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CFO's letter
- Introduction
- 2008 Performance
- Financial and Funding Strength
- Disclosure and governance
- Corporate social responsibilty
- Building on our strength
In 2008, TELUS’ solid operating performance and conservative financial policies resulted in sustainable cash flows, a strong balance sheet and ample liquidity. Operating in a dynamic growth industry, we are positioned to weather the volatile capital markets and weakening economy, while making strategic investments that are building strength for the future.
TELUS delivered solid financial performance in 2008. Revenue increased by 6.4 per cent to $9.7 billion, largely due to wireless and data growth. EBITDA (earnings before interest, taxes, depreciation and amortization) of $3.8 billion was up only one per cent, as growth in wireless and data was largely offset by erosion of traditional telecom services, short-term dilutive growth initiatives and higher restructuring costs in support of efficiency activities. Underlying earnings per share (EPS) increased one per cent to $3.37.
Given the importance of communications to consumers and businesses and a high proportion of recurring subscription revenues, telecommunications is a resilient business, which has allowed us to continue generating healthy operating cash flow.
As expected, capital expenditures increased by five per cent to $1.9 billion as we invested in strategic growth initiatives such as launching Koodo Mobile®, our new basic wireless service. We also continued to make J-curve investments that are initially dilutive to earnings and cash flow. These include building a next generation national wireless network, implementing large enterprise data contracts in Central Canada and continuing broadband service expansion that enables the further roll-out of TELUS TV®.
Over time, we anticipate meaningful profit contribution from these assets. In the meantime, we must focus on efficiency initiatives to help offset the start-up costs during dilutive stages of these investments. Managing costs in all areas of our busi ness will also help mitigate the impacts of a recession, competition and technological substitution on business volumes.
TELUS’ well-established financial policies are designed to support our business through market cycles and enable the Company to consistently deliver on our national growth strategy. Even with the 2008 purchases of Emergis for $743 million and wireless spectrum for $882 million, net debt to EBITDA ended the year at 1.9 times, within our long-term policy guideline of 1.5 to two times. We are in the fortunate position of having no sizeable long-term debt maturities until mid-2011 and a $2 billion bank credit facility committed to 2012. At yearend, we also had more than $1 billion of available liquidity.
Notably, TELUS’ traditional sources of capital have been consistently open and available to the Company throughout this extended period of capital market volatility. In April, we successfully issued $500 million of debt at a reasonable rate of 5.95 per cent. In December, we renewed a $700 million 364-day credit facility with a select group of Canadian banks and the undrawn facility extends to March 2010. Throughout this period, we were a consistent issuer of commercial paper in contrast to market access challenges faced by many other issuers. Additionally, we have maintained a constructive relationship with the four credit ratings agencies and retained investment grade ratings consistent with our policy objective range of BBB+ to A–.
If conditions become advantageous, TELUS in 2009 may access the public debt markets for long-term financing or establish new term credit facilities to refinance short-term financing sources or upcoming debt maturities.
TELUS is moving forward from a position of financial strength. We are committed to maintaining our prudent financial policies, which have positioned us well despite the turbulent markets, and we plan to again operate within these guidelines for 2009.
A new cash requirement for 2009 is the expected commence ment of more than $320 million in net cash tax payments. Additionally, even though our defined benefit pension plans began 2008 in a strong surplus position, they have of course experienced negative returns, although they continue to outperform the average benchmarks. As a result, in 2009 we are expecting an additional non-cash impact on pension expenses and an increase of approximately $110 million in cash funding.
Despite these developments, a combination of TELUS’ strong balance sheet and cash flow generation continues to allow the Company to return capital to our shareholders, while also reinvesting in our business. For example, capital expenditures are increasing by approximately $200 million in 2009, largely to fund the build of a national next generation wireless network that is geared toward creating long-term growth and value.
In keeping with our target dividend payout ratio guideline of 45 to 55 per cent of sustainable net earnings, we declared a fifth consecutive annual increase in our quarterly dividend to 47.5 cents per share commencing in January 2009 – approximately $600 million on an annual basis. We also renewed our share repurchase program for a smaller amount, which will be a discretionary use of cash in 2009.
At TELUS, we have a long-standing commitment to full and fair disclosure and best practices in corporate governance. We continue to gain external recognition in this regard and, in 2008, received:
- An A+ rating and ranked third in the world in the Annual Report on Annual Reports, an international ranking by e.com of our 2007 report .
- The Overall Award of Excellence for Corporate Reporting from the Canadian Institute of Chartered Accountants (CICA) covering all facets of our disclosure program
- The Award of Excellence for Financial Reporting from the CICA.
We are also making good progress in our transition from Canadian generally accepted accounting principles (GAAP) financial statements to International Financial Reporting Standards in 2011. The assessment and scoping of the project, and identification and selection of accounting policies needing changes, are well underway and we expect to maintain two parallel sets of accounting records in 2010.
For more information relating to our corporate governance practices and our commitment to high ethical standards, please see the next section of this report.
We believe having strong corporate governance at TELUS provides the necessary foundation for leadership in corporate social responsibility (CSR). In fact, true sustainable leadership requires the integration of CSR into our corporate strategy, cultural values and decision-making.
As a result, we are increasingly incorporating a triple bottom line approach to key business decisions by balancing sustained economic growth with a diligent focus on environmental and social goals. Recognizing that what gets measured gets done, we continue to set annual CSR priorities and obtain third-party verification of the results. Please visit telus.com/csr to view our CSR report.
Our established track record in CSR continues to be externally recognized. In 2008, we received Honourable Mention for Excellence in Sustainable Development Reporting from the CICA and were one of only five Canadian companies named to the 2009 Global 100 Most Sustainable Corporations list.
We have maintained a responsible and conservative approach to our financial strategy. This approach has served us well for many years. Our prudent financial policies and stewardship have led to TELUS maintaining a strong balance sheet, ample liquidity and an enviable debt maturity profile, which are well suited to current market conditions.
TELUS remains flexible and adaptable to both the opportunities and challenges in this dynamic industry. Management continues to closely monitor national and regional economies and associated business volumes to ensure we make timely adjustments to changing circumstances. In this way, we are striving to achieve our financial targets, consistent with our financial policies, while maintaining our profitability, cash flow and financial strength. Building on this strength, we are determined to meet the challenges of 2009 and stay on course to invest in the future and create value for shareholders.
Sincerely,
Robert McFarlane
February 20, 2009
