Telus Corp (TU) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the TELUS 2015 Q4 earnings conference call. I would like to introduce your speaker, Mr. Paul Carpino. Please go ahead.

Great. Thank you, Peter. Good morning, everyone, and thank you for joining us today.

The fourth quarter 2015 and 2016 targets news release and detailed supplemental investor information are posted on our website at TELUS.com. On the call today will be President and CEO, Darren Entwistle who will provide opening comments followed by a review of the fourth quarter operational and financial highlights as well the presentation of our 2016 targets by John Gossling, our CFO.

After our prepared remarks, we will conclude with a question-and-answer session. In consideration of your day, we're going to try and keep this call to under an hour.

Let me direct your attention to slide two. This presentation, answers to question and statements about future events, such as 2016 annual targets and guidance, intentions for dividend growth and future share purchases are subject to risk and uncertainties and assumptions.

Accordingly, actual performance could differ materially from statements made today so do not place undue reliance on them. We also disclaim any obligation to update forward-looking statements except as required by law.

I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosures, in particular, in section 10 of TELUS's annual MD&A and filings with securities commissions in Canada and the United States.

Let me now turn the call over to Darren to start.

Thanks, Paul, and good morning, everyone. Despite a period of heightened customer activity and a temperate economy in key markets, TELUS posted solid results across numerous financial, operating and growth metrics in the fourth quarter, including the most overall net RGUs, the most wireline net RGUs and the highest wireless lifetime revenue supported by our leading positions in client loyalty and ARPU.

Reflective of the consistency and the quality of our wireless and wireline assets, TELUS also led these metrics for the full year, despite the noted pressures.

Cumulatively, our strong asset mix delivered solid net additions in both wireline and wireless in the fourth quarter with net RGUs increasing 53,000 outperforming all of our competitors.

Full the full year, we recorded net RGUs of 267,000, which represented nine times more RGUs than our next closest competitor. Impressively for 2015, TELUS returned more than CAD1.6 billion to shareholders and completed its fifth consecutive year of delivering a dividend growth rate of 10% or higher under our multi-year dividend growth programs. This track record clearly distinguishes us from our peers and will be further enhanced by our commitment to an additional 10% dividend increase in 2016.

Let me now take you through some additional Q4 highlights and provide an overview as well of our 2016 targets.

In Wireless, TELUS reported postpaid wireless net additions of 62,000 in the fourth quarter. Our results in Q4 also reflect the resiliency of our business in the face of continuing economic and operational pressures. This is of course most notable in the Alberta market where we experienced just 4,400 net adds in the second half of 2015, compared to 50,000 in the second half of 2014. We continued to earn the best customer loyalty amongst our national peers in the fourth quarter achieving a churn rate of 1.01%, despite facing the most competitive December in recent memory.

For the full year, our postpaid churn was 0.94%, our second straight year recording a churn rate below the 1% level. Customer retention in the quarter was 17% of network revenue and reflective of the higher activity associated with the double cohort environment and the seasonally busy fourth quarter. The significant CAD50 million year-over-year increase in COR in Q4 is a strategic investment aligned with maintaining our leadership in lifetime revenue per client.

In this regard at CAD4,820, our current lifetime revenue per subscriber is 19% and 34% higher than our peers. Blended ARPU in Q4 was CAD63.74, the best amongst the national telcos. We achieved this ARPU level by year-end despite pressures associated with the declining proportion of subscribers moving from three year to two-year contracts. The implementation of TELUS' customer friendly initiative to provide clients with frequent, realtime notifications as they reach the upper echelons of their monthly data plan allowance and as well the challenging economic environment in Alberta where ARPU declined more than 4.5% in the second half of 2015, compared to the second half of 2014.

Whilst these factors moderated ARPU growth in 2015, the Alberta economy will ultimately improve and customers who continually bump up against their data plan limits will move to more appropriate data plan sizes, particularly with the increasing proportion of our customers using LTE devices.

Turning to wireline, TELUS delivered a strong performance on both revenue and as well EBITDA growth. TELUS continues to be one of the only major telecommunications companies globally to consistently report ongoing growth in wireline revenue, wireline EBITDA and wireline customer connections.

External wireline revenues increased an impressive 4.4% in the fourth quarter. Data revenue grew 8.8% with high-speed Internet net additions increasing by 22,000 and total TV net additions growing by 25,000. This growth reflects the ongoing enhancement of TELUS's high-speed broadband footprint in urban and rural communities, including fiber to the premise and the strong pullthrough effect of Optik TV bundling.

Residential NAL losses of 24,000 continued to reflect the trend of wireless and Internet substitution and of course the pressures coming from competition. However, indicative of the quality of our asset mix, our combined TV and high-speed net additions exceeded our residential network access line losses by a factor of two times.

Wireline EBITDA, excluding restructuring and other items increased 4.9% on a year-over-year basis. The margin increase also benefited from improvements and data services including high speed Internet, TELUS TV, business process outsourcing services, TELUS Health, ongoing process improvements and of course importantly operating efficiency initiatives.

Today we announced our 2016 targets that reflect the diversity and strength of TELUS' multiple growth assets in both wireless and our wireline operating segments. We met three of our four public objectives in 2015 and have achieved 76% of our total consolidated financial targets since 2000. Our 2016 targets are indicative of the benefits of the Company's ongoing strategic investments related to advanced broadband, infrastructure and technology and as well an unwavering focus on client service excellence and cost-efficiency. Indeed, we are targeting balanced growth in 2016 with revenue up to 3% higher and EBITDA up to 6% higher in both our wireless and wireline operations.

We anticipate wireless network revenue to reflect continued growth in both subscribers and blended ARPU, driven by strong demand for data services. Additionally, wireless EBITDA is expected to benefit from growth in wireless network revenue as well as savings from cost-efficiency initiatives and moderating retention costs.

