Telus Corp (TU) 2002 Q4 法說會逐字稿

Thank you for standing by. Welcome to the TELUS Corporation fourth quarter conference call. All parts will be in a listen-only mode. After wards, we will conduct a question-and-answer session. If you have a question, press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded, Friday, February 14th, 2003. I will turn the call over to Mr. John wheeler, Vice President, Investor Relations.

Welcome to our 2002 fourth quarter conference call and webcast. In Vancouver we have Darren Entwistle; President and CEO and Bob McFarlane, Chief Financial Officer. In Toronto we have George Cope, President and CEO of Telus Mobility.

We're going to start with some introductory comments, as usual, followed by a question question-and-answer session. The time of the call today will be one hour to one hour 15 minutes. The news release detailed investor relation is posted on our website at TELUS.com. With those with access to the internet, the slides are available for viewing at www.telus.com.

You are in a listen-only mode. Let me direct your attention to slide 2. Given the forward-looking nature of the presentations, comments and answers to questions today, statements made about future event and future financial results are subject to risks and uncertainties. TELUS' actual results could differ materially from statements made today. I ask you read the legal disclaimer and refer you to the risks outlined in the public disclosure in Canada and United States. Darren Entwistle will begin with opening remarks on slide 3

Thanks, John. Good morning. Thank you for joining us today. Today is a chance to report on the fourth quarter results and look back at what was surely the most desk year in the modern history of telecommunications.

Extremely harsh market conditions were compounded by punishing regulatory decisions to create an environment that pushed us all to our limits, and we recognize that certainly includes our investors. The difficult events of 2002 challenged and tested TELUS, but it is just this sort of environment that proves whether the organization has the right strategy and the ability to execute it successfully.

Turning now to slide 4. The event of the year highlighted the efficacy of the strategy we've been implementing the last three years. The integrity of the capital expenditures from 2000 through 2002 have been dedicated in the core business in the Canadian telecom market which is somewhat different than our peer group around the world.

It is bias to growth with major investments and national wireless and data access, high speed internet service in the west, and our territory in Quebec. Therefore, much of the investment required to underpin our future growth is nearing completion.

Facilitating a tapered capital expenditure profile going forward. George, and all of our TELUS Mobility team did an exceptional job drives the wireless performance in 2002. With the successful integration of four billing systems completed, they were able to focus on best in class, operating execution. Evidence of the success of integrating the Clearnet and TELUS acquisitions came recently as they earned the No. 2 for operate excellence behind NEXTEL and independent rating in North American wireless carriers.

According to a major North American manufacturer, our PCS network has achieved North America best in class performance for a number of months running.

TELUS Mobility has demonstrated to investors and to the market that an approach to profitable subscriber growth is the right wireless strategy. This is especially important in today's environment where improving cash flow is the only sure way to build shareholder value.

Revenue per customer or ARPU was resilient at $55 a month, a significant 20% premium to the closest of our major competitors. The subscriber base was up 16% to 3 million customers, underpinned by North American industry leading churn rate of 1.68% in the fourth quarter.

To top it off, EBITDA was up 50% this year to $535 million. Going now to slide 5. Looking back to our financial targets at the beginning of the year, we did not achieved the wire line growth we hoped for. There was softness in the enterprise data market, but our performance in the short term has also been inhibited by the significant resources and effort required to deliver on our efficiency improvements.

We enjoyed a strong year with respect to wireless and Internet growth, but doing the same on the wire line side was a bridge to far. The downside in our reduced revenue growth in 2002 was mitigated by $150 million of cost reductions.

Our operational efficiency program has not only worked but exceeded expectations. The 52 hundred 13 reductions this year means that we are already 80% of the way towards our 6500 target for the end of 2003. This will provide annual cost savings of $550 million by 2004.

As a result, our EBITDA margin in the communications segment increased in Q4 to its highest level for the year at 41%, up 410 basis points since the first quarter of 2002. Given that we are 80% of the way through the OEP, we expect to see the wire line growth reinvigorate over the course of 2003.

Despite the amount of management team and resources absorbed by the operational efficiency program, we made some significant gains in reaping the benefits of our ADSL investment by achieving 195,000 subscriber additions representing 91% growth in our high-speed customer base. In the process we performed well compared to the competition in terms of winning the majority share of net additions during the course of 2002.

Not with standing this, I think we need to further improve our competitiveness in this area, and this will be a focus of my attention in 2003. I'd like to highlight now a fourth quarter development that I think is telling. When you look back at the third quarter of 2002, we had to normalize for negative regulatory impacts to showing underlying EBITDA growth of positive 4%.

Absent normalizing for regulatory impacts are our EBITDA growth was negative 5%. By contrast, in the fourth quarter, EBITDA growth as reported was 8%, and when normalized for regulatory impact, underlying growth was 20%.

This [inaudible] well for the future as the margin expansion emanating from operating with the efficiency program and our wireless operations slows down our P&L and into our balance sheet as we draw to deliver accelerated growth in EBITDA, EPS, and free cash flow.

Indeed, we came close to being free cash flow positive in 2002, which Bob will detail for you in a few minutes and we are positioned to generate accelerating cash growth in 2003 and beyond, that will be deployed toward realize you are our credit enhancement objectives.

Finally, we overcame the challenges posed by regulatory decisions and the turbulent market to hit the high end of our original EBITDA guidance, delivering our $2.5 billion EBITDA, a rare occurrence in 2002 amongst global telecommunications companies.

In looking back in last years tumultuous events, investors that TELUS listened and responded to issues to common misperceptions in the market.

Turning to slide 6, we disclosed financial and operational details on the operational efficiency program earlier than we planned, and we publicly filed our bank facility agreement. In July, we provided new levels of disclosure, including cash flow forecast for the second half of 2002 and 2003, and showed a 2003 preliminary financial forecast, a year earlier than normal.

