During the year ended December 31, 2015, our subscriber connections
increased by 267,000 or 2.2 %. This reflects a 2.1% increase in wireless
subscribers, a 9.7% increase in TELUS TV subscribers and a 6.2% increase
in high-speed Internet subscribers, partly offset by a 5.7% decline in
residential NALs.
Our postpaid wireless subscriber net additions were 62,000 in the fourth
quarter of 2015 and 244,000 in the full year of 2015, representing
decreases of 56,000 and 113,000, respectively, from the same periods in
2014. The decrease reflects the economic slowdown, particularly in
Alberta
, increased competitive intensity, higher handset prices causing
slower demand and an increase in our postpaid churn rate. Our average
monthly postpaid subscriber churn rates were 1.01% in the fourth quarter
of 2015 and 0.94% in the full year of 2015, as compared to 0.94% in the
fourth quarter of 2014 and 0.93% in the full year of 2014. Our blended
churn was 1.32% in the fourth quarter of 2015 and 1.26% in the full year
of 2015, as compared to 1.43% in the fourth quarter and 1.41% in the
full year of 2014. The year-over-year increase in our postpaid
subscriber churn rate was primarily due to continued competitive
intensity as two-year and three-year contracts began expiring
coterminously in June 2015, as well as the effects of the economic
slowdown, particularly in
Alberta
, and our focused marketing efforts on
higher-value loading. The year-over-year improvement in our blended
subscriber churn rates in the fourth quarter and in the full year was
due to our continued focus on customers first initiatives, clear and
simple approach and retention programs, partly offset by the economic
slowdown, particularly in
Alberta
, the effects from the Wireless Code,
and our focused marketing efforts on higher-value loading impacting
postpaid subscriber churn as noted above.
Our wireline subscriber net additions were 23,000 in the fourth quarter
of 2015 and 91,000 in the full year of 2015, representing decreases of
7,000 and 3,000, respectively, from the same periods in 2014. Net
additions of high-speed Internet subscribers were 22,000 in the fourth
quarter of 2015, which was consistent with same period in 2014. For the
full year, high-speed Internet subscriber net additions were 91,000,
representing a year-over-year increase of 11,000 driven by the expansion
of our high-speed broadband footprint and the pull-through impact from
the continued bundling with Optik TV, partly offset by an increase in
our customer churn rate. Net additions of TELUS TV subscribers were
25,000 in the fourth quarter and 89,000 in the full year of 2015,
representing decreases of 3,000 and 12,000, respectively, from the same
periods in 2014. The year-over-year decline in the quarter and full year
is due to slower growth for paid TV services, lower oil sands
construction camp activity, increasing competition from OTT services and
technology substitution, as well as an increase in our customer churn
rate, all of which was partly offset by continued expansion of our high-
speed broadband footprint. During the fourth quarter, our TELUS TV
subscriber base surpassed the one-million-subscriber mark. Residential
NAL losses were 24,000 in the fourth quarter and 89,000 in the full year
of 2015, as compared to 20,000 in the fourth quarter and 87,000 in the
full year of 2014. The residential NAL losses continue to reflect the
ongoing trend of substitution to wireless and Internet-based services,
including losses to competitors, partially mitigated by the success of
our bundled service offerings.
-- Consolidated EBITDA decreased year over year by $23 million or 2.2% in
the fourth quarter of 2015 and increased year over year by $46 million
or 1.1% in the full year of 2015. EBITDA - excluding restructuring and
other costs increased year over year by $50 million or 4.9% in the
fourth quarter of 2015 and by $197 million or 4.6% in the full year of
2015. These increases reflect growth in wireless network revenues and
wireline data revenues, improving margins in Internet, TV, business
process outsourcing and TELUS Health, and executing on our operational
efficiency initiatives, all partly offset by higher wireless retention
costs and continued declines in legacy wireline and wireless voice
revenues.
-- Dividends declared per Common Share were $0.44 in the fourth quarter of
2015, up 10% from the fourth quarter of 2014, and dividends declared per
Common Share were $1.68 in the full year of 2015, up 11% from the full
year of 2014. On February 10, 2016, the Board declared a first quarter
dividend of $0.44 per share on the issued and outstanding Common Shares,
payable on April 1, 2016 to shareholders of record at the close of
business on March 11, 2016. The first quarter dividend increased by
$0.04 per share or 10% from the $0.40 per share dividend declared one
year earlier, consistent with our multi-year dividend growth program.
-- Free cash flow was $197 million in the fourth quarter of 2015,
reflecting a year-over-year decrease of $140 million in the quarter,
primarily from share-based compensation payments largely due to higher
year-over-year cash outflows associated with restricted stock units
(RSUs) arising from a timing difference which results in a cash outflow
that would have typically arisen in the fourth quarter of 2014 due to a
delay in issuing the annual allocation of RSUs that ended up occurring
in the first quarter of 2015, higher capital expenditures (excluding
spectrum licences) and lower EBITDA, partly offset by lower
restructuring disbursements net of expenses. In the full year of 2015,
free cash flow was higher year-over-year by $21 million as lower income
tax payments, lower restructuring disbursements net of expenses and
EBITDA growth were partly offset by higher capital expenditures
(excluding spectrum licences) and higher cash outflows associated with
share-based compensation.
1.3 Wireless segment
Wireless operating indicators
----------------------------------------------------------------------------
At December 31 2015 2014(1) Change
----------------------------------------------------------------------------
Subscribers
(000s)
Postpaid 7,352 7,108 3.4%
Prepaid 1,105 1,173 (5.8)%
----------------------------------------------------------------------------
Total 8,457 8,281 2.1%
----------------------------------------------------------------------------
Postpaid
proportion of
subscriber base
(%) 86.9 85.8 1.1 pts.
HSPA+ population
coverage(2)
(millions) 35.7 35.3 1.1%
LTE population
coverage(2)
(millions) 34.9 31.7 10.1%
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------------
2015 2014(1) Change 2015 2014(1) Change
----------------------------------------------------------------------------
Subscriber gross
additions
(000s)
Postpaid 273 308 (11.4)% 1,014 1,075 (5.7)%
Prepaid 98 131 (25.2)% 429 545 (21.3)%
----------------------------------------------------------------------------
Total 371 439 (15.5)% 1,443 1,620 (10.9)%
----------------------------------------------------------------------------
Subscriber net
additions
(000s)
Postpaid 62 118 (47.5)% 244 357 (31.7)%
Prepaid (26) (32) 18.8% (68) (105) 35.2%
----------------------------------------------------------------------------
Total 36 86 (58.1)% 176 252 (30.2)%
----------------------------------------------------------------------------
Blended ARPU,
per month(3)($) 63.74 63.34 0.6% 63.45 62.25 1.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Churn, per
month(3)(%)
Blended 1.32 1.43 (0.11)pts. 1.26 1.41 (0.15)pts.
Postpaid 1.01 0.94 0.07 pts. 0.94 0.93 0.01 pts.
Cost of
acquisition
(COA) per gross
subscriber
addition(3) ($) 472 433 9.0% 418 385 8.5%
Retention spend
to network
revenue(3) (%) 17.0 14.3 2.7 pts. 13.9 11.8 2.1 pts.
Retention
volume(3)
(units) 609 578 5.4% 2,169 1,971 10.1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Effective January 1, 2014, prepaid subscribers, total subscribers and
associated operating statistics (gross additions, net additions,
blended ARPU, blended churn and COA per gross subscriber addition) have
been adjusted for the inclusion of 222,000 Public Mobile prepaid
subscribers in the opening subscriber balances and subsequent Public
Mobile subscriber changes.
2 Including network access agreements with other Canadian carriers.
3 See Section 4.2 Operating indicators. These are industry measures
useful in assessing operating performance of a wireless company, but
are not measures defined under IFRS-IASB.
----------------------------------------------------------------------------
Operating revenues - wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-------------------------------------------------------
($ millions, except
ratios) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Network revenues 1,595 1,549 3.0% 6,298 6,008 4.8%
Equipment and other 177 195 (9.2)% 635 579 9.7%
----------------------------------------------------------------------------
External operating
revenues 1,772 1,744 1.6% 6,933 6,587 5.3%
Intersegment network
revenue 17 15 13.3% 61 54 13.0%
----------------------------------------------------------------------------
Total operating
revenues 1,789 1,759 1.7% 6,994 6,641 5.3%
----------------------------------------------------------------------------
---------------------------------------------------------------------------
Data revenue to
network revenues (%) 56 52 4 pts. 55 50 5 pts.
----------------------------------------------------------------------------
Network revenues from external customers increased year over year by $46 million or 3.0% in the fourth quarter of 2015 and $290 million or 4.8% in the full year of 2015. Data network revenue increased year over year by 9.9% in the fourth quarter of 2015 and 15% in the full year of 2015, reflecting growth in the subscriber base, a larger proportion of higher-rate two-year plans in the revenue mix, a favourable postpaid subscriber mix, increased data roaming and the full year period also included higher chargeable data usage, all of which was partly offset by the impacts of the economic slowdown, particularly in
Alberta
. Voice network revenue decreased year over year by 4.6% in the fourth quarter of 2015 and 4.9% in the full year of 2015 due to the increased adoption of unlimited nationwide voice plans, and continued substitution to data services and features.
-- Monthly blended ARPU was $63.74 in the fourth quarter of 2015 and $63.45
in the full year of 2015, reflecting a $0.40 or 0.6% year-over-year
increase in the quarter and a $1.20 or 1.9% year-over-year increase for
the full year. The increase was driven by the effects of higher-rate
two-year plans, a more favourable postpaid subscriber mix, increased
data roaming and the full year period also included growth in chargeable
data usage, all of which were partly offset by declines in voice
revenue, elimination of charges for paper bills and the impact of the
economic slowdown, particularly in
Alberta
. ARPU growth continued to
slow in the fourth quarter of 2015, primarily due to the declining
proportion of subscribers on legacy three-year plans renewing to higher-
rate two-year plans, as well as lower chargeable data usage. Chargeable
data usage declined year over year in the fourth quarter as a result of
increased data allotments in Your Choice(TM) plans commencing June 2015,
customer reactions to increased frequency of real-time data usage
notifications as part of our customers first initiatives, and the launch
of our US Easy Roam(TM) service in July 2015 for customers travelling in
the United States
. These data usage initiatives are aligned with our
priority of putting customers first and consequently are expected to
drive margin accretion through higher customer satisfaction.
-- Gross subscriber additions were 371,000 in the fourth quarter of 2015
and 1,443,000 for the full year of 2015, reflecting year-over-year
decreases of 68,000 for the quarter and 177,000 for the full year of
2015. Postpaid gross additions were 273,000 in the fourth quarter of
2015 and 1,014,000 in the full year of 2015, reflecting year-over-year
decreases of 35,000 in the quarter and 61,000 for the full year. These
declines in subscriber additions were mainly due to the economic
slowdown, particularly in
Alberta
, moderating growth in market
penetration, higher competitive intensity and the effect of higher
handset prices on customer demand. Prepaid gross additions were 98,000
in the fourth quarter of 2015 and 429,000 in the full year of 2015,
reflecting year-over-year decreases of 33,000 in the quarter and 116,000
for the full year, primarily due to lower Public Mobile gross additions.