In wireline TELUS anticipates continued data revenue growth from high-speed Internet, Optik TV services, business process outsourcing and increasingly TELUS Health Services.

Wireline EBITDA, excluding restructuring should also benefit from margin improvements from these growth opportunities as well as important traction from our ongoing efficiency initiatives. Our growth in revenue and EBITDA has been consistently underpinned by the significant and targeted generational investments TELUS continues to make in its core wireline and wireless broadband networks. This includes building out fiber directly to more homes, businesses, small cell sites and the like and this investment will continue in 2016 and beyond.

Consolidated capital expenditures, excluding the purchase of spectrum licenses and nonmonetary transactions are targeted to be approximately CAD2.65 billion in 2016. These are generational investments. And the technological and service advancements for customers as well as the future long-term cash flows for investors will be meaningful.

We will continue our highly successful broadband infrastructure expansion and upgrades. This includes bringing fiber optic cable deeper into the access network and connecting more homes, businesses and health care facilities to TELUS Fiber to support the evolving demands of our customers and our country. We will also continue investing in the expansion of 4G LTE wireless network technology including the ongoing deployment of 700 meg and 2.5-gig spectrum.

Importantly, the value of these investments drives share economies of scope in supporting all of our businesses, from the business market to consumer to government clients, and they reach across the full breath of our wireless and wireline products and services. Shareholders will see the benefits of these investments through the long-term fueling of topline growth and EBITDA expansion from ARPU and AMPU enhancement opportunities and then eventually through to free cash flow.

Importantly these investments will drive efficiency improvements and processes, lower maintenance cost and benefit the client experience in a typical TELUS fashion. Furthermore, these generational investments are synergistic with our long-term dividend growth model.

Importantly over the past 16 years, we've maintained the industry's most consistent and transparent approach to capital allocation, investing in our core business while simultaneously returning significant capital to our shareholders. Indeed, we've established an enviable track record with our pension. We're investing for the long-term, notwithstanding the inevitable exogenous factors and short-term economic volatility that frequently occur along the way.

Similar to the circumstances of 2000 and 2009 when we made game-changing strategic investments despite economic uncertainty, our current investments reflect the continuation of our consistent approach to managing TELUS for today and for the future. Clearly the investments made during those periods and the significant performance of those assets thereafter have driven meaningful long-term benefits for customers, shareholders and widely the Canadian economy.

Our 2016 targets also continue to buttress our dividend growth model and share repurchase initiatives. As I've already noted, we are targeting our sixth consecutive year of a 10% dividend increase in 2016. As a result, our shareholder-friendly initiatives, our capital investments and our balance sheet structure are prudently aligned with our long-term decision making and they're not based on quarterly short-term results.

I am exceptionally proud and sincerely appreciative of our team's unwavering commitment to our customers and to delivering on our strategy regardless of the challenges that we face and answer along the way. Indeed, I'm consistently impressed with what we achieve as a team and importantly how this translates into strong results for our customers, our investors, our team members and the communities we serve. This is the strength put into practice of our world-leading team engagement.

Now let me turn the call over to John.

Thanks very much, Darren. Good morning, everyone. I'm on slide n -- sorry 11, the Q4 wireless results. Fourth quarter wireless results continued to reflect strong operational execution in a competitive double cohort and a slower economic environment. Network revenue growth of 3% was driven by data revenue growth of 10%, reflecting subscriber growth, increased adoption of higher rate two-year plans, favorable post-paid mix and increased data roaming. This was partly offset by the impact of the economic slowdown, particularly in Alberta as we've mentioned which affected both subscriber growth and usage behavior as well as the ongoing decline in voice revenue.

When excluding restructuring and other costs, EBITDA increased by 2.8% based on higher network revenue partly offset by the CAD50 million of higher retention spend, some higher bad debt provisions as well as increased customer service and distribution channel expenses.

Retention volumes are up 5% to 609,000 units in the quarter driving higher associated commissions while per unit subsidy costs increased in a continued preference for higher value smartphones and lower device upgrade fees. The resulting cost retention represents 17% of network revenue in the quarter up from 14.3% a year ago. Capital expenditures increased year-over-year by 11% representing capital intensity of 12%. This reflects ongoing investments in wireless broadband infrastructure to enhance our network coverage, speed, and capacity and includes the ongoing deployment of 700 megahertz spectrum.

Moving over to slide 12, in wireline, revenues increased year-over-year by CAD50 million or 3.6% excluding the one-time recurring -- sorry -- nonrecurring real estate gains of approximately CAD13 million and other operating income. This solid increase is driven by data revenue growth of 9% reflecting high speed internet subscriber growth and higher revenue per customer, growth in business process outsourcing services from TELUS International, a higher TELUS TV subscriber base and increased TELUS Health revenues. This was partially offset by continued legacy voice and equipment revenue decline.

Reported wireline EBITDA decreased by 5.9% primarily due to a CAD54 million increase in restructuring and other cost. When we exclude these costs from both periods, wireline EBITDA increased by 8.2% with a margin of 28.5%. That's up 110 basis points year-over-year. Underlying this, EBITDA growth was 4.9% when you exclude both restructuring as well as the nonrecurring gain on the sale of certain real estate assets.

This EBITDA growth reflected improving margins in data services, including internet, TELUS TV, business process outsourcing as well as ongoing operational efficiency initiatives and was offset by high margin legacy revenue declines.

Capital expenditures increased 17% over the same period last year due to continued investments in our broadband network infrastructure. This includes connecting more homes and businesses directly to our fiber optic broadband network.

As noted on slide 13, on a consolidated basis, revenue was up 2.8% while EBITDA excluding restructuring and other costs increased by 4.9%. Basic earnings per share of CAD0.44 decreased by 14% reflecting significantly higher restructuring and other costs as well as higher depreciation and amortization expense, some ongoing investments in our fiber optic and 4G LTE networks. EPS drivers can be found in the appendix.

