TELUS reports strong results for fourth quarter 2016 and Announces 2017 financial targets
VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 02/09/17 -- (TSX: T)(NYSE: TU) - TELUS Corporation
Strong customer loading across key growth segments with 127,000 net new postpaid wireless, Internet and TELUS TV customer additions, up 17 per cent from last year
Industry-leading wireless monthly postpaid churn of 0.98 per cent, third consecutive year with churn below 1.00 per cent
Strong ARPU growth of 3.9 per cent and best-in-class lifetime revenue per client of $5,300
$1.2 billion returned to shareholders in 2016; 7 to 10 per cent annual dividend increase targeted in 2017
Targeting 2017 revenue growth of up to 3.5 per cent and EBITDA growth of up to 6.0 per cent on a consolidated basis
TELUS Corporation's consolidated operating revenue increased 2.7 per cent to $3.3 billion in the fourth quarter of 2016, over the same period a year ago, reflecting higher data revenue and subscriber growth in both wireless and wireline operations. Earnings before interest, income taxes, depreciation and amortization (EBITDA) decreased by 21 per cent to $769 million due to significantly higher restructuring and other costs which included the immediately vesting transformative compensation expense (transformative compensation) of $305 million. When excluding restructuring and other costs as well as net gains and equity income related to real estate joint venture developments in the fourth quarter of 2016, adjusted EBITDA was up 3.1 per cent to $1.1 billion, and up 5.1 per cent when excluding a non-recurring gain on certain real estate assets in the fourth quarter of 2015. This growth reflects higher wireless and wireline revenue, as well as ongoing execution of operational efficiency and effectiveness initiatives.
"TELUS delivered robust fourth quarter results reflecting strong revenue, EBITDA and subscriber growth across both of our wireless and wireline businesses," said Darren Entwistle, President and CEO. "Our exceptional team continued to demonstrate their ability to navigate successfully the competitive environment, delivering the best customer experience and shareholder value in the industry."
Mr. Entwistle added "TELUS built upon our track record of delivering industry-leading shareholder-friendly initiatives in 2016. Notably, we returned over $1.2 billion to shareholders in both dividends and share purchases and we are targeting another 7 to 10 per cent increase in dividends in 2017. TELUS has now returned approximately $14 billion to shareholders, including $8.7 billion in dividends and $5.2 billion in share purchases, representing $24 per share since 2004."
Mr. Entwistle further commented "As we look to 2017, TELUS is once again providing industry-leading revenue, EBITDA and dividend growth targets, highlighting the confidence we have in the entire global TELUS organization. These targets are representative of the ongoing excellence of our long-term strategy, reflecting the consistency, diversity and combined strength of both our wireless and wireline operating segments that underpin our shareholder-friendly initiatives."
Doug French, TELUS Executive Vice-President and CFO said, "TELUS' fourth quarter results demonstrated a strong finish to 2016, reflecting our team's consistent execution against our long-standing strategy along with maintaining an organization-wide focus on operational efficiency and effectiveness. Looking forward into 2017, we remain focused on delivering strong financial and operating performance, leading customer experience and maintaining our strong balance sheet position while we continue to make the generational investments in broadband and wireless networks. Through these investments, TELUS will continue to enhance its network leadership driving profitable growth and free cash flow to support ongoing investor returns well into the future."
In wireless, network revenue growth was driven by an 11 per cent increase in data revenue, reflecting a larger proportion of higher-rate two-year plans in the revenue mix, increased adoption of larger data buckets or topping up of data buckets, continued subscriber growth, a more favourable postpaid subscriber mix, and increased data usage from data-intensive devices. In wireline, data revenue growth of 6.1 per cent was generated by increased Internet and enhanced data service revenues from continued high-speed Internet subscriber growth and higher revenue per customer, growth in business process outsourcing revenues, and an increase in TELUS TV revenues from subscriber growth and higher revenue per customer.
In the quarter, TELUS attracted 127,000 new wireless postpaid, high-speed Internet and TV customers, up 18,000 over the same quarter a year ago and up 12,000 sequentially over the prior quarter. Net additions in the quarter included 87,000 wireless postpaid customers, 24,000 high-speed Internet subscribers, and 16,000 TELUS TV customers. These gains were partially offset by the ongoing loss of traditional telephone network access lines and a moderating decline in wireless prepaid customers. TELUS' total wireless subscriber base of 8.6 million is up 1.5 per cent from a year ago, reflecting a 2.7 per cent increase in the postpaid subscriber base to more than 7.5 million. TELUS' high-speed Internet connections have increased 5.7 per cent to 1.7 million, while TELUS TV subscribers are higher by 5.4 per cent to more than 1 million.
TELUS delivered an industry-leading wireless monthly postpaid churn rate of 0.98 per cent. TELUS' postpaid churn rate has now been below the 1 per cent level for 13 of the past 14 quarters. For the year, postpaid monthly churn was 0.95 per cent.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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Three months ended
C$ and in millions, except per share amounts December 31 Per cent
(unaudited) 2016 2015 change
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Operating revenues 3,305 3,217 2.7
Operating expenses before depreciation and
amortization 2,536 2,239 13.3
EBITDA(1) 769 978 (21.3)
EBITDA - excluding restructuring and other
costs(1)(2) 1,117 1,077 3.7
Adjusted EBITDA(1)(2)(3) 1,110 1,077 3.1
Net income 87 261 (66.7)
Net income attributable to common shares 81 261 (69.0)
Adjusted net income(4) 316 324 (2.5)
Basic earnings per share (EPS) 0.14 0.44 (68.2)
Adjusted basic EPS(4) 0.53 0.54 (1.9)
Capital expenditures 794 655 21.2
Free cash flow(5) (191) 197 n/m
Total subscriber connections(6) 12.673 12.495 1.4
(1) EBITDA is a non-GAAP measure and 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
of this measure, see Section 4.1 in the accompanying 2016 fourth quarter
Management's review of operations.
(2) For the fourth quarter of 2016 and 2015, restructuring and other costs
were $348 million and $99 million respectively. In the fourth quarter of
2016, TELUS recorded a transformative compensation expense of $305
million as part of other costs.
(3) Adjusted EBITDA for the fourth quarter of 2016 excludes: 1)
restructuring and other costs of $348 million; and 2) net gains and
equity income of $7 million related to real estate joint venture
developments.
(4) Adjusted net income and adjusted basic EPS are non-GAAP measures and do
not have any standardized meaning prescribed by IFRS-IASB. These terms
are defined in this news release as excluding from net income
attributable to common shares and basic EPS (after income taxes), 1)
restructuring and other costs in the fourth quarters of 2016 and 2015;
2) favourable income tax-related adjustments in the fourth quarters of
2016 and 2015; and 3) net gains and equity income from real estate joint
venture developments in the fourth quarter of 2016, For further analysis
of adjusted net income and Adjusted basic EPS see Section 1.2 in the
accompanying 2016 fourth quarter Management's review of operations.
(5) Free cash flow is a non-GAAP measure and does not have any standardized
meaning prescribed by IFRS-IASB. For definition and explanation of this
measure, see Section 4.1 in the accompanying 2016 fourth quarter
Management's review of operations.
(6) The sum of active wireless subscribers, residential network access lines
(NALs), high-speed Internet access subscribers and TELUS TV subscribers
(Optik TV� and TELUS Satellite TV� subscribers) measured at the end
of the respective periods based on information in billing and other
systems. Subsequent to a review of our subscriber base, TELUS' Q1 2016
beginning of period postpaid wireless subscriber base was reduced by
45,000 and the Q1 2016 beginning of period high-speed Internet
subscriber base was increased by 21,000.
For the quarter, net income of $87 million and basic earnings per share (EPS) of $0.14 were impacted by significantly higher restructuring and others costs, primarily reflecting the transformative compensation expense. When excluding restructuring and other costs, net gains and equity income from real estate joint venture developments, and favourable income tax-related adjustments, adjusted net income declined by 2.5 per cent, while adjusted basic EPS of $0.53 decreased slightly from the same period a year ago.
Free cash flow of $(191) million in the fourth quarter declined from $197 million a year ago, primarily due to payments in respect of transformative compensation and higher capital expenditures.
In the fourth quarter of 2016, TELUS returned $311 million to shareholders including $272 million in dividends paid and $39 million in share purchases under its 2017 normal course issuer bid (NCIB) program. In 2016, TELUS returned more than $1.2 billion to shareholders, including $1.07 billion in dividends paid and the purchase of approximately 4.3 million shares for $169 million.
============================================================================ This news release contains statements about financial and operating performance of TELUS (the Company) and future events that are forward looking, including with respect to the Company's 2017 annual targets and guidance and future dividend increases. 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, the forward-looking statements in this news release should be read together with the cautionary note in the accompanying fourth quarter Management's review of operations. Forward-looking statements in this news release are made based on the assumptions (including assumptions regarding the 2017 annual targets and guidance, semi-annual dividend increases through 2019, and our ability to sustain and complete our multi-year share purchase program through 2019), and subject to the qualifications and risk factors referred to in the Management's review of operations, in the 2016 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). The forward- looking statements contained in this news release describe our expectations at the date of this news release and, accordingly, are subject to change after such date. 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 2016 Operating Highlights
TELUS wireless
-- Wireless network revenues increased by $86 million or 5.4 per cent year-
over-year to $1.7 billion. This growth was driven by a larger proportion
of higher-rate two-year plans in the revenue mix, increased adoption of
larger data buckets or topping up of data buckets, continued subscriber
growth, a more favourable postpaid subscriber mix, and increased data
usage from data-intensive devices. This growth was partially offset by
the ongoing decline in voice revenue from increased adoption of
unlimited nationwide voice plans and continued but moderating
substitution to data services.
-- Blended ARPU was higher by 3.9 per cent to $66.24. This represents
TELUS' twenty-fifth consecutive quarter of year-over-year growth. The
growth was driven by data network revenue growth as described above.
-- Monthly postpaid subscriber churn of 0.98 per cent improved by three
basis points year-over-year. The decline reflects our focus on executing
on customers first initiatives and retention programs, partly offset by
competitive intensity and the effects of the economic slowdown,
particularly in Alberta. Blended monthly churn improved by 7 basis
points to 1.25 per cent reflecting improvements in both postpaid and
prepaid churn rates, as well as an increase in the mix of postpaid
subscribers.
-- Postpaid net additions of 87,000 were higher year-over-year by 25,000
due to higher gross additions, reflecting the success of targeted
promotions and marketing efforts, and lower churn. Total wireless net
additions of 78,000 were higher by 42,000 over a year ago due to higher
postpaid net additions and improved prepaid losses of 9,000.
-- Adjusted wireless EBITDA (EBITDA excluding the net gains and equity
income from real estate joint venture developments, as well as
restructuring and other costs) increased by $26 million or 4.0 per cent
over last year to $679 million. When excluding a non-recurring gain on
certain real estate assets in the fourth quarter of 2015, adjusted
wireless EBITDA would have increased by 5.1 per cent in the fourth
quarter 2016. The growth reflects higher network revenue as well as
ongoing operational efficiency and effectiveness initiatives, partly
offset by higher acquisition and retention spending reflecting higher
per-unit subsidies due to customer preference for higher-value
smartphones and competitive intensity.
-- Wireless capital expenditures increased by 19 per cent over the same
period a year ago due to ongoing investments in TELUS' fibre-optic
network to support its small-cell technology strategy to improve
coverage and prepare for a more efficient and timely evolution to 5G, as
well as investments in systems and cost efficiency initiatives.
TELUS wireline
-- External wireline revenues increased by $19 million or 1.3 per cent to
$1.5 billion. This growth was generated primarily by higher data service
and equipment revenue.
-- Data service and equipment revenues increased by $60 million or 6.1 per
cent, due to increased Internet and enhanced data revenues from
continued high-speed Internet subscriber growth and higher revenue per
customer, growth in business process outsourcing services, and increased
TELUS TV revenues from continued subscriber growth and higher revenue
per customer.
-- High-speed Internet net additions of 24,000 were up 2,000 from the same
quarter a year ago, reflecting the ongoing expansion of TELUS' high-
speed broadband footprint, including fibre-to-the-premises and the pull-
through effect of bundling with Optik TV.
-- Total TV net additions of 16,000 were lower by 9,000 over the same
quarter a year ago, as a result of lower gross additions, a higher
customer churn rate and a decline in satellite subscribers due to the
effects of heightened competitive intensity including OTT services,
slower subscriber growth for paid TV services, the economic slowdown,
and a high rate of market penetration for TV services. These factors
were partly offset by the ongoing expansion of our addressable high-
speed Internet and Optik TV footprint, connecting more homes and
businesses directly to fibre and bundling of these services together.
-- Residential network access lines (NALs) declined by 22,000 in the
quarter, an improvement of 2,000 over the same quarter a year ago.
Residential NAL losses continue to reflect the economic slowdown, the
ongoing trend towards wireless and Internet substitution, partly
mitigated by the success of TELUS' bundled service offerings.
-- Adjusted wireline EBITDA (EBITDA excluding the net gains and equity
income from real estate joint venture developments as well as
restructuring and other costs) increased by $7 million or 1.7 per cent
over last year to $431 million. When excluding a non-recurring gain on
certain real estate assets in the fourth quarter of 2015, adjusted
wireline EBITDA would have increased by 5.0 per cent in the fourth
quarter 2016. The improvement reflects execution on operating efficiency
and effectiveness initiatives, as well as improving margins in data
services, including Internet, business process outsourcing services,
TELUS TV, and TELUS Health services.
-- Capital expenditures increased 22 per cent over the same period a year
ago due primarily to continued strategic investments in broadband
network infrastructure, including connecting more homes and businesses
directly to TELUS' fibre-optic network. This investment supports high-
speed Internet and Optik TV subscriber growth, as well as TELUS' growing
customer demand for faster Internet speeds, and extends the reach and
functionality of TELUS' business and healthcare solutions.
TELUS sets 2017 consolidated financial targets
TELUS' consolidated financial targets for 2017 are reflective of the company's strategic investments in advanced broadband technology and wireless infrastructure, a commitment by the TELUS team to deliver client service excellence and continued focus on cost efficiency and effectiveness. TELUS' 2017 financial targets are supportive of the Company's multi-year dividend growth program first announced in May 2011, under which TELUS has since delivered 12 dividend increases. TELUS plans to continue delivering on its dividend growth program in 2017 through 2019, targeting annual dividend growth between 7 and 10 per cent.
In 2017, TELUS plans to continue generating positive subscriber growth in its key growth segments, including wireless, high-speed Internet and TELUS TV. Increasing customer demand for reliable access and fast data services are expected to support wireless and Internet growth. TELUS International and TELUS Health are also expected to contribute to TELUS' diversified growth profile.