TELUS turned a difficult situation into a positive one for both debt and equity holders. When the value of our bonds and equity declined significantly following the moody's downgrade to one notch below investment a grade, we bought back $410 million of debt at a 21% discount and funded it with a $337 million equity issue.

Carefully restricted by management to 10% dilution. The result was an improvement to our balance sheet and an increase in both our bond and our share prices. We saw in the latter half of 2002 a positive outcome for investors with debt values returning to par and our share values trebling in value.

We trust our balanced approach to growth and deleveraging will continue to build value in 2003.

Turning now to slide 7. TELUS is well positioned to achieve the the overall corporate objectives and financial targets we have set for 2003, continuing to deliver on our efficiency improvements objectives remains a top priority for this organization.

This is a Hallmark of a disciplined company. We are dedicated to driving a further $300 million in cost reductions in 2003 and simultaneously realize improved levels of service to our customers. Another key priority for TELUS mobility is to enhance our leadership position in the North American wireless industry by delivering significant market expansion and accelerated cash generation.

EBITDA mobility is targeted to increase 17 to 21% in 2003, and cash flow, as measured by EBITDA, less capex, is set to increase $175 million to $200 million. I'll tell you, I'll be disappointed if we do not do better than the public target in this area.

Based on improved operating performance, we are looking to achieve another top priority, to strengthen our credit position. We have three investment grade credit ratings, and we intend to make it four going forward as we increase our cash flow and reduce our debt. Ideally, this would happen in 2003, but, as you know, we do not control the timetable.

In addition, our haste to realize this objective is tempered by ensuring that our actions balance a need of both debt and equity holders. What we do control is the excellence of our execution in delivering on our financial targets. That is why I'm confident in saying it is only a matter of when we regain our investment grade rating with moody's, not if.

Two other note worthy challenges we will be addressing in 2003 include labor relations and the drive to profitability in central Canada. On the labor relations front, we are now moving into an expanded conciliation process that will take us into the fall before there is likely to be any possibility of job action.

TELUS is committed to achieving a settlement with the unionized employees. We are look fog a collective agreement that considers the current economic climate and competitive marketplace, balance the need of all employees, and provides the flexibility to meet the involving needs of our customers. We ask investor for the continued patience on this issue, which I'm committed to resolve in 2003. But in a manner that is to the benefit of all parties, including our shareholders.

We continue to focus on improving the operating and economic fundamentals of our business expansion into Ontario and Quebec by improving the cost structure in areas like sales productivity, managing off net costs, and reducing o capital expenditures. As the market strengthens, we are well positioned to grow our non-eyelet business. The state of the art data centers and Internet facilities and the strong team we are building in center Canada, we stand to benefit greatly as the only integrated alternative to bell in that marketplace.

As shown on slide 8, with $840 million of combined ILEC and non ILEC revenues in 2002 and positive EBITDA of $57 million, we have the scale to prove profitability of going forward.

With TELUS Quebec, we have one of the few companies to have an ILEC operation in this expansion territory. This gives us cash flow and management strength in the region and an ability to deliver our strong brand to benefit our business marketing efforts .

Clearly, expansion is not just an opportunity, but a necessity in a post world. As a national player, we have the ability to field the growth of our business by driving greater cooperation between our wireless and wire line operations, another unique advantage TELUS has compared to global see lax.

Our 2003 target for central Canadian wire line revenue is to grow to $870 million and $890 million, but EBITDA is expected to almost double to approximately $105 million. The management team is very committed to bettering our $60 million negative EBITDA target for our non-ILEC, operation this year. We have strong mo men dumb as Bob will highlight with five consecutive quarters of EBITDA improvements.

In closing, I want to note on slide 9 that the TELUS target for 2003 EBITDA growth of between 7 to 11% puts us in the top echelon of North American telecom's companies.

This type of growth in EBITDA coupled with a reduction of $200 million of our planned capital expenditures puts us in a strong position to drive increasing cash flow as measured by EBITDA less cap sex up above 400 to $500 million. I've shown on slide 10 the growing cash flow also puts us in the forefront amongst North American telecom companies.

In addition, as you can see on slide 11, we are expecting GAAP EPS to grow significantly, up by $1.10 to $1.30 in 2003 to our target of 35 to 55 cents per share. To conclude, we've clearly made progress in executing against our strategy in 2002 despite the meltdown in capital markets, depressed wireless valuations early in the year and regulatory decisions.

I'm optimistic going forward we have improved stability and regulation and, hopefully, improved investor confidence in the telecom sector. When you combine the factors with our continuing focus on operation excellence and efficiency improvements, I am confident we will continue to build appreciable value for equity and debt holders in the years ahead. Over to George and Bob for a review of the fourth quarter

Thank you.

Thank you.

Thanks, Darren. Good morning, everyone. I'm on slide 12. Let me start by indicating TELUS had a very strong fourth quarter in terms of our financial results.

With the exception of coming in slightly below our expectation on Q4, we exceeded all our financial targets for the year, and I think most notably for investor was exceeding EBITDA and cash flow targets we set at the beginning of the year.

Turning to slide 13. You can see on the slide the significant growth in EBITDA in Q4 over last year as Darren has already indicated. I think what is important for investors to know when you go a little deeper into our numbers, you'll find that over 100% of our revenue growth in Q4 flowed to the EBDA line and we had a flow of 86%.

So significant leverage as we've integrated the organizations. We have completed the integration of the organizations and completed the billing integrations now, and plan to continue to lever our expenses as we grow our revenue by subscriber he growth. We took our revenue per employee, per FTE employee over $40,000 annualized based on Q4 run rate.

Turning to slide 14, you can see our net ad of $131,000 in Q4. I will mention just bringing in at 417, just slightly below our guidance of 425. Clearly consistent with net ad being down across the industry in the fourth quarter, but on a year-over-year basis, as the industry declined, our market share went up, which I will take you through as we turn now to slide 15.