Free cash flow of CAD197 million decreased by 42% primarily due to higher share-based compensation, higher CapEx and lower reported EBITDA reflecting the significant restructuring costs.

Let's move to guidance now. I am on slide 15, 2016 targets reflect revenue growth of up to 3% and EBITDA growth of up to 6% in both wireless and wireline. TELUS wireless network revenue should benefit from modest growth in both subscribers and blended ARPU. ARPU is expected to benefit from increasing data usage as our 4G LTE and LTE advanced network investments enhance coverage resulting in continued growth in data and roaming revenues.

This should help offset lower voice revenues and the impacts from the economic slowdown in certain parts of the country, especially in Alberta. Wireless EBITDA is targeted to be higher as a result of the anticipated growth in wireless revenue, savings from cost efficiency initiatives and stable retention cost.

Reflecting the diversity and strength of our asset mix, wireline should see continued data revenue growth from high speed internet, Optik TV, TELUS Health as well as growth in our business process outsourcing through TELUS International.

This growth is expected to be partially offset by continued decreases in legacy voice revenues and the impact of the economic slowdown. Wireline EBITDA growth is supported by revenue increases, continued margin improvements in our growth products, as well as our ongoing efficiency initiatives partially offset by the ongoing industry trends of losses from higher margin legacy voice services.

Combining our operating segments, I am now on slide 16, basic earnings per share is expected to be higher year-over-year by 5% to 12% reflecting EBITDA growth combined with a reduction in shares outstanding from our ongoing share repurchase program. As Darren referenced earlier, consolidated capital expenditures in 2016, excluding spectrum licenses and nonmonetary transactions are targeted to be approximately CAD2.65 billion.

This equates to a capital intensity as a percentage of consolidated revenue of approximately 20%. On slide 17, we have outlined our notable assumptions for 2016. Total defined benefit pension expense for 2016 is estimated to be approximately CAD94 million of which approximately CAD89 million will be recorded employee benefits expense and CAD5 million in financing cost.

Defined benefit pension plan cash funding is planned to be approximately CAD57 million. Restructuring and other costs are expected to be approximately CAD175 million as we continue to invest in operational efficiency.

Cash income tax payments are estimated to be between CAD570 million and CAD630 million. This significant increase over 2015 is primarily a result of the impact of the use of the public mobile losses in 2014 which has had the effect of one, deferring a portion of our 2015 current taxes payable to early 2016 and two, increasing relative to 2015 the 2016 installment base which ultimately is expected to reduce the 2017 cash income tax statement by approximately CAD150 million.

Other key assumptions are listed in section 1.7 in our fourth quarter management's review of operations. Before I conclude I'd just like to highlight some balance sheet considerations as we head into 2016. Now, on slide 18, at the end of 2015 our net debt to EBITDA ratio was 2.66 times. The year-over-year increase reflects in part the three wireless spectrum auctions that occurred during 2015, where TELUS successfully acquired 57 megahertz of spectrum for CAD2 billion.

Since 2014, TELUS has made total spectrum investments of CAD3.6 billion. We are in a period of elevated investment as we execute our long term strategy focused on data and wireless growth consistent with our investments over the past 16 years.

However, we remain committed to our long-term objective for net debt EBITDA to be in the range of 2 to 2.5 times and we'll work towards returning to our objective range in the medium term as we believe this range is supportive of our long-term strategy. Throughout this unique investment cycle we have increased our wireless and wireline customer connections, consistently grown revenue EBITDA, delivered the strongest wireless lifetime revenue per customer and further enhanced the industry leading customer loyalty.

Importantly, over this period we've extended our average term to maturity of TELUS long-term debt to 11.1 years as compared to 5.5 years at the end of 2012 and reduced our weighted average cost of long term debt to 4.32% as compared to 5.44% at the end of 2012.

Reflective of our excellent debt maturity schedule, we only have CAD600 million of long-term debt maturing in May of this year. With over CAD2 billion of available liquidity combined with our investment grade credit ratings, TELUS has ready access to capital markets to finance any future needs of our operations.

Separately and notably, TELUS' defined benefit pension plans remain very well-funded on an absolute basis and compared to our peers. Our DB plans were 99% funded on an accounting basis and were over 100% funded on a solvency basis at the end of 2015, which reinforces our strong balance sheet position.

With that I will now pass the call back to Paul to take your questions.

That's great. Thanks John. Peter can you please proceed with questions from the queue for Darren and John?

Okay, thank you, first question comes from Vince Valentini. Please go ahead.

Yes, thanks very much. So, let me ask about your wireline segment free cash flow. So, I understand you're making investments at a time when capital is cheap, but this hasn't been a one-year phenomenon.

We have now seen five years in a row when your free cash flow margin has been 6% or less. So, I'm just wondering if you can give us any sense of how long you think this investment cycle is going to last and when you'll start generating some -- some better free cash flow from that segment. Or if free cash flow isn't the right metric to look at, if there's some other return metrics you see that are more favorable that you can point us to, I'd be happy to hear your views on that.

Okay. Thanks, Vince, and let me hit this one on the head. The ramp up in terms of our strategy manifesting itself in terms of free cash flow and cash flow yield on the wireline side of the business is going to take some time. And that's multiple years that I am referring to, Vince.

The metric that I would draw your attention to would be total shareholder return. It is a pretty simple thesis. I think it is worth articulating that if you look at TELUS, the goal for us is to take what is superior wireline revenue growth and superior wireline EBITDA growth and in the fullness of time over those multiple periods, having the patience for the ramp up, drive that through to superior cash flow and cash flow yield and I am highly confident that that particular sequence is going to come to fruition.

