the 2003 canadian telecom summit looking toward a brighter future toronto june 11, 2003

The 2003 Canadian Telecom Summit

Looking toward a brighter future

TorontoJune 11, 2003

Surviving the “perfect storm” to reach a brighter future

Robert McFarlaneEVP & Chief Financial Officer

3

agenda

the warm breeze - late 1990s

the global perfect storm

Canada’s perfect storm

the perfect storm strikes TELUS

lessons learned for a brighter future

5


Economic expansion

strong GDP growth

inflation contained

low interest rates

6


Source: BMO Nesbitt Burns

Historical North American Key Interest Rate Levels(1980 through present)

0%

5%

10%

15%

20%

25%

Jan

-80

Jan

-81

Jan

-82

Jan

-83

Jan

-84

Jan

-85

Jan

-86

Jan

-87

Jan

-88

Jan

-89

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

US Fed Funds Rate Bank of Canada Overnight Rate

7


Economic expansion strong GDP growth

inflation contained

low interest rates

Emergence of e-enabled individual investor/trader

8


emergence of e-trading

2000 2000

133% CAGR

Active accounts Avg. e-trades per day19941994

40% CAGR

TD Waterhouse

Source: TD Waterhouse 2000 Annual Report

9


Economic expansion strong GDP growth

inflation contained

low interest rates

Emergence of e-enabled individual investor/trader

Government surpluses reduced government debt issuance

traditional fixed income investment into government bonds shifts to corporates

Fixed income mandates shift to seeking more yield emergence of liquid corporate high yield market

10


Capital markets supported aggressive growth

revenue growth key attribute historical revenue growth trend nice but not necessary

potential revenue growth would suffice

over $925 billion of equity & debt issuance by telcos from 1995 to 2000

11

the warm breeze – late 1990s

North American IPOs

263

19991998 2000

Canada U.S.

479

348

51

327

63

505

64

714

150

480

1995 1996 1997

Source: J.P. Morgan Securities

19941993199219911990

443

321

589

475

175 155

246294

185

107155

12


Capital markets supported aggressive growth

revenue growth key attribute historical revenue growth trend nice but not necessary

potential revenue growth would suffice

over $925 billion of equity & debt issuance in 1995 to 2000

Capital market transitioned from “efficient” to “excessive”

13


Source: Bloomberg

Relative Price PerformanceNASDAQ Composite Index v. NYSE Composite Index

(January 1, 1998 - March 10, 2000)

50

100

150

200

250

300

350

Dec

-97

Dec

-98

Dec

-99

NASDAQ

NYSE

14


Say’s Law and Moore’s Law became accepted dogma in telecom Say’s Law: supply creates its own demand

Moore’s Law: data network traffic doubles every 2 years

Future value creation apparently a function of building capacity: since market began valuing firms on asset multiples as

proxy for future revenue growth

15


Resulting valuation metrics:

Wireless (POPs licensed, subscribers)

CLECs (PP&E, bldgs. connected)

IXCs (fibre miles built)

16

wireless penetration outlook

Canadian wireless penetration: 2006E

Prior expectation 40%

Revised - Sept ‘991 50-70%

1 September 1999 Clearnet Investor Forum

17

CLECs valued at multiples of PP&E

18


Worldcom success fuels copycats:

high levels of capital investment

high margins

high growth

high share price

fuels growth by acquisition

set new benchmarks for strategies of competitors

19

Worldcom vs. AT&T – capex intensity1

Source: Company reports, Merrill Lynch

AT&T Worldcom

199919981995 1996 1997 20001 Ratio of capital expenditures to revenue

9.5%9.7%

29%

23%24%

15%

29%

15%

41%

14%15%

24%

20

Worldcom vs. AT&T – EBITDA margin

Source: Company reports, Merrill Lynch

AT&T Worldcom

199919981995 1996 1997 20001 Ratio of capital expenditures to revenue

18%

27%

33%32%

34%

25%

29%

22%

26%

24%

27%

32%

21

Worldcom – enterprise valueWorldcom Total Enterprise Value Analysis

(December 31, 1990 - December 31, 2001)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

(US$M)

22

the warm breeze - late 1990’s

Result: phenomenal capital investment in telecom

“build it and they shall come” ideology became standard basis for telecom business plans

23

global telecom capital expenditures

Source: Merrill Lynch

20011999 2000 2002 2003E

$175

$145$154

$221$217(US$B)

24

the warm breeze – late 1990s

global telecom services - capital raised

Source: Securities Data Corporation, RBC Capital Markets

$0

$50

$100

$150

$200

$250

$300

$350

1995 1996 1997 1998 1999 2000

(US

$ B

illi

on

s)

