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Operator
Good morning, ladies and gentlemen. Welcome to the TELUS fourth-quarter conference call. I would like to introduce your chairperson, Mr. John Wheeler, Vice President of TELUS Investor Relations.
John Wheeler - VP IR
Thank you very much and welcome to the TELUS fourth-quarter 2005 conference call and webcast. Let me introduce the TELUS executives online with us today. With me are Darren Entwistle, President and CEO, and Bob McFarlane, Executive Vice President and CFO. We will start with introductory comments followed by question-and-answer session.
The news release on the fourth-quarter financial and operating results and detailed supplemental investor information are posted on our website at TELUS.com. For those with access to the Internet, the slides are posted for viewing at TELUS.com Investor Calls. You will be in listen-only mode during the opening comments.
Let me now direct your attention to slide 2. The forward-looking nature of the presentations, answers to questions, and statements about future financial results and targets subject to risks and uncertainties and assumptions. Accordingly, TELUS's actual results could differ materially from statements made today. I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosure in filings with Securities Commissions in Canada and the United States. Now over to Darren for slide 3.
Darren Entwistle - President and CEO
Good morning and thank you for joining us today. Today I will recap TELUS's full-year results for 2005 and review the benefits of our recently ratified landmark collective agreement with the TWU. Finally, I will cover the ongoing program for returning capital to investors and also touch on our key priorities for 2006.
Moving to slide 4, the clear theme for 2005 is that TELUS once again demonstrated the resilience and strength of our business strategy. This strategy has been executed consistently for over five years, focusing on national wireless and data growth, fueling it by exacting continuing efficiency gains from our core operations.
This strong growth overcame the nonrecurring negative impact of our extended labor disruption in the second half of 2005 and the ongoing competitive impacts we face.
At the consolidated level, TELUS delivered strong revenue and EBITDA growth in 2005, up 7%. This was despite the labor disruption here in Western Canada that resulted in a $133 million net impact on TELUS's operating expenses.
Focusing on TELUS's bottom-line earnings and cash generation, net income was up 24%, and free cash flow was up 13%. Notably, TELUS achieved or exceeded all of our original 2005 consolidated targets set over a year ago, despite the unplanned work stoppage.
Furthermore, we've established a distinguished track record in realizing the detailed targets we have set with investors over the last six years. In this regard TELUS has met or exceeded 88% of the 33 consolidated financial targets communicated to the Street over this six-year period.
Slide 5 shows our wireless and wireline business segments. What is particularly important for investors is that, with the release today of TELUS's subscriber results, it is clear that the wireless industry in Canada not only continues to grow, but in fact accelerated in 2005.
TELUS enjoyed a record year within a Canadian wireless industry that had the highest number of wireless net additions since 2001. The penetration rate in the industry hit almost 52%, up 510 basis points compared to a 440 basis points gain in 2004.
This evidences an encouraging trend in wireless subscriber growth in Canada. TELUS, in terms of wireless net additions, enjoyed 584,000 new customers over the course of 2005, including 235,000 in the fourth quarter alone. For the full year, TELUS realized 14% growth in wireless customers over the previous year of 2004.
Revenue in TELUS's wireless operations was up an impressive 17% in 2005 due to strong subscriber growth and another $2 increase year-over-year in ARPU, which of course is the 12th consecutive quarter of ARPU accretion at the TELUS organization.
As a result of this growth and, as well, disciplined expense control, we generated strong wireless EBITDA expansion of some 26%. Notably, simple cash flow in TELUS's wireless business, measured in EBITDA less CapEx, was up 32% to $1 billion.
Clearly, the growth story at TELUS and in the Canadian wireless industry continues to remain strong. With wireless now accounting for 41% of TELUS's consolidated revenues, 44% of our EBITDA, and 53% of our simple cash flow, we are well positioned to deliver continued growth for our shareholders due to the increasing exposure to wireless in our overall asset mix.
Turning to the wireline business results, whilst obviously impacted by the labor disruption this year, they showed resilience to competitive intrusion. Overall, 2005 wireline revenue was up over 1.6%, driven by an 8% increase in data, which was offset in part by a modest 4% decline in long distance services.
This leading long distance performance demonstrates our premium pricing strategy that preserves value in a mature and declining market. Is should also be noted that TELUS achieved its full-year result despite the fact that our long distance win back capability within our call centers was completely incapacitated by the work stoppage.
While EBITDA was down 5% in 2005, this can be attributed entirely to the $133 million of nonrecurring expenses owing to the extended labor disruption. Factoring this out, we would have increased EBITDA by 2% in our wireline business, a result that compares favorably amongst our global peers.
Simple cash flow was still a substantial $938 million from our wireline operations, although down a similar 5% on a year-over-year basis.
I am pleased to know that in the face of the labor disruption, TELUS managed to move forward with major product launches in both business segments in the fourth quarter of 2005.
TELUS launched our Next Generation Wireless High Speed network service with the deployment of EVDO in five major Canadian cities. This new service offers business clients wireless data transmission speeds of between 400 to 700 kilobits per second, which is at least six times faster than existing TELUS data services.
The greater bandwidth afforded by the EVDO deployment will be a further catalyst for continued wireless data growth, supporting such services as mobile TV, video and music downloads, and air card applications for business customers. Moreover, the EVDO platform provides us with a material speed advantage over our GSM competitor in business data applications.
On the wireline front, TELUS progressed our Future Friendly Home strategy and expanded our suite of services for mobility and security, now, to entertainment. TELUS TV has moved beyond the trial phase in both Edmonton and Calgary, with a phased neighborhood rollout of this all-digital television service. TELUS TV delivered differentiated customer choice without resorting to value-destroying price discounting.
