TELUS' (TU) CEO Darren Entwistle on Q4 2016 Results - Earnings Call Transcript

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TELUS Corporation (NYSE:TU) Q4 2016 Earnings Conference Call February 9, 2017 5:00 PM ET

Executives

Paul Carpino – Investor Relations

Darren Entwistle – President and Chief Executive Officer

Doug French – Chief Financial Officer

Analysts

Simon Flannery – Morgan Stanley

Phillip Huang – Barclays Capital

Aravinda Galappatthige – Canaccord

Vince Valentini – TD Securities

Richard Choe – JPMorgan

Maher Yaghi – Desjardins

Jeff Fan – Scotiabank

Operator

Good morning, ladies and gentlemen, welcome to the TELUS 2016 Q4 earnings conference call. I would like to introduce your speaker, Mr. Paul Carpino, please go ahead.

Paul Carpino

Thanks, Mike. Good morning, everyone, and thank you for joining us today. The Q4 2016 news release and detailed supplemental investor information are posted on our website at telus.com/investors.

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; and our 2017 targets by Doug French, our CFO. After our prepared remarks we will conclude with a question-and-answer session. In consideration of your day, we will try and keep this call to under an hour.

Let me direct your attention to Slide 2. This presentation, answers to questions and statements about future events including 2017 annual targets and outlook and intentions for dividend growth and future share purchases include forward-looking statements that are subject to risks and uncertainties and are made based on certain assumptions.

According, 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, our fourth quarter management's review of operations, as well as filings with securities commissions in Canada and the United States. The appendix of this presentation and section 4 of our fourth quarter management's review of operation provide definitions and reconciliations of the non-GAAP measures that we use today.

Let me now turn the call over to Darren starting on Slide 3.

Darren Entwistle

Thank you, Paul, and good morning to everyone. As you have seen today, TELUS finished 2016 with strong Q4 results driven importantly by both our wireline and wireless businesses.

Consolidated revenue was up 2.7% and EBITDA was up 5.1%, reflecting strong absolute and relative performance versus our peers. In the fourth quarter we delivered strong loaning across all key growth segments, with 127,000 net new postpaid wireless, internet and TELUS TV customers, up 17% from last year. In wireless we reported postpaid net additions of 87,000 in the fourth quarter, up 40% from one year ago. We also saw growth in network revenue and wireless EBITDA, which were up 5.4% and 5.1% respectively. Blended ARPU was also strong at CAD66.24 and up a solid 3.9% from 2016.

Customer loyalty remains the best in our industry where we achieved a churn rate of 0.98%. A meaningful 37 and 47 basis points better than our two national peers. Impressively, TELUS has now delivered a postpaid churn rate below 1% for three consecutive years. With strong ARPU and a low churn rate, TELUS also continues to deliver the best lifetime revenue per subscriber at CAD5,300, a significant 27% and 36% higher than our two closest competitors.

Turning to wireline, our proven and diversified TELUS product portfolio delivered strong performance in respect of revenue, EBITDA, and subscriber growth. External wireline revenues increased 1.3% and adjusted EBITDA grew a strong 5.0% in the fourth quarter. Data revenue grew 6.1% and high-speed internet and TV net additions were up a healthy 24,000 and 16,000, respectively. Importantly, TV and high-speed net additions exceeded our residential network access line losses by a factor of two times, further highlighting the effectiveness and the success of our capital investments in these growth sectors.

Our strong wireline results within this competitive environment reflect the benefits of a product portfolio that delivers a premium experience with broad choices for all of our customers, a clear differentiator for us in our chosen markets. Our consistent wireline results also reflect the benefits from our ongoing enhancements to TELUS's broadband footprint in both urban and rural communities, including fiber to the premise and the strong pull-through effect of Optik TV bundling. As our 2017 targets reflect, we continue to have confidence in our competitive positioning and our wireline markets.

Overall, Q4 and 2016 represented strong performance across our wireless and our wireline businesses. Through our consistent execution across both wireless and wireline operations, TELUS has been able to drive consistent customer loading and retention, underpinning our revenue and EBITDA growth. TELUS has been able to maintain a strong balance sheet and improving cash generation. We've been able to continue our successful long-term CapEx investment strategy and simultaneously reward shareholders with our long-term dividend growth programs.

Our 2017 targets announced this morning represent the TELUS team's confidence in continuing these strong growth trends, including consolidated revenue of up to 3.5% and EBITDA growth of up to 6% in 2017. Similar to 2016, both wireless and wireline results will contribute strongly to these targets, reflecting the quality of our dual-tenant growth engines at TELUS.

Our consistent growth in revenue and EBITDA has buttressed the targeted generational investments TELUS continues to make in its core wireline and wireless broadband networks. In this regard, consolidated capital expenditures are targeted at approximately CAD2.9 billion in 2017, similar to the 2016 level.

Clearly, our consistent, long-term approach to capital investments and the returns we exact in this regard has positioned TELUS well for today and for the future, and has allowed us to establish the best wireless and wireline networks on a global basis for our customers.