You can see on slide 15 that our net ads 418,000 were flat with last year's net ads despite the fact the industry net ads declined from 1.9 million to 1.3 million. With our market share increased year-over-year of net ads from 22% to, approximately 30%. Clearly that net ad market share was lower in Q4. That is consistent with our focus of trying to balance profitable subscriber growth with subscriber market share.

All subscribers aren't created equal. In our business doesn't have the seasonality in it because it is not a consumer product. We also resisted the temptation to match some of the grab and go bundles in the marketplace in the fourth quarter. That cost us a few incremental subscribers. We believe we're finding the balance between incremental subscriber growth and profitable subscriber growth.

You can see in slide 16 we continue to have a strong mix of 82 post paid and 17% prepaid. We have the stronger post pay, although the growth in fourth quarter prepaid is consistent with the seasonality with the gift-giving season. We continue to be pleased with the prepaid business as our we continue to be higher than our two major competitors.

Turning to slide 17, this is something, obviously, we're very pleased with and investors will, likewise, be. It is the first time I remember in many years have a flat year-over-year on a quarter by quarter basis. Can you see the fourth quarter in this year was the same as last year's. In fact, our ARPU in prepaid and post paid were up. It is the mix that makes it flat. The post -- prepaid ARPU, was up $22, up 10% last year and post paid was up 2%. There was more prepaid in the base.

Our minutes of use is growing from 276 to 302 minutes, and, clearly, the move to one minute billing from one second billing is helping TELUS mobility and helping the Canadian wireless industry, which is clearly good for all investors.

Turning to slide 18, I think a notable achievement for TELUS Mobility this year was maintaining the ARPU premium we held last year. There were many investors who wondered if we would be able to do that. We have, as you can see, our premium continue to be 20% over our competitors, our major competitor.

Turning to slide 19, probably the most important improvement in TELUS Mobility this year and very important as the Canadian market continues to grow in wireless but not obviously at the pace we've seen historically. Lowering our turn rate from 2.09% in the fourth quarter to 1.68% has increased the average life of our clients 11 months. At our ARPU, that's an increase in the value of the subscriber base of $600 per subscriber in one year.

And this has happened with a lot of work, with some key execution pieces coming together, particularly over $100 million being invested, roughly, in our retention programs, the move to permitted billing and grand fathering people who were on per second. The call centers have a service level that's in excess of 80 to 90%. Our drop call rate on our PCS network is under 1%. We have access to the bell footprint in eastern can Canada.

In fact, our revenue turn, though we don't publicly disclose it, our churn is lower than our churn which means when we're losing clients, we're losing them at the lower end. We have introduced a match program which means if a client goes to leave us for a competitive rate plan, we have built the billing system to match any rate plan of any of our competitors on the phone at that moment to, hopefully, mitigate the benefits competitors feel in reducing price and mitigate our churn. We have seen that in the churn number.

When you go to slide 20, you can see now that our churn rate, because of the things we have implemented, has now become the best in North America. I think what's more important for investors is the lifetime of our subscriber goes up and our ARPU continues to be a premium, the value of the subscriber base is significantly higher than comparable in both Canada or U.S. where U.S. churn is dramatically higher than that in Canada.

I will also mention another significant difference between the U.S. and Canada. In U.S. MOUs are did you believe that than Canadian carrier. The capital intensity is higher than in Canada. The churn rate is lower in can Canada than the U.S. There is clearly a difference between the two communities for investors to look at, much different than in the past, and, of course, our penetration growth is exceeding that of the U.S. and did, certainly, in the fourth quarter relative to the U.S.

In summary, on page 21, you can see we, in [inaudible], hit and exceeded all of our objectives for the year, other than slightly missing on net ads, but, clearly, with a market share movement we achieved in the year was dramatic and excellent for our investors.

We expect in '03 to be more focused than ever on financial disciplines, managing our churn, focusing on our ARPU so we can continue to drive significant EBITDA and cash flow growth with a prudent focus on subscriber growth and an enormous focus on churn management as the growth in the industry continues to slow relative to other times in wireless. Thank you. With that, I'll hand it over to Bob McFarlane.

Thanks, George. I'll start my comments on slide 23, with some consolidated highlights for 2002. In 2002 TELUS faced the impact of significant negative regulatory decisions. It became effective on January 1 and reduced revenues by 375 million and had a negative EBITDA impact of 211 million. We also applied an appropriately conservative accounting treatment to the June 2002 price cap decision by expensing the deferral account contingent obligations upfront.

The new price cap regulations caused an additional 2002 negative revenue and after-tax earnings impact after 56 million and 34 million respectively. Remarkably, we still executed operationally to overcome the regulatory impacts and met our key profitability and cash flow targets established at the outset of the year.

EBITDA before restructuring cost was flat year-over-year as mobility EBITDA growth, the operational efficiency program, and a favorable settlement on out standing tax investment credit claims offset regulatory impacts, and reflecting a maturration of the capital programs and discipline capital allocation, a large cap ex reduction in 2002 drove a significant improvement in cash flow. So let's take a look. Turning to slide 24.

Consolidated operating revenue decreased for the fourth quarter 2002 when compared with results to Q4, 2001, due to the regulatory cap ex decisions which both took effect in 2002.

Despite these negative regulatory impacts, EBITDA, including restructuring expenses increased due to the significant cost structure improvements in our communication segment and the tremendous EBITDA growth in the ability segment George just referenced.

After normalizing for regulatory impacts, Q4, 2002 operating revenues and EBITDA actually increased by 2 and 20% respectively. On slide 25, we can see a bar chart, which contrasts the quarterly EBITDA for 2002 versus 2001, excluding regulatory impacts.

Looking at the blue bar on the far right-hand of the slide, you can see the increase year-over-year growth in the fourth quarter 2002 EBITDA is setting the stage for further accelerated profitability growth in 2003. Turning to slide 26, there was continued success with the expanded Operational Efficiency Plan in the fourth quarter, which I'll comment on later in my presentation. As expected, the pretax provision related to the workforce reduction costs in the fourth quarter of 2002 was $241 million.