-- Net subscriber additions were 36,000 in the fourth quarter and 176,000
in the full year of 2015, reflecting year-over-year decreases of 50,000
in the quarter and 76,000 for the full year due to lower gross
subscriber additions, partially offset by an improvement in our blended
monthly churn rate. Postpaid net additions were 62,000 in the fourth
quarter of 2015 and 244,000 in the full year of 2015, reflecting year-
over-year decreases of 56,000 in the quarter and 113,000 in the full
year due to factors described in gross subscriber additions, as well as
increases in our postpaid monthly churn rate. Prepaid subscribers
decreased by 26,000 in the fourth quarter of 2015 and by 68,000 in the
full year of 2015, as compared to decreases of 32,000 in the fourth
quarter of 2014 and 105,000 in the full year of 2014. Prepaid losses
reflect conversions to postpaid services, our focused marketing efforts
on higher-value loading and increased competition for prepaid services.
-- Our average monthly postpaid subscriber churn rate was 1.01% in the
fourth quarter and 0.94% in the full year of 2015, as compared to 0.94%
in the fourth quarter and 0.93% in the full year of 2014. Our blended
monthly subscriber churn rate was 1.32% in the fourth quarter of 2015
and 1.26% for the full year of 2015, as compared to 1.43% in the fourth
quarter and 1.41% in the full year of 2014. The year-over-year increase
in our postpaid subscriber churn rate during the fourth quarter and full
year of 2015 was primarily due to increased competitive intensity as
two-year and three-year customer contracts began expiring coterminously
starting in June 2015, as well as the effects of the economic slowdown,
particularly in
Alberta
, and our focused marketing efforts on higher-
value loading. We expect these impacts to continue in 2016. The year-
over-year improvement in our blended subscriber churn rates in the
fourth quarter and full year of 2015 was due to our increasing
proportion of postpaid subscribers in our subscriber base and our
continued focus on customers first initiatives, our clear and simple
approach and retention programs, partly offset by the economic slowdown,
particularly in
Alberta
, competitive intensity, and our focused
marketing efforts on higher-value loading impacting postpaid subscriber
churn noted above.
Equipment and other revenues decreased year over year by $18 million in the fourth quarter of 2015, mainly due to lower gross additions and lower Black's Photography equipment revenues from the closure of stores in August 2015, partly offset by higher retention volumes and non-recurring gains on the sale of certain real estate assets. In the full year of 2015, equipment and other revenues increased year over year by $56 million, mainly due to higher retention volumes in part from the simultaneous expiration of two-year and three-year contracts, as well as higher-priced smartphones in the sales mix, partly offset by lower gross additions and lower Black's Photography revenue from the closure of stores in August 2015.
Intersegment revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated expenses.
Operating expenses - wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Goods and services
purchased:
Equipment sales
expenses 480 452 6.2% 1,623 1,423 14.1%
Network operating
expenses 190 194 (2.1)% 759 776 (2.2)%
Marketing expenses 129 138 (6.5)% 436 426 2.3%
Other(1) 166 166 -% 653 603 8.3%
Employee benefits
expense(1) 196 180 8.9% 717 686 4.5%
----------------------------------------------------------------------------
Wireless operating
expenses 1,161 1,130 2.7% 4,188 3,914 7.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes restructuring and other costs. See Section 4.1 Non-GAAP and
other financial measures.
----------------------------------------------------------------------------
Equipment sales expenses increased year over year by $28 million in the fourth quarter of 2015 and by $200 million in the full year of 2015, reflecting increased retention volumes and higher-value smartphones in the sales mix, partly offset by lower gross additions and lower costs of sales from the closure of Black's Photography stores in August 2015.
-- Retention costs as a percentage of network revenue were 17.0% in the
fourth quarter and 13.9% in the full year of 2015, as compared to 14.3%
in the fourth quarter and 11.8% in the full year of 2014, representing
year over year increases of $50 million or 23% in the fourth quarter and
$165 million or 23% in the full year of 2015. The year-over-year
increases in the fourth quarter and full year of 2015 were due to
greater retention volumes and associated commissions, as well as
increased per-unit subsidy costs due to a continued preference for
higher-value smartphones, higher subsidies during peak period loading in
the third and fourth quarters of 2015 and lower device upgrade fees.
-- COA per gross subscriber addition was $472 in the fourth quarter of 2015
and $418 for the full year of 2015, reflecting year-over-year increases
of $39 or 9.0% in the quarter and $33 or 8.5% in the full year of 2015.
The increases were mainly due to higher per-unit subsidy costs
reflecting a greater proportion of postpaid gross additions, increased
commissions, higher-value smartphones in the sales mix and increased
subsidies during peak period loading in the third and fourth quarters of
2015.
Network operating expenses decreased year over year by $4 million in the fourth quarter of 2015 and by $17 million in the full year of 2015 due to lower network maintenance and support costs, including turning down the Public Mobile CDMA network in the fourth quarter of 2014, partly offset by higher roaming costs driven by volume increases.
Marketing expenses decreased year over year by $9 million in the fourth quarter of 2015 mainly from lower advertising and promotional expenses, partly offset by higher commission expenses associated with higher retention volumes. For the full year of 2015, marketing expenses increased year over year by $10 million, primarily due to higher commission expenses driven by higher retention volumes, partly offset by reduced advertising and promotional expenses in the fourth quarter.
Other goods and services purchased was flat year over year in the fourth quarter as higher bad debt provisions were offset by lower administrative costs. For the full year of 2015, other goods and services purchase increased year over year by $50 million, primarily from higher non-labour restructuring and other costs mainly due to real estate rationalization, higher bad debt provisions to support the growing subscriber base, the expansion of our distribution channels and increases in external labour costs.
Employee benefits expense increased year over year by $16 million in the fourth quarter and by $31 million in the full year of 2015, reflecting higher labour restructuring costs from efficiency initiatives, lower capitalized labour costs and the full year period also included higher share-based compensation expenses.
EBITDA - wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-----------------------------------------------------------
($ millions,
except margins) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
EBITDA 628 629 (0.2)% 2,806 2,727 2.9%
Restructuring and
other costs
included in
EBITDA 25 6 n/m% 81 30 170.0%
----------------------------------------------------------------------------
EBITDA -
excluding
restructuring
and other costs 653 635 2.8% 2,887 2,757 4.7%
----------------------------------------------------------------------------
EBITDA margin (%) 35.1 35.8 (0.7)pts. 40.1 41.1 (1.0)pts.
EBITDA margin -
excluding
restructuring
and other costs
(%) 36.5 36.1 0.4 pts. 41.3 41.5 (0.2)pts.
----------------------------------------------------------------------------
Wireless EBITDA was relatively flat year over year in the fourth quarter of 2015 and increased by $79 million or 2.9% in the full year of 2015. Wireless EBITDA - excluding restructuring and other costs increased year over year by $18 million or 2.8% in the fourth quarter and by $130 million or 4.7% in the full year of 2015, reflecting network revenue growth driven by a larger customer base and ARPU growth, partly offset by higher retention spend, higher bad debt provisions, and increased customer service and distribution channel expenses.
1.4 Wireline segment
Wireline operating indicators
----------------------------------------------------------------------------
At December 31
(000s) 2015 2014 Change
----------------------------------------------------------------------------
Subscriber
connections:
High-speed
Internet 1,566 1,475 6.2%
TELUS TV 1,005 916 9.7%
Residential
network access
lines (NALs) 1,467 1,556 (5.7)%
----------------------------------------------------------------------------
Total wireline
subscriber
connections(1) 4,038 3,947 2.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
----------------------------------------------------------------------------
(000s) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Subscriber net
additions
(losses):
High-speed
Internet 22 22 -% 91 80 13.8%
TELUS TV 25 28 (10.7)% 89 101 (11.9)%
Residential NALs (24) (20) (20.0)% (89) (87) (2.3)%
----------------------------------------------------------------------------
Total wireline
subscriber
connection net
additions(1) 23 30 (23.3)% 91 94 (3.2)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Effective December 31, 2015, business NALs has been removed from the
reported subscriber base due to its diminishing relevance as a key
performance indicator (for example, the impact of migrations from voice
lines to IP services has led to business NAL losses without a similar
decline in revenue). Accordingly, December 31, 2014 has been
retrospectively adjusted to exclude 1,613,000 business NALs in the
reported subscriber balances. As of December 31, 2015, the business NAL
subscriber base was 1,586,000 and business NAL losses in the fourth
quarter and full year of 2015 were 5,000 and 27,000, respectively.
Comparatively, business NAL losses in the fourth quarter of 2014 were
5,000 and business NAL gains in the full year of 2014 were 2,000. Total
wireline subscriber connections, if business NALs were included, would
have been 5,624,000 in 2015, or an increase of 1.2% from 2014.
----------------------------------------------------------------------------
Operating revenues - wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Data service
and equipment 991 911 8.8% 3,772 3,472 8.6%
Voice service 358 393 (8.9)% 1,496 1,615 (7.4)%
Other services
and equipment 72 67 7.5% 238 255 (6.7)%
----------------------------------------------------------------------------
Revenues
arising from
contracts
with
customers 1,421 1,371 3.6% 5,506 5,342 3.1%
Other
operating
income 24 13 84.6% 63 73 (13.7)%
----------------------------------------------------------------------------
External
operating
revenues 1,445 1,384 4.4% 5,569 5,415 2.8%
Intersegment
revenue 44 44 -% 174 175 (0.6)%
----------------------------------------------------------------------------
Total
operating
revenues 1,489 1,428 4.3% 5,743 5,590 2.7%
----------------------------------------------------------------------------
Total wireline operating revenues increased year over year by $61 million or 4.3% in the fourth quarter of 2015 and by $153 million or 2.7% in the full year of 2015, driven by continued growth in Internet and enhanced data services revenue resulting from a larger subscriber base and higher revenue per customer, increased business process outsourcing services revenue, growth in TELUS TV services revenue from a larger subscriber base, and increased TELUS Health services revenue. These increases were partly offset by ongoing declines in legacy voice services, continued competitive pressures, product substitution, the impacts of the economic slowdown, particularly in
Alberta
, and the full year also included a decline in other services revenue.
Revenues arising from contracts with customers increased year over year by $50 million or 3.6% in the fourth quarter of 2015 and by $164 million or 3.1% in the full year of 2015.
-- Data service and equipment revenues increased year over year by $80
million or 8.8% in the fourth quarter of 2015 and by $300 million or
8.6% in the full year of 2015, primarily due to: (i) increased Internet
and enhanced data service revenues resulting from a 6.2% increase in
high-speed Internet subscribers over the year, higher revenue per
customer from upgrades to faster Internet speeds and larger usage rate
Internet plans, subscribers coming off of promotional offers, the
introduction of usage-based billing and the full year period also
included certain rate increases in late 2014; (ii) growth in business
process outsourcing revenues; (iii) increased TELUS TV revenues
resulting from a 9.7% subscriber growth over the year and certain rate
increases in 2015; and (iv) increased TELUS Health revenues. These
increases were partly offset by declines in managed services, video-
conferencing revenues and data equipment sales, largely reflecting an
economic slowdown, particularly in
Alberta
.