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2017 Targets 2016 Results Growth
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Consolidated
$13.120 to
$13.250
Revenues $ billion $ 12.799 billion 2.5 to 3.5%
EBITDA excluding
restructuring and other $4.850 to
costs(1) $$4.995 billion $ 4.708 billion 3.0 to 6.0%
Basic earnings per share(2) $$2.49 to $2.64 $ 2.44 2.0 to 8.0%
Approximately
Capital expenditures(3) $2.9 billion $ 2.968 billion -
(1) In 2017, total restructuring and others costs are expected to be
approximately $125 million, as compared to $479 million in 2016.
(2) Basic EPS for 2016 adjusted to exclude the lump-sum transformative
compensation expense of 38 cents.
(3)Capital expenditure targets and results exclude expenditures for
spectrum licences.
For 2017, TELUS is targeting consolidated annual revenue growth of between 2.5 and 3.5 per cent, driven by higher contribution from wireless network revenue reflecting continued subscriber and ARPU growth as well as ongoing wireline revenue growth from higher data services revenue.
Consolidated EBITDA excluding restructuring and other costs is targeted to be higher by 3.0 to 6.0 per cent driven by higher wireless network revenue growth, margin improvements from wireless and wireline data services and savings from ongoing cost efficiency and effectiveness initiatives. Higher subsidies for smartphones are expected to continue pressuring cost of acquisition and retention expense.
Basic earnings per share (EPS) is targeted to increase by 2.0 to 8.0 per cent driven primarily by EBITDA growth.
Consolidated capital expenditures for 2017, excluding the purchase of spectrum licences, are targeted to be approximately $2.9 billion. TELUS plans to continue connecting more homes and businesses directly to its fibre-optic network, to support ongoing high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. The investments in fibre will also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G. We also 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 for the full year are estimated to decline over 2016 levels to between $300 million and $360 million (2016 - $600 million). The decline in cash tax payments reflects both lower instalment payments for 2017 based on 2016 income and a lower final instalment payment for 2016 to be made in early 2017, partly offset by a decrease in income tax recoveries.
The preceding disclosure respecting TELUS' 2017 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 2016 and in the full year 2016 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 2017' in the accompanying Management's review of operations for the fourth quarter of 2016.
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 approximately $2.2 billion
in taxes in 2016 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 2000, the Company has remitted approximately $21 billion in these
taxes.
-- Disbursing spectrum renewal fees of $53 million to Innovation, Science
and Economic Development Canada in 2016. Since 2002, TELUS' total tax
and spectrum remittances to federal, provincial and municipal
governments in Canada have totaled approximately $26 billion.
-- Investing $3.0 billion in capital expenditures primarily in communities
across Canada in 2016 and more than $32 billion since 2000.
-- Spending $8.0 billion in total operating expenses in 2016, including
goods and service purchased of $5.7 billion. Since 2000, TELUS has spent
$99 billion and $65 billion respectively in these areas.
-- Generating a total team member payroll of $2.8 billion in 2016,
including payroll taxes of $137 million. Since 2000, total team member
payroll totals $39 billion.
-- Paying $1.07 billion in dividends in 2016 to individual shareholders,
mutual fund owners, pensioners and institutional investors, and
purchasing approximately 4.3 million shares for $169 million on behalf
of shareholders under TELUS' share purchase program.
-- Returning approximately $14 billion to shareholders through TELUS'
dividend and share purchase programs from 2004 to the end of 2016,
including $8.7 billion in dividends and $5.2 billion in share purchases,
representing nearly $24 per share.
Dividend Declaration
The TELUS Board of Directors has declared a quarterly dividend of 48 cents ($0.48) Canadian per share on the issued and outstanding Common Shares of the Company payable on April 3, 2017 to holders of record at the close of business on March 10, 2017.
This first quarter dividend represents a four cent increase from the $0.44 quarterly dividend paid on April 1, 2016.
About TELUS
TELUS (TSX: T)(NYSE: TU) is Canada's fastest-growing national telecommunications company, with $12.8 billion of annual revenue and 12.7 million subscriber connections, including 8.6 million wireless subscribers, 1.7 million high-speed Internet subscribers, 1.4 million residential network access lines and more than 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 over $482 million to charitable and not-for-profit organizations and volunteered more than 7.7 million hours of service to local communities since 2000. Created in 2005 by President and CEO Darren Entwistle, TELUS' 12 Canadian community boards and 5 International boards have led the Company's support of grassroots charities and have contributed more than $60 million in support of 5,595 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 2016 annual Management's discussion and analysis and financial statements, and our full 2016 annual report at telus.com/investors.
TELUS' fourth quarter 2016 and 2017 targets conference call is scheduled for Thursday, February 9, 2017 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 9 until March 15, 2017 at 1-855-201-2300. Please use reference number 1211356# 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
2016 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 any statements that do not refer to historical facts. They include, but are not limited to, statements relating to our objectives and our strategies to achieve those objectives, our targets (including our annual targets for 2017 described in Section 1.7 of this document), outlook, updates, our multi-year dividend growth program, our multi-year share purchase program, and statements about anticipated trends regarding our business and the environment in which we operate (in particular: Section 1 Discussion of operations). 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, could, expect, intend, may, plan, predict, seek, should, strive and will.
By their nature, forward-looking statements are subject to inherent risks and uncertainties and are based on assumptions, including assumptions about future economic conditions and courses of action. The assumptions on which our annual targets for 2017 are based are discussed in Section 1.7 of this document. These assumptions may ultimately prove to have been inaccurate and, as a result, our actual results or events may differ materially from our expectations expressed in or implied by the forward-looking statements.
Risks and uncertainties that could cause actual performance or events 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: our ability to continue to retain customers
throughan enhanced customer service experience, including through the
deploymentand operation of new wireless networks and the success of new
products,new services and supporting systems, such as Internet of Things
(IoT)services for Internet-connected devices; continued intense rivalry
acrossall 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 revenueper subscriber unit per month (ARPU) and churn for all
services (wirelessand wireline), as do customer usage patterns, flat-
rate pricing trends forvoice and data, inclusive rate plans for voice
and data and increasingavailability of Wi-Fi networks for data; mergers
and acquisitions ofindustry competitors; pressures on high-speed
Internet and TV ARPU andchurn resulting from market conditions,
government actions and customerusage patterns; residential and business
network access line (NAL) losses;subscriber additions and retention
volumes, and associated costs forwireless, TV and high-speed Internet
services; and our ability to obtain andoffer content on a timely basis
across multiple devices on wireless and TVplatforms at a reasonable
cost.
-- Technologicalsubstitution including: reduced utilizationand increased
commoditization of traditional wireline voice local and longdistance
services from impacts of OTT applications and wirelesssubstitution, a
declining overall market for paid TV services; theincreasing number of
households that have only wireless and/orInternet-based telephone
services; continuation of wireless voice ARPUdeclines as a result of,
among other factors, substitution to messagingand OTT applications;
substitution to increasingly available Wi-Fiservices from wireless
services; and disruptive technologies such as OTTInternet protocol (IP)
services that may displace our services includingTV and entertainment
services, and impact revenue.
-- Technology including: subscriber demand for data that may
challengewireless networks and spectrum capacity levels in the future;
our relianceon information technology and our need to understand and
streamline ourlegacy systems; technology options, evolution paths and
roll-out plans forwireless and wireline networks (including broadband
initiatives, such asfibre to the premises (FTTP), wireless small-cell
deployment, 5G wirelessand availability of resources and ability to
build out adequate broadbandcapacity); our reliance on wireless network
access agreements, which havefacilitated our deployment of wireless
technologies; choice of suppliersand those suppliers' ability to
maintain and service their product lines, whichcould affect the success
of upgrades to and evolution of technology thatwe offer (such as TELUS
TV); supplier concentration and market power fornetwork equipment, TELUS
TVr and wireless handsets; theperformance of wireless technology; our
expected long-term need to acquireadditional spectrum capacity through
future spectrum auctions and fromthird parties to address increasing
demand for data; deployment andoperation of new wireline broadband
networks at a reasonable cost andavailability, and success of new
products and services to be rolled out onsuch networks; network
reliability and change management; anduncertainties around our strategy
to replace certain legacy wirelinenetworks, systems and services to
reduce operating costs.
-- Capitalexpenditure levels and potential outlays for spectrum licences in
spectrumauctions or from third parties, due to: ourbroadband
initiatives, including connecting more homes and businessesdirectly to
fibre; our ongoing deployment of newer wireless technologies suchas 5G;
utilizing newly acquired spectrum; investments in networkresiliency and
reliability; subscriber demand for data; evolving systemsand business
processes; implementing efficiency initiatives; supportinglarge complex
deals; and future wireless spectrum auctions held byInnovation, Science
and Economic Development Canada (ISED). Our capitalexpenditure levels
could be impacted if we do not achieve our targetedoperational and
financial results.
-- Regulatorydecisions and developments including: the potential of
government intervention to further increase wireless competition; the
Canadian Radio-television and Telecommunications Commission (CRTC)
review of the Wireless Code; the 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 that favours 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; the potential impacts from
the CRTC's decision to require pro-rated refunds when customers
terminate their services; the CRTC's examination of differential pricing
practices related to Internet data plans; the impact from the review of
Canada's cultural policies by the Minister of Canadian Heritage;
vertical integration in the broadcasting industry resulting in
competitors owning broadcast content services and timely and effective
enforcement of related regulatory safeguards; and restrictions on non-
Canadian ownership of TELUS Common Shares and the ongoing monitoring and
compliance with such restrictions.
-- Humanresource matters including: recruitment,retention and appropriate
training in a highly competitive industry, andthe level of employee
engagement.
-- Processrisks including: our reliance on legacysystems and ability to
implement and support new products and services andbusiness operations;
our ability to implement effective change managementfor system
replacements and upgrades, process redesigns and businessintegrations
(including our ability to successfully integrateacquisitions, complete
divestitures or establish partnerships in a timelymanner, and realize
expected strategic benefits), the risk thattransaction with BCE to
acquire a portion of MTS' wireless customers anddealers, including
obtaining the necessary regulatory approvals, may notbe completed and
there being no assurance regarding the successfulmigration of such
customers and dealers; the implementation of complexlarge enterprise
deals that may be adversely impacted by availableresources, system
limitations and degree of co-operation from otherservice providers; our
ability to successfully manage operations in foreignjurisdictions;
information security and privacy breaches, including dataloss or theft
of data; intentional threats to our infrastructure andbusiness
operations; and real estate joint venture re-development risks.
-- Abilityto successfully implement cost reduction initiatives and realize
plannedsavings, net of restructuring and other costs, without losing
customerservice focus or negatively affecting business operations.
Examples of these initiatives are: our operating efficiencyand
effectiveness program to drive improvements in earnings beforeinterest,
income taxes, depreciation and amortization (EBITDA) includingthe
expected benefits of the immediately vesting transformativecompensation
initiative; business integrations; business process
outsourcing;offshoring and reorganizations, including any FTE employee
reductionprograms; procurement initiatives; and real estate
rationalization.Additional revenue and cost efficiency and effectiveness
initiatives willcontinue to be assessed and implemented, as required.
-- Financingand debt requirements including our ability tocarry out
financing activities and our ability to maintain investmentgrade credit
ratings in the range of BBB+ or the equivalent.
-- Abilityto sustain our dividend growth program through 2019 and ability
to sustainand complete our multi-year share purchase program through
2019. These programs may be affected by factors such as thecompetitive
environment, economic performance in Canada, our earnings andfree cash
flow, our levels of capital expenditures and spectrum licencepurchases,
and regulatory decisions and developments. Quarterly dividenddecisions
are subject to assessment and determination by our Board ofDirectors
(Board) based on the Company's financial position and outlook.The share
purchase program may be affected by a change in our intention topurchase
shares, and the assessment and determination of our Board fromtime to
time, based on the Company's financial position and outlook, andthe
market price of TELUS shares. Consequently, there can be no
assurancethat these programs will be maintained through 2019.
-- Taxationmatters including: interpretation of complextax laws by the tax
authorities that may differ from our interpretations;changes in tax
laws, including tax rates; tax expenses being materiallydifferent than
anticipated; elimination of income tax deferrals throughthe use of
different tax year-ends for operating partnerships andcorporate
partners; and tax collection authorities adopting moreaggressive
auditing practices.
-- Litigationand legal matters including: our ability todefend successfully
against investigations, regulatory proceedings, claimsand lawsuits,
including intellectual property infringement claims andclass actions
pending against us, as well as possible proceedings,intellectual
property infringement claims and class actions based onconsumer claims,
data, privacy or security breaches and secondary marketliability; and
the complexity of legal compliance in domestic and foreignjurisdictions.
-- Health,safety and the environment, including lostemployee work time
resulting from illness or injury, public concernsrelated to radio
frequency emissions, environmental issues affecting ourbusiness
including climate change, waste and waste recycling, risks relatingto
fuels systems on our properties, and changing government and
publicexpectations regarding environmental matters and our responses.
-- Businesscontinuity events including: our ability tomaintain customer
service and operate our networks in the event of humanerror or human-
caused threats, such as cyber attacks and equipmentfailures that could
cause various degrees of network outages; supply chaindisruptions;
natural disaster threats; epidemics; pandemics; and thecompleteness and
effectiveness of business continuity and disasterrecovery plans and
responses.
-- Economicgrowth and fluctuations including: the stateof the economy in
Canada, which may be influenced by economic and otherdevelopments
outside of Canada; future interest rates; inflation;unemployment levels;
effects of low oil prices; effects of low businessspending (such as
reducing investments and cost structure); pensioninvestment returns,
funding and discount rates; and Canadian/U.S. dollarexchange rates.
These risks are described in additional detail in Section 10 Risks and risk management in our 2016 Management's discussion and analysis (MD&A), which will be filed concurrently with this document. That description is incorporated by reference in this cautionary statement but is not intended to be a complete list of the risks that could affect the Company.
Many of these factors are beyond our control or our current expectations or knowledge. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Except as otherwise indicated in this document, the forward-looking statements made herein do not reflect the potential impact of any non-recurring or special items or any mergers, acquisitions, dispositions or other business combinations or transactions that may be announced or that may occur after the date of this document.
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements in this document describe our expectations and are based on our assumptions as at the date of this document and are subject to change after this date. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements.
This cautionary statement qualifies all of the forward-looking statements in this document.