With its soon-to-be constructed second headend in British Columbia, we will be in a position to continue the rollout in this province in the second half of 2006, with employee trials commencing in the first half.
Investors that have been involved with TELUS in recent years will know how important the results set out on slide 6 are to our Company and our management ethos. It is our belief that you can only truly judge an investment or a company to be superior if it can build and sustain consistent performance year in and year out.
The 2005 results and, as well, our robust growth targets for 2006 demonstrate that we are on track for continuing our leading performance against our global telecom peers. This value-creating growth in revenue, EBITDA or operating profit, EPS and cash flow remains top quartile or better in almost all cases over the four-year period.
What is striking about this type of financial performance is that it affords TELUS the ability to focus on the long term without being overly reactive to short-term issues. Moreover, we can afford to assess and invest in J-curve investment opportunities in our core businesses that are expected to create value in the years ahead.
The strength of TELUS's asset mix is reflected by the fact that we can find and implement long-term growth initiatives, such as TELUS TV or the EVDO investment, without undermining a top-quartile financial performance at the corporate level for TELUS Corporation.
Let me now turn to slide 7 and update you on the progressive collective agreement that we have realized with our unionized team members. As I mention last quarter, we were determined to bring the collective bargaining process to a positive conclusion for our shareholders, our customers, and our team members. The process to achieve this outcome took time, perseverance, and a great deal of strategic thinking. We remain convinced the outcome was worth this investment of TELUS's resources.
I should mention that the staged return-to-work process for 8,000 employees ended early December was extremely well organized and executed. Furthermore, we have been encouraged by the strength of team member re-engagement in TELUS's business strategy and operations.
TELUS now has a five-year agreement that provides labor certainty effectively into 2011 for some 14,000 TELUS team members. This is a longer than normal time frame for North American industry union contracts; and we are pleased to be able to provide this stability for the next five years or better for our investors, customers, and team members.
TELUS is operating now with an agreement that truly allows management to productively run the business, which is so necessary in the increasingly competitive marketplace in which we operate and compete. Under the provisions of the new agreement, we are in the process of outsourcing those jobs that are not core to our telecommunications operations. The first phase of the outsourcing has already been completed.
Additionally, just last week, we finalized the consolidation of two call centers and a dispatch center. In total, about 500 positions have been reduced or reassigned, with an additional 200 remaining to be completed in the near term.
What is particularly important about the contract is that it affords more flexibility to serve customers with an increased proportion of temporary and part-time employees. This greatly improves TELUS's ability to schedule and optimize fluctuating workloads in a highly competitive environment.
Also pertinent for enhancing productivity was the reduction in holiday days, nine, to be exact, for almost 6,000 TELUS team members. This means we have approximately 54,000 more days each year to assign to our core operations without hiring a single new employee.
Another [nontribure] consideration is that the agreement clearly supports the ongoing transition to a high-performance culture within the TELUS fold. Two catalysts are the implementation of universal, at-risk variable pay and, as well, team member advancement now being contingent upon merit rather than purely seniority.
This landmark collective agreement is a significant milestone for TELUS and heralds a new constructive era for our team. This is clearly reflected by the agreement to work jointly with the union to withdraw about 20 legal proceedings and to institute with the union common interest [forum] meetings.
Turning now to slide 8, another key investor theme again in 2005 and carrying on into 2006 is TELUS's demonstrated commitment to return cash to our investors. Our consistent strategy since 2000 has produced a superior asset mix. TELUS's strategy is producing significant cash flow that is being used to invest in core business operations; and as well, it also supports a recurring model to return cash to debt and equity holders.
This model is again clearly illustrated and executed throughout 2005 and into 2006. In December of 2005, we leveraged our strong cash position to redeem $1.6 billion of debt six months ahead of schedule. Moreover, TELUS has repurchased since December 2004 a total of 23 million shares of equity for $970 million. Continuing our program in this regard, we have already commenced purchases under a second issuer bid for up to 24 million shares by December 2006.
Finally, just last quarter, we announced the second consecutive increase in the TELUS quarterly dividend. The 37.5% increase from $0.20 per quarter to $0.275 is entirely consistent with our sustainable dividend growth model first announced in the 2004 financial year; and as well, it evidences the transparency we provide investors with a clear dividend payout guideline.
Notably, TELUS provided a best in class return of capital to shareholders of over 7% in 2005. This is measured on a per-share basis by combining share repurchases and cancellations and, as well, the dividend yield of TELUS Corporation.
TELUS generated this cash return to investors. TELUS exceeded our financial targets for 2005. And TELUS launched our wireless network upgrade and TELUS TV product all in the presence of a 16-week significant work disruption.
Before turning the call over to Bob, let me briefly outline our 2006 corporate priorities as shown on slide 9. The priorities build on a new collective agreement as well as the recent integration of our wireless and wireline business into one cohesive operating entity.
These five priorities have a direct and consistent linkage to advancing our national wireless and data growth strategy. They have a consistent and direct linkage to improving customer loyalty with TELUS's innovative deployment of IT solutions for both business and consumer customers.
These priorities have a direct connection to institutionalizing continued productivity and service improvements at our organization. Finally, these priorities reflect the strengthening and developing of the best talent in the Canadian, if not the global, telecommunications industry within the TELUS fold.
These key priorities also directly support the attainment of our leading 2006 financial and operating growth targets that we have postulated and that we are seeking to realize. Now over to Bob to review brief you on the strong quarterly results that continue to be generated by the team of people at TELUS.
Bob McFarlane - EVP and CFO
Thanks, Darren, and good morning, everyone. Let me begin with a review of TELUS's excellent fourth-quarter wireless results shown on slide 11. TELUS continues to deliver double-digit growth across the board. Excellent wireless revenue growth of 16% was driven both by strong subscriber growth and continued ARPU expansion.