And, you mentioned the last five years -- well when I look back on the last five years at TELUS I see excellent financial growth from the TELUS organization. I see excellent performance in terms of the dividend growth model and NCIBs. If you look over the last five years or since 2011, we've returned roughly CAD6.6 billion to shareholders or CAD11 per share.

If I look back over the last five years, our return on equity as a company has gone from sub 13% to greater than 18% and if I look back at the last five years and I look back at the last ten years and I look back at the last 16 years over each of those five, ten and 16-year periods TELUS has led our peer group on a global basis in terms of total shareholder return.

So, I think we are earning the right for patience during the ramp up period as we seek to translate our superior world leading wireline revenue growth, wireline EBITDA growth into superior world leading cash flow and cash flow yield from our wireline operations.

This is atypical which is why I've consistently used the word generational investment. And, yes, it is a protracted payback period, but what I can also say is that the symmetry of that elongated payback period is that when that payback period does come to fruition, the returns are also going to be protracted.

If you look at the wireline copper investment that we made historically, yes, it was a generational investment at the time. Yes, it had a very long payback period in terms of going to free cash flow positive. But, once it got to that particular point, the return could be measured in decades in terms of making a contribution to the cash position of the organization and I think that particular analogy is pertinent to what we are talking about in terms of the fiber investment.

Also if you just look back over the last 16 years at TELUS and say what were the big bets that really paid off for TELUS? And, I would say almost exclusively, the big bets that paid off at TELUS were contrarian in nature. When we went national on wireless back in 2000 with the acquisition of Clearnet it wasn't exactly the most popular move or popular investment strategy in the market at the time or even in the couple of years that followed.

In retrospect, it has been hugely lucrative for this organization. When we made the move from CDMA 2000 to wideband CDMA going HSPA+ back in 2009 during what was at that time the worst economic downturn in modern economic history, it was not a popular move for this organization to make.

And then, you look at how the wireless business performed thereafter. The returns, measured in cash, were extremely lucrative. When we went back down the path of TV as a Telco I didn't see a lot of people cheering for us on that particular strategy. And yet that particular product line is now going nascent cash positive in terms of its contribution and growing. And we have just now ticked over a million TV subs within our portfolio. So, I think we have a track record of making these generational investments, these big bets, if you will, pay off. I would argue that there are certain factors that are contemporary right now that are worth contemplating.

One is, of course, the symbiotic relationship between wireless and wireline. The investment that we are making in fiber isn't just for the wireline business. It is also for the wireless business whether it is cell towers or backhauling data traffic from small cell sites deployed within urban conurbations; it is absolutely critical and synergistic and we want to harvest that particular economy of scope.

I would also argue that there is a symbiotic relationship in that the wireless business grew at TELUS because the wireline cash flow funded it. And, now we are in a position where the wireless cash flow is funding the rebirth of the wireline business, and you can see that in the growth trajectory of our wireline disclosure.

Also, I think it is important to highlight that when it comes to CapEx, and I have worked in just about every telecommunications jurisdiction on a global basis and I don't know a single telco in the entire world that has never wasted a penny of shareholder money in terms of pursuing what turned out to be off strategy acquisitions or organic investments. At TELUS, okay, we have been an organization that has always put your money to work on strategy.

We have done it in a way that has been particularly fruitful and we have never strayed from the investment thesis of this organization on the wireless and wireline front with a particular pertinent focus on broadband. Also just one point that I think is interesting, I continue to be confused why acquisition capital seems to get a free ride, but organic capital seems to get an extraordinary amount of scrutiny.

If we were making a CAD2 billion disclosure on CapEx for 2016 with a CAD650 million purchase of a fiber company, no one would say boo to a goose. But, the fact that we are doing it organically seems to get a quizzical look on something that I think is ultimately tremendously strategic. And if you look back at the empirical evidence within the telecoms industry, smart, on strategy, concentrated, organic investments have materially outperformed acquisition capital that frequently was off strategy and frequently read -- led to write offs at certain points in the future.

If you look at our RGU story it is completely compelling. And it is an RGU story that is terrific despite absorbing the softness within Alberta and what was in my opinion, a rather a mediocre year for the TELUS organization.

We are unique in the fact that we're generating RGUs. I used to call them RGAs because they are revenue generating assets in terms of the outcomes that we're getting from our capital investments, and when I frequently look at who is positive on RGUs and who is negative on RGUs, on the positive side of the ledger frequently it is just TELUS and TELUS alone when you compare us to our peer group.

So, it says in terms of the CapEx that we are putting to work on the wireline side of the business, we are getting the results by building revenue generating assets on a positive basis. And again, it is down to us to drive that flow through in terms of great operational RGU results through to strong financial results which we are doing at the revenue and at the EBITDA level and finally the strong economic results at the cash flow level.

And then you look at the TELUS organization and our balance sheet, we can afford to make these investments. We've got a strong balance sheet. And I think it is a smart use of our ability to absorb leverage. And then in terms of being opportunistic in my view, when I look at the regulatory environment for wireline in Western Canada, I think it is decidedly favorable and that is not something I could have said too frequently over the past 16 years, but it is decidedly favorable to making wireline investments.

We do have, as you already point out, an opportunity as it relates to the low cost of capital. And the economies of scope on wireline fiber have never been as rich. I talked about wireless, but it is equally true for our health strategy, our IoT strategy in terms of the Internet of Things or machine to machine and beyond.

And shame on us if we don't have the discipline and the patience to put that money to work at this particular juncture for the longer term greater good of the company and our strategy. And then I look at our 2016 guidance and I say, okay, are we earning the right to make these investments? And, I would say yes, we are earning the right to make these wireline investments.

When you look at the magnitude of our guidance, that up to 6% growth rate, and then you look at the diversity of our guidance where we've got 6% EBITDA growth postulated not just for the wireless side of the business, but for wireline as well. And that level of both diversity and magnitude is unique amongst global telcos when you look at the strength of our asset mix.