Management's review of operations (MRO)
February 9, 2017
Contents
----------------------------------------------------------------------------
Section Description
----------------------------------------------------------------------------
1. Discussion of 1.1 Preparation of Management's review of
operations 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 2017
----------------------------------------------------------------------------
2. Changes in financial
position
----------------------------------------------------------------------------
3. Discussion of cash 3.1 Overview of cash flow results
flow 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
This section contains forward-looking statements, including those with respect to our expectations for capitalization of long-term debt interest, deployment of wireless spectrum licences, ARPU growth, wireless retention spending and high-speed Internet subscriber growth trends as they relate to the future. There can be no assurance that we have accurately identified the trends based on past results, or that these trends will continue. See Caution regarding forward-looking statements at the beginning of this MRO.
1.1 Preparation of Management's review of operations (MRO)
The following sections discuss the consolidated financial position and financial performance of TELUS for the three-month period and year ended December 31, 2016. The discussion 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 MRO is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures 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.
Additional information relating to the Company, including our annual information form and other filings with securities commissions or similar regulatory authorities in Canada, is available on SEDAR (www.sedar.com). Our filings with the Securities and Exchange Commission in the United States, including Form 40-F, are available on EDGAR (www.sec.gov).
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 9, 2017.
In this MRO, unless otherwise indicated, results for the fourth quarter and full year of 2016 are compared with corresponding results from the fourth quarter and full year of 2015.
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) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Consolidated statements of income
----------------------------------------------------------------------------
Operating revenues 3,305 3,217 2.7% 12,799 12,502 2.4%
Operating expenses 3,069 2,757 11.3% 10,617 10,149 4.6%
Operating income 236 460 (48.7)% 2,182 2,353 (7.3)%
Financing costs 134 114 17.5% 520 447 16.3%
Income before
income taxes 102 346 (70.5)% 1,662 1,906 (12.8)%
Income taxes 15 85 (82.4)% 426 524 (18.7)%
Net income 87 261 (66.7)% 1,236 1,382 (10.6)%
Net income
attributable to
Common Shares 81 261 (69.0)% 1,223 1,382 (11.5)%
Earnings per share
(EPS) ($)
Basic EPS 0.14 0.44 (68.2)% 2.06 2.29 (10.0)%
Adjusted basic
EPS (1) 0.53 0.54 (1.9)% 2.58 2.58 -
Diluted EPS 0.14 0.44 (68.2)% 2.06 2.29 (10.0)%
Dividends declared
per Common Share
($) 0.48 0.44 9.1% 1.84 1.68 9.5%
Basic weighted-
average Common
Shares
outstanding
(millions) 591 598 (1.2)% 592 603 (1.8)%
----------------------------------------------------------------------------
Other operating
highlights
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
----------------------------------------------------------
($ millions,
unless noted
otherwise) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Subscriber
connections
(2)(thousands) 12,673 12,495 1.4%
EBITDA (earnings
before interest,
income taxes,
depreciation and
amortization) (1) 769 978 (21.3)% 4,229 4,262 (0.8)%
Restructuring and
other costs (3) 348 99 n/m 479 226 111.9%
EBITDA - excluding
restructuring and
other costs (1) 1,117 1,077 3.7% 4,708 4,488 4.9%
Adjusted EBITDA
(4) 1,110 1,077 3.1% 4,667 4,488 4.0%
Adjusted EBITDA
margin (5) (%) 33.7 33.5 0.2 pts. 36.6 35.9 0.7 pts.
Free cash flow (1) (191) 197 n/m 141 1,078 (86.9)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notations used in MRO: 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� and TELUS Satellite TV� subscribers),
measured at the end of the respective periods based on information in
billing and other systems. Subsequent to a review of our subscriber base
during the first quarter of 2016, our 2016 opening postpaid wireless
subscriber base was reduced by 45,000 and our 2016 opening high-speed
Internet subscriber base was increased by 21,000.
3 In the fourth quarter of 2016, we recorded an immediately vesting
transformative compensation expense of $305 million as part of other
costs. Adjusted EBITDA for all periods excludes restructuring and other
costs. Adjusted EBITDA for the fourth quarter of 2016 excludes net gains
and equity income of $7 million, related to real estate joint venture
developments.
4 Adjusted EBITDA for the full year of 2016 excludes: (i) a $15 million
gain in the second quarter of 2016 from the exchange of wireless
spectrum licences; and (ii) net gains and equity income of $26 million
($9 million in the second quarter, $10 million in the third quarter and
$7 million in the fourth quarter) related to real estate joint venture
developments.
5 Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues,
where the calculation of the Operating revenues excludes the net gains
and equity income related to real estate joint venture developments, as
well as the gain on exchanged wireless spectrum licences.
----------------------------------------------------------------------------
Operating revenues
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Service 3,079 2,943 4.6% 12,000 11,590 3.5%
Equipment 209 243 (14.0)% 725 840 (13.7)%
----------------------------------------------------------------------------
Revenues arising from
contracts with
customers 3,288 3,186 3.2% 12,725 12,430 2.4%
Other operating income 17 31 (45.2)% 74 72 2.8%
----------------------------------------------------------------------------
3,305 3,217 2.7% 12,799 12,502 2.4%
----------------------------------------------------------------------------
Consolidatedoperating revenues increased by $88 million in the fourth quarter of 2016 and $297 million for the full year of 2016.
-- Service revenue increased by $136 million in the fourth quarter of 2016
and $410 million for the full year of 2016. The increases primarily
reflect growth in wireline data services and wireless network revenue,
partly offset by continuing decline in wireline voice revenues. Wireline
data service revenue reflects increased Internet and enhanced data
revenue, increased business process outsourcing revenue and increased
TELUS TV revenue. Internet, enhanced data and TV revenues reflect
subscriber growth and higher revenue per customer. Wireless network
revenue reflects growth in blended average revenue per subscriber unit
per month (ARPU) and the wireless subscriber base.
-- Equipment revenue decreased by $34 million in the fourth quarter of 2016
and $115 million for the full year of 2016. This reflects a decline in
wireless equipment revenue of $17 million for the fourth quarter and $77
million for the full year from a combination of higher per-unit
subsidies and lower retention volumes, partly offset by higher-value
smartphones in the sales mix. For the full year, the decrease in
wireless equipment revenue was also affected by discontinuance of
Black's Photography revenue from the closure of stores in August 2015.
In addition, wireline equipment revenue decreased by $17 million for the
fourth quarter and $38 million for the full year, primarily from lower
sales activity in the business market in part from the economic slowdown
and a focus on providing managed services rather than equipment-only
sales.
-- Other operating income decreased by $14 million in the fourth quarter of
2016 and increased by $2 million for the full year of 2016. The decrease
for the quarter was mainly due to non-recurrence of gains on the sale of
certain real estate assets in the fourth quarter of 2015, partly offset
by net gains and equity income on real estate joint venture developments
in 2016. The increase for the full year was mainly due to net gains and
equity income related to real estate joint venture developments, gains
from the sale of property, plant and equipment in 2016, and the gain
from the exchange of wireless spectrum licences in the second quarter of
2016, partly offset by non-recurrence of gains on the sale of certain
real estate assets in the fourth quarter of 2015 and a decrease in
amounts recognized from the regulatory price cap deferral account for
provisioning broadband Internet services to eligible rural and remote
communities.
For additional discussion on wireless and wireline revenues, see Section 1.3 Wireless segment and Section 1.4 Wireline segment.
Operating expenses
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
----------------------------------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services purchased 1,574 1,482 6.2% 5,631 5,532 1.8%
Employee benefits expense 962 757 27.1% 2,939 2,708 8.5%
Depreciation 406 406 - 1,564 1,475 6.0%
Amortization of intangible
assets 127 112 13.4% 483 434 11.3%
----------------------------------------------------------------------------
3,069 2,757 11.3% 10,617 10,149 4.6%
----------------------------------------------------------------------------
Operating expenses increased by $312 million in the fourth quarter of 2016 and $468 million for the full year of 2016. This increase included the immediately vesting transformative compensation expense (transformative compensation) of $305 million recorded in the fourth quarter of 2016.
-- Goods and services purchased increased by $92 million in the fourth
quarter of 2016 and $99 million for the full year of 2016. The increases
were due to higher wireless acquisition and retention spending
(including the effect of higher supplier cost of handsets partially due
to the decline in the Canadian dollar exchange rate vs. the U.S. dollar
over the last two years), as well as increased roaming costs. The
increases were also due to higher wireline network operating and
administrative costs to support our growing subscriber base, higher
advertising and promotional expenses in support of bundled offerings and
our response to heightened competitive intensity, as well as higher TV
costs of sales due to a larger subscriber base, partly offset by lower
transit and termination costs, ongoing operational efficiency and
effectiveness initiatives, and lower equipment costs related to the
decline in equipment revenue.
-- Employee benefits expense increased by $205 million in the fourth
quarter of 2016 and $231 million for the full year of 2016, mainly due
to the transformative compensation expense of $305 million recorded in
the fourth quarter of 2016. The transformative compensation was paid to
substantially all of our existing unionized and non-unionized Canadian-
situated workforces; a portion of the after-tax value for certain lump-
sum recipients was paid in Common Shares purchased in the market for
that purpose under our normal course issuer bid (NCIB) by an employee
benefit plan trust. The one-time payment to unionized employees in the
fourth quarter of 2016 represents both a one-time payment in lieu of
wage increases for the period July 1, 2016 to December 31, 2018 (a
period of 30 months) and a one-time payment as compensation for
reductions in certain premium payments and paid time-off provisions that
underpin future productivity improvements. A similar approach with
respect to salary increases was adopted for management employees. For
most of our current Canadian-situated management employees, there was a
one-time payment in the fourth quarter of 2016 in lieu of general salary
increases for 2017 and 2018. For the unionized and non-unionized
workforces, approximately 40% of the after-tax value of such qualifying
lump-sum payments was paid in our Common Shares by way of an employee
benefit trust.
For substantially all of our Canadian-situated employees, the next salary increases are planned for 2019. This arrangement will provide us with financial flexibility to make the necessary growth and retention investments within a competitive environment.
Excluding the transformative compensation expense, Employee benefits expense reflects a decrease in employee compensation of $100 million in the fourth quarter and a $74 million decrease for the full year. These decreases resulted mainly from lower employee-related restructuring costs and realizing the benefits from operational efficiency and effectiveness initiatives, partly offset by an increase in TELUS International (Cda) Inc. (TELUS International) employees and compensation to support growth in business process outsourcing revenue.
-- For additional discussion on wireless and wireline Goods and services
purchased and Employee benefits expenses, see Section 1.3 Wireless
segment and Section 1.4 Wireline segment.
-- Depreciation was unchanged in the fourth quarter of 2016 and increased
by $89 million for the full year of 2016. The increase for the full year
was due to the impact of our continuing program of asset life studies
and increased expenditures associated with capital assets (such as the
broadband network and the wireless LTE network), partly offset by asset
retirements of $9 million in 2015 relating to the closure of Black's
Photography retail stores.
-- Amortization of intangible assets increased by $15 million in the fourth
quarter of 2016 and $49 million for the full year of 2016. This reflects
increased expenditures associated with the intangible asset base,
partially offset by software asset life adjustments arising from our
continuing program of asset life studies.
Operating income
----------------------------------------------------------------------------
Fourth quarters ended Years ended December
December 31 31
------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Wireless EBITDA (See Section
1.3) 598 628 (4.8)% 2,906 2,806 3.6%
Wireline EBITDA (See Section
1.4) 171 350 (51.1)% 1,323 1,456 (9.1)%
Depreciation and
amortization (discussed
above) (533) (518) (2.9)% (2,047) (1,909) (7.2)%
----------------------------------------------------------------------------
Operating income 236 460 (48.7)% 2,182 2,353 (7.3)%
----------------------------------------------------------------------------
Operating income decreased by $224 million in the fourth quarter of 2016 and $171 million for the full year of 2016. Excluding the effects of the $305 million transformative compensation expense recorded in the fourth quarter of 2016, Operating income increased by $81 million in the fourth quarter and $134 million for the full year. For discussion of consolidated EBITDA and adjusted EBITDA, please see Other operating highlights, which follows later in this section.
Financing costs
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Gross interest expenses 142 133 6.8% 554 515 7.6%
Capitalized long-term debt
interest (12) (18) 33.3% (52) (45) (15.6)%
Employee defined benefit
plans net interest 3 7 (57.1)% 6 27 (77.8)%
Interest (income) (2) (4) 50.0% (3) (25) 88.0%
Foreign exchange losses
(gains) 3 (4) n/m 15 (25) n/m
----------------------------------------------------------------------------
134 114 17.5% 520 447 16.3%
----------------------------------------------------------------------------
Financing costs increased by $20 million in the fourth quarter of 2016 and $73 million for the full year of 2016.
-- Gross interest expenses, prior to capitalization of long-term debt
interest, increased by $9 million in the fourth quarter of 2016 and $39
million for the full year of 2016, primarily due to the increase in
average long-term debt balances outstanding, including the full-year
impact of increased debt related to the purchase of spectrum licences in
2015, partly offset by a reduction in the effective interest rate. Our
weighted average interest rate on long-term debt (excluding commercial
paper and the revolving component of the TELUS International credit
facility) was 4.22% at December 31, 2016, as compared to 4.32% one year
earlier.
-- Capitalized long-term debt interest is in respect of debt incurred for
the purchase of spectrum licences during spectrum auctions held by
Innovation, Science and Economic Development Canada, which we expect to
deploy in our existing network in future periods. Capitalization of
long-term debt interest occurs until substantially all of the activities
necessary to prepare the spectrum for its intended use are complete;
effectively when cell sites that can utilize the spectrum are ready to
be put into service. Capitalization of interest is expected to cease in
2017.
-- Employee defined benefit plans net interest decreased by $4 million in
the fourth quarter of 2016 and $21 million for the full year of 2016,
mainly from the decrease in the defined benefit plan deficit at December
31, 2015, to $53 million from $598 million one year earlier, partly
offset by a higher discount rate.
-- Interest income was higher in 2015 and was derived primarily from
interest income related to the settlement of prior years' income-tax
related matters.
-- Foreign exchange losses (gains) have fluctuated as the weakening of the
Canadian dollar relative to the U.S. dollar in 2016 was combined with
the increase in 2016 of foreign exchange derivatives being designated as
held for hedging, rather than designated as held for trading.
Income taxes
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------------
($ millions, except
tax rates) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Income tax computed
at applicable
statutory rates 30 93 (67.7)% 444 505 (12.1)%
Revaluation of
deferred income tax
liability to
reflect future
statutory income
tax rates (5) - n/m (4) 48 n/m
Adjustments
recognized in the
current period for
income taxes of
prior periods (9) (7) (28.6)% (12) (30) 60.0%
Other (1) (1) - (2) 1 n/m
----------------------------------------------------------------------------
Income taxes 15 85 (82.4)% 426 524 (18.7)%
----------------------------------------------------------------------------
Income taxes
computed at
applicable
statutory rates (%) 29.7 26.7 3.0 pts. 26.7 26.5 0.2 pts.