This corresponded to 159 million after tax charge. The other cost of reduced net earnings with us a negative regulatory impacts which had an after-tax $45 million impact. Consequently, net income for Q4 2002 decreased year-over-year despite reduced goodwill and improved EBITDA before regulatory decision impacts of approximately $73 million after tax.

So GAAP EPS was negative 41 cents in Q4, 2002, versus negative 16 cents last year. However, EPS, before restructuring costs was 5 cents in Q4 '02, versus negative 16 cents last year, reflecting significant underlying operational improvement.

Now, to slide 27. Earlier this -- in 2002 we announced our expectations for significantly reduced capital expenditures. We continued to deliver disciplined expenditures this quarter cap ex of 416 million in the fourth quarter was down 30% from a year ago. As a result, cap ex intensity as measured by the ratio of cap ex to sales decreased by 8.5 points year-over-year to 23%.

The reduced capital expenditures in combination with increased EBITDA drove dramatic $229 million improvement in quarterly cash flow generation as measured by EBITDA, less cap ex.

As desired, our focus on improving capital efficiency has led to significantly lower capital intensity as depicted on slide 28. On both a quarter-over-quarter and a year-to-date basis, we have observed declines in consolidated cap ex intensity to 23 and 24%, down from 32 and 37% the prior year respectively.

Slide 29 shows a dramatic increase in free cash flow year-over-year, resulting in the lower capex, as well as cash tax savings and reduced dividends. In fact, free cash flow has improved approximately 98% from negative 1.35 billion to negative 26 million, a $1.3 billion improvement in one year. If one further takes into account the considerable working capital funds provided by the successful accounts receivable securitazation program, net of cash outflows for restructuring and work flow reduction costs and 2002 free cash flow would improve by another $270 million, but the 12-month pre-cash flow improvement understates the accelerated progress made in the latter part of 2002.

Slide 30 compares our second half 2002 free cash flow actual results, the guidance provided in conjunction with our Q2 results on July 29th, 2002. We generated $92 million of free cash flow for the second half of 2002, exceeding our guidance of negative 65 to positive 10. Not only did we exceed our overall free cash flow guidance, but, as you can see from the check marks in the far right side of the slide, we exceeded expectations for each component of free cash flow with a minor exception of dividends which were slightly higher than guided due to the increasing number of shares out standing after the equity issue.

Turning to slide 31, can you see the operational free cash flow generation in the second half of 2002, combined with the very successful equity funded debt buyback of $410 million principal value of debt for 318 million of cash led to a reduction in the debt to equity ratio from 3.6 times at June 30 to 3.3 times at December 2002. Even expectations for increased EBITDA and free cash flow in the future, we are expecting a significant drop in our leverage going forward consistent with our public target of a net debt EBITDA ratio of 3.0 times by the end of 2003 and less than 2.7 times by the end of 2004.

Slide 32 shows an incredible story as it plots the market value of our 2006 notes over the past 12 months. Following credit rating downgrades in July 2002 that, apparently, were, in part, based on discounting the future execution of our business plan, our public debt lost half its value and traded into the 50s.

After considerable effort to focus the market on the facts concerning TELUS' strong financial position and healthy Q2 results, our debt rallied somewhat but still remained at prices disconnected from the fundamental credit worthiness of TELUS.

In the face of this market, TELUS took significant action to the benefit of all security holders by buying back $410 million of debt at the prevailing discounted prices, eventually funded by an equity issue once the shares nearly doubled in value. The debt repurchase at 21% discount underscored our commitment to reduce leverage, ensure a strong financial position and improve our credit ratings.

Our public debt is trading near par once again despite no changes in the so-called negative outlooks of the various credit agencies.

Now, let's turn to slide 33 and briefly review Q4 results for the wire line communication segment. In 2002 the communication segment suffered from negative regulatory decision that is significantly impacted revenues and EBITDA. Partially offsetting these regulatory impacts were the efficiency program and a favorable settlement with CCRA concerning tax investments the other highlights high speed internet business, a 23% reduction in cap ex levels and finally we significantly improved cash flow as measured by EBITDA, less cap ex.

Let's review Q4 wire line revenues in slide 35. In our wire line communications segment, fourth quarter revenues were down 11% from a year ago, primarily due to regulatory impacts of $112 million. Wire line EBITDA decreased by 4.9%, again primarily due to the negative impacts in the changes and contribution and the price cap decision.

Normalized for the negative regulatory impacts, revenues were down 2.6% and EBITDA increased by 61 million, or 11% versus Q4, '01. Lower cap ex more than offset the negative impact to regulatory decisions to result in significant positive cash generation in the fourth quarter and communication segment EBITDA less cap ex increased by 44% to $226 million.

Turning to slide 36, this slide shows our wire line revenues and a product segmented basis. To facilitate an understanding of underlying operational results, the right most column normalizes the negative price cap and the subtotal line excludes regulatory contribution effects.

As you can see, excluding the impact of the price cap and the contribution regulatory decisions, overall, communication revenue is down 2.9% in Q4, largely due to challenges in our voice LD business and other revenues, which consists of customer premises equipment sales.

Local voice revenue is negatively impacted by the cap price decision as well as a reduction of approximately 56,000 access lines from one year ago. LD revenues were down 8% in the fourth quarter year-over-year, primarily a result of lower usage, including effects from substitution alternative technologies and lower business LD rates.

Year-over-year comparison was also affected by the capping of consumer unlimited LD plans in June 2001 which temporary boosted 2001 revenues. Excluding negative price cap impacts, LD revenue is down 8%.