Equity Debt

47% CAGR (%)47% CAGR

the global perfect storm

26

the global perfect storm North American technology meltdown

Relative Price PerformanceNASDAQ Composite Index v. NYSE Composite Index

(December 31, 1997 - June 6, 2003)

50

100

150

200

250

300

350

Dec

-97

Mar

-98

Jun-

98

Sep

-98

Dec

-98

Mar

-99

Jun-

99

Sep

-99

Dec

-99

Mar

-00

Jun-

00

Sep

-00

Dec

-00

Mar

-01

Jun-

01

Sep

-01

Dec

-01

Mar

-02

Jun-

02

Sep

-02

Dec

-02

Mar

-03

NASDAQ

S&P/TSX

NASDAQ

NYSE

27

(US$B) $185

$119

$94

2001 2002

access to capital markets dries up

Source: J.P. Morgan Securities

the global perfect storm North American equity issuance – total

2000

28

the global perfect storm North American equity issuance - telecom

18

1999

(US$B)

38

1998

telecom issuance peaks in 2000 then in free-fall

1014

8

1995 1996 1997Source: J.P. Morgan Securities

49

2000

16

10

20022001

29

120

100

60

186

141

1998 1999 2000 2001 2002

the global perfect storm global issuer public debt default analysis

Source: Moody’s Investors Services

number of defaults skyrocket

30

the global perfect storm global issuer public debt default analysis


200119991998 2000 2002

$107B

$30B$20B

$30B

$163BUS$270B of public debt defaults in 2001/02

31

the global perfect storm US CLEC1 value destruction

Source: J.P. Morgan Securities Inc.

1 Composite comprised of, Teligent, Winstar, PSInet, McLeod and Global Crossing. Global Crossing enterprise value is as of May-99

$103B

$4.5B

Total Enterprise Value, post-restructuring

Total Enterprise Value, Mar-00

US$98B destroyed

32

Accounting irregularities surface

Investor confidence shaken generally & Worldcom/ Qwest/Adelphia placed focus on telecom sector

US political reaction: passed Sarbanes-Oxley Act in 45 days

Investor flight to safety, any telecom not considered safe

the global perfect storm corporate malfeasance

33

Credit agencies didn’t see it coming investor backlash

reacted by raising the bar becoming significantly more conservative

Equity and debt market raised the bar: cash is King!

Capital markets closed to negative cash flow stories

the global perfect storm cash becomes King again

34

the global perfect storm global credit rating activity - telecom

45

200119991998 2000 2002


Downgrades

Upgrades

123 97121

783

611

58

173129

30 5631491312

1995 1996 1997

35

35

Capex Intensity Trend Analysis

2001 2002

US RBOCs 25% 18%

AT&T 13% 10%Sprint FON 31% 14%US Wireless 34% 26%

the global perfect storm capital spending ambitions scaled back

Sources: Company reports, Merrill Lynch

1 Ratio of capital expenditures to revenue2 Composite comprised of SBC Communications, Verizon, and BellSouth

Q1-03

11%

7%10%14%

2

36

“. . . 24 of the nation's 29 top telecommunications companies

that have not yet filed for bankruptcy are at risk of doing so in

coming months. Only a few companies - among them

Verizon, Cisco Systems, SBC and BellSouth - are relatively

free from the risk of toppling into insolvency . . .” - June 18,

2002

the global perfect storm telecom meltdown

38


telecom underperforms TSX

1 Adjusted to include companies previously removed: Call-Net, Microcell, 360networks, GT Group Telecom, Microcell, and AT&T Canada

Relative Performance

S&P/TSX Composite & Telecom Services Sub-Index1

(December 31, 1997 - Present)

0

20

40

60

80

100

120

140

160

180

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

S&P/TSX Telcom Services Sub-Index (Adj.)

Telecom

TSX

39

Cdn alternate carrier revenue growth stagnates

1,505 1,5451,489

73

209

801

929

1,250

119

20012000 2002

Call-Net AT&T Canada

GT Group

($M)