EBITDA grew 14%, reflecting higher cost of acquisition expense associated with record gross additions of 421,000, which is nearly 69,000 more than last year and also includes 3 million in additional net expenses incurred as a result of the labor disruption in Western Canada.
We are pleased that we were able to successfully increase our wireless CapEx. The increase is a result of the deferral of some third-quarter network capital into the fourth quarter, due to the labor disruption, and primarily relate to our strategic investments in our next-generation EVDO-capable wireless network.
Turning to slide 12, TELUS reported record fourth-quarter net additions of 235,000 new subscribers. While postpaid net additions remained relatively stable year-over-year at 143,000, TELUS experienced strong growth in prepaid during the fourth quarter. Our seasonal promotions in the prepaid space were quite effective in driving volume in this category. Prepaid represented about 39% of our fourth-quarter net additions.
Our total subscriber base increased by 15% year-over-year, with postpaid subscribers as a percentage of total subscribers remaining at an industry high 81% of our 4.5 million total subscribers.
Turning to slide 13. Since TELUS is the last major Canadian carrier to report wireless additions, we now have the data to review subscriber growth momentum in the Canadian market. As you can see, despite some recent fears to the contrary, the industry continued to grow at an accelerating pace. There were roughly 680,000 industry net additions in the fourth quarter of 2005, a nearly 2-point penetration gain.
Wireless penetration, at close to 52% in Canada, represents a 5.1-point expansion in the past 12 months and marks the third straight year of accelerating subscriber growth. The 1.8 million net additions in 2005 were the highest in Canada since 2001, so fears of a slowdown in wireless subscriber growth are premature and unfounded, based on actual results of the past year.
The next slide shows two things. The first is the positive industrywide trend of increasing average revenue per user or ARPU. Second, that TELUS continues to maintain our industry-leading ARPU, with a significant premium to our next closest competitor. TELUS's ARPU increased by $2 to $63, primarily driven by growth in consumer and business data usage, unbundled features, as well as a 5% increase in voice minutes of use, which together more than offset traditional voice price reductions.
Of note, our postpaid ARPU increased to $71 in the fourth quarter, and our prepaid ARPU grew to about $26, approximately double that of our major peers. This is an important point to keep in mind when valuing our customer base.
Slide 15 shows how our focus on profitable growth compares to our direct competitors. With a premium ARPU and a low blended churn rate, down slightly despite the labor disruption, TELUS is generating a lifetime revenue per average subscriber of $4,400, well ahead of our peers. Therefore while COA was higher, TELUS's wireless marketing efficiency, as shown by COA as a percentage of lifetime revenue, remains very attractive.
While I could go on at length at how TELUS's overall 2005 performance stacks up against our North American peers, I will leave it to this next slide, which is probably the most important for investors.
This shows wireless cash flow yield, as measured by EBITDA less CapEx, as a percentage of revenue. At 31.5%, TELUS's 2005 cash flow yield was the highest amongst the North American wireless carriers that have so far reported 2005 year-end results. This reflects TELUS's excellent subscriber metrics, leading wireless EBITDA margins, and low capital intensity, even while continuing to invest in network upgrades, capacity, and expansion.
The next slide, 17, recaps TELUS's annual results relative to our original public targets set in December 2004. As you can see, we significantly exceeded our wireless target ranges for revenue, EBITDA, and subscriber net additions, while CapEx was consistent with our plans, being slightly above range.
Given the variable COA, with higher subscriber loading, it is truly impressive that we are able to report significantly higher subscriber additions than expected while also exceeding our EBITDA target range. Clearly, this was another tremendous year of economic creation at our wireless operation.
Slide 18 recaps TELUS's annual performance relative to our most recent guidance made on December 16. The checkmarks across the board reflect our impressive ability to project the final two weeks of the year. Good going to my finance team.
Turning now to the wireline's results of slide 19, TELUS's revenue was remarkably stable despite the labor disruption that affected our ILEC operations in Western Canada in the fourth quarter. The fourth-quarter revenue breakdown is shown here. Essentially, growth in local and data revenues were offset by declines in long distance and voice equipment sales. The long distance revenue decline reflected increased competition, as well as constrained resources and win back activities during the labor disruption.
Data revenue growth was 7.2% on a reported basis. Consumer data revenue growth continued, but slowed this quarter due to lower Internet additions as a result of the labor disruption. Also, mandated CDNS discounts offset increased data revenues from acquisitions. Underlying organic data growth was approximately 6.8% when excluding the impact of regulatory decisions and acquisitions made in the past year.
Slide 20 shows overall financial results for the wireline business. Notably, our wireline revenues remained stable year-over-year despite the labor disruption and competitive activity. In part, this reflects the success we had in maintaining service levels during the work stoppage.
As expected, wireline EBITDA decreased during the fourth quarter as a result of increased expenses associated with emergency operations activities which maintained the service levels at higher-than-expected levels during the disruption, as well as increased restructuring and workforce reduction costs of $36 million.
We estimate that net expenses associated with the labor disruption were approximately $49 million in wireline, excluding [postpone] revenue impacts. Adjusting EBITDA for these nonrecurring expenses, as well as for restructuring costs in both periods, means that our normalized EBITDA would have been down 1.6%.
CapEx increased 4% as TELUS sought to catch up on deferred capital network investments caused by the labor disruption and to support new growth initiatives like TELUS TV.
Depicted on slide 21, our nonincumbent operations in central Canada remained successfully focused on generating quality, recurring, data-focused revenues. Revenue was $165 million, up 6%; and we had our fifth straight quarter of positive EBITDA at $7.1 million. These operations were for the most part unaffected by the labor disruption in the West.