Turning to slide 37, we can see data growth being depicted. Reported Q4 data revenues were down $5 million or 1.4% in the same period last year at approximately $340 million. This slide shows organic data growth rate. Backing out 2001 acquisitions as well as the price cap impacts and international IT outsourcing revenues, the organic growth rate was 3% for Q4 and 10% year-to-date.

So data growth experienced a slowdown in Q4, which we are working hard to reverse in 2003. Slide 38 shows TELUS had a 43,000 new ADSL subscribers in the fourth quarter. It was impacted by a reduction of approximately 3400 high speed internet subscribers as a result of a post implementation review completed in Q4 follows the Q3 billing system conversion.

195,000 total Internet ads for 2002, we were just shy of our target of 200,000 net additions for the year. At the same time we ended the year with 410,000 high-speed subscribers, up 91% and took the majority of the high-speed net additions in the west and, we believe, led the Canadian industry in terms of high-speed internet growth.

On slide 39, we can see that the 1.1% year-over-year decline in network access lines for TELUS in Q4 was consistent with our Canadian peers, but much bet are than the U.S. experienced. This is a result of the number of factors U.S. carriers have a much greater proportions of second lines and, hence, greater exposure to Internet cannibalization.

Only 6.5% of TELUS consumer lines are second lines. Canada has experienced less wireless, as the structure in Canada is not offering the buck the offerings now prevalent in the U.S. The Canadian economy has been stronger than in the U.S., and a significant loss that are being incurred by the ARBAK are given a different U.S. framework.

TELUS is uniquely positioned to benefit from gaining lines through out of region expansion as the non ILEC continues to exceed business losses. Slide 40 shows our progress in the central Canadian non-ILEC. For the fourth quarter it generated a record $152 million in revenue. More importantly, you can see that TELUS reported, as Darren referenced, five consecutive quarters of improving non ILEC EBITDA trending from the trough of negative $38 million in the third quarter of 2001 to $18 million in Q4, 2002.

On a year-over-year basis, revenue and EBITDA improved by 192 million and 38 million respectively. Slide 41 provides an update on the most recent stats data of our operational efficiency program. The program continues to progress at a much faster rate than what was anticipated.

In Q4 there was a reduction of approximately 2500 positions and the closure or consolidation of 21 customers contact centers. All tolled, headcount was reduced by 5200 in 2002 and 6000 total since the commencement of the OEP.

The OEP is expected to result in a net reduction of about a further 1300 employees in 2003 for a total reduction of 7300 positions since commencing phase one. Slide 42 provides an update on one-time costs and recurring savings related to the OEP. OEP savings in Q4, 2002 were $50 million out of a total savings of $157 million for all of 2002. OEP savings for 2003 are expected to be an incremental $300 million to total $450 million in 2003. There after, annual savings are currently estimated to be approximately $550 million.

Total restructuring and workforce reduction costs of about $570 million in 2002, include 13 million of phase one costs in excess of the 2001 provision, in addition to an accounting provision of $557 million for phase two in three costs. We expect about another 20 million or so of costs to become eligible to be recorded in 2003. Now, let's briefly review our mobility segment starting in slide 44.

Our mobility segment had a very strong year. We successfully completed our fifth and final billing system conversion which marked the last major integration project as George mentioned, 2002 net ads were flat despite a industry slow down in growth. We achieved the industry leading churn rate. We experienced excellent profitability growth as costs were, essentially, fixed despite strong revenue growth. We significantly reduced our cap ex level due to the benefits the 1X digital network, reduced expansion costs as a result of the roaming resale agreements and given tremendous improvements in EBITDA and cap ex we generated meaningful cash flow ahead of plan.

Let's look at slide 45. It shows that TELUS Mobility performs well. Network revenue is sup 16% due to a combination of the strong sub describer growth and APRU. EBITDA increased more that revenue was up a tremendous 133% year-over-year to $129 million due to continued expense control, lower contribution fees and enhanced operating efficiencies.

Cap ex declined 39%, and the combination of the strong revenue growth and reduced cap ex resulted in cap ex intensity decreasing by a notable 20 points. Mobility achieved outstanding growth and significant cash generation as reflected by EBITDA less cap ex being positive in the fourth quarter despite it being the heaviest quarter for loading costs, which, of course, we expense upfront.

Slide 46 shows the TELUS Mobility added 131,000 subs in the fourth quarter to total 4-18 thousand for the year. Mobility continued to exercise pricing discipline in the quarter despite promotional activity. For the full year, net ads were flat over 2001 and achievement reflecting 30% industry decline.

Slide 47 showed mobility continue to perform well and other operating measures. Mobility industry leading monthly revenue for sub subscriber as George mentioned was flat year-over-year at $56 and we and experienced a tremendous 40 point improve in the churn rate to 1.68.

Let's turn to slide 48 and review how far TELUS Mobility has come in two short years. Of course, the acquisition of Clearnet created a large scale national wireless competitor for TELUS now covering 27 million POPs. Our subscriber base has increased by 138,000 subscriber or 39% on a pro forma basis. This improves to 1.76 million subs or 142% growth on a reported basis.

While our ARPU is down slightly, the 18-point improvement in churn results in a subscriber base at a racial contrast in industry experienced is more valuable and a per subscriber basis than the one we had two years ago. Lifetime revenue of the TELUS Mobility client is over $3,000. The financial results are even more impressive as we can see in slide 49.

Looking at our financial metrics on a pro forma basis other the past two years, annual network revenue is up 33%. On a reported basis, the revenue increase becomes 83%. EBITDA is up $361 million per annum or 208%. Capex has been reduced by 14%, lead tog a cap ex intensity decrease from 33 to 23%, a 10 point drop. All tolled in the past two years, annual cash flow is increased by $435 million.

Know that in 2002 the mobility segment produced positive unleveled cash flow of 75 million, a full year ahead of original plans. Clearly, the results over the past two years attest to a very successful post acquisition integration, and the management team that's capable of creating increased significant value. Now, let's review our 2002 performance and outlook for the year.