The recent open signal network report released in January of this year noted that Canadian wireless carriers have established networks that already offer speeds more than 10 megabits per second faster than the average global LTE connection, and nearly twice that of a typical 4G connection in the United States.

A particular note to TELUS customers and shareholders is the fact that the open signal report highlighted that the TELUS network was recognized as the fastest overall wireless network in Canada. This report also went on to highlight that the TELUS network was number one in terms of low latency, an important factor as the demand for data services and applications continues to grow at an exponential rate.

In addition to the benefits seen from our wireless investments, our 2017 CapEx investments will also see us continue to build out our successful fiber optic network where we have now passed over 1 million homes and businesses.

In addition to the notable benefits our capital investments delivered to our customers and, importantly, the communities that we serve, they also deliver meaningful benefits to our shareholders. Through the success of these investments we have shown our ability to consistently drive long-term revenue and EBITDA growth, to deliver ARPU expansion, to create ARPU enhancement opportunities, and to deliver greater free cash flow to support our shareholder-friendly initiatives.

Indeed we have established an enviable track record in this regard. Notably, we returned over CAD1.2 billion to shareholders in both dividends and share purchases in 2016. Furthermore, TELUS has now returned approximately CAD14 billion to shareholders including CAD8.7 billion in dividends and CAD5.2 billion in share purchases, representing CAD24 per share since 2004.

In continuing with this key focus at TELUS, and in building upon our track record of six consecutive years of 10% annual dividend growth, we are targeting an additional 7% to 10% dividend increase in 2017, as was previously announced.

2016 was a strong year for TELUS, and indeed our 2017 targets reflect our team's commitment to continue this level of performance. I want to take this opportunity to thank the TELUS team for their ability to consistently deliver on our strategy, regardless of the competitive environment or economic challenges that we face along the way.

I am fortunate that I get to work with this team day in and day out and I'm always impressed with what our organization achieves as a team and how this translates into strong results for our customers, our investors, and the communities that we work in. Let me now turn the call over to Doug to provide additional details on our results.

Doug French

Thank you, Darren, and good morning. I'm on Slide 8. Fourth quarter wireless results showed a strong network revenue growth and improving margins as a result of solid operational execution in a competitive market. Network revenue grew 5.4% reflecting 3.9% increase in ARPU, driven by data and continued high value postpaid subscriber growth.

While reported EBITDA was down 4.7% due to the immediately investing transformative compensation expense recorded in the fourth quarter, adjusted EBITDA increased by 4%. When excluding the nonrecurring real estate gain in the fourth quarter of 2015, adjusted wireless EBITDA increased by 5.1% from higher network revenue, cost savings through our execution of our operational efficiency and effective initiatives.

Adjusted EBITDA margins were up 20 basis points as revenue growth and expense control offset an increase in combined COA and COR costs as a result of the competitive environment. Capital expenditures increased year-over-year by 19% reflecting the continued LTE enhancements, spectrum deployments, and increased investments to support our small cell and 5G strategy.

Moving on to wireline on Slide 9. In wireline, revenue increased 1.3% year-over-year making it 24 consecutive quarters now with wireline revenue increases. The growth was driven by CAD60 million increase in data revenue reflecting continued high-speed and TV subscriber growth and higher revenue per internet and TV subscriber, as well as strong growth from TELUS international.

Offset was a decline in voice and other revenue. Reported EBITDA declined as a result of the transformative compensation expense. Adjusted wireline EBITDA increased by 1.7% with a margin of 28.5% and, when excluding the nonrecurring real estate gain in the fourth quarter of 2015, adjusted wireline EBITDA growth was 5% for the fourth quarter reflecting the benefits of our cost efficiency programs and improving margins in data services.

CapEx increased 22% due to continued generational investments in our broadband infrastructure. This included connecting more homes and businesses directly to our fiber optic network. The TELUS pure fiber footprint now covers more than one million homes and businesses, or over 38% of the targeted footprint and growing.

On a consolidated basis, as shown on Slide 10, TELUS had revenue growth of 2.7% and adjusted EBITDA growth of 3.1%. Adjusted EBITDA was up 5.1% when excluding that nonrecurring real estate gain.

Adjusted earnings were down – adjusted earnings per share were down CAD0.01 to CAD0.53 as EBITDA growth was offset by increased depreciation and amortization costs as well as financing costs. A full set of the drivers, please see the appendix.

As noted earlier, CapEx increased by 21%. Free cash flow was negative CAD191 million, largely due to a higher CapEx, as well as the transformative compensation payments. These components are also shown on a slide in our appendix.

Turning to Slide 11. For 2017 we are targeting consolidated revenue growth of 2.5% to 3.5%. Consolidated EBITDA, excluding restructuring and other costs, is targeted at 3% to 6%. Although we are not presenting segmented targets for the year, similar to 2016, both for our 2017 wireless and wireline EBITDA, we're expected to be aligned with our consolidated target range reflecting the diversity of our combined strength of our two segments.