Moving on to slide 22. We can see that we added 27,000 new high-speed Internet subscribers in the fourth quarter. We are pleased with this result, since it was achieved despite the constraints posed by the labor disruption, our marketing and fulfillment capabilities.
However, we were able to successfully maintain service levels during the disruption; and as a result customer retention rates remain significantly better than experienced last year. Including 236,000 dial-up subscribers, TELUS's total Internet base now totals just under 1 million, with 76% subscribing to our higher speed ADSL service.
Slide 23 shows TELUS's network access line or NAL performance, which declined 2.4% year-over-year. As expected, TELUS experienced increased residential line losses, down 3.6%. This reflects increased competitive activity from resellers and VoIP competitors, including cable telephony competition in Calgary, Edmonton, and Victoria; ongoing substitution to wireless as well as second lines to ADSL; and the impact of the labor disruption, which affected TELUS's ability in the West to add or retain customers or, for that matter, to complete out orders.
Business lines fell 0.4% year-over-year, but increased sequentially due to growth in nonincumbent business lines.
To conclude on wireline, turning to slide 24, it is a remarkable achievement that TELUS met or exceeded all of our original financial targets for wireline in 2005, which were considered challenging at the time, despite the impact from the labor disruption which was not factored into the targets. Revenue was well in excess of target, while our nonincumbent performance was notable in both revenue and profitability.
TELUS missed only on our high-speed Internet net adds, where performance was significantly negatively affected by the four-month labor disruption.
On slide 25, you can see that the 2005 wireline results were in line with our most recent wireline guidance provided in mid-December. Again, kudos to our financial planning team for getting the last two weeks of December correct.
Now let's turn to TELUS's consolidated results as shown in slide 26. Consolidated fourth-quarter revenue was up 6% to $2.09 billion driven by the strong revenue growth in wireless. EBITDA fell 4% due to the lower wireline EBITDA caused by the labor disruption; while EPS fell 42% to $0.22. I will elaborate more on the reasons for this in a moment.
CapEx rose by 9% this quarter as mentioned earlier, due largely to catch-up spending in December, resulting from the labor situation, and continued network investments.
Slide 27 shows that underlying consolidated EBITDA, normalized for restructuring costs in both periods, was down only 2.2%. Furthermore, excluding the $52 million in net labor disruption expenses in the fourth quarter, consolidated EBITDA would have been up 4.4% despite the record wireless subscriber loading.
Let's look at EPS now on slide 28. As mentioned, reported EPS was down 42% this quarter. However, there were many unfavorable items that distorted the true underlying growth rate. Restructuring and workforce reduction costs depressed earnings by $0.07 this year versus $0.04 last year.
The two other large nonrecurring items included the $0.10 EPS impact from increased net labor disruption expenses, as well as the $0.06 financing charging incurred, as previously disclosed, to redeem early $1.6 billion of notes.
Normalizing for these items, as well as tax related and adjustments, you can see that the underlying growth rate EPS would have been a more favorable 40%. This clearly illustrates the real strength in TELUS's underlying earnings potential now that the labor disruption is behind us.
Slide 29 shows how $110 million in reported free cash flow was generated this quarter. Higher net cash interest reflects the onetime financing charging for the early redemption of debt; while net cash tax recoveries of $47 million relate to the settlement of prior-period tax issues.
Looking below the free cash flow line, an additional $19 million was raised through option exercises; and $350 million from an expansion of our existing accounts receivable securitization program; while $97 million was used for cash dividends.
A net $30 million was used for working capital and other, including the lump sum and retroactive payments made to unionized employees as a result of the ratification of our new collective agreement, offset by an increase in trades payable as a result of increased OpEx and capital expenditures in the quarter.
This left $352 million to apply to our December 1 debt reduction as well as for continued share repurchases.
Slide 30 details TELUS's share repurchase activities already touched on by Darren. TELUS was again active in the quarter, repurchasing 5.1 million shares for $229 million. The fact we did not slow down our share repurchase activities in the fourth quarter, despite a large debt redemption and cash payments to employees, underlines our commitment to returning capital to shareholders.
Let's move to the next slide, 31. On December 1, TELUS early redeemed $1.6 billion in notes. As a result, we incurred a $33.5 million pre-tax loss on the redemption. However, the transaction was modestly NPV-accretive to TELUS, as this loss was lower than the interest and swap-related costs that would have been recorded over the remaining term of the debt.
TELUS financed the bond redemption mainly through cash on hand as well as the proceeds from the $350 million increase in the accounts receivable securitization program, and finished 2005 with $142 million in bank borrowings.
As Darren mentioned, we announced our second dividend increase since establishing our dividend payout ratio guideline of 45% to 55% of prospective sustainable net earnings. All of these activities demonstrate TELUS's track record for returning capital to investors.
As outlined on slide 32, following TELUS's September 26 announcement of its intention to redeem the $1.6 billion in notes, three of four credit rating agencies issued positive upgrades to triple B+ or the equivalent triple B-high rating level for TELUS Corporation. DBRS also raised our wholly-owned operating subsidiary, TELUS Communications Inc., one notch higher at A-low.
As shown, TELUS comfortably met its long-term financial policy leverage targets for net debt to EBITDA of 1.5 to 2.0, and net debt to total capitalization of 45% to 50%.
I have often been asked by media about the significance of TELUS achieving our annual financial targets, given many companies are viewed as only announcing targets which are easily achievable. So let's look at slide 33 and reacquaint ourselves with what the Street consensus for 2005 was, just prior to the announcement of our original targets in December of 2004.
As shown here, our original targets were deemed realistic stretch estimates at the time, and were at or above consensus Street estimates in all cases.