Slide 51 shows our 2002 results compared to original targets set at the end of '01. We managed to meet and, for the most part, exceed all our profitability and cash flow targets. However, we did miss our revenue target as Darren referenced due to regulatory impacts. Our 2002 revenue for regulatory impacts was by 5% to approximately 7.4 billion.

Now, let's review a summary of our key 2003 financial targets on slide 52 with implied growth rates updated for final better than expected 2002 result. We're targeting revenue to grow 3 to 4%, EBITDA to grow 7 to 11%, EPS to increase $1.10 to $1.30 per share, to a range of 35 to 55 cents per share, and Capex to decrease another 12%. These targets represent solid revenue growth and strong growth in profitability and continued cap ex discipline.

Now, let's turn to slide 53 to wrap up our prepared comments. In summary we had an encouraging quarter for TELUS. For TELUS mobile it was out standing. Telecommunication has experienced better than expected better than expected progress on the OEP, which bodes well for future profitability.

Cap ex intensity was significantly reduced as planned. Fourth, we were pre cash flow positive in the second half of 2002 and expect to be so in the foreseeable future. Fifth, we met or exceeded consolidated profitability targets. Sixth, we expect a significant reduction in leverage in 2003 and 2004. And our 2003 targets reflect a very positive outlook for building on this progress into the year. In short, we're executing the plan. Now back to John.

Thanks very much. Dave, could we please start the Q&A session and give people the instructions. I would like to remind questioners, we want one question to be fair to the other people in the queue. We'll go from there. Thank you.

Ladies and gentlemen, if you would like to register a question, press the 1, followed by the 4 on your telephone. You will hear a throw-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, press the 1 followed by the 3. If you are using a speakerphone, lift the hand set before entering your request. Once again, to register a question, press one four. One moment, please.

The first question comes from the line of John Henderson with Scotia Capital Markets. Please proceed with your question

Hi. Good morning. Question on your data services line. Wonder if you can help identify the reasons for the slowdown in the revenue growth from 11.8% on an organic basis in Q3 to 3% this quarter and if you've been successful in lining up Mr. Chang's replacement. Thank you.

the question concerns the data growth. We, obviously, had good data growth emanating from our ADSL side, about $13 million of growth occurred there, as well as good growth in Internet working and hosting as well as on our frame relay and digital lines. However, we had some lower revenues, some other categories, particularly on the wholesale and data settlements side, as well as a little bit on E-commerce and management services.

We had a couple big contracts on the management services side in the fourth quarter 2001 that helped us get a good result in that quarter, but we didn't replicate with any elephant deals this past quarter. That accounted for that decline, around a $10 million number. CP data side was a little lower as well. So, overall, we came with about $10 million net increase in data, and we, certainly, plan to do better in 2003. Darren, do you have any comments to that?

Yeah. I think, John, I would encourage you to look at the data performance for the year and not extrapolate too much from the Q4 performance. I do think it is indicative of softness that we are experiencing within the data market. Additionally, I think when you look back at last year, a lot of our efforts in management time went into delivering good results in the wireless business and delivering on our OEP targets. I'll tell you, when you remove 5213 people from the organization, it's quite a strain.

For example, within the ILEC territory we took out about 25% of our sales force. That's going to have an impact on the near term as well as [inaudible] well with the future. Again, I don't think, as I indicated in my remark that it's feasible to strive for excellence in wireless, to strive for cleanse in terms of cost reduction and growth for the wire line business simultaneously. It will take us time over the course of 2003 to get revenue growth in the wire line business and don't look for us to come out strong out of the gate in that particular area. We'll pick up the base over the course of 2003. We will come strong out of the gate in respect to the EBITDA growth, EPS growth and free cash flow growth

Thank you very much.

the following question calms from the line of Richard Talbot from RBC Capital Markets.

Looking at the operating efficiency program, [audio gap] $52 million you referenced in the quarter. There were some significant reductions in the workforce during the quarter. I'm trying to get a sense, depending on the timing of those reductions, what a reasonable run rate would be for the first quarter of 2003 in terms of the OEP impact? Thanks.

Thanks for the question, Richard. We really is not our habit to give specific quarterly guidance. Obviously, the reductions that occurred last year were very back ended as reflected by the significant number of departed in Q4. You could probably work through some math related to that into Q1 of this year. However, in terms of the 1300 or so targeted reductions for 2003, at this point, I'm not giving specifically quarterly guidance. Suffice to say that the sooner we can achieve the reductions without adversely affecting service levels, the better.

Richard, one of the things we pointed out is we wanted to ensure in terms of striving for the remaining reductions that we did it in a fashion that was consist consistent with maintaining our service levels. So you can look to see some degree of uniformity as we strife to hit the 6500 target over the four quarters of 2003

Okay. If I could follow up, for the total OEP plan you're targeting $550 million of improvements on a basis of 6500 positions or, roughly, 85,000 per position. If we look at the run rate of $52 million in the quarter, that would be about, about, 40,000 per head. Is it reasonable you're comfortable on a position basis you're looking around that 85,000 per position efficiency improvement? Is that still a reasonable goal?

Well, in terms of the cost side, I think we have given the guidance in terms of the provisions as well as what we expect will be provisional next year. Having said that, the overall cost per employee in terms of severance costs would likely trend down as a result of the fact that the people who have yet to leave, have signed up to leave pursuant to our early retirement and voluntary departure programs and are bargain related as opposed to management related, the average cost on departure would be less incremental tale

Thank you.

Following question comes from the line of Glen Campbell with Merrill Lynch. Please proceed with your question.

Thanks very much. Still on the subject of labor costs. I wonder if you could tell us what proportion of labor costs you expect to capitalize in '03 and, just for reference what they were in the second and third quarters?