-- Voice service revenues decreased year over year by $35 million or 8.9%
in the fourth quarter of 2015 and by $119 million or 7.4% in the full
year of 2015. The decreases reflect the ongoing decline in legacy voice
revenues from technological substitution, increased competition, greater
use of inclusive long distance plans and lower long distance minutes of
use, partially offset by certain rate increases. We experienced a 5.7%
decline in residential NALs in the year, compared to a 5.3% decline in
2014.
-- Wireline subscriber connections net additions were 23,000 in the fourth
quarter of 2015 and 91,000 in the full year of 2015, reflecting year-
over-year decreases of 7,000 or 23% in the fourth quarter and 3,000 or
3.2% in the full year of 2015.
-- Net additions of high-speed Internet subscribers were flat year over
year in the fourth quarter and increased year over year by 11,000 or
14% in the full year of 2015. The increase was driven by the
expansion of our high-speed broadband footprint and the pull-through
impact from the continued bundling with Optik TV service, partially
offset by an increase in our customer churn rate. Net additions of
TELUS TV subscribers declined year over year by 3,000 or 11% in the
fourth quarter of 2015 and by 12,000 or 12% in the full year of
2015, as expansion of our addressable high-speed broadband footprint
was more than offset by the effects of slower subscriber growth for
paid TV services, lower oil sands construction camp activity,
increasing competition from over-the-top (OTT) services and
technology substitution, and an increase in our customer churn rate.
During the fourth quarter of 2015, our TELUS TV subscriber base
surpassed the one-million-subscriber mark. Continued focus on
expanding our addressable high-speed Internet and Optik TV
footprint, connecting more homes and businesses directly our fibre-
optic network, and bundling these services together, has resulted in
a combined Internet and TV subscriber growth of 180,000 or 7.5% over
the year.
-- Residential NAL losses of 24,000 in the fourth quarter and 89,000 in
the full year of 2015, as compared to 20,000 NAL losses in the
fourth quarter of 2014 and 87,000 NAL losses in the full year of
2014. The residential NAL losses continue to reflect the ongoing
trend of substitution to wireless and Internet-based services,
including losses to competitors, partially mitigated by the success
of our bundled service offerings and our customers first
initiatives.
-- Other services and equipment revenues increased year over year by $5
million in the fourth quarter of 2015, mainly due to non-recurring
services. In the full year of 2015, other services and equipment
revenues decreased year over year by $17 million, reflecting declines in
voice equipment sales and the elimination of charges for paper bills.
Other operating income increased year over year by $11 million in the fourth quarter of 2015, primarily from non-recurring gains on the sale of certain real estate assets. In the full year of 2015, Other operating income decreased year over year by $10 million as a result of a decline in the current period amortization of deferred revenue in respect of the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities, as well as lower investment income, partly offset by higher gains from the sale of certain real estate assets.
Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated expenses.
Operating expenses - wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Goods and services
purchased(1) 578 585 (1.2)% 2,296 2,300 (0.2)%
Employee benefits
expense(1) 561 471 19.1% 1,991 1,801 10.5%
----------------------------------------------------------------------------
Total operating
expenses 1,139 1,056 7.9% 4,287 4,101 4.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes restructuring and other costs. See Section 4.1 Non-GAAP and
other financial measures.
----------------------------------------------------------------------------
Goods and services purchased decreased by $7 million year over year in the fourth quarter of 2015 and by $4 million in the full year of 2015. The decreases were primarily due to a decline in business equipment cost of sales associated with lower equipment revenues, reduced advertising and promotions costs, and the full year period also included a retroactive assessment of additional TV revenue contribution expensed in the third quarter of 2014 for approximately $15 million towards our Canadian programming funding requirements, all of which were partly offset by higher non-labour restructuring and other costs from real estate rationalization, and increased network operating costs and administrative costs to support our growing subscriber base.
Employee benefits expense increased year over year by $90 million in the fourth quarter and by $190 million in the full year of 2015. The increases were primarily due to higher labour restructuring costs from efficiency initiatives, higher compensation and benefit costs mainly to support increased business process outsourcing revenue, and higher employee defined benefit pension plan expense, partly offset by increases in capitalized labour costs associated with increased capital expenditures and the fourth quarter also included lower share-based compensation.
EBITDA - wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------------
($ millions,
except margins) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
EBITDA 350 372 (5.9)% 1,456 1,489 (2.2)%
Restructuring
and other costs
included in
EBITDA 74 20 n/m% 145 45 n/m%
----------------------------------------------------------------------------
EBITDA -
excluding
restructuring
and other costs 424 392 8.2% 1,601 1,534 4.4%
----------------------------------------------------------------------------
EBITDA margin
(%) 23.5 26.0 (2.5)pts. 25.4 26.6 (1.2)pts.
EBITDA -
excluding
restructuring
and other costs
margin (%) 28.5 27.4 1.1 pts. 27.9 27.4 0.5 pts.
----------------------------------------------------------------------------
Wireline EBITDA decreased year over year by $22 million or 5.9% in the fourth quarter of 2015 and by $33 million or 2.2% in the full year of 2015, primarily from increased restructuring and other costs, higher wages and salaries, and continued declines in legacy voice services, partly offset by growth in data service and equipment revenues and non-recurring gains on the sale of certain real estate assets. EBITDA - excluding restructuring and other costs increased year over year by 8.2% in the fourth quarter of 2015 and 4.4% in the full year of 2015, as compared to year-over-year revenue increases of 4.3% for the quarter and 2.7% for the full year, reflecting improving margins in data services, including Internet, TELUS TV, business process outsourcing and TELUS Health services. The year over year growth in EBITDA - excluding restructuring and other costs also benefited from non-recurring gains on the sale of certain real estate assets.
1.5 Summary of consolidated quarterly results and trends
----------------------------------------------------------------------------
($ millions,
except per share
amounts) 2015 Q4 2015 Q3 2015 Q2 2015 Q1
----------------------------------------------------------------------------
Operating revenues 3,217 3,155 3,102 3,028
----------------------------------------------------------------------------
Operating expenses
Goods and services
purchased(1) 1,482 1,394 1,372 1,284
Employee benefits
expense(1) 757 693 649 609
Depreciation and
amortization 518 471 464 456
----------------------------------------------------------------------------
Total operating expenses 2,757 2,558 2,485 2,349
----------------------------------------------------------------------------
Operating income 460 597 617 679
Financing costs 114 106 110 117
----------------------------------------------------------------------------
Income before income
taxes 346 491 507 562
Income taxes 85 126 166 147
----------------------------------------------------------------------------
Net income and Net
income attributable to
Common Shares 261 365 341 415
----------------------------------------------------------------------------
Net income per Common
Share:
Basic (basic EPS) 0.44 0.61 0.56 0.68
Adjusted basic EPS(2) 0.54 0.66 0.66 0.70
Diluted 0.44 0.61 0.56 0.68
Dividends declared per
Common Share 0.44 0.42 0.42 0.40
----------------------------------------------------------------------------
Additional information:
EBITDA(2) 978 1,068 1,081 1,135
Restructuring and other
costs included in
EBITDA(2) 99 51 59 17
EBITDA - excluding
restructuring and other
costs(2) 1,077 1,119 1,140 1,152
Cash provided by
operating activities 863 1,018 943 718
Free cash flow(2) 197 310 300 271
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions,
except per share
amounts) 2014 Q4 2014 Q3 2014 Q2 2014 Q1
----------------------------------------------------------------------------
Operating revenues 3,128 3,028 2,951 2,895
----------------------------------------------------------------------------
Operating expenses
Goods and services
purchased(1) 1,476 1,333 1,268 1,222
Employee benefits
expense(1) 651 630 610 596
Depreciation and
amortization 468 459 444 463
----------------------------------------------------------------------------
Total operating expenses 2,595 2,422 2,322 2,281
----------------------------------------------------------------------------
Operating income 533 606 629 614
Financing costs 115 124 115 102
----------------------------------------------------------------------------
Income before income
taxes 418 482 514 512
Income taxes 106 127 133 135
----------------------------------------------------------------------------
Net income and Net
income attributable to
Common Shares 312 355 381 377
----------------------------------------------------------------------------
Net income per Common
Share:
Basic (basic EPS) 0.51 0.58 0.62 0.61
Adjusted basic EPS(2) 0.53 0.64 0.63 0.62
Diluted 0.51 0.58 0.62 0.60
Dividends declared per
Common Share 0.40 0.38 0.38 0.36
----------------------------------------------------------------------------
Additional information:
EBITDA(2) 1,001 1,065 1,073 1,077
Restructuring and other
costs included in
EBITDA(2) 26 30 11 8
EBITDA - excluding
restructuring and other
costs(2) 1,027 1,095 1,084 1,085
Cash provided by
operating activities 917 1,037 855 598
Free cash flow(2) 337 219 210 291
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Goods and services purchased and Employee benefits expense amounts
include restructuring and other costs.
2 See Section 4.1 Non-GAAP and other financial measures.
----------------------------------------------------------------------------
Trends
The consolidated revenue trend continues to reflect year-over-year increases in: (i) wireless network revenues generated from a moderating growth in the subscriber base due to the impacts of the economic slowdown, particularly in
Alberta
, slower growth in wireless postpaid market penetration, increased competitive intensity and higher handset prices, as well as a moderating growth in ARPU driven by a larger proportion of higher-rate two-year plans, a more favourable postpaid subscriber mix, and increases in data roaming and chargeable data usage, partly offset by a decline in voice revenue; (ii) wireless equipment revenue that has generally increased due to higher retention volumes, especially in 2015 as two-year and three-year customer contracts began to expire coterminously, and an increase in the sales mix of higher-priced smartphones; and (iii) growth in wireline data revenues, driven by
Internet, enhanced data services, business process outsourcing,
TELUS TV and TELUS Health services. This growth was partially offset by the continued declines in wireless voice revenues, as well as wireline voice service and other wireline services and equipment revenues.
The wireless data revenue growth trend is moderating as it is impacted by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, and unlimited messaging rate plans, as well as customer reactions to increased frequency of real-time data usage notifications and offloading of data traffic from our wireless network to increasingly available Wi-Fi hotspots. We introduced two-year wireless rate plans in July 2013, which have impacted acquisition and retention trends, as well as data usage, as subscribers optimize unlimited talk and text and shared data plans, and which we expect will increase the frequency of subscribers updating their devices and services. ARPU is expected to continue to increase over time, though at lower growth rates, as a result of the declining proportion of customers on legacy three-year plans renewing to higher-rate two-year plans, continued but moderating growth in chargeable data usage, and the ongoing shift in our subscriber base towards higher-value postpaid customers. However, the level of ARPU is highly dependent on competition, the economic situation, consumer behaviour, government decisions, device selection and other factors, and, as a consequence, there cannot be any assurance that ARPU growth will continue to materialize. In the third and fourth quarters of 2015, for instance, ARPU growth was tempered by the impact of the economic slowdown, particularly in
Alberta
, and also by the ongoing decline in voice revenue. This factor is expected to continue to impact growth through 2016.