Turning to slide 34, we compare TELUS's consolidated results to our original targets. TELUS achieved or exceeded all original consolidated financial targets, based primarily on the strength of our wireless results, as well as the resilience of our wireline operations. This is remarkable when you reflect that this has been accomplished despite incurring an extended and expensive labor disruption not contemplated at the time we set our original targets.
As shown on slide 35, you can again see that we achieved our most recent December 16 consolidated guidance for 2005. I should add that I am sure why some on the Street elected to ignore our guidance with only two weeks remaining in the year.
Before I conclude with our 2006 targets, let me provide an update in regard to TELUS's pensions. This has been a hot topic of late and a tough issue for many companies. In our case, TELUS ended the year with strong investment performance in our pension plans, leaving them 98% funded in aggregate.
Also I should mentioned that at the beginning of 2006, we closed our defined benefit plans to new TCI management employees. We currently expect to contribute approximately $165 million in pension funding in 2006, across both our defined benefit and defined contribution plans, as compared to $160 million in 2005.
In addition, we have finalized our discount rate assumption for 2006; and reflecting the year-end yield curve, it has been lowered to 5.0%. This compares with the 5.25% level assumed and disclosed on December 16 with our preliminary 2006 targets, and a 6.0% actual discount rate assumed for 2005. However, the impact of the lower discount rate for 2006 is expected to be offset by the strong investment performance which we achieved in 2005.
Slide 37 provides an overall summary of our 2006 targets. Looking ahead, TELUS is reiterating its robust 2006 targets announced in December that reflect revenue growth of 6% to 7%; EBITDA growth of 6% to 9%; EPS growth of 22% to 33%; and an increase in free cash flow to more than $1.55 billion even with slightly higher CapEx, some of which has been deferred from last year due to the labor disruption.
When you scan these growth rates, I believe it is fair to say that the 2006 targets build upon our track record of outstanding growth and compare very favorably to our peers on a global basis.
In summary, TELUS has reported solid quarterly and full-year consolidated results despite a onetime impact from the labor disruption and an increasingly competitive environment. Strong, profitable wireless growth is set to continue at TELUS, and the outlook for Canadian industry remains very attractive.
The five-year collective agreement achieved in November allows for increased effectiveness and efficiency into 2006 and beyond.
We are generating significant cash flow for shareholder-enhancing initiatives, such as our share purchase program and dividends.
TELUS is targeting strong growth in revenue, earnings, and cash flow again this year. We expect, if we can execute against these attributes, that we could continue to create value for TELUS's investors.
With that, Darren and I would be happy to take your questions. So I will turn the call back to John to moderate the Q&A portion of today's call.
John Wheeler - VP IR
Thanks, Bob. Just before I turn the call over to Aggie to conduct the Q&A session, can I please ask your cooperation for one question at a time, please? However, if you do need a follow-up question related to the answer to your first question, that is appropriate. Aggie, please proceed.
Operator
(OPERATOR INSTRUCTIONS) Jonathan Allen, RBC Capital Markets.
Jonathan Allen - Analyst
Bob, the COA increase of 10% was a bit of a surprise, just given that the postpaid gross and net addition seemed to be more or less flat year-over-year; and the subscriber increase was really more on the prepaid side, which is usually associated with lower COA.
So I am curious. First of all, is this a onetime increase that we saw in the fourth quarter with COA going up? Or are you finding it a little bit more difficult perhaps to continue adding customers going forward?
Bob McFarlane - EVP and CFO
Jonathan, a couple things. Firstly, I think we need to keep in mind that these results were accomplished during a quarter when we had a labor disruption. So one of the tactics the Company chose to use that was to elevate our media spend in the quarter, in part to compensate for that factor.
So it is a little difficult to say as to what would have occurred in the absence of disruption. But clearly I think there would have been a little more throughput, et cetera, and a better result on that basis.
I tried to point out -- the way, of course, that we do look at it is the efficiency of the spend. Given the ARPU churn profile of the subscribers, we certainly have again a good return on the COA investment.
I think as well in the quarter there is a bit a tactical shift led by some of our competitors to point-of-purchase promotions, which we responded to later in the quarter. Of course those are variable with adds, where you don't get a scale pick-up, as volume picks up as a result.
So whether those type of promotions and activities continue, I am not so sure. They are typically associated with a Christmas-type of promotion season. So it is hard to predict the dynamic and the interplay between competitors. But I think you should see a return to more normal COA levels in our organization on the wireless front.
Jonathan Allen - Analyst
Now, you mentioned the advertising cost or spend went up during the labor strike. Is that something then that we should assume that should more or less not happen again, say, next holiday season for 2006? That there was some component in there that was more onetime in nature?
Bob McFarlane - EVP and CFO
I don't think I can give you assurance one way or the other. We certainly are not comfortable with giving our long-range media campaign tactics in a public environment like this. Obviously, we review the efficiency.
I think anyone who has watched TV, et cetera, can only be impressed with the quality of the advertising that we continue to have. We found it to be effective. As to what the intensity will be going forward, I think we will have to remain tight about that.
Jonathan Allen - Analyst
If I could ask a definition or clarification question. On COA, I noticed the general and admin costs really accelerated in the fourth quarter, up about 21% compared to 9% run rate in the rest of the year. Was there some impact of COA within that category? How do you define the COA is what I am getting at?
Bob McFarlane - EVP and CFO
Well, I think you're referring to the wireless COA.
Jonathan Allen - Analyst
Correct.
Bob McFarlane - EVP and CFO
Okay. So, wireless COA principal components would consist of -- we already mentioned the media spend, so call that advertising as well as promotion. The commissions that are paid to the distribution channels along with the handset subsidy.
So those are the principal elements that comprise it. They are in the operating expense line for -- on the wireless side, but specifically in marketing.