And then, lastly I am not asking investors to take a holiday on returns while we make these strategic investments. Quite the opposite of that. In fact, I would argue these strategic investments over the near to medium term support the sustainability of the dividend growth model over the longer term and I think our track record in the past, currently in 2016, and prospectively in terms of what's going to happen in 2017 and beyond is extremely strong and you can draw inference from that in terms of wondering what the future holds in that regard.

When we put our 10% dividend growth commitment in 2016 in the headline of our press release, I think you can take that to the bank. And you can see that since 2011, we have delivered pretty well against those expectations and I look forward to the AGM in 2016 to talk about what we're going to do in 2017 and beyond as it relates to dividend growth and NCIB activity.

Thanks, Vince and I appreciate the thoughtful question.

Thank you very much.

Next question, Peter.

And your next question comes from Philip Huang. Please go ahead.

Thanks, good morning. I just wanted to sort of expand on the capital returns question and want to get your thoughts on that. A lot of the pressures that TELUS has been facing are hopefully transient such as the double goal which obviously is impactful to the entire industry. But also hopefully, the weaker macro environment is also transient. To the extent that your capital returns program are multi years and thus based on multi-year assumptions, is it fair to assume that TELUS would notch I guess, would not be shy to temporarily deviate from target payout ratios in the near term, should that be the case? And then, I have a quick follow up on the wireline side.

I don't think that we're going to deviate from our capital return policies, I don't see the need to do that. I think we've shown that we can absorb exogenous shocks and make strategic investment and stick with our capital return policy. So I can't be more unequivocal than that. In terms of our CapEx investment, what you're seeing in 2016 is indicative of what you can expect in 2017 and 2018 as we build out our broadband infrastructure.

As it relates to the Alberta market, I think it is an excellent point that you are making. I was at pains to point out that the solid results that we have generated both operationally and financially were in the face of a weaker Alberta economy. And, amongst the major players in Canada we have a disproportionate exposure to that particular economy, but nevertheless, we not only delivered solid financial results, but we are delivering against our commitments in terms of shareholder returns.

And then, lastly and importantly, to me I think there is a silver lining here which is if we can deliver these results and carry on the way that we have and meet the expectations of capital returns to shareholders within a soft Alberta economy, what does that portend in terms of when that particular economy recovers and it will. And, I think that speaks to the strength of the TELUS organization. It speaks to the quality of your asset mix and the strength of our execution.

And I think the silver lining should not be lost on anyone because if we can generate results of this ilk within the context that we face now economically within Alberta, then I would say we have a very bright future ahead of us. And then, lastly I think, the other point that is well taken is, yes the double cohort impact is going to get normalized in terms of year-over-year results through the second half of 2016.

We've been making COR investments that represent a nominal augmentation of circa CAD50 million on a quarterly basis. We're going to see as we proceed through the second half of 2016 the impact of that get normalized on a year-over-year basis.

But we are going to have a modestly elevated cost implication associated with two-year contracts from a limitation point of view, but we should see improved strength within the wireless business as we get through the second quarter and into the third and fourth quarters of 2016 and 2017 and beyond. And, I think that will also support what we want to do in terms of hitting revenue and EBITDA targets in 2016 and beyond and also the continuity of our shareholder return program.

That's very helpful. I just want to expand a little bit on the Alberta impact and as it relates to the wireline business. Your Q4 numbers were actually quite strong and your outlook for the wireline business is also very strong. Given that the wireline segment should arguably have bigger exposure to the Alberta impact, how come we are not seeing more of it in the wireline business? Is it a reflection of your seeing I guess an acceleration on the payoff from your investment in fiber and I guess, as a result of that giving you -- affording you greater pricing power, et cetera? Like how -- I was just a little bit surprised to see that the impact was more evident or more of a note on the wireless business as opposed to the fixed line business even though the geography suggests a bigger exposure for the wireline business. Thanks.

So, that's a very good question and I think would be very helpful for people not necessarily living in Western Canada. So, let me give you some insights into Alberta that you might find helpful.

Number one, and you would have seen in my opening comments some increased disclosures. So, we broke out for you what the implications of Alberta were in the second half of 2015 by showing the contrast versus the second half of 2014. And what we illustrated is that we had a net loading decline on post paid of circa 45,000 post paid net loads in the second half of 2015 versus the second half of 2014. And we an ARPU diminution of circa 4.5%. And, I thought that clarity was important for people to appreciate.

If I normalized out the Alberta impact on wireless, our post paid ARPU would have been up 1.7%. So, I thought that that increased disclosure would be helpful to you and that was the etiology behind it. Let me give you some additional color as well. Whilst we are seeing continued weakness if I give you the Q4 number, the second half number at 4.5% ARPU decline it was just a tick over that at 4.7% in terms of the ARPU decline in Q4 on a post paid basis. And we saw as well within wireless churn tick up.

What's interesting is it's the Alberta version of churn ticking up. Yes, it went higher on a year-over-year basis but it's still markedly lower than the national average. The other thing in terms of scratching at the point that you are getting, the impact in Alberta is most pronounced on business although there is a consumer impact. But the impact is most biased towards business and on the wireless front.

So, if you look at the ARPU comments that I have been making which are holistic measures, on the business front, business ARPU in Alberta was down 7.6% in the fourth quarter. So, it's more pronounced on business and it is more pronounced on the wireless side.

Next if you think about our strategy over the last 16 years, how many times have you heard me say it is critical to have the diversity of multiple growth tenants? I kept banging on and on and on during the halcyon days of the wireless performance that we have to also support wireline so that we are not a one-trick pony with a single growth tenet on wireless. We have to nurture the development of our wireline business so we can have a more robust portfolio through diversification, getting economic contribution not from a single wireless asset, but both wireless and wireline.