Retention spending as a percentage of network revenue has increased year over year from 11.8% in 2014 to 13.9% in 2015, mainly from the coterminous expiration of two-year and three-year contracts beginning on June 3, 2015 and an increase in the sales mix of higher-subsidy smartphones. We may continue to experience a higher volume of contract renewals than previously experienced prior to June 3, 2015. We may also experience continuing pressure on our postpaid subscriber churn if some of our remaining clients on three-year contracts choose to terminate their contracts early or if increased competitive intensity continues in 2016. Accordingly, our wireless segment historical operating results and trends prior to the coterminous expiration of two-year and three-year contracts may not be reflective of results and trends for future periods.
Historically, there has been significant third and fourth quarter seasonality due to higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals. Typically, these impacts can also be more pronounced around popular device launches. Wireless EBITDA usually decreases sequentially from the third to the fourth quarter, due to seasonal loading volumes. Subscriber additions have typically been lowest in the first quarter. Historically, monthly wireless ARPU has experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by seasonal sequential declines in the fourth and first quarters. This seasonal effect on ARPU is expected to diminish in the future, as unlimited nationwide voice plans become more prevalent and chargeable usage and long distance spikes become less pronounced.
The trend of increasing wireline data revenue reflects growth in high-speed Internet and enhanced data services, including increases in usage and adoption of higher-speed services, growth in business process outsourcing, the continuing but moderating expansion of our TELUS TV subscriber base (up 9.7% in 2015), growth in TELUS Health solutions and certain rate increases. Higher Internet service revenues are due to a larger high-speed Internet subscriber base (up 6.2% in 2015), bundling of offers with Optik TV service, the introduction of usage-based billing and certain rate increases. A general trend of declining wireline voice revenues is due to competition from voice over IP (VoIP) service providers (including cable-TV competitors), resellers and facilities-based competitors, as well as technological substitution to wireless and IP-based services and applications, increased competition in the small and medium-sized business market, and the impact of the economic slowdown and associated customers' re-sizing of services.
The trend in Goods and services purchased expense reflects increasing wireless equipment expenses associated with higher-value smartphones in the sales mix and higher retention volumes, increasing content costs due to a growing wireline TELUS TV subscriber base, growing wireless customer service and distribution channel expenses, and increasing non-labour restructuring and other costs, partly offset by lower wireless network operating expenses from operational efficiency initiatives.
The trend in Employee benefits expense reflects increases in compensation and employee-related restructuring costs, as well as more FTE employees supporting business process outsourcing revenue growth, partly offset by lower domestic FTE employees in part due to the reduction of full-time positions announced in November 2015 and higher capitalized labour costs associated with increased capital expenditures, as described in Section 3.3.
The general trend in depreciation and amortization reflects increases due to growth in capital assets in support of the expansion of our broadband footprint and enhanced LTE network coverage, as well as adjustments related to our continuing program of asset life studies.
The general trend in Financing costs reflects an increase in long-term debt outstanding associated with significant investments in wireless spectrum licences acquired in the Department of Innovation, Science and Economic Development's auctions in 2014 and 2015. Financing costs also include the Employee defined benefit net interest expense that has increased for 2015, primarily due to the increase in the defined benefit plan deficit at December 31, 2014, as compared to the defined benefit plan surplus at December 31, 2013. Employee defined benefit plans net interest expense is expected to decrease in 2016 as a result of the decrease in net deficit, partially offset by the application of a higher discount rate at December 31, 2015 (see Note 14 of our 2015 Consolidated financial statements). Moreover, Financing costs are net of capitalized interest related to spectrum licences acquired during the spectrum auctions held by the Department of Innovation, Science and Economic Development, which we expect to deploy into our existing network in future periods (capitalized long-term debt interest is $45 million since commencement in the second quarter of 2015). Financing costs for the eight periods shown include varying amounts of foreign exchange gains or losses and varying amounts of interest income, including $20 million of interest income in the second quarter of 2015 resulting from the settlement of prior years' income tax-related matters. In addition, Financing costs in the third quarter of 2014 included long-term debt prepayment premiums of approximately $13 million.
The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from legislated income tax changes and adjustments recognized in the current period for income tax of prior periods, including any related after-tax interest on reassessments. The trend in basic EPS also reflects the impact of share purchases under our NCIB program.
The trend in cash provided by operating activities reflects growth in consolidated EBITDA and lower income tax payments in 2015, net of higher interest expenses related to our financing activities. The trend in free cash flow reflects the factors affecting cash provided by operating activities, as well as increases in capital expenditures (excluding spectrum licences), but excludes the effects of certain changes in working capital, such as trade accounts receivable and trade accounts payable.
1.6 Performance scorecard (key performance measures)
In 2015, we achieved three of four original consolidated targets and all four of our original segmented targets, which were announced on February 12, 2015. We achieved our consolidated revenue targets, primarily due to growth in wireless network revenues and wireline data revenues. Wireless network revenues were close to the high end of our target range, reflecting growth in our subscriber base and higher ARPU. Wireline revenues were near the midpoint of our target range, as growth in wireline data revenues was partly offset by declines in legacy voice services and lower business spending.
We met our target for consolidated EBITDA - excluding restructuring and other costs. Our target for wireless EBITDA - excluding restructuring and other costs was met due to an increase in network revenues partially offset by higher retention spending. Our target for wireline EBITDA - excluding restructuring and other costs was met due to growth in wireline data revenues, as well as improving margins in enhanced data services, TELUS TV services, business process outsourcing services and TELUS Health services.
Our basic EPS excluding restructuring and other costs and income tax-related adjustments met our target range, primarily due to growth in our wireless and wireline EBITDA - excluding restructuring and other costs noted above, as well as a reduction in the number of shares outstanding resulting from our NCIB program.
Our capital expenditures in 2015 exceeded both our original target and revised guidance as we continued to focus on investments in wireless and wireline broadband infrastructure, including the expansion of our LTE and fibre-optic networks and the continued deployment of 700 MHz spectrum, as well as in network and system resiliency and reliability in support of our ongoing customers first initiatives, and readying our network and systems for the future retirement of legacy assets.
We met all but one of our long-term financial objectives, policies and guidelines, including generally maintaining a minimum of $1.0 billion of unutilized liquidity, adhering to our dividend payout ratio guideline of 65 to 75% of sustainable earnings on a prospective basis and maintaining long-term investment grade credit ratings in the range of BBB+ or the equivalent. As at December 31, 2015, our Net debt to EBITDA - excluding restructuring and other costs was outside of the long-term objective range of 2.00 to 2.50 times, primarily due to our purchases of spectrum licences during the atypical concentration of wireless spectrum auctions in 2014 and 2015. We will endeavour to return this ratio to within the objective range in the medium term, as we believe that this range is supportive of our long-term strategy. (For additional details, see Section 7.5 of the 2015 annual MD&A.)
We also completed 10 semi-annual dividend increases from 2011 to 2015, consistent with our intention to target ongoing semi-annual dividend increases, with an annual increase of circa 10% through to the end of 2016, subject to the assessment and determination by our Board of Directors of our financial position and outlook, as well as our long-term dividend payout ratio guideline of 65 to 75% of prospective sustainable earnings. There can be no assurance that we will maintain this dividend growth program. See Caution regarding forward-looking statements - Ability to sustain dividend growth program of circa 10% per annum through 2016
The following scorecard compares TELUS' performance to our original or revised 2015 targets and also presents our 2016 targets. Our 2016 targets, plans and assumptions are fully qualified by the Caution regarding forward-looking statements at the beginning of Management's review of operations. (See also Section 10 - Risks and risk management in the 2015 annual MD&A.)
Scorecard
----------------------------------------------------------------------------
2015 performance
----------------------------------------
Original or
Actual results revised targets Result 2016 targets
and growth and growth and growth
----------------------------------------------------------------------------
Consolidated
Revenues $12.350 to $12.750 to $12.875
$12.502 billion $12.550 billion yes billion
4.2% 3 to 5% 2.0 to 3.0%
--------------------------------------------------------------------------
EBITDA - $4.625 to $4.755
excluding $4.400 to $4.575 billion
restructuring $4.488 billion billion(2) 3 to yes 3.0 to 6.0%
and other 4.6% 7%
costs(1)
--------------------------------------------------------------------------
Basic EPS $2.48(3) $2.40 to $2.60 $2.40 to $2.56
7.4% 4 to 13% yes 5.0 to 12.0%(4)
--------------------------------------------------------------------------
Capital Approx. $2.65
expenditures( $2.577 billion Approx. $2.5 no billion
5) billion(5)
--------------------------------------------------------------------------
Wireless segment
Network $6.175 to $6.300 $6.425 to $6.490
revenue $6.298 billion billion yes billion
(external) 4.8% 3 to 5% 2.0 to 3.0%
--------------------------------------------------------------------------
EBITDA - $2.975 to $3.060
excluding $2.850 to $2.950 billion
restructuring $2.887 billion billion yes 3.0 to 6.0%
and other 4.7% 3 to 7%
costs(1)
--------------------------------------------------------------------------
Wireline segment
Revenue $5.525 to $5.625 $5.680 to $5.735
(external) $5.569 billion billion yes billion
2.8% 2 to 4% 2.0 to 3.0%
--------------------------------------------------------------------------
EBITDA - $1.650 to $1.695
excluding $1.550 to $1.625 billion
restructuring $1.601 billion billion yes 3.0 to 6.0%
and other 4.4% 1 to 6%
costs(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Met target: yes; Missed target: no.
1 See description in Section 4.1 Non-GAAP and other financial measures.
2 Original 2015 guidance was EBITDA including restructuring and other
costs of $4.325 billion to $4.500 billion, however due to significant
increases in restructuring and other costs announced in the second and
third quarters of 2015, we revised guidance in those respective periods
to be EBITDA - excluding restructuring and other costs of $4.400
billion to $4.575 billion, reflecting the exclusion of our original
assumption for restructuring and other costs of $75 million
3 Target-related basic EPS, reflects basic EPS, as reported, excluding
the impact of incremental restructuring and other costs in excess of
our original restructuring and other costs guidance of $75 million, as
well as income tax-related adjustments
4 2016 targeted growth for basic EPS is in the range of 5.0 to 12.0%,
compared to 2015 basic EPS, as reported, of $2.29
5 Excludes expenditures for spectrum licences and excludes non-monetary
transactions. Our capital expenditures guidance was revised in the
second quarter of 2015; the original target was approximately the same
as 2014 capital expenditures ($2.359 billion).
----------------------------------------------------------------------------
We made the following key assumptions when we announced the 2015 targets in February 2015.
Assumptions for 2015 targets and result
----------------------------------------------------------------------------
Our original estimate for economic growth in
Canada
was 2.1% in 2015. In our
second quarter MD&A, we revised our estimate for 2015 economic growth in
Canada
to a range of 1.0% to 1.5%. We estimate that growth in 2015 was 1.1%.