Jonathan Allen - Analyst
SO nothing necessarily in general and admin then?
Bob McFarlane - EVP and CFO
Not that I can think of, no.
Jonathan Allen - Analyst
Okay, well before John cuts me off, I'm going to say thank you very much.
Bob McFarlane - EVP and CFO
You're welcome.
John Wheeler - VP IR
Good timing, Jonathan. Aggie, please?
Operator
Vince Valentini with TD Newcrest.
Vince Valentini - Analyst
Stick with the wireless metrics here, the retention spending jumped to 7.3% of revenue from 6.2. Can you give us any color on whether that is a good run rate going forward. Or if there was anything onetime in nature in there?
Can you give us any color on what you are getting in return for those investments? What type of contract lengths? If you can give us any sense of where your base is right now, and whether that is improving in terms of more three-year contracts versus what you had a year ago?
Bob McFarlane - EVP and CFO
Okay, well, basically we look at retention spend effectiveness as a function of whether it is correlated with driving a churn rate lower or not. In that respect, we had a labor disruption and had a reduction in our churn rate.
So think about that one for a minute. I would suggest that our retention efforts have been quite successful. So from that standpoint, the answer is we are quite pleased with the efforts.
There is an experimental aspect to it. From time to time you will take it up or take it down, and just see what the incremental change is, so you can be sure that you have got the right correlation factors and therefore are spending at the right levels.
We have generally found though, that it is a higher retain investment for our organization. So we are quite happy with what occurred in the fourth quarter.
Vince Valentini - Analyst
Just a clarification follow-up. Cogeco Voice over IP customers that you provide the wholesale service for, do you count those in your business or residential access lines?
Bob McFarlane - EVP and CFO
To the extent that we have a line provided through our wholesale operation to another carrier, it would be reflected in our business NALs.
Vince Valentini - Analyst
Okay, thanks.
Operator
Marje Soova with Goldman Sachs.
Marje Soova - Analyst
I just wanted to ask if you could give us any more detail in terms of the prepaid subscriber economics. Prepaid can produce margins higher than postpaid due to the high permanent revenues, as we have seen from European experience. But the key is to keep the acquisition costs low.
So I wanted to just get a sense of if there is anything you can help us with in terms of margins; how they compare, prepaid versus postpaid, for TELUS; and cost of acquisition as well. Thanks.
Bob McFarlane - EVP and CFO
Okay, what I can do is point out in our case, rounded, our ARPUs for prepaid in the fourth quarter were $26 per subscriber. So in the Canadian context I would compare to the low teens for most of our competitors.
So there is a quite different financial or economic analysis or implication, I guess, when you compare the different prepaid offerings. In our case for a variety of reasons, the type of product we sell, the type of market segments we market towards, the [purchasers] of their prepaid tend to use it. The use it a fair bit and that generates the $26 ARPU.
As you know, our overall churn rate at 1.4% is a blended one. But having said that, in our case, we have a healthy lifetime revenue for prepaids. The key, as I think you're implying, is you want to have an efficient cost of acquisition in terms of obtaining that subscriber.
In our case, we were quite successful in the fourth quarter with a program that was quite easy to purchase; bundled some airtime along with the handset; and I think was immensely popular as a gift product.
So that outcome, I guess, is fairly conventional in terms of the Canadian market, where the fourth-quarter prepaid definitely takes a spike up, and that is what we saw in our case, to about 39% of our total additions.
So at the end of the day, while on this call I won't give segmented COA and churn, et cetera, suffice to say that we're happy with the return profile of the prepaid. But having said that, I think reflecting the 79% of our base which is postpaid already, our primary marketing effort is directed towards the postpaid space.
John Wheeler - VP IR
Aggie, next question, please.
Operator
Peter Rhamey, BMO Nesbitt Burns. (technical difficulty)
Peter Rhamey - Analyst
How quickly do the strike-related impacts go away in Q1? You had a $0.10 impact this quarter. I think experience has shown that sometimes these impacts can linger on for a number of quarters after a strike is resolved. I was hoping you could give us some direction in that.
Bob McFarlane - EVP and CFO
Fair enough, Peter. While our strike ended in late November, the reality is that, with the back-to-work program it is not like everyone returned to work the next day. So it was over a number of weeks, and we gradually returned our operations to normal.
So I would say that while virtually the entire fourth quarter was affected in one way or the other in a significant fashion by the disruption, as we get to January 1 and on in the first quarter there is really minimal impact. So I would not expect that there would be any notable lingering costs that will turn up in the first quarter.
Peter Rhamey - Analyst
Great. If I can ask a related question then, just looking at your cash flow statement; and I'm trying to isolate where the labor settlement costs might have been accounted for here.
Bob McFarlane - EVP and CFO
Okay, the labor, if you recall, because our contract expired almost five years previous, we had been accruing for the labor settlement in our accrued liabilities in payables.
So then as people returned to work, which as you may recall, approximately 60% of bargaining unit members in Alberta did return to work during the labor disruption. If they returned by a certain date they received their lump sum or a portion of their lump sum catch-up payments that were owed to them. So a portion did go out in the third quarter.
Then the bulk of it of course went out in the fourth quarter. So essentially it's a reduction of the payables, and that would show up on the slide that I had in terms of the working capital line. So there was no incremental cost to the P&L because the expenses had already been accrued.
Peter Rhamey - Analyst
Right, and on a free cash flow basis, it would have impacted your free cash flow number in the quarter?
Bob McFarlane - EVP and CFO
Because it was netted into the working capital, it was virtually all paid out in the fourth quarter. It is reflected in the '05 numbers.
Peter Rhamey - Analyst
Could you share that number with us?