Well, it's a nice try. I'm not really familiar with many companies that disclose the cap rate in their MD&A. We do

I'm quite pleased by that

I would say that's a forward-looking disclosure. Rather than going to what our cap rate is going to be, I would just -- I'm not going to do that. What I would say is for people listening is, keep in mind that when you have a significant capital expenditure program reduction and then you typically have an increased as a result of the inability to apply labor that is normally working on capital projects. When you look at the TELUS results and you see the significant margin, operating margin improvement and labor costs improvement, it is in spite of or in face of that dynamic that goes in the other direction as a result of reduced cap ex. So, with that, Glen, I'm not going to give a specific guidance number going forward

Okay. That's fair. With respect for the labor negotiations, I'm assuming because there hasn't been a contract for the past couple years, that the wage and salary rates have been, essentially, on the old scales. I wanted to confirm that and, also, whether there has been any provision taken for any possible retroactive changes.

Thewage that is are being paid, Glen, are on the old scale they continue to work under the exists collective agreements, of which there are five, until we reach a new collective agreement. In terms of going forward and ensuring that we're properly accruing, I think you can look to the organization as we have been in the past to be very conservative and very [inaudible] to those considerations from an accounting perspective. I think to disclose anything more than that would probably not be appropriate.

Thanks very much.

the next question comes from the line of Rob Goff with CSFB. Please proceed with your question

Thank you very much. My question would be for George. You took the bold move in '02 being leader of per minute billing. Do you see similar moves this year by the industry, and do you see yourself taking the leadership role once again?

We are certainly looking to see if there are other moves in the industry possible, either looking to Europe or the U.S. or things that are different than those done in Canada. I think the way we handled it last year, the only way we could handle it going forward is, if and when we do it, that's when we have to announce it, Rob. It has competitive issues. We are trying to identify as many as we can. We have no announcement on that. We also don't always -- we're always somebody who is happy to follow other industry leadership if there are moves to more profitability and balance that against growth. That's all I'll comment, other than to say, clearly, the benefit what we did benefited TELUS Mobility and the industry.

Rob Goff Thank you.

the following question comes from the line of Peter Rhamey with BMO.

Yes. Another wireless question. Please be patient with this one. George and Darren, George, you've got guidance out there. You're happy to keep that in the early days. This is 2 003 guidance in '03.

What stops you getting more confident about exceeding that range but keeps you awake at night? Darren, you did indicate that if you met the low end of that range, you would be somewhat disappointed, if I recall right.

I'm wondering whether, George, it is a fact that the micro cell wire card or portable or wireless portability or is there some other issue out there we should know about?

Thanks, Peter. For George, I'll lead this off. I think I understand the question you're asking, Peter. My remarks were in respect of the free cash generation at TELUS Mobility, free cash for the purposes of these comments, which is con trued to be EBITDA less cap ex. I think as a result of the significant margin expansion that we have enjoyed in the past with TELUS Mobility and we foresee continuing in the future, we have a forecasted growth rate at the EBITDA level between 17 and 21%, coupled with a tapered capital expenditure profile for mobility going forward given that we really put in place the coverage that we need. We have made the move to 1 X. That allows us, if you will, to be more strident in our efforts to reduce our capital expenditure profiles. Those two things, coupled together, I think, make for a very positive picture in respect to free cash generation. I guess we're laying down the [inaudible] to see if we're doing better between 175 and 200 million

Thanks for the clarification.

George, do you want to add to that?

I think maybe just a couple things. Clearly the EBITDA growth we have maintained over the last two years, as an absolute dollar growth. We want to get and try to keep -- to maintain. That's in the guidance we have given. Clearly, the objective is always to do better. I will say we have on the net gross side, I think, it's very clear when the industry has one from one nine to one three over last year, we want to be conscious of our goal is to get profitable growth and if penetration growth were to be slower again this year than last year -- and that's too early to tell -- those are the things that could mitigate or, as you see, Peter, keep you up at night to find the balance between not a lot of subscriber growth relative to historical, yet growing the EBDA line. If we get a stronger economy in the second half of the year and see some business growth, that will, obviously, help the wireless industry. That's, clearly, the one thing we're watching carefully is incremental penetration growth.

The issue with micro sell or local number portability isn't something that you think about?

)) Well, I would say it is not a specific past there is time of mine. Certainly, the industry structure, clearly, is an important issue and something we're following closely. I think it's very clear to people who have investment in TELUS that industry structure that was not as competitive as it is today would benefit share shoulders at TELUS. We'll watch that carefully

Thanks very much.

the following question comes from the line of John grand John Grandy with Yorkton Securities. Please proceed with your question

The one number that surprised me was the payment to Verizon in the quarter. I guess I don't fully understand how the contractual arrangements work. Could you give us guidance on the amount of the payments for '03 and direction for this quarter?

Hi, John. It's Bob McFarlane. Firstly, we have a contractual agreement to payments both in terms of purchases to some of their software and products and services and the like, and, so there is a schedule. It was very much upfront. We have significant declines in those payments, as you just referenced, down 40 million in the past period. Going forward, I'll come back at the end of the call. I do know it is down significantly. I would have to look it up to give you the precise number

John Grandy You expect it to be down in '03?

I will try to give you a number prior to the end of the call

Thanks a lot.

the following question comes from the line of Devigos from CIBC markets.

You talked about leverage and credit ratings and so on. Clearly, you're moving in the right [inaudible]. A lot of your equity holders are saying you have done a larger equity issue in 2002 in order to lead them more aggressively.

The bond repurchase opportunity is not Dwight what it was because the bonds are trade at or near par, there are organic methodology you are looking at to accelerate the move, wireless IP and as most wireless stocks are trading at 7 to 8, whether you're considering equity -- TELUS level and so on?

I don't think it would be appropriate to announce on this call whether or not we're considering equity. I think we have given good service to that particular subject in terms of the pros and cons. What I can point out relative to whether we should have done more in 2002 is that, at that particular time, we should equity at $9.85.