No material adverse regulatory rulings or government actions. Regulatory
developments in 2015 are discussed in Section 10.4 Regulatory matters in our
2015 annual MD&A. None of these developments had a material impact on our
operations.
Intense wireless and wireline competition, continuing from 2014, in both
consumer and business markets. See Section 10.2 Competition in our 2015
annual MD&A.
Approximately one percentage point increase in wireless industry penetration
of the Canadian market. In 2015, we estimate that wireless industry
penetration of the Canadian market increased by approximately two percentage
points.
Ongoing subscriber adoption of, and upgrades to, data-intensive smartphones,
as customers want more mobile connectivity to the Internet. In 2015,
retention costs as a percentage of network revenue increased year over year
by 2.1 pts. to 13.9%, driven by greater retention volumes and higher per-
unit subsidy costs that were primarily due to our customers' preference for
higher-value smartphone devices.
Wireless revenue growth resulting from postpaid subscriber loadings
consistent with increased market penetration, as well as a modest increase
in blended ARPU resulting from higher-rate two-year plans, increased data
usage, including increased use of shared data plans, and subscriber mix. In
2015, wireless network revenues grew by 4.8% and blended ARPU grew by 1.9%.
Higher wireless acquisition and retention expenses, dependent on gross
loadings, market pressures and the impact of coterminous renewals of two-
year and three-year contracts. In 2015, retention expenses grew by
approximately 23% and retention volumes increased by 10%, however,
acquisition expenses declined by approximately 3% and gross additions
declined by 11%.
Growth in wireline data revenue, consistent with 2014, resulting from an
increase in high-speed Internet and Optik TV subscribers, speed upgrades and
expanding broadband infrastructure, as well as business outsourcing and
healthcare solutions. In 2015, wireline data revenue increased by 8.6%, as
compared to 8.2% in 2014, while the total of high-speed Internet subscribers
and TV subscribers increased by 7.5% in 2015, as compared to 8.2% in 2014.
Pension plans: Defined benefit pension plan expense of approximately $106
million recorded in Employee benefits expense and approximately $26 million
recorded in employee defined benefit plans net interest in Financing costs;
a 3.90% discount rate for employee defined benefit pension plan accounting
purposes (2014 - 4.75%); and defined benefit pension plan funding of
approximately $88 million. In 2015, the defined benefit pension plan
expenses and defined benefit pension plan funding were approximately as
estimated, except for a higher defined benefit pension plan expense of $118
million recorded in Employee benefits expense driven by increased past
service costs.
Restructuring and other costs of approximately $75 million for continuing
operational efficiency initiatives, with other margin enhancement
initiatives to mitigate pressures from technological substitution and
subscriber growth. We revised our assumption to approximately $125 million
in our second quarter MD&A. Subsequently, in our third quarter MD&A, we
revised the assumption to $250 million (see Investing in internal
capabilities in Section 2.2 in our 2015 annual MD&A). The actual result was
$226 million for 2015.
Income taxes: Income taxes computed at applicable statutory rate of 26.0 to
26.5% and cash income tax payments between $280 million and $340 million.
Cash tax payments were expected to decrease in 2015, primarily due to lower
final payments for the previous tax year. In our second quarter MD&A, we
revised our assumption for cash income tax payments downward to a range of
$200 million to $260 million, due to the deferral of the 2015 instalments to
2016 and higher refunds from the settlement of prior years' income tax-
related matters. The actual income taxes were computed at an applicable
statutory rate of 26.5% in 2015, including the impact of an increase in the
Alberta
provincial corporate tax rate from 10% to 12% effective July 1,
2015. The actual cash income tax payments were $256 million for 2015.
Continued investments in broadband infrastructure and 4G LTE expansion and
upgrades, as well as in network and systems resiliency and reliability. In
2015, capital expenditures (excluding spectrum licences and non-monetary
transactions) were $2.577 billion, including continued investment in the
expansion of our LTE and fibre-optic networks, as well as in system and
network resiliency and reliability (see Building national capabilities in
Section 2.2 in our 2015 annual MD&A).
Participation in the Department of Innovation, Science and Economic
Development's (formerly Industry Canada) wireless spectrum auctions for AWS-
3 spectrum (1755 - 1780 MHz and 2155 - 2180 MHz), as well as for 2.5 GHz
(2500 - 2690 MHz) bands in March 2015 and April 2015. We participated in
these auctions, as well as a residual auction held in August 2015 (see
Building national capabilities in Section 2.2 in our 2015 annual MD&A).
Further weakening of the Canadian dollar to
U.S.
dollar exchange rate from
the U.S. 90.5 cent average exchange rate in 2014, in part due to the impact
of lower oil prices on Canadian exports. Assumption of further weakening in
the exchange rate during 2015 was confirmed, as the average exchange rate
for the Canadian dollar in 2015 was U.S. 78 cents.
----------------------------------------------------------------------------
1.7 Financial and operating targets for 2016
For 2016, we have targeted consolidated revenues in the range of $12.750 to $12.875 billion, or growth of approximately 2.0 to 3.0%. Consolidated EBITDA - excluding restructuring and other costs is targeted in the range of $4.625 to $4.755 billion, or growth of approximately 3.0 to 6.0%. Revenue and EBITDA excluding restructuring and other costs growth is expected to result from increases in wireless and wireline data services, and savings from cost efficiency initiatives. Basic EPS is expected to be in the range of $2.40 to $2.56, or an increase of approximately 5.0% to 12.0% due to EBITDA growth, combined with a reduction in shares outstanding as a result of our NCIB program.
Wireless network revenue is targeted to be in the range of $6.425 to $6.490 billion in 2016, or an increase of approximately 2.0 to 3.0% due to modest growth in both subscribers and blended ARPU. We also expect growth in data and roaming revenues will offset lower voice revenue. Wireless EBITDA - excluding restructuring and other costs is targeted to be $2.975 to $3.060 billion, or an increase of approximately 3.0 to 6.0%, as a result of anticipated growth in wireless network revenue, savings from cost efficiency initiatives and stable retention costs.
Wireline revenue is targeted to be in the range of $5.680 to $5.735 billion in 2016, or an increase of approximately 2.0 to 3.0%, reflecting continued data revenue growth from high-speed Internet and Optik TV services, as well as from business process outsourcing and TELUS Health services, partially offset by continued decreases in legacy voice revenues and continued effects of the economic slowdown. Wireline EBITDA - excluding restructuring and other costs is targeted to be in the range of $1.650 to $1.695 billion in 2016, or an increase of approximately 3.0 to 6.0%. We anticipate margin improvements from our high-speed Internet and Optik TV services, business outsourcing and TELUS Health services, as well as our ongoing efficiency initiatives, partially offset by the continuing industry trend of revenue losses from higher-margin legacy voice services.
Consolidated capital expenditures, excluding the purchase of spectrum licences and non-monetary transactions, in 2016 are targeted to be approximately $2.65 billion. We plan to continue broadband infrastructure expansion and upgrades, including bringing fibre-optic cable deeper into the network and connecting more homes and businesses to the fibre-optic network, to support high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. We intend to continue investing in our wireless network for 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
Our long-term financial objectives, policies and guidelines are described in Section 4.3 of our 2015 annual MD&A. Achievement of our 2016 targets is subject to risks and uncertainties, including, but not limited to competition, regulatory matters, financing and debt requirements, taxation matters, economic conditions, litigation and other factors noted in our Caution regarding forward-looking statements and in our 2015 annual MD&A filed on February 11, 2016. The 2016 targets are based on many assumptions including:
Assumptions for 2016 targets
-- Moderately higher economic growth in
Canada
in 2016, estimated to be
1.7%, up from an estimated 1.1% in 2015. For our incumbent local
exchange carrier (ILEC) provinces in
Western Canada
, we estimate that
economic growth in
British Columbia
was 2.3% in 2015 and will be in the
range of 2.0% to 2.5% in 2016, and that economic growth (contraction) in
Alberta
was approximately (1.0)% in 2015 and will be in the range of
0.5% to 1.0% in 2016, in part due to low oil prices.
-- No material adverse regulatory rulings or government actions.
-- Continued intense wireless and wireline competition in both consumer and
business markets.
-- An increase in wireless industry penetration of the Canadian market,
consistent with 2015.
-- Ongoing subscriber adoption of, and upgrades to, data-intensive
smartphones, as customers want more mobile connectivity to the Internet.
-- Wireless revenue growth resulting from modest growth in both postpaid
subscriber loadings and blended ARPU.
-- Stable wireless acquisition and retention expenses to 2015, however,
these will be dependent on gross loadings, market pressures and the
continued impact of the coterminous expiration of two-year and three-
year plans, which began in June 2015.
-- Continued growth in wireline data revenue, resulting from an increase in
high-speed Internet and Optik TV subscribers, speed upgrades and
expanding broadband infrastructure, as well as business outsourcing and
healthcare solutions.
-- Continued focus on our customers first initiatives and maintaining our
customers' likelihood-to-recommend scores.
-- Pension plans: Defined benefit pension plan expense of approximately $89
million recorded in Employee benefits expense and approximately $5
million recorded in employee defined benefit plans net interest in
Financing costs; a 4.00% discount rate for employee defined benefit
pension plan accounting purposes (2015 - 3.90%); and defined benefit
pension plan funding of approximately $57 million.
-- Restructuring and other costs of approximately $175 million for
continuing operational efficiency initiatives, with other margin
enhancement initiatives to mitigate pressures from slow economic growth,
technological substitution and modest subscriber growth. The completion
of our initiative to reduce approximately 1,500 full-time positions
previously announced in November 2015.
-- Income taxes: Income taxes computed at applicable statutory rate of 26.3
to 26.8% and cash income tax payments between $570 million and $630
million (2015 - $256 million). Cash tax payments are increasing in 2016,
primarily as a result of the impact of the use of the Public Mobile
losses in 2014, which has the effect of: (i) deferring a portion of our
2015 current taxes payable to February 2016; and (ii) increasing,
relative to 2015, the 2016 instalments payable, which ultimately is
expected to reduce the 2017 cash income tax payments by approximately
$150 million.
-- Increased investments in broadband infrastructure, including our new
fibre-optic network, and 4G LTE expansion and upgrades, as well as in
network and systems resiliency and reliability.
-- A continuing weakness in the average Canadian dollar to
U.S.
dollar
exchange rate from the U.S. 78 cent average exchange rate in 2015, in
part due to the continued effects of low oil prices and certain
U.S.
monetary policy changes.
2. Changes in financial position
Refer to the annual 2015 Management's discussion and analysis (MD&A) for information regarding changes in the financial position.
3. Discussion of cash flow results
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the Management's review of operations.
For detailed information on the following topics, refer to the 2015 annual Management's discussion and analysis (MD&A): i) liquidity and capital resource measures; ii) credit facilities; iii) sale of trade receivables; iv) credit ratings; v) financial instruments, commitments and contingent liabilities; vi) outstanding share information; and vii) transactions between related parties.