Effective tax rate
(%) 14.7 24.6 (9.9) pts. 25.6 27.5 (1.9) pts.
----------------------------------------------------------------------------
Total income tax expense decreased by $70 million in the fourth quarter of 2016 and $98 million for the full year of 2016, primarily due to lower Income before income taxes, including the effects of the transformative compensation expense recorded in the fourth quarter of 2016. The decreases also resulted from revaluations of deferred income tax liabilities in 2016 to reflect the provincial income tax rate reduction in Quebec beginning in 2017, the $48 million non-cash adjustment in the second quarter of 2015 to revalue deferred income tax liabilities arising from an increase in the Alberta provincial corporate tax rate, partly offset for the full year by lower recoveries related to the settlement of prior years' income tax-related matters (excluding related interest income).
Analysis of Net income
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Net income attributable to
Common Shares 81 261 (180) 1,223 1,382 (159)
Add back (deduct):
Restructuring and other
costs, after income taxes 255 72 183 351 166 185
(Favourable) unfavourable
income tax-related
adjustments (15) (9) (6) (17) 1 (18)
Net gains and equity income
from real estate joint
venture developments,
after income taxes (5) - (5) (16) - (16)
Gain on the exchange of
wireless spectrum
licences, after income
taxes - - - (13) - (13)
Asset retirement from
planned closure of
Black's, after income
taxes - - - - 6 (6)
----------------------------------------------------------------------------
Adjusted net income 316 324 (8) 1,528 1,555 (27)
----------------------------------------------------------------------------
Net income attributable to Common Shares decreased by 69% in the fourth quarter of 2016 and 12% for the full year of 2016. Excluding restructuring and other costs, income tax-related adjustments, net gains and equity income from real estate joint venture developments in 2016, the gain on the exchange of wireless spectrum licences in 2016 and the asset retirement from the closure of Black's Photography retail stores in 2015, adjusted Net income decreased by 2.5% in the fourth quarter of 2016 and 1.7% for the full year of 2016.
Analysis of basic EPS
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Basic EPS 0.14 0.44 (0.30) 2.06 2.29 (0.23)
Add back (deduct):
Restructuring and other
costs, after income
taxes, per share 0.43 0.12 0.31 0.60 0.28 0.32
Favourable income tax-
related adjustments, per
share (0.03) (0.02) (0.01) (0.03) - (0.03)
Net gains and equity
income from real estate
joint venture
developments, after
income taxes, per share (0.01) - (0.01) (0.03) - (0.03)
Gain on the exchange of
wireless spectrum
licences, after income
taxes, per share - - - (0.02) - (0.02)
Asset retirement from
planned closure of
Black's, after income
taxes, per share - - - - 0.01 (0.01)
----------------------------------------------------------------------------
Adjusted basic EPS 0.53 0.54 (0.01) 2.58 2.58 -
----------------------------------------------------------------------------
Basic EPS decreased by 68% in the fourth quarter of 2016 and 10% for the full year of 2016. The reduction in the number of shares outstanding, as a result of our normal course issuer bid (NCIB) program, net of share option exercises, contributed positively to basic EPS by approximately $0.01 in the fourth quarter of 2016 and $0.03 for the full year of 2016. Excluding restructuring and other costs, net gains and equity income from real estate joint venture developments, income tax-related adjustments, the gain on the exchange of wireless spectrum licences and the asset retirement from the closure of Black's Photography retail stores, adjusted basic EPS decreased by $0.01 in the fourth quarter of 2016 and was unchanged for the full year of 2016.
Comprehensive income
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Net income 87 261 (66.7)% 1,236 1,382 (10.6)%
Other comprehensive income
(loss) (net of income
taxes):
Items that may be
subsequently
reclassified to income (5) 7 n/m (15) 21 n/m
Item never subsequently
reclassified to income -
Employee defined benefit
plans re-measurements (167) 486 n/m - 445 (100.0)%
----------------------------------------------------------------------------
Comprehensive income
(loss) (85) 754 n/m 1,221 1,848 (33.9)%
----------------------------------------------------------------------------
Comprehensive income decreased by $839 million in the fourth quarter of 2016 and $627 million for the full year of 2016, primarily due to changes in employee defined benefit plan re-measurement amounts and lower 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 2016, our total subscriber connections increased by 178,000,
reflecting a 2.7% increase in wireless postpaid subscribers, a 5.7%
increase in high-speed Internet subscribers and a 5.4% increase in TELUS
TV subscribers partly offset by a 6.3% decline in wireless prepaid
subscribers and a 6.3% decline in wireline residential NALs. See Section
1.3 Wireless segment and Section 1.4 Wireline segment for additional
information.
-- EBITDA includes restructuring and other costs, such as the $305 million
transformative compensation expense recorded in other costs in the
fourth quarter of 2016. EBITDA also includes net gains and equity income
related to real estate joint venture developments recorded in the
second, third and fourth quarters of 2016, and a gain from the exchange
of wireless spectrum licences recorded in the second quarter of 2016.
EBITDA decreased by $209 million in the fourth quarter of 2016 and $33
million for the full year of 2016.
-- Adjusted EBITDA excludes restructuring and other costs, the real estate
net gains and equity income, and the gain from the exchange of wireless
spectrum licences, as noted above. Adjusted EBITDA increased by $33
million in the fourth quarter and $179 million for the full year of 2016
due to: growth in wireline data revenues and wireless network revenue
improvements in Internet, business process outsourcing, TELUS TV and
TELUS Health margins; and execution on our operational efficiency and
effectiveness initiatives. This growth was partly offset by higher
wireless acquisition and retention costs, continued declines in legacy
wireline voice revenues, and for the full year, approximately $5 million
of costs and revenue impacts, predominately in the wireline segment,
related to the severe wildfires in northern Alberta. Had 2015 adjusted
EBITDA also excluded the non-recurring gain on certain real estate
assets in the fourth quarter of 2015, adjusted EBITDA would have
reflected an increase of approximately $53 million or 5.1% in the fourth
quarter of 2016, and an increase of approximately $199 million or 4.5%
for the full year of 2016. (See Section 1.3 Wireless segment and Section
1.4 Wireline segment for additional details.)
-- Dividends declared per Common Share were $0.48 in the fourth quarter of
2016 and $1.84 for the full year of 2016, reflecting increases of 9.1%
from the fourth quarter of 2015 and 9.5% from the full year of 2015.
This is consistent with our announced intention of sustained dividend
growth of circa 10% per annum through 2016. On February 8, 2017, the
Board declared a first quarter dividend of $0.48 per share on the issued
and outstanding Common Shares, payable on April 3, 2017, to shareholders
of record at the close of business on March 10, 2017. The first quarter
dividend reflects a cumulative increase of $0.04 per share or 9.1% from
the $0.44 per share dividend declared one year earlier, consistent with
our announced intention to target ongoing semi-annual dividend
increases, with the annual increase in the range of 7 to 10% from 2017
through to the end of 2019.
-- Free cash flow decreased by $388 million in the fourth quarter of 2016
and $937 million for the full year of 2016. The decrease for the quarter
resulted mainly from increased payments in respect of restructuring and
other costs and the increase in capital expenditures (excluding spectrum
licences). For the full year, the decrease was mainly due to the $391
million increase in capital expenditures (excluding spectrum licences),
increased payments in respect of restructuring and other costs, as well
as increases in income taxes paid and interest paid. These factors were
partly offset by increases in EBITDA - excluding restructuring and other
costs. (See Section 4.1 Non-GAAP and other financial measures.)
The increase in capital expenditures reflects our continued to focus on
investments in broadband infrastructure, including our fibre-optic
network, which also supports our small-cell technology strategy to
improve coverage and prepares for a more efficient and timely evolution
to 5G, as well as deployment of 700 MHz and 2500 MHz spectrum licences.
1.3 Wireless segment
Wireless trends and seasonality
The historical trend in wireless network revenue reflects growth in both our ARPU and subscriber base. This growth, coupled with higher-value smartphones in the sales mix, was partially offset by the decline in wireless equipment revenue, reflecting higher per-unit subsidies and lower retention volumes. Retention volumes declined due to (i) the effects on contract renewals of higher handset prices (including the effect of higher supplier costs due to depreciation of the Canadian dollar relative to the U.S. dollar over the last two years), as well as an increasing number of customers choosing to stay on month-to-month service; (ii) increased competitive intensity; and (iii) economic conditions resulting in customers purchasing fewer handsets.
The wireless ARPU growth trend has increased in 2016 due to a higher mix of data share plans and an increased mix of higher-rate plans including the newly launched Premium Plus plans in June 2016. This was partly offset by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, consumer response to increased frequency of customer data usage notifications and offloading of data traffic to increasingly available Wi-Fi hotspots. ARPU is expected to continue to increase modestly in 2017, as a result of the continued growth in data usage and the ongoing shift in our subscriber base towards higher-value postpaid customers, as seen in the third and fourth quarters of 2016. However, the level of ARPU is highly dependent on competition, the economic environment, consumer behaviour, the regulatory environment, device selection and other factors, and, as a consequence, there cannot be assurance that ARPU growth will continue to materialize.
Retention spending as a percentage of network revenue has increased to 14.7% in 2016 from 13.9% in 2015, mainly from an increase in the sales mix of higher-subsidy smartphones and competitive pressures. While retention volumes decreased in 2016, we have generally experienced a higher volume of contract renewals than prior to 2015. We expect this trend to continue with two-year contracts in the consumer and small business base. We may also experience continuing pressure on our postpaid subscriber churn if competitive intensity continues, in part due to an increase in customers on expired contracts, as well as customers bringing their own devices and therefore not entering into term contracts. Accordingly, our wireless segment historical operating results and trends may not be reflective of results and trends for future periods.
Historically, there have been significant third and fourth quarter seasonal effects reflected in higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals in those quarters. These impacts can be more pronounced around popular device launches and seasonal events such as back to school, Black Friday and Christmas. The costs associated with higher seasonal loading volumes have typically resulted in sequential decreases in wireless EBITDA from the second quarter through to the fourth quarter, typically followed by sequential increases in wireless EBITDA from the fourth quarter through to the second quarter. Subscriber additions have generally been lowest in the first quarter. Historically, 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 has moderated, as unlimited nationwide voice plans have become more prevalent and chargeable voice and long distance spikes become less pronounced. In addition, customers are opting for higher capacity data plans resulting in less variability in chargeable data usage. See Section 8.2 Accounting policy developments in our annual 2016 MD&A for the timing of revenue recognition and classification of revenue effects of IFRS 15, Revenue from Contracts with Customers.
Wireless operating indicators
----------------------------------------------------------------------------
At December 31 2016 2015 Change
----------------------------------------------------------------------------
Subscribers (000s)
Postpaid(1) 7,550 7,352 2.7 %
Prepaid 1,035 1,105 (6.3)%
----------------------------------------------------------------------------
Total 8,585 8,457 1.5 %
----------------------------------------------------------------------------
Postpaid
proportion of
subscriber base
(%) 87.9 86.9 1.0 pts.
HSPA+ population
coverage (2)
(millions) 35.7 35.7 - %
LTE population
coverage (2)
(millions) 35.2 34.9 0.9 %
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
----------------------------------------------------------
2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Subscriber gross
additions (000s)
Postpaid 297 273 8.8 % 1,039 1,014 2.5 %
Prepaid 101 98 3.1 % 360 429 (16.1)%
----------------------------------------------------------------------------
Total 398 371 7.3 % 1,399 1,443 (3.0)%
----------------------------------------------------------------------------
Subscriber net
additions (000s)
Postpaid 87 62 40.3 % 243 244 (0.4)%
Prepaid (9) (26) 65.4 % (70) (68) (2.9)%
----------------------------------------------------------------------------
Total 78 36 116.7 % 173 176 (1.7)%
----------------------------------------------------------------------------
Blended ARPU, per
month (3) ($) 66.24 63.74 3.9 % 65.10 63.45 2.6 %
Churn, per month
(3)(%)
Blended 1.25 1.32 (0.07)pts. 1.21 1.26 (0.05)pts.
Postpaid 0.98 1.01 (0.03)pts. 0.95 0.94 0.01 pts.
Cost of
acquisition (COA)
per gross
subscriber
addition (3) ($) 500 472 6.0 % 455 418 8.9 %
Retention spend to
network revenue
(3) (%) 17.9 17.0 0.9 pts. 14.7 13.9 0.8 pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Subsequent to a review of our subscriber base during the first quarter
of 2016, our 2016 opening postpaid subscriber base was reduced by
45,000.
2 Including network access agreements with other Canadian carriers.
3 See Section 4.2 Operating indicators. These are industry measures useful
in assessing operating performance of a wireless company, but are not
measures defined under IFRS-IASB.
----------------------------------------------------------------------------
Operating revenues - Wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------
($ millions, except
ratios) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Network revenue 1,681 1,595 5.4% 6,541 6,298 3.9%
Equipment and other
service revenues 155 170 (8.8)% 537 626 (14.2)%
----------------------------------------------------------------------------
Revenues arising from
contracts with customers 1,836 1,765 4.0% 7,078 6,924 2.2%
Other operating income 5 7 (28.6)% 37 9 n/m
----------------------------------------------------------------------------
External operating
revenues 1,841 1,772 3.9% 7,115 6,933 2.6%
Intersegment network
revenue 15 17 (11.8)% 58 61 (4.9)%
----------------------------------------------------------------------------
Total operating revenues 1,856 1,789 3.7% 7,173 6,994 2.6%
----------------------------------------------------------------------------
Network revenue from external customers increased by $86 million in the fourth quarter of 2016 and $243 million for the full year of 2016. Data network revenue increased by 10.7% in the fourth quarter of 2016 and 9.4% for the full year of 2016, reflecting: (i) a larger proportion of higher-rate two-year plans in the revenue mix, including the newly launched Premium Plus plans in June 2016; (ii) a larger proportion of customers selecting plans with larger data buckets or topping up their data buckets; (iii) growth in the subscriber base; (iv) a higher postpaid subscriber mix; and (v) increasing data usage from data-intensive devices. Voice network revenue decreased by 1.3% in the fourth quarter of 2016 and 2.8% for the full year of 2016 due to the increased adoption of unlimited nationwide voice plans and continued but moderating substitution to data services, partly offset by growth in the subscriber base.
-- Monthly blended ARPU was $66.24 in the fourth quarter and $65.10 for the
full year of 2016, reflecting increases of $2.50 or 3.9% for the quarter
and $1.65 or 2.6% for the full year. The increases were primarily driven
by effects of higher data network revenue (as described above), partly
offset by continued declines in voice revenue.