1Includes only Q1 and Q2 before GT’s CCRA filing

1

40

Canadian alternate carrier debt value destruction

$13.6B

$4.7B

$2.6B

$1.6B

$2.0BMicrocell

balance sheet debt after restructuring

$1B

360networks

Call-Net

balance sheet debtbefore restructuring

AT&T Canada

$2.7B

GT

$500M

$350M360networks

Call-Net

$215M

Microcell

AT&T Canada

$0B

41

Capital no longer available for telcos with no prospect of cash flow

Liquidity crisis emerges in 2002

Similar outcome as per US:

restructurings

destruction of value

Outcome was not regulatory induced but rather inevitable consequence of global perfect storm


value destruction emulates US experience

42

TELUS/Bell West non-ILECs

source of intense competition

$335M

$527M

2001 2002 2001 2002

$182M

$368M

TELUS East (Non-ILEC) Bell West

$58M$84M

20002000

43

Regulatory impacts

Contribution & rebanding decisions significantly reduce subsidies to ILECs for below-cost rural service

Announced in 2001, effective January 2002

Decisions significantly benefit non-incumbent long distance carriers

2002 price cap decision on local rates further hurt ILECs – also hurt CLECs

the perfect storm strikes TELUS

45

strategic imperatives 2000-2003

Provide integrated solutions

Build national capabilities

Partner, acquire & divest as necessary

Focus relentlessly on growth markets

Go to market as one team

Invest in internal capabilities

46

build national capabilities

TELUS national infrastructure – 2000

Add ML map - network before expansion

47

build national capabilities

TELUS’ national infrastructure - 2003

Add ML map - network after expansion

48

TELUS’ Assessment

Price CapContribution & Rebanding

regulatory tornado hits TELUS with little warning

($211M)

($57M) ($75M)

($268M)

2002

($211M)($343M)

2003

($75M)

49

TELUS’ perfect storm arrives TELUS Common Equity

(February 1, 2001 - July 26, 2002)

$5

$10

$15

$20

$25

$30

$35

$40

$45

Feb

-01

Mar

-01

Apr

-01

May

-01

Jun-

01

Jul-0

1

Jul-0

1

Aug

-01

Sep

-01

Oct

-01

Nov

-01

Dec

-01

Jan-

02

Feb

-02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-0

2

May 31Initial reaction to CRTC price cap decision

May 5Annual General Meeting & Q1 results

Jul 25Moody's downgrade

Mar 21BCE earnings warning

Jun 25WorldCom fraud

~April 2001CRTC Contribution & Rebanding decision

Oct 25Dividend reduced to $0.15 from $0.35

~Aug-Nov 2001Enron collapse

50

TELUS recovery plan

Increased focus on cash flow generation reduced dividend by 57% offsetting cash impact of

contribution decision – Fall 2001

Operational Efficiency Plan commenced

focus on improved capital efficiency

continued successful execution by Mobility

51

March 2003Actual

2003E

7,300

6,600

Staff Reductions (net) Annual Cost Savings

2004E

$550M

$245M

OEP leads to ~29% reduction of wireline employee base

operational efficiency program (OEP)

52

invest where there is industry growth

(1.0)%Wireless

LD

Estimated 3-year industry revenue growth(CAGR% 2003-2006)

(3.8)%

6.9%

8.5%

Local

Data

Source: TELUS estimates for Canadian industry revenue growth

53

TELUS capex & capex intensity1

$1.5$1.7

$1.6$1.8

$2.6

24%

20%

29%28%

37%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

1999 2000 2001 2002 2003E

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 Ratio of capital expenditures to revenue2 Includes $356 million for wireless spectrum

Capex in billions

2

54

how does TELUS Mobility measure up?

Sources: TELUS estimates. Cdn. Statistics - Company Reports; US Statistics - Company Reports and Morgan Stanley1 Projected capex as a % of forecast total revenue. 2 Projected EBITDA less projected Capex divided by projected total revenues

3 Projected wireless penetration gain divided by # of carriers in market. For TELUS, projected net adds divided by projected covered POPs

0.5%0.9%1.2%Penetration gain/carrier3

6 to 83 to 43 to 4No. of carriers in market

53%41%12%Mkt penetration/cov. POPs

9.2%5.3%11%(EBITDA – Capex) / tot. rev2

21%18%20%Capex intensity1

15%16%29%Annual EBITDA growth rate

32%26%34%EBITDA / network rev.