And, in this particular case, the wireline business, particularly TELUS driving as a new entrant in areas like TV, high speed internet and the like, has been deeply fruitful for us. So, the economic pressures that have been hitting business wireless and to a lesser extent but still observable on consumer wireless are not impacting consumer wireline anywhere near the same degree.

And we have seen healthy growth transpiring in terms of high speed internet access. We've seen healthy growth on TV which is reasons why our TV plus HSIA loading was a 2-to-1 ratio over our network access line losses and why our consumer RGUs were plus 23,000, which I think compares pretty favorably to our peers, particularly even when you factor in the business now impact at the same time.

Now that's not saying that wireline is impervious. So, what we have seen is modest tick ups as it relates to HSIA churn -- TV churn and the like. We have seen people being more discriminating with their bills that impacted TV ARPU in term of things like baud selections and the like. So, it is not impervious, but it is nice to have that second growth tenet. It is nice to be the new entrant and it is nice to be driving HSIA and TV growth, much of it supported by the fiber investments we are making in Alberta at a time when there's not a lot of investments going on within that particular province.

And I think that juxtaposition speaks well for TELUS. And, of course, the last time we made investments during an economic downturn was the HSPA build on wireless and we all know how that paid off. So, that's been particularly important for us.

The next thing that I think people need to appreciate and you see this being discussed in the US a lot, but I don't hear a lot of it discussed in Canada is the fact that our industry and many of our products are countercyclical to the impacts of an economic downturn as it relates to TV, entertainment, as it relates to HSIA and connection to the outside world from worldwide webs to social media considerations and the like, as it relates to your smartphone to manage your life, the one device you can't leave home without, those things are very resilient within the throes of an economic downturn and can be quite countercyclical and an investment safe haven during the time of economic duress within a particular geography.

And the next thing you can see is that it is not just a backward looking view in terms of what I am telling you now to answer your question. We've put our money where our mouth is in terms of the diversity of our wireless, wireline business and you can see that in the EBITDA growth that we are postulating for wireless and wireline in the 2016 guidance.

And then lastly for us, let's not let a good crisis go to waste. As it relates to the business wireline environment, we have a hell of a lot of technology solutions from what we are doing on the cloud front from public, private and hybrid, what we are doing on collaborative services such as video conferencing. What we can do on managed IT and off shoring activities. We can leverage technology-driven solutions that take cost out of the P&L for a number of our business customers within Alberta at a time when efficiency solutions are at a premium.

I think that's equally true on terms of what we can do on IoT. I think we've got to keep expanding our LTE footprint in the province because there is a countercyclical aspect that I think we need to get down to leverage and I think we can do a lot more as it relates to LTE expansion and LTE penetration.

We're only at 60% of our base penetrated with LTE at this point and we know that every time we drive that penetration, up goes data ARPU. We are going keep on going with the fiber expansion within the province. And I think it is a great time to be investing when a lot of the province right now is retrenching and, of course, we're going to drive our health strategy in Alberta very fervently, leveraging a great strategic partnership that we have with Alberta health services.

And then lastly we have a second layer of diversity which is geographic diversity. And, Western Canada isn't one province. It is two. And the BC economy has been very strong for us at TELUS. And it's ameliorated some of the pressures we have seen in Alberta and it is nice to have that growth in BC and that geographic diversification whilst we work our way through the eventual Alberta recovery and all the benefits that are going to come from that ultimate recovery coming to fruition.

All right, thanks very much.

That's some color on Alberta.

Thanks. Thanks, Phil. Peter, next question please.

Your next question comes from Simon Flannery. Please go ahead.

Thank you very much. Just a clarification, John, perhaps, I think you said a 10% dividend increase for 2016. Are you implying you will increase around 5% in May, and then not make any commitment about November and will go to a rolling one-year decision versus the three-year plans?

And then, Darren, can you talk a little about -- you talked about the benefits of having wireless and wireline. One of your competitors has made a play to move into the wireless space. How do you think about your ability to compete versus a quad play offering in Western Canada, and how that might change the marketplace? Thanks.

Thanks, Simon. Let me be very clear in answering your question about the dividend growth. The 10% dividend growth is for 2016 in totality. So, we would intent to make an announcement to that effect in both May at our AGM and in November as it relates to our Q3 results. And the rough rule of thumb would just be 5% at each instance. So, yes, we are actually making a commitment for November that is prospective. So, it's not just a commitment for May, but also a commitment for November and the 5% on magnitude on the twice yearly increase is a good rule of thumb and holistically, it is going to be at circa 10% over 2016. So, I just wanted to clarify that.

The other thing that I think is worth maybe reiterating is at the AGM in May of 2016, I will postulate where we are going with the dividend growth model in 2017 and beyond at that juncture. Does that answer that part of your question?

Yes, that's very helpful. Thank you.

As it relates to Shaw, a couple of things to know without getting into it too deeply. We have a new blend of competition or a new complexion of competition. We do not have any new competitors. And, that rather important point frequently gets lost along the way. The complexion of the competition has changed, but we don't have any new competitors that we're facing in Western Canada.

Secondly and I think history has borne this out repetitiously, frequently very painfully. I would much prefer smart, rigorous, sustainable competition over onerous, regulatory intervention any day of the week.

We know how to respond to smart, rigorous and sustainable competition. Dealing with onerous regulatory intervention is quite something else. And so I am pretty comfortable with this overall development, particularly with a new government in Ottawa. Next, clearly I remain highly confident in TELUS's strategy. I remain highly confident in our asset strength, diversity, the mix if you will. I remain confident in our culture of execution and I think we will be well served in the years ahead by our customers' first priority that knows no bounds.