3.1 Overview of cash flow results
In 2015, we paid $1.5 billion for wireless spectrum licences acquired in the first quarter AWS-3 spectrum auction, $479 million for the licences acquired in the second quarter 2500 MHz spectrum auction and $58 million for the licences acquired in the third quarter residual spectrum auction (700 MHz and AWS-3 bands). In March 2015, we publicly issued $1.75 billion of senior unsecured notes in three series with the proceeds mainly used to fund the spectrum licences purchased in the AWS-3 spectrum auction, repay approximately $110 million of indebtedness drawn from the 2014 Credit Facility and repay approximately $135 million of outstanding commercial paper. We utilized existing Short-term borrowings and long-term credit facilities to fund the spectrum licences purchased in the 2500 MHz and residual spectrum licence auctions. In December 2015, we publicly issued $1.0 billion of senior unsecured notes in two series with the proceeds mainly used to repay outstanding commercial paper and to fund the repayment, on maturity, of a portion of the $600 million principal amount outstanding on our Series CI Notes due May 2016.
In 2015, we paid dividends of $992 million to the holders of Common Shares and returned $628 million of cash to shareholders through share purchases under our completed 2015 and advanced 2016 normal course issuer bid (NCIB). During the month ended January 31, 2016, 1.0 million of our Common Shares were purchased by way of the automatic share purchase plan (ASPP) at a cost of $39 million. Subsequent to December 31, 2015, we paid dividends of $263 million to the holders of Common Shares in January 2016. Our capital structure financial policies, financing plan and report on financing and capital structure management plans are described in Section 4.3 of the 2015 annual MD&A.
Cash flows
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
($ millions) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Cash provided by
operating activities 863 917 (5.9)% 3,542 3,407 4.0%
Cash used by investing
activities (625) (713) 12.3% (4,477) (3,668) (22.1)%
Cash provided (used)
by financing
activities (156) (370) 57.8% 1,098 (15) n/m
----------------------------------------------------------------------------
Increase (decrease) in
Cash and temporary
investments, net 82 (166) 149.4% 163 (276) 159.1%
Cash and temporary
investments, net,
beginning of period 141 226 (37.6)% 60 336 (82.1)%
----------------------------------------------------------------------------
Cash and temporary
investments, net, end
of period 223 60 n/m 223 60 n/m
----------------------------------------------------------------------------
3.2 Cash provided by operating activities
Cash provided by operating activities decreased by $54 million in the fourth quarter of 2015 and increased by $135 million in the full year of 2015, when compared to the same periods in 2014.
Analysis of changes in cash provided by operating activities
----------------------------------------------------------------------------
($ millions) Fourth
quarter Full year
----------------------------------------------------------------------------
Cash provided by operating activities, three-month
period and year ended December 31, 2014 917 3,407
Year-over-year changes:
Higher (lower) EBITDA (see Section 1.3 Wireless
segment and Section 1.4 Wireline segment) (23) 46
Higher share-based compensation cash outflows, net
of expense (93) (112)
Lower employer contributions to defined benefits
plans, net of expense 4 25
Lower restructuring disbursements, net of
restructuring expenses 45 96
Higher interest paid - (46)
Higher interest received 20 22
Lower (higher) income taxes paid, net of
recoveries received (8) 208
Other operating working capital changes 1 (104)
----------------------------------------------------------------------------
Cash provided by operating activities, three-month
period and year ended December 31, 2015 863 3,542
----------------------------------------------------------------------------
-- Share-based compensation payments, net of expense, increased year over
year in the quarter and the full year of 2015 mainly from higher year-
over-year cash outflows associated with restricted stock units (RSUs)
arising from a timing difference which resulted in a cash outflow that
would have typically arisen in the fourth quarter of 2014 but ended up
occurring in the first quarter of 2015 due to a delay in our 2012 annual
allocation of RSUs.
-- Restructuring disbursements, net of restructuring expenses, were lower
year over year in the quarter and the full year of 2015, reflecting
increased restructuring and other costs mainly from personnel-related
costs and real estate rationalization, partly offset by higher
associated disbursements in 2015.
-- Income taxes paid, net of recoveries received, was relatively flat year
over year in the quarter and decreased year over year in the full year
of 2015. The decrease for the full year period reflects lower required
instalments and a lower final income tax payment for the 2014 income tax
year than was required in the comparable period of 2014 for the 2013
income tax year.
-- Other operating working capital changes reflected a net $104 million
decrease in the full year of 2015, compared to 2014. This included a
decrease in Accounts payable and accrued liabilities and an increase in
Inventories, partly offset by decreases in Accounts receivable and
Prepaid expenses.
3.3 Cash used by investing activities
Cash used by investing activities decreased year over year by $88 million in the fourth quarter of 2015 and increased year over year by $809 million in the full year of 2015. The changes included the following:
-- Cash payments for capital assets (excluding spectrum licences) decreased
year over year by $35 million in the fourth quarter of 2015 and
increased year over year by $149 million for the full year of 2015.
These changes were composed of:
-- Year-over-year increases in capital expenditures of $85 million in
the fourth quarter and $218 million in the full year of 2015 (see
table and discussion below).
-- Comparative decreases in capital expenditure payments reflecting
payment timing differences as Accounts payable and accrued
liabilities increased year over year by $117 million in the quarter
and $66 million in the full year of 2015.
-- Payments for wireless spectrum licences were higher year over year by
$46 million in the fourth quarter of 2015, reflecting the final payment
for wireless spectrum licences purchased during the residual spectrum
licence auction in August 2015. For the full year of 2015, our payments
for spectrum licences were $2.0 billion, as compared to approximately
$1.2 billion in 2014. These payments reflect spectrum licences purchased
primarily through the atypical concentration of wireless spectrum
auctions in 2014 and 2015, which allowed us to more than double our
national spectrum holdings.
-- Payments for business acquisitions and related investments to complement
our existing lines of business, were $NIL in the fourth quarter of 2015
(fourth quarter of 2014 - $3 million) and $10 million in the full year
of 2015 (full year of 2014 - $49 million).
-- In the fourth quarter of 2015, our advances and contributions to real
estate joint ventures, net of receipts, were $11 million, and in the
full year of 2015, receipts from the real estate joint ventures, net of
advances and contributions, were $48 million, mainly from a $95 million
repayment of construction financing by the TELUS Garden real estate
joint venture pursuant to its bond issuance for the completed, and now
occupied, office tower in July 2015. For the comparable periods in 2014,
advances and contributions from real estate joint ventures, net of
receipts, were $16 million and $53 million, respectively, which
primarily reflect advances under construction credit facilities
commensurate with construction progress.
Capital expenditure measures
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-------------------------------------------------------
($ millions, except
capital intensity) 2015 2014 Change 2015 2014 Change
----------------------------------------------------------------------------
Capital expenditures
(excluding spectrum
licences and non-
monetary
transactions)(1)
Wireless segment 209 188 11.2% 893 832 7.3%
Wireline segment 446 382 16.8% 1,684 1,527 10.3%
----------------------------------------------------------------------------
Consolidated 655 570 14.9% 2,577 2,359 9.2%
----------------------------------------------------------------------------
Wireless segment
capital intensity
(%) 12 11 1 pt. 13 13 - pt.
Wireline segment
capital intensity
(%) 30 27 3 pts. 29 27 2 pts.
Consolidated capital
intensity(2)(%) 20 18 2 pts. 21 20 1 pt.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Capital expenditures include assets purchased, but not yet paid for,
and therefore differ from Cash payments for capital assets, as
presented on the Consolidated statements of cash flows. See Note 25(b)
of the Consolidated financial statements.
2 See calculation and description in Section 4.1 Non-GAAP and other
financial measures.
----------------------------------------------------------------------------
Wireless segment capital expenditures increased year over year by $21 million in the fourth quarter of 2015 and by $61 million in the full year of 2015. The increases were due to the continued investment in wireless broadband infrastructure to enhance our network coverage, speed and capacity, including the deployment of 700 MHz spectrum, as well as the continued investment in system resiliency and reliability in support of our ongoing customers first initiatives, and to ready the network and systems for future retirement of legacy assets.
Wireline segment capital expenditures increased year over year by $64 million in the fourth quarter of 2015 and by $157 million in the full year of 2015. We continued to invest in our wireline broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers' demand for faster Internet speeds, and extends the reach and functionality of our healthcare solutions. We also continued to make investments in system and network resiliency and reliability.
3.4 Cash provided (used) by financing activities
Net cash used by financing activities decreased year over year by $214 million in the fourth quarter of 2015. Net cash provided by financing activities increased year over year by $1.1 billion in the full year of 2015. Financing activities included the following:
Dividends paid to the holders of Common Shares
Dividends paid to the holders of Common Shares totalled $252 million in the fourth quarter of 2015 and $992 million in the full year of 2015, or year-over-year increases of $19 million in the fourth quarter and $79 million in the full year. This reflected increased dividend rates under our dividend growth program, offset by lower outstanding shares resulting from shares purchased and cancelled under our NCIB program.
Purchase of Common Shares for cancellation
In the fourth quarter of 2015, we purchased approximately six million shares under our 2016 NCIB for $226 million. For the full year of 2015, we purchased approximately 16 million shares under our completed 2015 and advanced 2016 NCIB for $628 million. In 2014, we purchased approximately 2.9 million shares in the fourth quarter and approximately 16 million shares in the full year under our NCIB program, for $112 million in the quarter and $612 million for the year.
Normal course issuer bid in 2015
----------------------------------------------------------------------------
Period Common Increase
Shares Average (decrease)
purchased purchase Purchase in accounts
and price per costs ($ payable Cash outflow
cancelled share ($) millions)($ millions) ($ millions)
----------------------------------------------------------------------------
First quarter 3,793,200 41.06 156 - 156
Second
quarter 3,322,600 40.74 135 29 106
Third quarter 2,531,862 43.43 110 (30) 140
Fourth
quarter 5,962,800 39.15 234 8 226
----------------------------------------------------------------------------
Total 15,610,462 40.64 635 7 628
----------------------------------------------------------------------------
In January 2016, we purchased, by way of the ASPP, 1,043,300 Common Shares for cancellation under our 2016 NCIB.
Normal course issuer bid in 2016
----------------------------------------------------------------------------
Period Common Increase
Shares Average (decrease)
purchased purchase Purchase in accounts
and price per costs ($ payable Cash outflow
cancelled share ($) millions) ($ millions) ($ millions)
----------------------------------------------------------------------------
January 2016 1,043,300 37.34 39 (5) 44
----------------------------------------------------------------------------
Short-term borrowings
Short-term borrowings are composed primarily of amounts advanced to us from an arm's-length securitization trust pursuant to the transfer of receivables securitization transactions (see Section 7.7 Sale of trade receivables in the 2015 annual MD&A). Such proceeds were $100 million throughout the first quarter of 2015, increased to $500 million during the second quarter of 2015, decreased to $100 million during the third quarter of 2015 and remained at $100 million in the fourth quarter of 2015.