Bob McFarlane - EVP and CFO
Well, it was approximately $200 million in payments.
Peter Rhamey - Analyst
In total?
Bob McFarlane - EVP and CFO
In total.
Peter Rhamey - Analyst
But not in the quarter, though?
Bob McFarlane - EVP and CFO
That is correct.
Peter Rhamey - Analyst
Okay, thank you.
Operator
Robert Goff with Haywood.
Robert Goff - Analyst
My question is a bit of a follow-up on Vince's. Could you go over the percentage of wireless adds that were on two-year or three-year contracts? Then also give us some perspective on where your base would be on for contracts. Thank you.
Bob McFarlane - EVP and CFO
For competitive reasons, we don't think it would be prudent to give the disclosure in terms of how many are one, two, or three-year contracts. Suffice to say that our organization has been offering three-year contracts for a number of years now. So presumably whatever the distribution is in the industry, we would be more elongated in terms of duration than our peers.
Robert Goff - Analyst
And that would have been true as well in the quarter?
Bob McFarlane - EVP and CFO
I really don't want to get into the specifics. That has certain competitive implications that would be wiser to avoid.
Robert Goff - Analyst
Okay, thanks, Bob.
Operator
Jeff Fan with UBS.
Jeff Fan - Analyst
I wanted to ask a little bit about the office closure and the contracting out. Of the [five] people that were affected by that, can you elaborate on the number of people that accepted volunteer retirement or your departure plans?
Then the second related question is, in terms of the integration of the wireline and wireless operations, are there any redundancies that you're going to be able to remove through that integration? Thanks.
Darren Entwistle - President and CEO
Thanks for the question, Jeff. In terms of what we have done in the first phase of our contracting out of non-core operations within the TELUS fold, we have proceeded with the contracting out provisions that have allowed us to effect up to 507 positions within TELUS. Of those 507 positions, about 60% have been reduced or eliminated within TELUS.
The remaining people are being reassigned back into core operations. That effectively relates to the outsourcing activity. In addition to that we are also, as I indicated in my remarks, enjoying efficiency gains in respect of office closures or consolidations as it relates to call centers and dispatch centers.
We will be looking, going forward into the future, to either eliminate or reduce a further 200 positions as a result of those initiatives. That is still to come.
But thus far we have done 507 in terms of positions impacted by contracting out. 60% have been effectively reduced, with the remaining 40% of the positions being reassigned to core operations within TELUS.
Jeff Fan - Analyst
Sorry; the 200 positions, is that in addition to the 500?
Darren Entwistle - President and CEO
That is correct.
Jeff Fan - Analyst
Okay. On the integration of the wireline and wireless?
Darren Entwistle - President and CEO
We haven't disclosed any particular targets in that regard. Suffice to say that within the $100 million OpEx provision that we have for workforce restructuring set up for 2006, and a material element of that will support the implementation of the new collective agreement. But a portion of that money will also be set aside to pursue operating efficiency and effectiveness gains owing to the merger of our wireline and wireless business.
Jeff Fan - Analyst
Or maybe just qualitatively, prior to the integration what sort of -- what were some of the support services or functional areas where wireless and wireline were still kept separate, I guess? For instance, financial, legal, etc.
Darren Entwistle - President and CEO
Yes, I think in terms of areas like shared service functions, they relate to human resources or finance or legal or regulatory; that there are opportunities there for synergies. In terms of the business enablement functions as we bring together IT and the network, there's opportunities for not just efficiency synergies but productivity gains, owing from the dissemination of best practice across both organizations.
On the customer-facing business unit front, we also have the opportunity to improve our economies of scope in areas like our channels to market. Taking one channel that would previously support one product and expanding it to support a multiplicity of products across wireline and wireless allows us to get better economies of scope out of our channels to market. And that delivers a productivity gain to this organization and enhances our sales effectiveness.
Jeff Fan - Analyst
Okay, great. Thanks a lot.
Operator
Vance Edelson with Morgan Stanley.
Vance Edelson - Analyst
The prepaid strength was impressive, considering that Virgin Mobile entered the market almost a year ago, and presumably they were fairly well positioned for the holidays. Could you just comment on the impact that they are having so far? And how you see yourself as competitively positioned in the prepaid market? Thanks.
Bob McFarlane - EVP and CFO
Well, Virgin Mobile is, I guess, a reseller off the Bell Mobility network. So I am sure they would have a more informed -- since they're a partner, they have more informed response than we would.
But Virgin Mobile is a target almost exclusively on the use space and only on prepaid. So from that perspective, I guess you could refer to them as a niche marketing organization. In our case, we have a much more broader appeal to the marketplace.
I think your comment is correct that it is impressive that we did so well in spite of the competition, not only from the likes of Virgin Mobile, but you also have the Bell Mobility branded solo prepaid offering. And, of course, the traditional strength that the Fido come into Rogers' organization, who I think to their credit probably deemphasized loading in the prepaid space, both in the fourth quarter and in the past year.
At the end of the day, the TELUS brand is one of the most recognized and liked brands in all of Canada, and from that standpoint, Virgin Mobile is a tertiary brand recognition in the Canadian market.
Vance Edelson - Analyst
Okay. Thanks, Bob.
Operator
Greg MacDonald with National Bank Financial.
Greg MacDonald - Analyst
We heard some strong commentary and actually saw some strong action or reasonably strong action from Bell Canada on pricing rationality. You compete with them on the wireless side. I am wondering, did the comments affect your thinking on promotional or pricing potential activity going forward, and in particular on pricing?
I can appreciate you are the highest ARPU company in the market. But on pricing, do you get the impression that there is still room to increase prices in 2006, given the competitive environment?