It doesn't actually discriminate between wireless and wireline. It is a mentality we bring to bear for our clients across all of our technologies and all the markets we seek to serve. We are going to drive service-based differentiation and product-based differentiation and compete over the long-term smartly on value. And that's just the mentality for us. And maybe to back that up when my family steps forward on the back of the Shaw/Wind announcement and we make a CAD10 million investment in TELUS stock, I think it speaks to my confidence in the attributes of our organization and our ability to execute on our strategy and support sustainable returns to our shareholders on a deeply protracted basis.

And so the only thing I will say to conclude is at the end of the day time will tell. And, we'll see how the competitive model bears out. There's lots of bumping and grinding within this industry.

But I think we will do very, very well over the longer term. And I think healthy competition is a good thing. It is a good thing for industry. It is a good thing for consumers. And I would hope that it can be sustainable in that regard. And I would hope that the regulatory model on a go forward basis reflects a level playing field for all protagonists participating within our industry.

Great, thank you.

Thanks, Simon. Next question, Peter?

Okay, next question comes from Maher Yaghi, please go ahead.

Yes, thank you for taking my question. I want to approach this question maybe differently and in terms of the organization has significantly returned money to shareholders in terms of dividends, dividends and share buyback. But, since you were talking about the long-term, Darren, when I look at 2011 you had approximately CAD7 billion of debt, net debt. At the end of 2015, we are sitting at CAD12 billion, but free cash flow went from CAD1 billion in 2011 to about CAD1 billion in 2015 if I normalize for the cost of debt that is lower right now, i.e., the return on invested capital has declined quite a bit and it's not just for TELUS. I mean, it's for all the industry players in Canada.

If this is the case, how do you allocate capital and how much do you think you can stretch the balance sheet with the share buy backs before your credit metrics underperform peers in Canada and your cost of debt becomes too high?

Let's, I guess, break this down one -- our 2011 to 2016 comparison has to reflect the fact that our capacity for debt has grown from 2000 to 2005 to 2010 to 2016. So, when you look at the net debt to EBITDA at TELUS it compares quite favorably with our peers on a broad basis.

Number two, the quality of the earnings at our organization are extremely strong. And a metric that seems to be forgotten about in the net debt to EBITDA world is EBITDA, the interest coverage and the interest we are paying now when we are in a situation where our cost of debt on an interest basis is 50% lower than what it was a decade ago I think are points that are not deeply appreciated.

Indeed, when you look at where we have taken both our average interest cost and our debt maturity looking at our average interest cost at sub 4.5% and our average term to maturity at 11 years, we are in a pretty robust position to say the least.

We have no major financings that we're going to have to undertake until we get into 2018 period, the financings that we have prospectively over the next 12 to 18 months are more moderate in nature and easily achieved by this organization. So I feel pretty strong about that. Whether we're at Baa1 or Baa2, the first priority for this organization is to drive our strategy and the debt cost differential between Baa1 and Baa2 is not consequential to this organization looking forward from 2016 all the way to 2020. So, I am confident in the sustainability of both our investment thesis as well as our shareholder return thesis.

Next, if you look at what is pressurized, our balance sheet it is the fact that we had an atypical level of concentration in spectrum auctions over the last three years. TELUS acquired more spectrum in the last three years than we had done previously over the 13 years before it. And I say that to highlight just how atypical it was. When you acquire more spectrum in 36 months than you did in the previous 13 years I think it is illustrative of what was a fairly atypical event for this organization and to absorb that and make the generational investment that we are making in fiber we are putting our balance sheet to work.

But that's what the balance sheet is there for. It is not there to be abused. We're going to be judicious about it. We're going to respect our credit policies and metrics along the way. You can bet that after we're harvesting these investments and we're going to drive our net debt to EBITDA below 2.5 times as we have done previously on many instances within this organization.

We're as committed to our credit goals, on the longer term as we are on the equity front. But right now this is a smart move for this organization to make this particular investment and that is that's exactly what we're going to do and we cane can afford to bring it to fruition.

And one could say that and instead of looking at the spectrum acquisition as the share repurchases added about CAD5 billion since 2004 to that that level, I am trying to understand when I look back into 2017 and beyond, given the structure of the company and the debt that it has and without getting into more specifics, than what you'd like but could we continue to see the company allocate money to share buy backs in addition to supporting the fundamentally more important, I think, for many shareholders which is the dividend growth model that is industry leading.

So, a dividend growth model is our first priority. Number two, the NCIB and the dividend growth model have been tremendously synergistic particularly with TELUS in a cash taxpaying environment. So looking at debt from of a cash tax perspective and the tax affected by the cost of debt is not lost on me, but when you calculate what we've spent on NCIB, the [techie] calculation that you would do is how many dividend out flows have we avoided indefinitely as a result of that particular NCIB set of investment. And this organization has avoided hundreds and hundreds of millions of dollars of dividend out flows through our NCIB purchases such as the synergistic nature between the two.

Next if you look at our NCIB program, calculate the IRR. The IRR on our NCIB program is roughly 11%. Compare that to current cost of capital environment, I would say that's not a bad outcome and that's empirically, you can go and do that calculation it's 11%, then I would say that's a pretty good outcome.

Next aspect of the NCIB is what is one thing you consistently seen within the telecoms industry? Exogenous shocks. Okay? Economic, exogenous shocks, credit crunches equity market issues, government and regulatory intervention, changes in the competitive dynamic so on and so forth. To have an NCIB program that is maybe not routinized, that's statutory, but more discretionary and opportunistic. I think is a good vehicle or weapon to have in our repertoire that when we get hit by an exogenous shock, be it a change in the competitive dynamic regulatory decision and the like so on and so forth, to be able to step into the market and buy back stock judiciously on weakness is a smart thing for us to do. Particularly given the complexion of investors these days from longer term to near-term to what goes on, on the hedging side as well.

I think it is a smart weapon for us to bring to bear. Now, whether that is going to run in perpetuity at CAD500 million a year, as we go through the generational investments on wireline that's something to be contemplated.