Long-term debt issues and repayments
Long-term debt issues, net of repayments, were $329 million in the fourth quarter of 2015 and $2.7 billion in the full year of 2015, which were primarily composed of:
-- A March 24, 2015, public issue of $1.75 billion of senior unsecured
notes in three series: a $250 million offering at 1.50% due March 27,
2018, a $1.0 billion offering at 2.35% due March 28, 2022 and a $500
million offering at 4.40% due January 29, 2046. The net proceeds were
used to fund a portion of the $1.5 billion purchase price of the
wireless spectrum licences acquired in the Department of Innovation,
Science and Economic Development's (formerly Industry Canada) AWS-3
spectrum auction during the first quarter of 2015, and to repay
approximately $110 million of indebtedness drawn from the 2014 Credit
Facility and approximately $135 million of outstanding commercial paper.
The remainder was used for general corporate purposes.
-- A $400 million draw on our five-year revolving credit facility in the
second quarter of 2015, which was reduced to $NIL during the third
quarter of 2015. At December 31, 2015, no amounts were drawn against our
five-year credit facility and $256 million was required to backstop
commercial paper. Our commercial paper program provides low cost funds
and is fully backstopped by this five-year committed credit facility
(see Section 7.6 Credit facilities in the 2015 annual MD&A).
-- A November 23, 2015, repayment of our $125 million TELUS Communications
Inc. Series 2 Debentures, upon maturity.
-- A December 8, 2015, public issue of $1.0 billion of senior unsecured
notes composed of a $600 million offering at 3.75% due March 10, 2026,
and $400 million of 4.85% Notes through the re-opening of Series CP
Notes, maturing April 5, 2044. The net proceeds were used to repay
approximately $956 million in outstanding commercial paper and to fund
the repayment, on maturity, of a portion of the $600 million principal
amount outstanding on TELUS' Series CI Notes due May 2016. The balance
will be used for general corporate purposes.
-- A decrease in commercial paper during the fourth quarter of 2015 from
$787 million at September 30, 2015 (U.S.$589 million) to $256 million at
December 31, 2015 (U.S.$185 million). For the full year of 2015,
commercial paper increased by a net $126 million.
All of our debt transactions contributed to an increase in our average term to maturity of long-term debt (excluding commercial paper) to approximately 11.1 years at December 31, 2015, compared to approximately 10.9 years at the end of 2014. Additionally, our weighted average cost of long-term debt was 4.32% at December 31, 2015, compared to 4.72% at the end of 2014.
In comparison, repayments of long-term debt, net of debt issues, were $25 million in the fourth quarter of 2014, while long-term debt issues, net of repayments, were $1.8 billion in the full year of 2014, which were primarily composed of:
-- An April 4, 2014 public issue of $1.0 billion of senior unsecured notes
in two series: a $500 million offering at 3.20% due April 5, 2021, and a
$500 million offering at 4.85% due April 5, 2044. The net proceeds were
used to repay the approximately $914 million of indebtedness drawn to
fund a portion of the purchase price of the 700 MHz spectrum licences
and the remainder was used for general corporate purposes.
-- A September 10, 2014 public issue of $1.2 billion of senior unsecured
notes in two series: an $800 million offering at 3.75% due January 17,
2025, and a $400 million offering at 4.75% due January 17, 2045. The net
proceeds were used to repay indebtedness consisting of: (i) advances on
the 2014 credit facility and commercial paper issued to fund a
substantial portion of the early redemption, on September 8, 2014, of
our $500 million 5.95% Series CE Notes; and (ii) other outstanding
commercial paper, which had been incurred for general corporate
purposes.
-- A net increase in commercial paper to $130 million at December 31, 2014,
from a $NIL balance at December 31, 2013.
4. Definitions and reconciliations
4.1 Non-GAAP and other financial measures
We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS and its segments, as well as to determine compliance with debt covenants and to manage the capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure.
Adjusted basic earnings per share: This measure is used to evaluate performance at a consolidated level and excludes items that may distort the underlying trends in business performance. This measure should not be considered an alternative to basic earnings per share in measuring TELUS' performance. Items that may, in management's view, obfuscate the underlying trends in business performance include significant gains or losses on real estate redevelopment partnerships, restructuring and other costs, long-term debt prepayment premiums, income-tax related adjustments and asset retirements related to restructuring activities (see Section 1.2).
Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences and non-monetary transactions) divided by total operating revenues. This measure provides a basis for comparing the level of capital expenditures to those of other companies of varying size within the same industry.
Dividend payout ratio: This is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the Consolidated financial statements, divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods (divided by annual basic earnings per share for fiscal years). Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings on a prospective basis.
Calculation of Dividend payout ratio
----------------------------------------------------------------------------
Years ended December 31 ($) 2015 2014
----------------------------------------------------------------------------
Numerator - sum of the last four quarterly
dividends declared per Common Share(1) 1.68 1.52
Denominator - Net income per Common Share 2.29 2.32
----------------------------------------------------------------------------
Ratio (%) 73 66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 For the year ended December 31, 2015, the numerator period has been
aligned with the denominator period; the comparative amounts have been
restated.
----------------------------------------------------------------------------
Dividend payout ratio of adjusted net earnings: More representative of a sustainable calculation is the historical ratio based on reported earnings per share adjusted to exclude income tax-related adjustments, long-term debt prepayment premiums and items adjusted for in EBITDA. Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings on a prospective basis.
Calculation of Dividend payout ratio of adjusted net earnings
----------------------------------------------------------------------------
Years ended December 31 ($) 2015 2014
----------------------------------------------------------------------------
Numerator - sum of the last four quarterly dividends
declared per Common Share(1) 1.68 1.52
----------------------------------------------------------------------------
Adjusted net earnings ($ millions):
Net income attributable to Common Shares 1,382 1,425
Add back long-term debt prepayment premium after
income taxes - 10
Add back net unfavourable (deduct net favourable)
income tax-related adjustments 1 (6)
----------------------------------------------------------------------------
1,383 1,429
----------------------------------------------------------------------------
Denominator - Adjusted net earnings per Common Share 2.29 2.33
----------------------------------------------------------------------------
Adjusted ratio (%) 73 66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 For the year ended December 31, 2015, the numerator period has been
aligned with the denominator period; the comparative amounts have been
restated.
----------------------------------------------------------------------------
EBITDA (earnings before interest, income taxes, depreciation and amortization): We have issued guidance on and report EBITDA because it is a key measure used to evaluate performance at a consolidated level and the contribution of our two segments. EBITDA is commonly reported and widely used by investors and lending institutions as an indicator of a company's operating performance and ability to incur and service debt, and as a valuation metric. EBITDA should not be considered an alternative to Net income in measuring TELUS' performance, nor should it be used as an exclusive measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues less the total of Goods and services purchased expense and Employee benefits expense.
We may also calculate an adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a valuation metric, or should not be included in an assessment of our ability to service or incur debt. In respect of the TELUS Garden residential real estate partnership, which is included in the wireless and wireline segments, we do not anticipate retaining an ownership interest in the TELUS Garden residential condominium following completion of construction. For the TELUS Garden residential real estate partnership, gains net of equity losses were $NIL in the fourth quarter and full year of both 2015 and 2014.
EBITDA reconciliation
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
------------------------------------------------
($ millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
Net income 261 312 1,382 1,425
Financing costs 114 115 447 456
Income taxes 85 106 524 501
Depreciation 406 366 1,475 1,423
Amortization of intangible
assets 112 102 434 411
----------------------------------------------------------------------------
EBITDA 978 1,001 4,262 4,216
----------------------------------------------------------------------------
EBITDA - excluding restructuring and other costs: We report this measure as a supplementary indicator of our operating performance.
Calculation of EBITDA - excluding restructuring and other costs
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
------------------------------------------------
($ millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
EBITDA 978 1,001 4,262 4,216
Restructuring and other
costs included in EBITDA 99 26 226 75
----------------------------------------------------------------------------
EBITDA - excluding
restructuring and other
costs 1,077 1,027 4,488 4,291
----------------------------------------------------------------------------
Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the Consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the Consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.
Free cash flow calculation
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
------------------------------------------------
($ millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
EBITDA 978 1,001 4,262 4,216
Restructuring costs net of
disbursements 56 11 97 1
Items from the Consolidated
statements of cash flows:
Share-based compensation
expense, net of payments (78) 15 (38) 74
Net employee defined
benefit plans expense 37 22 118 87
Employer contributions to
employee defined benefit
plans (26) (15) (94) (88)
Interest paid (129) (129) (458) (412)
Interest received 21 1 24 2
Capital expenditures
(excluding spectrum
licences) (655) (570) (2,577) (2,359)
----------------------------------------------------------------------------
Free cash flow before income
taxes 204 336 1,334 1,521
Income taxes paid, net of
refunds received (7) 1 (256) (464)
----------------------------------------------------------------------------
Free cash flow 197 337 1,078 1,057
----------------------------------------------------------------------------
The following reconciles our definition of free cash flow with cash provided by operating activities.
Free cash flow reconciliation with cash provided by operating activities
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
-------------------------------------------------
($ millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
Free cash flow 197 337 1,078 1,057
Add (deduct):
Capital expenditures
(excluding spectrum
licences) 655 570 2,577 2,359
Adjustments to reconcile
to Cash provided by
operating activities 11 10 (113) (9)
----------------------------------------------------------------------------
Cash provided by operating
activities 863 917 3,542 3,407
----------------------------------------------------------------------------
Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of Long-term debt. Net debt is a component of the Net debt to EBITDA - excluding restructuring and other costs ratio.
Calculation of Net debt
----------------------------------------------------------------------------
As at December 31 ($ millions) 2015 2014
----------------------------------------------------------------------------
Long-term debt including current maturities 12,038 9,310
Debt issuance costs netted against long-term debt 52 43
Derivative assets, net (14) -
Cash and temporary investments (223) (60)
Short-term borrowings 100 100
----------------------------------------------------------------------------
Net debt 11,953 9,393
----------------------------------------------------------------------------
Net debt to EBITDA - excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA - excluding restructuring and other costs. Our long-term policy guideline for this ratio is from 2.00 to 2.50 times. This measure is similar to the leverage ratio covenant in our credit facilities.
Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges when undertaking major or transformational changes to our business or operating models. We include incremental external costs incurred in connection with business acquisition or disposition activity, as well as litigation costs, in the context of significant losses and settlements, in other costs.
Components of restructuring and other costs
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
------------------------------------------------
($ millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
Goods and services purchased 11 6 70 21
Employee benefits expense 88 20 156 54
----------------------------------------------------------------------------
Restructuring and other
costs included in EBITDA 99 26 226 75
----------------------------------------------------------------------------
4.2 Operating indicators
The following measures are industry metrics that are useful in assessing the operating performance of a wireless telecommunications entity, but do not have a standardized meaning under IFRS-IASB.
Average revenue per subscriber unit per month (ARPU) is calculated as network revenue divided by the average number of subscriber units on the network during the period and is expressed as a rate per month.
Churn per month is calculated as the number of subscriber units deactivated during a given period divided by the average number of subscriber units on the network during the period, and expressed as a rate per month. A TELUS, Koodo, or Public Mobile brand prepaid subscriber is deactivated when the subscriber has no usage for 90 days following expiry of the prepaid credits.
Cost of acquisition (COA) consists of the total of the device subsidy (the device cost to TELUS less the initial charge to the customer), commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as cost of acquisition divided by gross subscriber activations during the period.