-- Gross subscriber additions increased by 27,000 in the fourth quarter of
2016, but decreased by 44,000 for the full year of 2016. Postpaid gross
additions increased by 24,000 in the fourth quarter of 2016 and 25,000
for the full year of 2016. The increases in postpaid gross additions
were due to the success of targeted promotions and our focused marketing
efforts on higher-value postpaid loading, partly offset by competitive
intensity and the effects of the economic slowdown, particularly in
Alberta. Prepaid gross additions increased by 3,000 in the fourth
quarter of 2016, primarily due to the success of the Public Mobile
brand. For the full year, prepaid gross activations decreased by 69,000
mainly from competitive intensity, lower-priced postpaid offers and our
focused marketing efforts on higher-value postpaid loading.
-- Our average monthly postpaid subscriber churn rate was 0.98% in the
fourth quarter of 2016 and 0.95% for the full year of 2016, as compared
to 1.01% and 0.94%, respectively, in the same periods in 2015. The
continuing low postpaid subscriber churn rates during the fourth quarter
and full year period of 2016 reflect our focus on executing on customers
first initiatives and retention programs, partly offset by competitive
intensity and the effects of the economic slowdown, particularly in
Alberta, and for the full year, the simultaneous expiration of two-year
and three-year customer contracts in the first half of 2016. Our blended
monthly subscriber churn rate was 1.25% in the fourth quarter of 2016
and 1.21% for the full year of 2016, as compared to 1.32% and 1.26%,
respectively, in the same periods in 2015. The improvement in our
blended subscriber churn rates during the fourth quarter and full year
of 2016 reflect improvements in the prepaid churn rates, as well as an
increase in the mix of postpaid subscribers.
-- Net subscriber additions increased by 42,000 in the fourth quarter of
2016 due to increased gross additions and an improvement in our blended
monthly churn rate. For the full year of 2016, net subscriber additions
declined 3,000 due to lower gross additions, partly offset by an
improvement in blended monthly churn rate. Postpaid net additions
increased by 25,000 in the fourth quarter of 2016 and decreased by 1,000
for the full year of 2016, due to the factors affecting gross subscriber
additions and postpaid churn described above. Prepaid subscribers
decreased by 9,000 in the fourth quarter of 2016 and 70,000 for the full
year of 2016, as compared to decreases of 26,000 and 68,000,
respectively, in the same periods in 2015. The reduction in prepaid
subscribers in all periods reflects conversions to postpaid services
(due to our marketing efforts focused on higher-value postpaid loading)
and increased competition for prepaid services.
Equipment and other service revenues decreased by $15 million in the fourth quarter of 2016 and $89 million for the full year 2016, resulting from a combination of higher per-unit subsidies, lower retention volumes, competitive intensity and the discontinuance of Black's Photography revenue from the closure of stores in August 2015, partly offset by increased postpaid gross additions and higher-value smartphones in the sales mix.
Other operating income decreased by $2 million in the fourth quarter of 2016 and increased by $28 million in the full year of 2016. The decrease for the quarter resulted from the non-recurrence of gains on the sale of certain real estate assets in 2015, partly offset by net gains and equity income related to real estate joint venture developments in 2016. The increase for the full year was mainly due to net gains and equity income related to real estate joint venture developments, gains from the sale of property, plant and equipment in 2016, and the gain from the exchange of wireless spectrum licences in the second quarter of 2016.
Intersegment revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated wireline expenses.
Operating expenses - Wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
-------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services
purchased:
Equipment sales expenses 513 480 6.9% 1,684 1,623 3.8%
Network operating expenses 200 190 5.3% 773 759 1.8%
Marketing expenses 131 129 1.6% 420 436 (3.7)%
Other(1) 181 166 9.0% 667 653 2.1%
Employee benefits expense(1
2) 233 196 18.9% 723 717 0.8%
----------------------------------------------------------------------------
Wireless operating expenses 1,258 1,161 8.4% 4,267 4,188 1.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes restructuring and other costs. See Section 4.1 Non-GAAP and
other financial measures.
2 Includes transformative compensation expense of $70 million recorded in
other costs in the fourth quarter of 2016.
----------------------------------------------------------------------------
Total wireless operating expenses increased by $97 million in the fourth quarter of 2016 and $79 million for the full year of 2016.
Equipment sales expenses increased by $33 million in the fourth quarter of 2016 and $61 million for the full year of 2016, reflecting an increase in higher-value smartphones in the sales mix, including premium devices on Premium Plus plans, and increasing handset costs (including the effect of higher supplier costs due to depreciation of the Canadian dollar relative to the U.S. dollar over the last two years) and increased postpaid gross additions, partly offset by lower retention volumes, and by lower cost of sales from the closure of Black's Photography stores in August 2015.
-- Retention costs as a percentage of network revenue were 17.9% in the
fourth quarter of 2016 and 14.7% for the full year of 2016, compared to
17.0% in the fourth quarter of 2015 and 13.9% for the full year of 2015.
The increases were driven by higher per-unit subsidy costs including the
impacts of the newly launched Premium Plus plans in June 2016 reflecting
the factors noted in Equipment sales expense above, partly offset by
lower retention volumes and lower associated commissions.
-- COA per gross subscriber addition was $500 in the fourth quarter of 2016
and $455 for the full year of 2016, reflecting increases of $28 and $37,
respectively, in the same periods in 2015. These increases reflect the
factors noted in Equipment sales expense above and in the quarter,
increased advertising and promotional costs, partly offset by lower
commissions.
Network operating expenses increased by $10 million in the fourth quarter of 2016 and $14 million for the full year of 2016. The increases were mainly due to increased roaming volumes, partly offset by lower maintenance costs.
Marketing expenses increased by $2 million in the fourth quarter of 2016 and decreased by $16 million for the full year of 2016. Advertising and promotional expenses were higher during the fourth quarter from seasonal marketing activities, however were generally lower for the full year. In addition, both the fourth quarter and the full year marketing expenses benefitted from lower commission expenses driven by lower retention volumes.
Other goods and services purchased increased by $15 million in the fourth quarter of 2016 and $14 million for the full year of 2016, primarily due to increases in external labour, higher non-labour restructuring and other costs in the quarter, and higher bad debt provisions resulting from a larger subscriber base, partly offset in the full year by lower non-labour restructuring and other costs from provisions for the closure of Black's Photography retail stores during the third quarter of 2015.
Employee benefits expense increased by $37 million in the fourth quarter of 2016 and $6 million for the full year of 2016, mainly due to the $70 million transformative compensation expense recorded in the fourth quarter of 2016 (see discussion under Employee benefits expense in Section 1.2). Excluding the transformative compensation expense, employee compensation decreased by $33 million in the fourth quarter and $64 million for the full year, mainly due to lower employee-related restructuring costs and realizing benefits from ongoing operational efficiency and effectiveness initiatives.
EBITDA - Wireless segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------------
($ millions, except
margins) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
EBITDA 598 628 (4.7)% 2,906 2,806 3.6%
Restructuring and
other costs
included in
EBITDA(1) 85 25 n/m 121 81 49.4%
----------------------------------------------------------------------------
EBITDA - excluding
restructuring and
other costs 683 653 4.6% 3,027 2,887 4.8%
Deduct gain on sale
of wireless
spectrum licences - - - (15) - n/m
Deduct net gains and
equity income from
real estate joint
venture
developments (4) - n/m (12) - n/m
----------------------------------------------------------------------------
Adjusted EBITDA(2) 679 653 4.0% 3,000 2,887 3.9%
----------------------------------------------------------------------------
EBITDA margin (%) 32.2 35.1 (2.9)pts. 40.5 40.1 0.4 pts.
Adjusted EBITDA
margin (%)(3) 36.7 36.5 0.2 pts. 42.0 41.3 0.7 pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes transformative compensation expense of $70 million recorded in
other costs in the fourth quarter of 2016.
2 See description under EBITDA in Section 4.1.
3 The calculation of the Adjusted EBITDA margin excludes the net gains and
equity income on real estate joint venture developments from both EBITDA
and Operating revenues, and excludes restructuring and other costs from
EBITDA.
----------------------------------------------------------------------------
Wireless EBITDA decreased by $30 million in the fourth quarter of 2016 and increased by $100 million for the full year of 2016. The decrease for the quarter was mainly due to the transformative compensation expense recorded in the fourth quarter of 2016. Wireless adjusted EBITDA increased by $26 million in the fourth quarter of 2016 and $113 million for the full year of 2016, reflecting network revenue growth driven by higher ARPU and a larger customer base, as well as executing on ongoing operational efficiency and effectiveness initiatives, partly offset by higher acquisition and retention spending. Had 2015 adjusted EBITDA also excluded the non-recurring gain on certain real estate assets in the fourth quarter of 2015, wireless adjusted EBITDA would have reflected an increase of approximately $33 million or 5.1% in the fourth quarter of 2016, and an increase of approximately $120 million or 4.2% for the full year of 2016.
1.4 Wireline segment
Wireline trends
The trend of increasing wireline data service revenue reflects growth in business process outsourcing services, high-speed Internet and enhanced data services, TELUS TV revenues and TELUS Health revenues, and is partly offset by declining data equipment revenues. The increases in Internet and TV service revenues are being generated by higher revenue per customer and subscriber growth. The trend of declining wireline voice revenues is due to technological substitution and greater use of inclusive long distance and lower wholesale volumes 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, continuing increased competition in the small and medium-sized business market, and the impact of the economic slowdown.
High-speed Internet subscriber base growth slowed in 2016, primarily from the impact of the economic slowdown and competitive intensity; however, we expect continued subscriber growth as the economy recovers and as we continue our investments in expanding our fibre-optic network. TELUS TV subscriber base growth has moderated due to a declining overall market for paid TV services, resulting from the economic slowdown, the high rate of market penetration and increased competition, including from over-the-top (OTT) services. Residential network access line (NAL) losses continue to reflect the economic slowdown and the ongoing trend of substitution to wireless and Internet-based services.
Wireline operating indicators
----------------------------------------------------------------------------
At December 31 (000s) 2016 2015 Change
----------------------------------------------------------------------------
Subscriber connections:
High-speed Internet(1) 1,655 1,566 5.7%
TELUS TV 1,059 1,005 5.4%
Residential network access
lines (NALs) 1,374 1,467 (6.3)%
----------------------------------------------------------------------------
Total wireline subscriber
connections (1) 4,088 4,038 1.2%
----------------------------------------------------------------------------
Fourth quarters ended Years ended December
December 31 31
----------------------------------------------------------------------------
(000s) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Subscriber net additions
(losses):
High-speed Internet(1) 24 22 9.1% 68 91 (25.3)%
TELUS TV 16 25 (36.0)% 54 89 (39.3)%
Residential NALs (22) (24) 8.3% (93) (89) (4.5)%
----------------------------------------------------------------------------
Total wireline subscriber
connection net additions 18 23 (21.7)% 29 91 (68.1)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Subsequent to a review of our subscriber base during the first quarter
of 2016, our 2016 opening high-speed Internet subscriber base was
increased by 21,000.
----------------------------------------------------------------------------
Operating revenues - Wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Data services and
equipment 1,051 991 6.1% 4,059 3,772 7.6%
Voice services 340 358 (5.0)% 1,363 1,496 (8.9)%
Other services and
equipment 61 72 (15.3)% 225 238 (5.5)%
----------------------------------------------------------------------------
Revenues arising from
contracts with customers 1,452 1,421 2.2% 5,647 5,506 2.6%
Other operating income 12 24 (50.0)% 37 63 (41.3)%
----------------------------------------------------------------------------
External operating
revenues 1,464 1,445 1.3% 5,684 5,569 2.1%
Intersegment revenue 51 44 15.9% 194 174 11.5%
----------------------------------------------------------------------------
Total operating revenues 1,515 1,489 1.7% 5,878 5,743 2.4%
----------------------------------------------------------------------------
Total wireline operating revenues increased by $26 million in the fourth quarter of 2016 and $135 million for the full year of 2016.
-- Data services and equipment revenues increased by $60 million in the
fourth quarter of 2016 and $287 million for the full year of 2016. The
increases were primarily due to: (i) increased Internet and enhanced
data service revenues resulting from a 5.7% increase in our high-speed
Internet subscribers over 12 months, higher revenue per customer from
upgrades to faster Internet speeds and larger usage Internet rate plans,
subscribers coming off of promotional offers, the phased-in introduction
of usage-based billing in 2015 and certain rate increases; (ii) growth
in business process outsourcing revenues; and (iii) increased TELUS TV
revenues resulting from a 5.4% subscriber growth over 12 months and
higher revenue per customer including certain rate increases. This
growth was partly offset by the ongoing decline in legacy data services,
as well as a decline in data equipment revenues in the business market
related to the economic slowdown, particularly in Alberta.
-- Voice services revenues decreased by $18 million in the fourth quarter
of 2016 and $133 million for the full year of 2016. The decreases
reflect the ongoing decline in legacy revenues from technological
substitution, the economic slowdown, increased competition, greater use
of inclusive long distance plans and lower long distance minutes of use
including lower wholesale volumes, partially offset by certain rate
increases. We experienced a 6.3% decline in residential NALs in the
year.
-- Wireline subscriber connections net additions were 18,000 in the fourth
quarter of 2016 and 29,000 for the full year of 2016, reflecting
decreases of 5,000 and 62,000, respectively, over the same periods in
2015.
Net additions of high-speed Internet subscribers increased by 2,000 in the fourth quarter of 2016 and decreased by 23,000 for the full year of 2016. The increase in the fourth quarter of 2016 was driven by the continued expansion of our high-speed broadband footprint, including fibre to the premises and the pull-through impact from the continued adoption of Optik TV. The decrease for the full year of 2016 was due to the effects of heightened competitive intensity and the impact of the economic slowdown in Alberta, resulting in increased churn. Net additions of TELUS TV subscribers were down 9,000 in the fourth quarter of 2016 and 35,000 for the full year of 2016. The decreases reflected lower gross additions, a higher customer churn rate and a decline in satellite-TV subscribers due a declining overall market for paid TV services resulting from the economic slowdown in Alberta, a high rate of market penetration and the effects of heightened competitive intensity including OTT services. These pressures were partly offset by the continued focus on expanding our addressable high-speed Internet and Optik TV footprint, connecting more homes and business directly to fibre, and bundling these services together. This contributed to combined Internet and TV subscriber growth of 122,000 or 4.7% in 2016.