Clearly, the stock has moved forward from that position now, which I think mitigates the dilution of an equity issuance which, I think, is in the best interest of equity and debt holders. I think we made a prudent move at the time, which was driven by something that was opportunistic to repurchase our debt at advantageous rates. That's what drove our behavior. At the end of the day we are very, very confident in our ability within this organization to generate significant and accelerated free cash generation over the course of 2003 and 2004.

That is going to be the principal method that we use to ensure that the balance sheet remains healthy going forward and we pay down the debt we have kin occurred nationally on the wire line and wireless front and roll out our ADSL across Alberta and BC. I'll pass it to the CFO to see if he wants to make additional comments on this

Sure, Darren. Just a couple points. I guess my first reaction is that's the first comment ever made to me that we may not have done as large an issue as we should have. That's brand new news to me and contrary to the feedback from the shareholders I have received. The reason we did the share issue issuance at the time was, as Darren referenced, to make an important signal that we stand behind the balance sheet and we have the ability to do so. We took advantage of the discounted debt purchase. While we weren't happy at issuing shares of $10 per se, it was a fantastic transaction given the discount on the debt we used the funds to buyback. As we look at the price today, as you refuse reference in your comments, we still are less than the fundamental value. Given the prospects outlined today, it should become more apparent to the market. We will continue to execute it

For what it was worth, it was my personal decision to limit the dilution to 10%. Can you say whether that is right or whether that's wrong. I think it does reflect my sensitivities in respect to equity holders and, and my confidence in going forward and generate the free cash necessary to pay down debt. That's where that particular decision in cap came from, what what it's worth.

I think that's useful. Philosophically, I can understand you don't want to talk specifics. Philosophically, how do you feel about a wireless IPO today?

Wireless IPO. I won't talk philosophically. I will tell you straight. We won't do AIPO for the wireless basis. It is not consistent with the strategy this organization is purveying. Remember when I bored you with the six strategic compare it is when we embard on the strategy and I continue to report against those when we have the investor days. The first element to that strategy is develop integrated solutions into the marketplace. That's what our customers want and that's what did he ever us from the competition. We will be driven by extra strategy. We won't be driven by financial engineering or desires of investment bankers

Thanks very much.

Following question comes from the line of Robert Hastings with Raymond James Raymond James & Associates. Please proceed with your question

Robert Hastings Thank you. Maybe on a different line, without going into the strategy that TW to scare away customers, they do raise all sorts of comments about standards of performance and expectations. Do you have any comments as you go through the OEP? Whether you're satisfied and what else you might be doing?

I guess I couldn't be more satisfied with the OEP. I think the only area that performed to a similar standard within TELUS over the past 12 months has been the wireless business. The two most significant achievements are the achievements we've realized as a result of the operational efficiency program and the results we posted within the wireless business. When we first embarked upon the OEP program we set a goal to hold the line in with respect to customer service.

I think, essentially, we have delivered against that goal. Indeed, the biggest issues that we've had on the service front have not emanated from the OEP program, but, rather, some of the difficulties we had in to IP implementation on the consumer business unit. Now going forward, with 80% of the program behind us and we're bedding down the improvements in our cost structures and our changes in personnel that have been ensued from the OEP program, I am looking to improve customer service going forward. So I guess to draw a line under it, I feel we held the line on service over the past 12 months, and we had some issues, but that's typical with a company of our size. Now going forward with the OEP being put behind us, I'm looking to raise the bar in respect to the service that this organization affords its customer base. In terms of what the TWU has to say in this particular area, that's not something I'm going to comment on.

I will tell you that the future of this company, the future well fare of this company are linked. That's an inescapable logic.

I would, of course, agree with you. I wasn't questioning the OEP as opposed to how your standards of service and performance were doing. I think you answered that. You're back on line and look to improve this yearThank you.

Operator, I would like to take one more question.

the final question comes from the line of Michael Urlocker with UBS Warburg. Proceed with your question

My question is with Darren. Certainly everybody is aware there is a hiccup going on with your competitor Bell Canada in your territories. There was a regulatory setback for them or an advantage for you regarding next year. Do you see an opportunity for growing the wholesale business, an opportunity for defending with the enterprise customer what are the dynamics in that market you have to defend?

I think first off bell Canada is a quality competitor. They are a reality we'll have to deal with in western Canada for many years to come. We're respectful. I think that's a good start to anything when competitive strategy. In so far as the regulatory decision was concerned in respect to bell, that's a positive development for this organization. It gives us more opportunity to go after business with corporate Canada. I have said repeatedly, any organization that is looking to deal with new com pets in its incumbent market and looking to expand beyond that market is a necessity. It can allow you to preserve margins in your incumbent business when you're experiencing competitive intrusion. It can get cash flow moving quickly as you're looking to expand nationally. So we very much focus on the wholesale business that treats bell as a customer across Alberta and BC we have a positive relationship with bell. They are one of our largest customers as we are one of their largest customers. In terms of how the competition is going in Alberta and BC, on the retail side it has not manifested itself as of yet to be particularly intense, but we expect that probably is going to transpire going forward. We think we're in a good position to compete with bell nationally across Ontario and Quebec.

Thank you.

John, I said I would get back in terms of Verizon number. Unfortunately, I don't have the data at hand. I will have to give you a call directly. Other analysts can obtain it through our IRA area.

Thank you very much. Darren.

I would like to thank investors for joining us today and the support they have afforded this organization over the past year. The past year has certainly had its challenges. I can tell you that. It's my belief we have the right strategy and have had the right strategy for the last three years and the right team that's help us to weather the storm. We remain to improve our financial and focus strategy as well as continued benefiting flowing from the operational efficiency program. Again, we appreciate your continued support. Thank you for the time and interest and the quality questions you have posed to us today. Cheers.

Ladies and gentlemen, that's concludes the conference call for today. We thank you very much for your participation. We ask you please disconnect your lines. Have a nice day.