Retention spend to network revenue represents direct costs associated with marketing and promotional efforts (including device subsidies and commissions) aimed at the retention of the existing subscriber base, divided by network revenue.
Retention volume represents the number of subscriber units retained in the period through marketing and promotional efforts that result in client upgrades or contract renewals.
Wireless subscriber unit (subscriber) is defined as an active recurring revenue-generating unit (e.g. cellular phone, tablet or mobile Internet key) with a unique subscriber identifier (SIM or IMEI number) that has access to the wireless voice and/or data networks for communication. In addition, TELUS has a direct billing or support relationship with the user of each device. Subscriber units exclude machine-to-machine (M2M) devices (a subset of the Internet of Things), such as those used for asset tracking, remote control monitoring and meter readings, vending machines and wireless automated teller machines.
Wireline subscriber connection is defined as an active recurring revenue-generating unit that has access to stand-alone services, including Internet access, TELUS TV and residential network access lines (NALs). In addition, TELUS has a direct billing or support relationship with the user of each service. Reported subscriber units exclude business NALs as the impact of migrating from voice lines to IP services has led to business NAL losses without a similar decline in revenue, thus diminishing its relevance as a key performance indicator.
Condensed consolidated statements of income and other comprehensive income (unaudited)
Three months Twelve months
Periods ended December 31
(millions except per share
amounts) 2015 2014 2015 2014
----------------------------------------------------------------------------
OPERATING REVENUES
Service $ 2,943 $ 2,856 $ 11,590 $ 11,108
Equipment 243 259 840 819
----------------------------------------------------------------------------
Revenues arising from
contracts with customers 3,186 3,115 12,430 11,927
Other operating income 31 13 72 75
----------------------------------------------------------------------------
3,217 3,128 12,502 12,002
----------------------------------------------------------------------------
OPERATING EXPENSES
Goods and services purchased 1,482 1,476 5,532 5,299
Employee benefits expense 757 651 2,708 2,487
Depreciation 406 366 1,475 1,423
Amortization of intangible
assets 112 102 434 411
----------------------------------------------------------------------------
2,757 2,595 10,149 9,620
----------------------------------------------------------------------------
OPERATING INCOME 460 533 2,353 2,382
Financing costs 114 115 447 456
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 346 418 1,906 1,926
Income taxes 85 106 524 501
----------------------------------------------------------------------------
NET INCOME 261 312 1,382 1,425
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Items that may subsequently
be reclassified to income
Change in unrealized fair
value of derivatives
designated as cash flow
hedges (3) 5 (4) 1
Foreign currency translation
adjustment arising from
translating financial
statements of foreign
operations 8 6 25 10
Change in unrealized fair
value of available-for-sale
financial assets 2 (2) - (4)
----------------------------------------------------------------------------
7 9 21 7
----------------------------------------------------------------------------
Item never subsequently
reclassified to income
Employee defined benefit
plan re-measurements 486 (652) 445 (445)
----------------------------------------------------------------------------
493 (643) 466 (438)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 754 $ (331)$ 1,848 $ 987
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 0.44 $ 0.51 $ 2.29 $ 2.31
Diluted $ 0.44 $ 0.51 $ 2.29 $ 2.31
TOTAL WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
Basic 598 611 603 616
Diluted 599 613 604 618
Condensed consolidated statements of financial position (unaudited)
As at December 31 (millions) 2015 2014
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary investments, net $ 223 $ 60
Accounts receivable 1,428 1,483
Income and other taxes receivable 1 97
Inventories 360 320
Prepaid expenses 213 199
Real estate joint venture advances 66 -
Current derivative assets 40 27
----------------------------------------------------------------------------
2,331 2,186
----------------------------------------------------------------------------
Non-current assets
Property, plant and equipment, net 9,736 9,123
Intangible assets, net 9,985 7,797
Goodwill, net 3,761 3,757
Other long-term assets 593 354
----------------------------------------------------------------------------
24,075 21,031
----------------------------------------------------------------------------
$ 26,406 $ 23,217
----------------------------------------------------------------------------
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Short-term borrowings $ 100 $ 100
Accounts payable and accrued liabilities 1,990 2,019
Income and other taxes payable 108 2
Dividends payable 263 244
Advance billings and customer deposits 760 753
Provisions 197 126
Current maturities of long-term debt 856 255
Current derivative liabilities 2 -
----------------------------------------------------------------------------
4,276 3,499
----------------------------------------------------------------------------
Non-current liabilities
Provisions 433 342
Long-term debt 11,182 9,055
Other long-term liabilities 688 931
Deferred income taxes 2,155 1,936
----------------------------------------------------------------------------
14,458 12,264
----------------------------------------------------------------------------
Liabilities 18,734 15,763
----------------------------------------------------------------------------
Owners' equity
Common equity 7,672 7,454
----------------------------------------------------------------------------
$ 26,406 $ 23,217
----------------------------------------------------------------------------
Condensed consolidated statements of cash flows (unaudited)
Three months Twelve months
Periods ended December
31 (millions) 2015 2014 2015 2014
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 261 $ 312 $ 1,382 $ 1,425
Adjustments to reconcile
net income to cash
provided by operating
activities:
Depreciation and
amortization 518 468 1,909 1,834
Deferred income taxes (9) 100 68 188
Share-based
compensation expense,
net (78) 15 (38) 74
Net employee defined
benefit plans expense 37 22 118 87
Employer contributions
to employee defined
benefit plans (26) (15) (94) (88)
Other (46) 10 (17) (49)
Net change in non-cash
operating working
capital 206 5 214 (64)
----------------------------------------------------------------------------
Cash provided by
operating activities 863 917 3,542 3,407
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash payments for
capital assets,
excluding spectrum
licences (619) (654) (2,522) (2,373)
Cash payments for
spectrum licences (46) (28) (2,048) (1,171)
Cash payments for
acquisitions and
related investments - (3) (10) (49)
Real estate joint
ventures advances and
contributions (12) (18) (50) (57)
Real estate joint
venture receipts 1 2 98 4
Proceeds on dispositions 47 - 52 7
Other 4 (12) 3 (29)
----------------------------------------------------------------------------
Cash used by investing
activities (625) (713) (4,477) (3,668)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to
holders of Common
Shares (252) (233) (992) (913)
Purchase of Common
Shares for cancellation (226) (112) (628) (612)
Issuance and repayment
of short-term
borrowings (1) - - (300)
Long-term debt issued 2,882 659 9,219 7,273
Redemptions and
repayment of long-term
debt (2,553) (684) (6,486) (5,450)
Other (6) - (15) (13)
----------------------------------------------------------------------------
Cash provided (used) by
financing activities (156) (370) 1,098 (15)
----------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in
cash and temporary
investments, net 82 (166) 163 (276)
Cash and temporary
investments, net,
beginning of period 141 226 60 336
----------------------------------------------------------------------------
Cash and temporary
investments, net, end
of period $ 223 $ 60 $ 223 $ 60
----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF OPERATING CASH FLOWS
Interest paid $ (129) $ (129) $ (458) $ (412)
----------------------------------------------------------------------------
Interest received $ 21 $ 1 $ 24 $ 2
----------------------------------------------------------------------------
Income taxes paid, net $ (7) $ 1 $ (256) $ (464)
----------------------------------------------------------------------------
Segmented information (unaudited)
Three-month periods
ended December 31
(millions) Wireless Wireline
2015 2014 2015 2014
----------------------------------------------------------------------------
Operating revenues
External revenue $ 1,772 $ 1,744 $ 1,445 $ 1,384
Intersegment revenue 17 15 44 44
----------------------------------------------------------------------------
$ 1,789 $ 1,759 $ 1,489 $ 1,428
----------------------------------------------------------------------------
EBITDA(1) $ 628 $ 629 $ 350 $ 372
----------------------------------------------------------------------------
CAPEX, excluding
spectrum licences(2) $ 209 $ 188 $ 446 $ 382
----------------------------------------------------------------------------
Three-month periods
ended December 31
(millions) Eliminations Consolidated
2015 2014 2015 2014
----------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 3,217 $ 3,128
Intersegment revenue (61) (59) - -
----------------------------------------------------------------------------
$ (61) $ (59) $ 3,217 $ 3,128
----------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 978 $ 1,001
----------------------------------------------------------------------------
CAPEX, excluding
spectrum licences(2) $ - $ - $ 655 $ 570
----------------------------------------------------------------------------
Operating revenues
(above) $ 3,217 $ 3,128
Goods and services
purchased 1,482 1,476
Employee benefits
expense 757 651
----------------------------------------------------
EBITDA (above) 978 1,001
Depreciation 406 366
Amortization 112 102
----------------------------------------------------
Operating income 460 533
Financing costs 114 115
----------------------------------------------------
Income before income
taxes $ 346 $ 418
----------------------------------------------------
Years ended December
31 (millions) Wireless Wireline
2015 2014 2015 2014
----------------------------------------------------------------------------
Operating revenues
External revenue $ 6,933 $ 6,587 $ 5,569 $ 5,415
Intersegment revenue 61 54 174 175
----------------------------------------------------------------------------
$ 6,994 $ 6,641 $ 5,743 $ 5,590
----------------------------------------------------------------------------
EBITDA(1) $ 2,806 $ 2,727 $ 1,456 $ 1,489
----------------------------------------------------------------------------
CAPEX, excluding
spectrum
licences(2) $ 893 $ 832 $ 1,684 $ 1,527
----------------------------------------------------------------------------
Years ended December
31 (millions) Eliminations Consolidated
2015 2014 2015 2014
----------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 12,502 $ 12,002
Intersegment revenue (235) (229) - -
----------------------------------------------------------------------------
$ (235) $ (229) $ 12,502 $ 12,002
----------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 4,262 $ 4,216
----------------------------------------------------------------------------
CAPEX, excluding
spectrum
licences(2) $ - $ - $ 2,577 $ 2,359
----------------------------------------------------------------------------
Operating revenues
(above) $ 12,502 $ 12,002
Goods and services
purchased 5,532 5,299
Employee benefits expense 2,708 2,487
--------------------------------------------------------
EBITDA (above) 4,262 4,216
Depreciation 1,475 1,423
Amortization 434 411
--------------------------------------------------------
Operating income 2,353 2,382
Financing costs 447 456
--------------------------------------------------------
Income before income
taxes $ 1,906 $ 1,926
--------------------------------------------------------
1 Earnings before interest, income taxes, depreciation and amortization
(EBITDA) does not have any standardized meaning prescribed by IFRS-IASB
and is therefore unlikely to be comparable to similar measures
presented by other issuers; we define EBITDA as operating revenues less
goods and services purchased and employee benefits expense. We have
issued guidance on, and report, EBITDA because it is a key measure that
management uses to evaluate the performance of our business and is also
utilized in measuring compliance with certain debt covenants.
2 Total capital expenditures (CAPEX).
FOR FURTHER INFORMATION PLEASE CONTACT:
Media relations:
Shawn Hall
(604) 619-7913
shawn.hall@telus.com
Investor relations:
Paul Carpino
(647) 837-8100
ir@telus.com
Source: TELUS Corporation
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