Residential NAL losses were 22,000 in the fourth quarter of 2016 and 93,000 for the full year of 2016, as compared to NAL losses of 24,000 and 89,000, respectively, for the same periods in 2015. The residential NAL losses continue to reflect the economic slowdown, the ongoing trend of substitution to wireless and Internet-based services, and increased competition, partially mitigated by the success of our bundled service offerings and our customers first initiatives.
-- Other services and equipment revenues decreased by $11 million in the
fourth quarter and $13 million for the full year of 2016, mainly due to
declines in voice equipment sales.
Other operating income decreased by $12 million in the fourth quarter of 2016 and $26 million for the full year of 2016, mainly due to non-recurrence of gains on the sale of certain real estate assets in the fourth quarter of 2015, as well as a decrease in amounts recognized from the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities. Partly offsetting these were net gains and equity income on real estate joint venture developments in 2016.
Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated wireless expenses.
Operating expenses - Wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Goods and services purchased
(1) 615 578 6.4% 2,339 2,296 1.9%
Employee benefits expense (1
2) 729 561 29.9% 2,216 1,991 11.3%
----------------------------------------------------------------------------
Wireline operating expenses 1,344 1,139 18.0% 4,555 4,287 6.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes restructuring and other costs. See Section 4.1 Non-GAAP and
other financial measures.
2 Includes transformative compensation expense of $235 million recorded in
other costs in the fourth quarter of 2016.
----------------------------------------------------------------------------
Total wireline operating expenses increased by $205 million in the fourth quarter of 2016 and $268 million for the full year of 2016, primarily due to the following factors:
Goods and services purchased increased by $37 million in the fourth quarter of 2016 and $43 million for the full year of 2016, due to increased network operating and administrative costs to support our growing subscriber base, and higher advertising and promotional expenses related to bundled offerings and in response to heightened competitive intensity, as well as higher TELUS TV costs of sales, partly offset by lower transit and termination costs and lower equipment costs related to declining equipment revenue.
Employee benefits expense increased by $168 million in the fourth quarter of 2016 and $225 million for the full year of 2016, mainly due to the transformative compensation expense recorded in the fourth quarter of 2016 (see discussion under Employee benefits expense in Section 1.2). Excluding the transformative compensation expense, Employee benefits expense decreased by $67 million in the fourth quarter and $10 million for the full year. These decreases were mainly due to lower employee-related restructuring costs, a lower defined benefit pension plan expense and a decrease in employee compensation in the fourth quarter from operational efficiency and effectiveness initiatives, partly offset by an increase in TELUS International employees and compensation supporting growing business process outsourcing revenue.
EBITDA - wireline segment
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
---------------------------------------------------------
($ millions, except
margins) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
EBITDA 171 350 (51.1)% 1,323 1,456 (9.1)%
Restructuring and
other costs
included in
EBITDA(1) 263 74 n/m% 358 145 146.9%
----------------------------------------------------------------------------
EBITDA - excluding
restructuring and
other costs 434 424 2.4% 1,681 1,601 5.0%
Deduct net gains
and equity income
from real estate
joint venture
developments (3) - n/m (14) - n/m
----------------------------------------------------------------------------
Adjusted EBITDA(2) 431 424 1.7% 1,667 1,601 4.1%
----------------------------------------------------------------------------
EBITDA margin (%) 11.3 23.5 (12.2)pts. 22.5 25.4 (2.9)pts.
Adjusted EBITDA
margin(3) (%) 28.5 28.5 - 28.4 27.9 0.5 pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes transformative compensation expense of $235 million recorded in
other costs in the fourth quarter of 2016.
2 See description under EBITDA in Section 4.1.
3 The calculation of the Adjusted EBITDA margin excludes the net gains and
equity income on real estate joint venture developments from both EBITDA
and Operating revenues, and excludes restructuring and other costs from
EBITDA.
----------------------------------------------------------------------------
Wireline EBITDA decreased by $179 million in the fourth quarter and $133 million for the full year of 2016, mainly due to the transformative compensation expense recorded in the fourth quarter of 2016. Wireline adjusted EBITDA increased by 1.7% in the fourth quarter of 2016 and 4.1% for the full year of 2016, as compared to operating revenue increases of 1.5% in the fourth quarter of 2016 and 2.1% for the full year of 2016, excluding the net revenue impacts from the real estate joint venture developments. This reflects our execution on cost efficiency programs, as well as improving margins in data services, including Internet, business process outsourcing services, TELUS TV and TELUS Health services. Had 2015 adjusted EBITDA also excluded the non-recurring gain on certain real estate assets in the fourth quarter of 2015, wireline adjusted EBITDA would have reflected an increase of approximately $20 million or 5.0% in the fourth quarter of 2016, and an increase of approximately $79 million or 5.0% for the full year of 2016.
1.5 Summary of consolidated quarterly results and trends
Refer to the annual 2016 Management's discussion and analysis (MD&A) for information regarding our summary of consolidated quarter results and our discussion of consolidated trends.
1.6 Performance scorecard (key performance measures)
In 2016, we achieved three of four original consolidated targets and all of our original segment targets, missing only the target for capital expenditures. In respect of updated guidance provided for five targets with our second quarter results, we achieved the revised target for consolidated revenue, consolidated EBITDA - excluding restructuring and other costs, and wireless segment EBITDA - excluding restructuring and other costs. We did not achieve the revised guidance for capital expenditures or wireline external revenue. Our original targets were announced on February 11, 2016.
We achieved our consolidated revenue target primarily due to growth in wireless network revenue, which exceeded the high end of our target range. Wireless network revenue growth resulted from higher than expected ARPU (driven by increased data usage) and growth in our subscriber base. Wireline revenues were slightly below the revised bottom end of our target range due to slower than anticipated growth in data revenues, continued declines in legacy voice services and lower business spending than expected in the second half of 2016.
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 revenue and executing on operational efficiency and effectiveness initiatives, partially offset by higher acquisition and retention spending. Our target for wireline EBITDA - excluding restructuring and other costs was met due to executing on our efficiency and effectiveness initiatives and improved margins in enhanced data services, TELUS TV services, business process outsourcing services and TELUS Health services.
Our basic EPS of $2.06 for 2016 included the effect of the transformative compensation expense recorded in other costs of $0.38 in the fourth quarter of 2016; however, the target for basic EPS did not include this expense. When the effects of the transformative compensation expense are excluded from basic EPS, we met our target range.
Our capital expenditures in 2016 exceeded both our original target and revised guidance, as we continued to focus on investments in broadband infrastructure, including our fibre-optic network, which also supports our small-cell technology strategy to improve coverage and prepares for a more efficient and timely evolution to 5G, as well as deployment of 700 MHz and 2500 MHz spectrum licences.
The following scorecard compares TELUS' performance to our original or revised 2016 targets and also presents our 2017 targets. Our capital structure financial policies and report on financing and capital structure management plans are described in Section 4.3 of our 2016 annual MD&A. Our 2017 targets, plans and assumptions are forward-looking statements and should be read together with the Caution regarding forward-looking statements at the beginning of this MRO. (See also Section 10 - Risks and risk management in the 2016 annual MD&A.)
Scorecard
----------------------------------------------------------------------------
2016 performance
-------------------------------------------
Original or revised
Actual results targets(4) and 2017 targets
and growth growth Result and growth(5)
----------------------------------------------------------------------------
Consolidated
Revenues $12.799 billion $12.775 to $12.875 yes $13.120 to
2.4% billion(4a) 2.2 to $13.250 billion
3.0% 2.5 to 3.5%
---------------------------------------------------------------------------
EBITDA - $4.708 billion $4.650 to $4.755 yes $4.850 to
excluding 4.9% billion(4b) 3.6 to $4.995 billion
restructuring 6.0% 3.0 to 6.0%
and other
costs(1)
---------------------------------------------------------------------------
Basic EPS $2.06 - - -
(10.0)%
---------------------------------------------------------------------------
Basic EPS(2) $2.44 $2.40 to $2.56 yes $2.49 to $2.64
6.6% 5.0 to 12.0% 2.0 to 8.0%
---------------------------------------------------------------------------
Capital $2.968 billion Approx. $2.85 no Approx. $2.9
expenditures(3) billion(4c) billion
----------------------------------------------------------------------------
Wireless segment
Network revenue $6.541 billion $6.425 to $6.490 yes -
(external) 3.9% billion
2.0 to 3.0%
---------------------------------------------------------------------------
EBITDA - $3.027 billion $3.000 to $3.060 yes -
excluding 4.8% billion(4d) 3.9 to
restructuring 6.0%
and other costs
----------------------------------------------------------------------------
Wireline segment
Revenue $5.684 billion $5.705 to $5.735 no -
(external) 2.1% billion(4e) 2.4 to
3.0%
---------------------------------------------------------------------------
EBITDA - $1.681 billion $1.650 to $1.695 yes -
excluding 5.1% billion
restructuring 3.0 to 6.0%
and other costs
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Met target yes; Missed target no. See description in Section 4.1 Non-
GAAP and other financial measures.
2 Our target for basic EPS excluded the transformative compensation of
$0.38 per share recorded in other costs in the fourth quarter of 2016;
actual results adjusted to exclude the transformative compensation
expense.
3 Excludes expenditures for spectrum licences.
4 Targets were revised in the second quarter of 2016 to reflect improved
performance in wireless and wireline, and the general positive
environment for generational capital investments in broadband
infrastructure.
4a The original target for Consolidated revenues was $12.750 to $12.875
billion, or an increase of 2.0 to 3.0%.
4b The original target for Consolidated EBITDA - excluding restructuring
and other costs was $4.625 to $4.755 billion, or an increase of 3.0 to
6.0%.
4c The original target for Capital expenditures was $2.65 billion.
4d The original target for wireless segment EBITDA - excluding
restructuring and other costs was $2.975 to $3.060 billion, or an
increase of 3.0 to 6.0%.
4e The original target for wireline segment external revenue was $5.680
to $5.735 billion, or an increase of 2.0 to 3.0%.
5 Targets exclude the effect of the pending agreement with BCE Inc. (BCE),
pursuant to which we would acquire a portion of Manitoba Telecom
Services Inc.'s (MTS') postpaid wireless subscribers and dealer
locations in Manitoba, dependent on the successful completion of BCE's
acquisition of MTS.
----------------------------------------------------------------------------
We made the following key assumptions when we announced the 2016 targets in February 2016.
Assumptions for 2016 targets and result
----------------------------------------------------------------------------
- Our economic assumptions are based on a composite of estimates from
Canadian banks and other sources. Our original assumptions for 2016
were: (i) moderately higher economic growth in Canada of 1.7%, up from
an estimated 1.1% in 2015; (ii) for our incumbent local exchange carrier
(ILEC) provinces in Western Canada, economic growth in B.C. in the range
of 2.0% to 2.5% and economic growth in Alberta in the range of 0.5% to
1.0%, in part due to low oil prices.
In our MD&A for the first quarter of 2016, we revised our 2016 economic
growth (contraction) assumptions to 1.4% for Canada, 2.5% for B.C. and
(1.0) to (1.5)% for Alberta. In our MD&A for the second quarter of 2016,
we further revised our 2016 economic growth (contraction) assumptions to
1.3% for Canada, 2.9% for B.C. and (2.0)% for Alberta, in part due to
the Fort McMurray wildfires. In our MD&A for the third quarter of 2016,
we again revised our 2016 economic growth (contraction) assumptions to
1.2% for Canada, 2.8% for B.C. and (2.2)% for Alberta.
We estimate that economic growth for 2016 was 1.2% for Canada and 2.9%
for B.C., while the contraction in Alberta was (2.4)%.
- Our original assumption for restructuring and other costs was
approximately $175 million for continuing operational efficiency
initiatives. The assumption for other costs did not include the $305
million transformative compensation expense recorded in the fourth
quarter of 2016.
- Our assumption was for stable wireless acquisition and retention
expenses, as compared to 2015, 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. Both acquisition
and retention expenses increased in 2016 from heightened competitive
intensity, resulting in higher subsidy rates.
Confirmed:
- No material adverse regulatory rulings or government actions.
- Continued intense wireless and wireline competition in both consumer and
business markets.
- A modest increase in wireless industry penetration of the Canadian
market, consistent with 2016.
- 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.
- 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. Actual results were:
$92 million recorded in Employee benefits expense, $6 million recorded
in employee defined benefit plans net interest, a discount rate of 4.00%
and defined benefit pension plan funding of $70 million.
- 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). Actual results were a statutory income
tax rate of 26.7% and cash income tax payments of $600 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. The
average exchange rate for 2016 was U.S. 75.5 cents.
----------------------------------------------------------------------------
1.7 Financial and operating targets for 2017
For 2017, we have targeted consolidated revenues in the range of $13.120 to $13.250 billion, or growth of approximately 2.5 to 3.5%. Consolidated EBITDA - excluding restructuring and other costs is targeted in the range of $4.850 to $4.995 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 and effectiveness initiatives. Basic EPS is expected to be in the range of $2.49 to $2.64, or an increase of approximately 2.0 to 8.0%, when compared to 2016 basic EPS adjusted to exclude $0.38 for transformative compensation. This increase results primarily from growth in EBITDA - excluding restructuring and other costs. For 2017, we have not set public guidance targets for wireless and wireline.
Consolidated capital expenditures, excluding the purchase of spectrum licences, in 2017 is targeted to be approximately $2.9 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. The investments in fibre will also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G. We intend to continue investing in our 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 capital structure financial policies and long-term financial objectives are described in Section 4.3 of our 2016 annual MD&A.
Achievement of our 2017 targets is subject to risks and uncertainties as noted in our Caution regarding forward-looking statements and in our 2016 annual MD&A filed on February 9, 2017. The 2017 targets are based on many assumptions including:
Assumptions for 2017 targets
-- Moderately higher economic growth in Canada in 2017, estimated to be
1.8% (1.2% in 2016). For our incumbent local exchange carrier (ILEC)
provinces in Western Canada, we estimate that economic growth in B.C.
will be 2.3% in 2017 (2.9% in 2016), and that economic growth in Alberta
will be between 1.0 to 2.0% in 2017 (estimated contraction of 2.4% in
2016).
-- No material adverse regulatory rulings or government actions.
-- Continued intense wireless and wireline competition in both consumer and
business markets.
-- A modest increase in wireless industry penetration of the Canadian
market, consistent with 2016.
-- 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 loading and blended ARPU.
-- Continued pressure on wireless acquisition and retention expenses,
dependent on gross loading, competitive intensity and customer
preferences.
-- 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 erosion of wireline voice revenue, resulting from
technological substitution and greater use of inclusive long distance
and lower wholesale volumes.
-- Continued focus on our customers first initiatives and maintaining our
customers' likelihood-to-recommend scores.