US Avg 2003

Cdn Avg 2003

TM 2003 guidance

TELUS Mobility is a premium wireless provider operating in rational Cdn wireless industry

55

wireless penetration outlook

Canadian wireless penetration: 2006E

Prior expectation 40%

Revised - Sept ‘99 50-70%

Current expectation approx. 50%

56

brightest future ever for Cdn. wireless industry

Rational industry structure supports competition

Stable revenue per subscriber

Among lowest churn rates in the world

Producing positive free cash flow for the first time since inception in 1985

Financial prospects very bright for those with good strategies, well-executed

57

TELUS free cash flow1

2001 2002

2003E

1 EBITDA less capex, cash interest, cash taxes, cash dividends; excludes restructuring & workforce reduction costs

$(1.35)B

$(26)M

$500 to 600M

58

TELUS recovery plan

Increased focus on cash flow generation reduced dividend by 57% offsetting cash impact of

contribution decision – Fall 2001

Operational Efficiency Program commenced



Enhanced public disclosure – Summer 2002 bank covenants disclosed

increased Investor Relations communication

issued 2004 cash flow guidance early

59

TELUS corporate governance

Took comprehensive action in 2002

Supports direction in US of Sarbanes-Oxley/SEC

Supports Canada’s proposed National Policy on disclosure & Ontario’s Bill 198

60

Enhancements include:

Required

Not required

CEO & CFO certification of Financial Statements & MD&A

Disclosure controls & procedures Enhance MD&A Ethics policy update & disclose Whistle blower hotline Improve risk management process External auditor independence

TELUS corporate governance

response to concerns

61

TELUS recovery plan

Increased focus on cash flow generation reduced dividend by 57% – Fall 2001 - offsetting cash impact

of contribution & rebanding decision

Operational Efficiency Plan commenced



Enhanced public disclosure – Summer 2002 bank covenants disclosed

increased Investor Relations communication

issued 2004 cash flow guidance early

Debt buyback / equity issue – Aug/Sept 2002

Reduce leverage

62

strategy & execution paying offTELUS Bond Performance

$40

$60

$80

$100

$120

Jul-0

2

Aug

-02

Sep

-02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

May

-03

C$ 7.5% 2006

US$ 7.5% 2007

US$ 8.0% 2011Jul 29

Q2 results & increased disclosure

Nov 4Q3 results

Sep 12Equity offering & debt buyback

Dec 162003 targets release

Apr 16Moody's outlook upgrade to stable

Feb 14Q4 results

Apr 30Annual General Meeting &

Q1 Results

May 29Fitch outlook upgrade to stable

63

2003 outlook

leading North American telecom performance

9.2%

5.3% 5.0%

(0.6%)(2.0%)

(4.5%)

(21.2%)

(13.0%)

(6.3%)

TELUS MTS

Sprint

BCE

SBCVerizon AT&TAliantBell

South

Projected EBITDA Growth Rates – 2003E

Note: TELUS data based on 2002 actual results & average of 2003 targetsOther 2003 estimates provided by TD Securities, based on analysts estimates

64

1.5%

BellSouth

Projected EBITDA-Capex Growth Rates – 2003E

11.5% 8.5% 7.0%

18.4%

(19.9%)

(4.6%)(0.6%)

52.3%

TELUS MTS SprintBCE

SBCVerizon AT&T

Aliant

Note: TELUS data based on 2002 actual results & average of 2003 targetsOther 2003 estimates provided by TD Securities, based on analysts estimates

2003 outlook

leading North American telecom performance

65

strategy & execution paying off - equity

TELUS Equity Performance

$5

$10

$15

$20

$25

Jul-

02

Au

g-0

2

Se

p-0

2

Oct

-02

No

v-0

2

De

c-0

2

Jan

-03

Fe

b-0

3

Ma

r-0

3

Ap

r-0

3

Ma

y-0

3

Jul 29Q2 results & increased disclosure

Nov 4Q3 results

Sep 12Equity offering & debt buyback

Dec 162003 targets release Feb 14

Q4 release

Apr 30Annual General

Meeting & Q1 results

Lessons learnedfor a brighter future

67

lessons learned

Customers & investors should determine telecom winners and losers, not regulator

Do not ask regulators to subsidize poor strategies, poorly executed

CLEC/alternate carrier failures in Canada consistent with US experience, not due to CRTC

Debt-free ‘fallen angels’ source of rejuvenated competition

Bell & TELUS geographic expansions are source of increasingly intense competitive rivalry

68

lessons learned TELUS has incurred ~$350M of reduced operating profit due to

price cap and contribution/rebanding regulatory decisions

Regulatory decisions should ideally be consistent, transparent and sensitive to capital market considerations

Unlike US, Canada has evolved to correct wireless industry structure

TELUS Mobility is producing best-in-class results and we are now experiencing the brightest future ever for Cdn. wireless industry despite moderating growth

TELUS experience in past year shows that good telecom strategy consistently well-executed will be rewarded despite regulatory and other external adversity

questions?

the 2003 canadian telecom summit looking toward a brighter future toronto june 11, 2003

Documents

warm breeze late

future revenue growth

excessive slide

bloomberg slide

s source

brighter future slide

multiples of ppe slide

s capital markets