Bob McFarlane - EVP and CFO
Well, Greg, I think the answer to that is yes, and there is also room to reduce prices. It is a combination of the two in a very dynamic and competitive marketplace. I think the issue goes to being intelligent about one's pricing, and certainly the comments that we have heard from our competitor are encouraging ones.
But, of course, we have not been the source of a lot of unnecessary discounting in the marketplace. So I think the implications are more meant for some other parties.
I think one of the issues in the wireless space goes to we are the only company that is operating without a discount brand in the marketplace, yet we actually led the industry in subscriber additions. So I think that gives rise to the question about the effectiveness and efficiency of multibranded approaches in the marketplace and whether they are really accretive to value in terms of having these discount brands.
Most recently, you presumably have noticed the advertisements for the Rogers organization basically saying that their discount brand, Fido, which until recently has been marked as a discount brand with inferior coverage, now has the equivalent coverage on a digital basis to the whole Rogers network. So it's the same handset, same coverage at a different price point in the marketplace.
So, obviously, that type of tactic in the market is not necessarily one that promotes a disciplined response by the competitor. So I think it's going to be very important to see not only what Bell's words are, but what some of the other entrants in the marketplace, such as Rogers -- how they behave. In our case we will act accordingly.
Greg MacDonald - Analyst
Okay, maybe just a quick follow-on on that, then. Rather than the opportunity for price increases, which I was sort of implying on the high-end on the business side, if I am thinking about lower end, or let's call it youth markets, do the comments give you any comfort on your ability to sustain the higher than average ARPU that you have on your prepaid side?
Bob McFarlane - EVP and CFO
Well I would say directionally of course comments like that are helpful. We need to see how they translate to actions and respond. Again it is a competitive marketplace. So traditionally we have seen -- if you look at our own results last year, we had price reductions ourself on certain basic rate plans, on voice bundles.
But at the same time, the adoption for data and the subscription for additional features and the like, and just along with increased usage, more than offset that. So it's understanding that balance and making sure you end up on the accretive side of the equation. Really data provides us all the opportunity to do that.
So where we get most disappointed, I think, is when we see someone have a differentiated product, whether it be the RAZR phone, or a new data offering on BlackBerry, etc.; and yet uses that as a promotion vehicle when they have unique differentiation in the marketplace.
That is the kind of thing that would be contrary to our approach to the marketplace, and is probably money being left on the table.
Greg MacDonald - Analyst
Okay, thanks very much.
John Wheeler - VP IR
Operator, can we have one more question, please?
Operator
John Henderson, Scotia Capital.
John Henderson - Analyst
I am wondering if you could -- if you have actually assessed what the revenue impacts of the strike were in the quarter and overall, I guess.
Bob McFarlane - EVP and CFO
Well, John, I guess it's a good question. The reality is we have some internal estimates, but it's a bit of a mug's game, because you're really assessing what would have happened if we did not have a strike. And of course since we had a strike, we don't know for sure what would have happened. Obviously, it would have been better.
I think what is also important for people to understand is the organization made a very important strategic decision during the labor disruption. When we had the return to work of so many people in Alberta, it certainly gave us the opportunity to go one of two ways. We could either go more towards minimizing the expenses associated with the labor disruption and perhaps trend more to traditional service levels that are realized or maintained during disruption; or choose, as we did, to continue to deploy management overtime and other resources, along with working bargaining unit members to maintain service levels the best we could.
Because we did that, I think we are seeing in the results reflected here some resiliency in the revenues. Our revenues basically held year-over-year despite the incremental competition in the wireline space and despite having a labor disruption. So from that standpoint, I think we benefited.
Obviously, we could have drove higher revenues. An example of that clearly is in the Internet space. So I think you can take a look at the numbers that we did, and you could probably estimate what we would be able to do if we did not have the strike. The fact that we had no outbound marketing for the fourth quarter obviously interfered with our ability to market aggressively on either Internet or long distance, etc.
So at the end of the day, I don't have a hard number for you. There is a number there, but I think the most important thing for investors is we have come out of this phase really not adversely affected in terms of the robustness of our organization to build growth in the near future.
John Henderson - Analyst
Okay. I have a quick follow-up in wireless on the promotional activity side. Do you think that it is sort of a necessary development that your promotional activity is higher than it was in the past, and that it will continue on an ongoing basis. Partly to offset sort of the handset advantages of GSM, like the RAZR and the ROKR and these things? That -- now you have got a RAZR that you can use to respond with, but I expect that will probably continue.
Bob McFarlane - EVP and CFO
The reality is that it ebbs and flows. I think what did occur in the fourth quarter is that our competitors were very quick out of the chute in October to have point-of-purchase, gift with a purchase promotions that were quite effective in the marketplace. So we responded really in the November time frame.
So it's interesting, when you look at the quarter you say, record fourth quarter. Well, it wasn't exactly a fast quarter in October for ourself. So it shows you just how well we did in the back half of the quarter.
So in that case, clearly, we were responding to an extent to what occurred. You know, we certainly have adjusted our prepaid offering in the marketplace, so the same offering does not exist anymore in the first quarter. What we will do going forward is very much an interaction or an interplay to the dynamics of what each competitor does in the market.
So I really don't want to give you too much color on a go-forward basis for competitive reasons. But suffice to say I think that that market has found the point-of-purchase promotions effective; that would suggest that they may be repeated; but it is hard to say.
John Henderson - Analyst
Okay, thanks very much.
John Wheeler - VP IR
Okay, thank you very much everybody for joining us today. We really do appreciate your interest and the continued support of TELUS. We look forward to working with you in the coming quarters.
Operator
Ladies and gentlemen, thank you for participating in this TELUS fourth-quarter conference call. On behalf of myself and the rest of the teleconference team, thank you for choosing TELUS.