-- Employee defined benefit pension plans: Pension plan expense of
approximately $83 million recorded in Employee benefits expense and
approximately $5 million recorded in employee defined benefit pension
plans net interest in Financing costs; a 3.80% rate for discounting the
obligation and 4.00% rate for current service costs for employee defined
benefit pension plan accounting purposes; and defined benefit pension
plan funding of approximately $65 million.
-- Restructuring and other costs of approximately $125 million for
continuing operational efficiency and effectiveness initiatives, with
margin enhancement initiatives to mitigate pressures related to economic
growth, technological substitution and subscriber growth.
-- Income taxes: Income taxes computed at applicable statutory rate of 26.4
to 26.9% and cash income tax payments between $300 million and $360
million (2016 - $600 million). Cash tax payments are decreasing in 2017,
resulting from lower instalment payments for 2017 based on 2016 income,
a lower final instalment payment for 2016 to be made in early 2017,
partly offset by a decrease in income tax recoveries.
-- Increased investments in broadband infrastructure, including expanding
our fibre-optic network and 4G LTE capacity expansion and upgrades, as
well as investments in network and systems resiliency and reliability.
-- No wireless spectrum auctions anticipated in 2017.
-- Continuing weakness in the average Canadian dollar to U.S. dollar
exchange rate (U.S. 75.5 cents in 2016).
-- Targets exclude the effects of the pending agreement with BCE Inc.
pursuant to which we would acquire a portion of Manitoba Telecom
Services Inc.'s (MTS') postpaid wireless subscribers and dealer
locations in Manitoba, dependent on the successful completion of BCE's
acquisition of MTS.
2. Changes in financial position
Refer to the annual 2016 Management's discussion and analysis (MD&A) for information regarding changes in the financial position.
3. Discussion of cash flow results
For detailed information on the following topics, refer to the 2016 annual Management's discussion and analysis (MD&A): i) liquidity and capital resource measures; ii) credit facilities; iii) sale of trade receivables; iv) credit ratings; v) financial instruments, commitments and contingent liabilities; vi) outstanding share information; and vii) transactions between related parties.
3.1 Overview of cash flow results
Our capital structure financial policies, financing plan and report on financing and capital structure management plans are described in Section 4.3 of the 2016 annual MD&A.
Cash flows
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
--------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Cash provided by operating
activities 732 870 (15.9)% 3,219 3,556 (9.5)%
Cash used by investing
activities (848) (625) (35.7)% (2,923) (4,477) 34.7%
Cash provided (used) by
financing activities 138 (163) n/m (87) 1,084 n/m
----------------------------------------------------------------------------
Increase (decrease) in
Cash and temporary
investments, net 22 82 (73.1)% 209 163 28.2%
Cash and temporary
investments, net,
beginning of period 410 141 n/m 223 60 n/m
----------------------------------------------------------------------------
Cash and temporary
investments, net, end of
period 432 223 93.7% 432 223 93.7%
----------------------------------------------------------------------------
3.2 Cash provided by operating activities
Analysis of Cash provided by operating activities
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
EBITDA (see Section 1.3
Wireless segment and
Section 1.4 Wireline
segment) 769 978 (209) 4,229 4,262 (33)
Restructuring and other
costs, net of disbursements 51 56 (5) 24 97 (73)
Employee defined benefit
plan expense, net of
employer contributions 8 11 (3) 22 24 (2)
Share-based compensation
expense, net of payments (67) (78) 11 (2) (38) 36
Interest paid, net of
interest received (120) (108) (12) (506) (434) (72)
Income taxes paid, net of
recoveries received (29) (7) (22) (600) (256) (344)
Other operating working
capital changes 120 18 102 52 (99) 151
----------------------------------------------------------------------------
Cash provided by operating
activities 732 870 (138) 3,219 3,556 (337)
----------------------------------------------------------------------------
-- Share-based compensation expense, net of payments decreased for the
fourth quarter, mainly due to fewer restricted stock units (RSUs)
vesting in 2016. Share-based compensation expense, net of payments for
the full year decreased mainly due to cash outflows associated with the
2012 RSUs being made in the first quarter of 2015 that would normally
have been paid in the fourth quarter of 2014. This resulted from a delay
in the 2012 annual allocation of RSUs.
-- Income taxes paid, net of refunds received, increased in the fourth
quarter and full year of 2016. The increases reflect higher required
instalment payments, as well as higher refunds received in the
comparative period in 2015. The increase for the full year also includes
a larger final income tax payment in the first quarter of 2016 in
respect of the 2015 income tax year than was required in the first
quarter of 2015 in respect of the 2014 income tax year, mainly due to
the use of Public Mobile losses in 2014.
-- Other operating working capital changes in 2016 include a net increase
in accounts payable and accrued liabilities, as described in Section 6
Changes in financial position of our annual 2016 MD&A.
3.3 Cash used by investing activities
Cash used by investing activities
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Cash payments for capital
assets, excluding spectrum
licences (781) (619) (162) (2,752) (2,522) (230)
Cash payments for spectrum
licences - (46) 46 (145) (2,048) 1,903
Cash payments for
acquisitions (74) - (74) (90) (10) (80)
Real estate joint venture
receipts, net of advances
and contributions 7 (11) 18 70 48 22
Proceeds on dispositions 3 47 (44) 3 52 (49)
Other (3) 4 (7) (9) 3 (12)
----------------------------------------------------------------------------
(848) (625) (223) (2,923) (4,477) 1,554
----------------------------------------------------------------------------
-- The increases in Cash payments for capital assets, excluding spectrum
licences, in 2016 were composed of:
-- Increases in capital expenditures of $139 million in the quarter and
$391 million for the full year (see Capital expenditure measures
table and discussion below),
-- For the quarter, higher capital expenditure payments of $13 million
with respect to payment timing differences, as associated Accounts
payable and accrued liabilities decreased and the net change in
asset retirement obligations was $10 million. For the full year,
lower capital expenditure payments with respect to payment timing
differences, as associated Accounts payable and accrued liabilities
increased by $171 million for 2016, net of changes in asset
retirement obligations of $10 million.
-- Payments for spectrum licences in 2016 were monetary consideration as
part of an approved spectrum licence exchange with Xplornet in the
second quarter. Payments in 2015 were in respect of the AWS-3 and 2500
MHz spectrum licences acquired in Innovation, Science and Economic
Development Canada's (ISED's) wireless spectrum auctions.
-- Cash payments for acquisitions were in respect of several individually
immaterial acquisitions complementary to our existing lines of business.
-- Receipts from real estate joint ventures, net of advances and
contributions, resulted mainly from repayment of construction financing
from the TELUS Garden real estate joint venture.
-- Proceeds on dispositions in 2015 were primarily related to the sale of
real estate properties and small portfolio investments.
Capital expenditure measures
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($ millions, except capital
intensity) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Capital expenditures
(excluding spectrum
licences and non-monetary
transactions)(1)
Wireless segment 249 209 19.1% 982 893 10.0%
Wireline segment 545 446 22.2% 1,986 1,684 17.9%
----------------------------------------------------------------------------
Consolidated 794 655 21.2% 2,968 2,577 15.2%
----------------------------------------------------------------------------
Wireless segment capital
intensity (%) 13 12 1 pt. 14 13 1 pt.
Wireline segment capital
intensity (%) 36 30 6 pts. 34 29 5 pts.
Consolidated capital
intensity (2)(%) 24 20 4 pts. 23 21 2 pts.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
2 See description in Section 4.1 Non-GAAP and other financial measures.
----------------------------------------------------------------------------
Wireless segment capital expenditures increased by $40 million in the fourth quarter of 2016 and $89 million for the full year of 2016, primarily due to continued investments in our fibre-optic network to support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G, as well as investments in cost efficiency initiatives. For the full year 2016, this also includes higher spending on the deployment of the 700 MHz and 2500 MHz spectrum bands. We also continued to invest in system and network 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 by $99 million in the fourth quarter of 2016 and $302 million for the full year of 2016 due to continuing investments in our broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers' demand for faster Internet speeds, and extends the reach and functionality of our business and healthcare solutions. We also continued to make investments in cost efficiency initiatives, as well as in system and network resiliency and reliability.
3.4 Cash provided (used) by financing activities
Cash provided (used) by financing activities
----------------------------------------------------------------------------
Fourth quarters ended
December 31 Years ended December 31
------------------------------------------------
($ millions) 2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Dividends paid to holders of
Common Shares (272) (252) (20) (1,070) (992) (78)
Purchase of Common Shares
for cancellation (39) (226) 187 (179) (628) 449
Long-term debt issued, net
of redemptions and
repayment 446 322 124 883 2,719 (1,836)
Issue of shares by
subsidiary to non-
controlling interest 3 - 3 294 - 294
Other - (7) 7 (15) (15) -
----------------------------------------------------------------------------
138 (163) 301 (87) 1,084 (1,171)
----------------------------------------------------------------------------
Dividends paid to the holders of Common Shares
Increases in dividends paid for the fourth quarter and full year 2016 reflect higher dividend rates under our dividend growth program, partially offset by a lower number of outstanding shares resulting from shares purchased and cancelled under our normal course issuer bid (NCIB) program.
Purchase of Common Shares for cancellation
Our 2016 NCIB concluded on September 14, 2016 and our 2017 NCIB commenced on September 30, 2016. In 2015, we purchased approximately 16 million shares for $628 million under the 2015 and 2016 NCIBs.
----------------------------------------------------------------------------
Normal course issuer bid purchases
----------------------------------------------------------------------------
Common
Shares Increase
purchased Average (decrease)
and purchase Purchase in Accounts
cancelled price per costs ($ payable ($ Cash outflow
Period (millions) share ($) millions) millions) ($ millions)
----------------------------------------------------------------------------
2016 Q1 1 37.77 50 (10) 60
2016 Q2 2 38.43 61 - 61
2016 Q3 - 42.92 19 - 19
2016 Q4 1 39.64 35 - 35
----------------------------------------------------------------------------
Total excluding 4 39.34 165 (10) 175
employee
benefit plan
trust
transactions
----------------------------------------
Employee benefit plan trust transactions
- 2016 Q4 4 - 4
------------------------------------
2016 year 169 (10) 179
----------------------------------------------------------------------------
Long-term debt issues and repayments
Net issues and repayments in the fourth quarter of 2016 were primarily composed of: a $476 million increase in commercial paper, including foreign exchange effects, to a balance of $613 million (U.S.$456 million) at December 31, 2016, from $137 million (U.S.$104 million) at September 30, 2016. This was partially offset by a $29 million decrease in net draws on the TELUS International credit facility, including foreign exchange effects.
For the full year of 2016, net long-term debt issues and repayments were primarily composed of:
-- The September 2016 public issue of U.S.$600 million of senior unsecured
notes at 2.80%, due February 16, 2027. The proceeds were used to repay
U.S.$453 million of commercial paper, with the balance to be used for
general corporate purposes. We have entered into a foreign exchange
derivative (a cross currency interest rate exchange agreement) which
effectively converted the principal payments and interest obligations to
Canadian dollar obligations with an effective fixed interest rate of
2.95% and an effective issued and outstanding amount of $792 million
(reflecting a fixed exchange rate of $1.3205).
-- A $357 million net increase in commercial paper, including foreign
exchange effects, to a balance of $613 million at December 31, 2016
(U.S.$456 million) from $256 million (U.S.$185 million) at December 31,
2015.
-- Net draws on the TELUS International credit facility of $332 million
(U.S.$253 million) as at December 31, 2016.
-- Net of the $600 million repayment of Series CI Notes in May 2016.
In comparison, net long-term debt issues and repayments in the fourth quarter of 2015 were primarily composed of:
-- 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
was 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, net long-term debt issues and repayments were primarily composed of the items noted for the fourth quarter and the following:
-- 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 ISED's AWS-3 spectrum auction
during the first quarter of 2015, and to repay approximately $110
million of indebtedness drawn from the 2014 credit facility (which was
subsequently renewed and extended) and approximately $135 million of
outstanding commercial paper. The remainder was used for general
corporate purposes.
-- A $126 million net increase in commercial paper to $256 million
(U.S.$185 million) at December 31, 2015.
-- 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 average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) was approximately 10.4 years at December 31, 2016 (approximately 11.1 years at December 31, 2015). Additionally, our weighted average cost of long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) was 4.22% at December 31, 2016, as compared to 4.32% at December 31, 2015.
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, as well as to determine compliance with debt covenants and to manage our 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 Net income and adjusted basic earnings per share: These measures are used to evaluate performance at a consolidated level and exclude items that may obscure the underlying trends in business performance. These measures should not be considered alternatives to Net income and basic earnings per share in measuring TELUS' performance. Items that may, in management's view, obscure the underlying trends in business performance include significant gains or losses associated with real estate development partnerships, gains on exchange of wireless spectrum licences, restructuring and other costs, long-term debt prepayment premiums (when applicable), income-tax related adjustments and asset retirements related to restructuring activities. (See Analysis of Net income and Analysis of basic EPS in Section 1.2.)
Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences) 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. For fiscal years, the denominator is annual basic earnings per share. 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 per share on a prospective basis.
Calculation of Dividend payout ratio ---------------------------------------------------------------------------- Years ended December 31 ($) 2016 2015 ---------------------------------------------------------------------------- Numerator - sum of the last four quarterly dividends declared per Common Share (1) 1.84 1.68 Denominator - Net income per Common Share 2.06 2.29 ---------------------------------------------------------------------------- Ratio (%) 89 73 ----------------------------------------------------------------------------
Dividend payout ratio of adjusted net earnings: This ratio is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by adjusted net earnings per share. Adjusted net earnings per share is basic earnings per share, as used in the Dividend payout ratio, adjusted to exclude the gain on the exchange of wireless spectrum licences, net gains and equity income from real estate joint venture developments, business acquisition-related provisions, immediately vesting transformative compensation (transformative compensation) expense, long-term debt prepayment premium (when applicable) and income tax-related adjustments.
Calculation of Dividend payout ratio of adjusted net earnings
----------------------------------------------------------------------------
Years ended December 31 ($) 2016 2015
----------------------------------------------------------------------------
Numerator - sum of the last four quarterly dividends
declared per Common Share (1) 1.84 1.68
----------------------------------------------------------------------------
Adjusted net earnings ($ millions):
Net income attributable to Common Shares 1,223 1,382
Deduct net gains and equity income from real estate
joint venture developments, after income taxes (16) -
Deduct gain on the exchange of wireless spectrum
licences, after income taxes (13) -
Add back business acquisition-related provisions,
after income taxes 15 -
Add back transformative compensation expense, after
income taxes 224 -
Add back net unfavourable (deduct net favourable)
income tax-related adjustments (17) 1
----------------------------------------------------------------------------
1,416 1,383
----------------------------------------------------------------------------
Denominator - Adjusted net earnings per Common Share 2.39 2.29
----------------------------------------------------------------------------
Adjusted ratio (%) 77 73
----------------------------------------------------------------------------
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 segment contribution. 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 calculate EBITDA - excluding restructuring and other costs, as it is a component of the EBITDA - excluding restructuring and other costs interest coverage ratio and the Net debt to EBITDA - excluding restructuring and other costs ratio.