But, I think having zero as I see NCIB program is not a smart solution. But maybe a smaller NCIB program over the next few years that we can use on a thoughtful discretionary debt basis is quite a useful tool. The other thing that we have gotten moving from a more opportunistic and discretionary is that we can do block buys at fairly deep discount better in the 5%, 6%, 7% zone. So, not only are we get opportunistic and buying at weakness but we buy a block and get a further discount that's been the other 5% zone.

Again, I think those are smart investments. But, go and calculate the IRR. I think you'll find it at 11%. And don't calculate how many dividends we've avoided in perpetuity, the result of a contraction of our share base. And those dividends by the way are growing at 10% per year.

So cancelling shares and avoiding dividends is truly enough, a synergistic undertaking. So to me it is just a smart balancing effect, but overall at the sub CAD500 million level it's not a big player as it relates to our overall credit profile.

Thank you.

Can I point you back to our May conference call? We can get you the transcript if you don't have it. Darren made a lot of comments when we changed the leverage from two to 2.5 times in weight average optimization and part of your question is you have gone from 1.6 times to 2.66. There is actually quite a bit of work we did behind that we discussed on that call. That would be a good thing to refer back to and we can certainly get it for you.

Thank you.

Peter Vee, time for one more question. Peter Vee, time for one more question.

The next question comes from Jeffrey Fan.

Thanks for squeezing me in. I guess this is a question for Darrin. A lot of your capital spending projects is related to broad bend and I want to go back to the wireline fiber deployment. Because so much is going toward this particular area I was wondering if you can give us a little bit of clarity or transparency into the number of homes that currently has fiber and how much did you grow that base over the last few years? Just to give us some sense as to this capital is going toward expanding your base and to help us understand perhaps put some numbers on how long this may last.

Okay. Let's take the last part of the question first, Jeff. The capital expenditure for 2016 is going to be indicative of the capital profile for 2017 and 2018. So, I don't know a lot of companies getting multiple year CapEx guidance. We are quite distinguished in that we give dividend growth guidance, but I think it is important that you get a flavor of where we are going with this particular strategy. So, I think knowing that 17 and 18 will not be dissimilar to 16 is probably helpful in a prudent level of incremental disclosure. And next in terms of where we are at on the fiber front, at thus far, we are at about 60 communities in Western Canada and Eastern Quebec. So it is good progress a good start. And we have good momentum. To maybe give you some additional context with which to process that, if you think that our optic footprint covers approximately just under 3 million homes then I think it is important for you to know that the fiber component of that from a coverage perspective is currently at the 25% mark of those three million homes.

In terms of additional insights and disclosure if you are looking at our 2016 CapEx I think it is helpful to know that circa 20% of our 2016 CapEx is going to be dedicated to our fiber program. And, I have asked Paul and the team to give guys a stratified view of our CapEx uses so that you can understand and where the dollars are going.

What you will discover is that the [dial] dollars are going decidedly to broadband, at both wireless and wireline. You will also see a lot of it is success based in nature and I'll encourage you with the investor relations team to have a conversation as to what is fixed within our capital expenditure portfolio as what is discretionary or variable within our capital expenditure portfolio and over reflecting the fact that we are making these investments. Only predicated upon the fact that we are generating a good operational return and prospectively a good financial and economic return. And I think that profile is being better understood, would be a good communications vehicle between ourselves and the street.

Next in terms of the question that you might ask is how is it going? You're affecting this expenditure how are things going against the expectations or certainly the business case that you would have for this particular program. And that as part of your question and goes back to the question that Vince was asking as well.

And what I can tell you in terms of the expectations that we have within the fiber business case we have beat our internal expectations in terms of penetration gain. We are surpassing our exportations in terms of revenue per client or revenue per home or ARPU in you want in terms of wireline. Churn in terms of client loyalty and stickiness is better than what we anticipated. We're achieving cost reductions that are quite remarkable. In terms of things like customer minutes of degradation. They are [1/15th] on fiber what they are on copper as one point of illustration in terms of the longer terms lowering our cost base in terms of the OpEx implications from this particular investment.

And the likelihood to recommend the client experience feedback that we've have been getting which has been measured empirical on and scientific is that the [LTR] result that we're generating from fiber based optic clients is superior to traditional technology and significantly so in that regard.

When you look at the 23,000 net wireline RGUs that we did within the consumer area, in Q4 our fiber program made a substantive contribution to that result. So, it's not inconsequential within the overall results of the TELUS organization despite the fact that it is a program that is still building momentum.

And then lastly, yes, we are driving hard synergies between fiber that was originally to support TV and HSIA with our wireless small cell strategy within the urban markets that we are talking about. We are driving fiber to support our health strategy within the primary care ecosystem connecting homes with home health monitoring devices, connecting homes with doctors, bringing fiber into doctors' offices to facilitate what they are doing with their electronic medical records and providing fiber connectivity between docs, clinicians and pharmacies. Wiring the primary care ecosystem with fiber allows us to more securely, effectively and efficiently deliver better health information for significantly outcomes for Canadians.

And, of course fiber is key as it relates to supporting what we're doing within the [IELT] end to end world that we're now in a world where there are more devices connected to broadband technology than there are people that having that fiber capability I think is a nice differentiating factor.

And lastly this is a path that if you really think about strategically is a necessity not a nice to do. And I think this challenge is going to confront everyone, cable and telco alike that wants to be a long-term viable competitor within this industry.

So, does that additional color help you in terms of where we are spending, how much we are spending, so on and so forth, where we are at in the program and how we are doing in terms of the performance parameters?

Yes, that's great, thanks, Darren.

Great.

Thanks, Jeff. And thanks, everyone for joining us on the call today. If any follow-up please reach out to the investor relations department. Thank you.

Ladies and gentlemen, this concludes the TELUS 2015 Q4 earnings conference call. Thank you for your participation. Have a nice day.