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.
EBITDA reconciliation
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
----------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
Net income 87 261 1,236 1,382
Financing costs 134 114 520 447
Income taxes 15 85 426 524
Depreciation 406 406 1,564 1,475
Amortization of intangible assets 127 112 483 434
----------------------------------------------------------------------------
EBITDA 769 978 4,229 4,262
Restructuring and other costs
included in EBITDA(1) 348 99 479 226
----------------------------------------------------------------------------
EBITDA - excluding restructuring and
other costs 1,117 1,077 4,708 4,488
Deduct gain on the exchange of
wireless spectrum licences - - (15) -
Deduct net gains and equity income
from real estate joint venture
developments (7) - (26) -
----------------------------------------------------------------------------
Adjusted EBITDA 1,110 1,077 4,667 4,488
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes transformative compensation expense of $305 million recorded in
other costs in the fourth quarter of 2016.
----------------------------------------------------------------------------
Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the condensed interim consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the condensed interim consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.
Free cash flow calculation
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
----------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
EBITDA 769 978 4,229 4,262
Deduct gain on the exchange of
wireless spectrum licences - - (15) -
Deduct net gains and equity income
from real estate joint venture
developments (7) - (26) -
Deduct non-cash gains from the sale
of property, plant and equipment (2) - (17) -
Restructuring and other costs, net
of disbursements 51 56 24 97
Items from the Consolidated
statements of cash flows:
Share-based compensation (67) (78) (2) (38)
Net employee defined benefit plans
expense 26 37 93 118
Employer contributions to employee
defined benefit plans (18) (26) (71) (94)
Interest paid (123) (129) (510) (458)
Interest received 3 21 4 24
Capital expenditures (excluding
spectrum licences) (794) (655) (2,968) (2,577)
----------------------------------------------------------------------------
Free cash flow before income taxes (162) 204 741 1,334
Income taxes paid, net of refunds
received (29) (7) (600) (256)
----------------------------------------------------------------------------
Free cash flow (191) 197 141 1,078
----------------------------------------------------------------------------
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) 2016 2015 2016 2015
----------------------------------------------------------------------------
Free cash flow (191) 197 141 1,078
Add (deduct):
Capital expenditures (excluding
spectrum licences) 794 655 2,968 2,577
Adjustments to reconcile to Cash
provided by operating activities 129 18 110 (99)
----------------------------------------------------------------------------
Cash provided by operating
activities 732 870 3,219 3,556
----------------------------------------------------------------------------
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) 2016 2015 ---------------------------------------------------------------------------- Long-term debt including current maturities 12,931 12,038 Debt issuance costs netted against long-term debt 67 52 Derivative liabilities (assets), net 20 (14) Accumulated other comprehensive income amounts arising from financial instruments used to manage interest rate and currency risks associated with U.S. dollar- denominated long-term debt (excluding tax effects) (34) - Cash and temporary investments (432) (223) Short-term borrowings 100 100 ---------------------------------------------------------------------------- Net debt 12,652 11,953 ----------------------------------------------------------------------------
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 also 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.
In the fourth quarter of 2016, we made transformative compensation lump-sum payments for substantially all of our existing unionized and non-unionized Canadian-situated workforces recorded in other costs. For the unionized and non-unionized workforces, approximately 40% of the after-tax value of such qualifying lump-sum payments was paid in our Common Shares by way of an employee benefit trust.
Components of restructuring and other costs
----------------------------------------------------------------------------
Fourth quarters Years
ended December 31 ended December 31
----------------------------------------
($ millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
Goods and services purchased 23 11 62 70
Employee benefits expense(1) 325 88 417 156
----------------------------------------------------------------------------
Restructuring and other costs 348 99 479 226
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 Includes transformative compensation expense of $305 million recorded in
other costs in the fourth quarter of 2016.
----------------------------------------------------------------------------
4.2 Operating indicators
The following measures are industry metrics that are useful in assessing the operating performance of a wireless and wireline telecommunications entity, but do not have a standardized meaning under IFRS-IASB.
Average revenue per subscriber unit per month (ARPU) for wireless subscribers 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 (or churn) 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 is expressed as a rate per month. A TELUS, Koodo� or Public Mobile brand prepaid wireless 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 the cost of acquisition divided by the 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.
Wireless subscriber unit (subscriber) is defined as an active recurring mobile revenue-generating unit (e.g. mobile phone, tablet or mobile Internet key) with a unique subscriber identifier (SIM or IMEI number). 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 fixed 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) 2016 2015 2016 2015
----------------------------------------------------------------------------
OPERATING REVENUES
Service $ 3,079 $ 2,943 $ 12,000 $ 11,590
Equipment 209 243 725 840
----------------------------------------------------------------------------
Revenues arising from contracts with
customers 3,288 3,186 12,725 12,430
Other operating income 17 31 74 72
----------------------------------------------------------------------------
3,305 3,217 12,799 12,502
----------------------------------------------------------------------------
OPERATING EXPENSES
Goods and services purchased 1,574 1,482 5,631 5,532
Employee benefits expense 962 757 2,939 2,708
Depreciation 406 406 1,564 1,475
Amortization of intangible assets 127 112 483 434
----------------------------------------------------------------------------
3,069 2,757 10,617 10,149
----------------------------------------------------------------------------
OPERATING INCOME 236 460 2,182 2,353
Financing costs 134 114 520 447
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 102 346 1,662 1,906
Income taxes 15 85 426 524
----------------------------------------------------------------------------
NET INCOME 87 261 1,236 1,382
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges (7) (3) (20) (4)
Foreign currency translation
adjustment arising from translating
financial statements of foreign
operations 1 8 5 25
Change in unrealized fair value of
available-for-sale financial assets 1 2 - -
----------------------------------------------------------------------------
(5) 7 (15) 21
----------------------------------------------------------------------------
Item never subsequently reclassified
to income
Employee defined benefit plan re-
measurements (167) 486 - 445
----------------------------------------------------------------------------
(172) 493 (15) 466
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (85) $ 754 $ 1,221 $ 1,848
============================================================================
NET INCOME ATTRIBUTABLE TO:
Common Shares $ 81 $ 261 $ 1,223 $ 1,382
Non-controlling interest 6 - 13 -
----------------------------------------------------------------------------
$ 87 $ 261 $ 1,236 $ 1,382
============================================================================
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO:
Common Shares $ (92) $ 754 $ 1,206 $ 1,848
Non-controlling interest 7 - 15 -
----------------------------------------------------------------------------
$ (85) $ 754 $ 1,221 $ 1,848
============================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.14 $ 0.44 $ 2.06 $ 2.29
Diluted $ 0.14 $ 0.44 $ 2.06 $ 2.29
TOTAL WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 591 598 592 603
Diluted 592 599 593 604
Condensed consolidated statements of financial position (unaudited)
As at December 31 (millions) 2016 2015
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary investments, net $ 432 $ 223
Accounts receivable 1,471 1,428
Income and other taxes receivable 9 1
Inventories 318 360
Prepaid expenses 233 213
Real estate joint venture advances - 66
Current derivative assets 11 40
----------------------------------------------------------------------------
2,474 2,331
----------------------------------------------------------------------------
Non-current assets
Property, plant and equipment, net 10,464 9,736
Intangible assets, net 10,364 9,985
Goodwill, net 3,787 3,761
Other long-term assets 640 593
----------------------------------------------------------------------------
25,255 24,075
----------------------------------------------------------------------------
$ 27,729 $ 26,406
============================================================================
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Short-term borrowings $ 100 $ 100
Accounts payable and accrued liabilities 2,330 1,990
Income and other taxes payable 37 108
Dividends payable 284 263
Advance billings and customer deposits 737 760
Provisions 124 197
Current maturities of long-term debt 1,327 856
Current derivative liabilities 12 2
----------------------------------------------------------------------------
4,951 4,276
----------------------------------------------------------------------------
Non-current liabilities
Provisions 395 433
Long-term debt 11,604 11,182
Other long-term liabilities 736 688
Deferred income taxes 2,107 2,155
----------------------------------------------------------------------------
14,842 14,458
----------------------------------------------------------------------------
Liabilities 19,793 18,734
----------------------------------------------------------------------------
Owners' equity
Common equity 7,917 7,672
Non-controlling interest 19 -
----------------------------------------------------------------------------
7,936 7,672
----------------------------------------------------------------------------
$ 27,729 $ 26,406
============================================================================
Condensed consolidated statements of cash flows (unaudited)
Three months Twelve months
Periods ended December 31 (millions) 2016 2015 2016 2015
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 87 $ 261 $ 1,236 $ 1,382
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization 533 518 2,047 1,909
Deferred income taxes (90) (9) (42) 68
Share-based compensation expense,
net (67) (78) (2) (38)
Net employee defined benefit plans
expense 26 37 93 118
Employer contributions to employee
defined benefit plans (18) (26) (71) (94)
Other 34 (39) 29 (3)
Net change in non-cash operating
working capital 227 206 (71) 214
----------------------------------------------------------------------------
Cash provided by operating
activities 732 870 3,219 3,556
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash payments for capital assets,
excluding spectrum licences (781) (619) (2,752) (2,522)
Cash payments for spectrum licences - (46) (145) (2,048)
Cash payments for acquisitions (74) - (90) (10)
Real estate joint ventures advances
and contributions (5) (12) (33) (50)
Real estate joint venture receipts 12 1 103 98
Proceeds on dispositions 3 47 3 52
Other (3) 4 (9) 3
----------------------------------------------------------------------------
Cash used by investing activities (848) (625) (2,923) (4,477)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to holders of Common
Shares (272) (252) (1,070) (992)
Purchase of Common Shares for
cancellation (39) (226) (179) (628)
Issuance and repayment of short-term
borrowings - (1) - -
Long-term debt issued 1,103 2,694 5,726 8,973
Redemptions and repayment of long-
term debt (657) (2,372) (4,843) (6,254)
Issue of shares by subsidiary to
non-controlling interest 3 - 294 -
Other - (6) (15) (15)
----------------------------------------------------------------------------
Cash provided (used) by financing
activities 138 (163) (87) 1,084
----------------------------------------------------------------------------
CASH POSITION
Increase in cash and temporary
investments, net 22 82 209 163
Cash and temporary investments, net,
beginning of period 410 141 223 60
----------------------------------------------------------------------------
Cash and temporary investments, net,
end of period $ 432 $ 223 $ 432 $ 223
============================================================================
SUPPLEMENTAL DISCLOSURE OF OPERATING
CASH FLOWS
Interest paid $ (123) $ (129) $ (510) $ (458)
============================================================================
Interest received $ 3 $ 21 $ 4 $ 24
============================================================================
Income taxes paid, net $ (29) $ (7) $ (600) $ (256)
============================================================================
Segmented information (unaudited)
Three months
ended
December 31
(millions) Wireless Wireline Eliminations Consolidated
2016 2015 2016 2015 2016 2015 2016 2015
----------------------------------------------------------------------------
Operating
revenues
External
revenues
Service $ 1,689 $ 1,601 $ 1,390 $ 1,342 $ - $ - $ 3,079 $ 2,943
Equipment 147 164 62 79 - - 209 243
----------------------------------------------------------------------------
Revenues
arising
from
contracts
with
customers 1,836 1,765 1,452 1,421 - - 3,288 3,186
Other
operating
income 5 7 12 24 - - 17 31
----------------------------------------------------------------------------
1,841 1,772 1,464 1,445 - - 3,305 3,217
Intersegment
revenues 15 17 51 44 (66) (61) - -
----------------------------------------------------------------------------
$ 1,856 $ 1,789 $ 1,515 $ 1,489 $ (66) $ (61) $ 3,305 $ 3,217
============================================================================
EBITDA(1) $ 598 $ 628 $ 171 $ 350 $ - $ - $ 769 $ 978
============================================================================
CAPEX,
excluding
spectrum
licences(2) $ 249 $ 209 $ 545 $ 446 $ - $ - $ 794 $ 655
============================================================================
Operating
revenues -
external (above) $ 3,305 $ 3,217
Goods and
services
purchased 1,574 1,482
Employee
benefits expense 962 757
--------------------------------
EBITDA (above) 769 978
Depreciation 406 406
Amortization 127 112
--------------------------------
Operating income 236 460
Financing costs 134 114
--------------------------------
Income before
income taxes $ 102 $ 346
================================
Years ended
December 31
(millions) Wireless Wireline Eliminations Consolidated
2016 2015 2016 2015 2016 2015 2016 2015
----------------------------------------------------------------------------
Operating
revenues
External
revenues
Service $ 6,569 $ 6,338 $ 5,431 $ 5,252 $ - $ - $12,000 $11,590
Equipment 509 586 216 254 - - 725 840
----------------------------------------------------------------------------
Revenues
arising
from
contracts
with
customers 7,078 6,924 5,647 5,506 - - 12,725 12,430
Other
operating
income 37 9 37 63 - - 74 72
----------------------------------------------------------------------------
7,115 6,933 5,684 5,569 - - 12,799 12,502
Intersegment
revenues 58 61 194 174 (252) (235) - -
----------------------------------------------------------------------------
$ 7,173 $ 6,994 $ 5,878 $ 5,743 $ (252) $ (235) $12,799 $12,502
============================================================================
EBITDA(1) $ 2,906 $ 2,806 $ 1,323 $ 1,456 $ - $ - $4,229 $4,262
============================================================================
CAPEX,
excluding
spectrum
licences(2) $ 982 $ 893 $ 1,986 $ 1,684 $ - $ - $2,968 $2,577
============================================================================
Operating
revenues -
external (above) $12,799 $12,502
Goods and
services
purchased 5,631 5,532
Employee
benefits expense 2,939 2,708
--------------------------------
EBITDA (above) 4,229 4,262
Depreciation 1,564 1,475
Amortization 483 434
--------------------------------
Operating income 2,182 2,353
Financing costs 520 447
--------------------------------
Income before
income taxes $1,662 $1,906
================================
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 it is
also utilized in measuring compliance with certain debt covenants.
2 Total capital expenditures (CAPEX.
Contacts: Media relations: Shawn Hall (604) 619-7913 [email protected] Investor relations: Paul Carpino (647) 837-8100 [email protected]
Source: TELUS Corporation