EPS is targeted to increase 2% to 8%. We're targeting to invest approximately CAD2.9 billion in capital expenditures, which represents a capital intensity of approximately 22% as we continue to enhance and expand our TELUS fiber footprint, future-proofing our network, and supporting the continued high speed internet and Optik TV subscriber growth.

In wireless, we continue to deploy spectrum and investing in our 4G LTE expansion and upgrades, our small cell technology, fiber connectivity to prepare for more efficient and timely evolution to 5G. Our key assumptions for 2017 include restructuring of approximately CAD125 million, income taxes at a statutory rate of 26.4% to 26.9% and income tax payments of approximately CAD300 million to CAD360 million.

The buy-in benefit plan expense of CAD83 million, which is in EBITDA, and CAD5 million in interest for financing costs. Cash contributions are expected to be approximately CAD65 million. For the list of assumptions and support for our 2017 outlook, please see section 1.7 of our fourth quarter management review of operations.

Let me put the call back to Paul now for questions and answers.

Paul Carpino

Thank you, Doug. Mike, can you please proceed with questions from the queue for Darren and Doug?

Question-and-Answer Session

Operator

Sure. First question comes from Simon Flannery [Morgan Stanley]. Please go ahead.

Simon Flannery

Great. Thank you. This one for Doug. Doug, could you just talk about the balance sheet, and the leverage targets? I think you're just a shade about your 2 to 2.5 target? How do you think about wanting to get back in that range, versus balancing that versus buybacks?

And I guess, a question for both of you, in terms of the 7% to 10% how should we think about what's driving that? Is the low end of guidance a 7% dividend, and the high-end of guidance a 10%, or what other factors go into that? Thanks.

Doug French

Okay. So for the balance sheet, as we previously discussed on our last call, we expect to be back to, within the range in 2018 to our leverage metrics. You can also see in our appendix for free cash flow, that even after dividends as we lead out into 2017 and 2018, that we will be free cash flow after dividends during that time frame. So that is our expectations on our leverage, and Darren, do want to add comments on the second one?

Darren Entwistle

Simon, you're right, the low end of the guidance is 7%, and the high end of the guidance is 10%. And the way to think about it is, it's driven by the EBITDA performance of the organization, of flowing through to the bottom line, and the improving cash picture of the organization, per the guidance that I gave on the last call, and where we want to be by 2018.

Simon Flannery

Great. Thank you.

Paul Carpino

Great. Thanks, Simon. Next question, Mike?

Operator

All right, next we have a question from Phillip Huang [Barclays Capital]. Please go ahead.

Philip Huang

Yes, thanks, good morning. A question on the fixed line side of the business. Was wondering if you could, I think on the back of Shaw's strong broadband subscribers, it was easy to assume that Shaw that taken some gross share away from TELUS, given their WideOpen plans, but clearly that does not appear to be the case this quarter. Was wondering, if you could give us an update on the overall market, including the pricing environment?

Darren Entwistle

Okay. So as it relates to developments on Shaw 150 – I have got a bit of an echo on the line.

Paul Carpino

I think it's gone now.

Darren Entwistle

It's gone now, okay. Good. So as it relates to the market developments on the competitive front, with both Shaw 150 and the BlueSky program with Xfinity, I think the first point for investors to note, is that TELUS – and I would suspect Shaw as well, would prefer robust competition over regulation that would be onerous, or government intervention any day of the week. I think it's also healthy in terms of the market, when we see the developing competition being based on product innovation and value for money, rather than purely price discounting.

I think that's superior over the long-term for the sustainability of the competitive intensity. It's superior over the long-term for customers, and superior over the longer term for investors, like when you're competing on product-based innovation and value for money, rather than price discounting.

When we look at the market, and our positioning within the market, and the tale of the tape, we would believe at TELUS of the Optik ecosystem versus Xfinity, it's favorable to our organization. And we think it's favorable in respect of functionality, features, the road map that we have for the Optik ecosystem, and cost economics.

The other thing that I think is important to reflect upon is that the Optik ecosystem at TELUS is buttressed by the combination of Optik with our wide band fibre deployment, that supports the performance and functionality of optics, but also drives our HSIA offering and features like speed symmetry that's quite unique on the uplink, as well as the downlink, and all sorts of future for all home services, that I think will be quite exciting in the years ahead, that present the opportunity for us to earn our way to establishing new RGU connections with the home, and the revenue, and the margins that flow from that.

The other thing in terms of thinking about the market is that we don't really, and kind of consistent with the consolidated guidance we gave today, we don't think of the market on a hard-segmented wireline wireless basis. We think about it as services that are available over broadband, whether that's fixed or wireless for customers, whether they're sedentary or whether they're on the move. And when you think about the power that we have, with the investments that we've made and continue to make in our wireless network, it's quite the advantage.

So I like the ability to take our Optik ecosystem mobile with a ubiquitous LTE, LTE advanced and in the future a 5G wireless network, that has decidedly superior performance characteristics in terms of speed, coverage, and latency, which is so important in a world of data applications, whether it is gaming or face-timing along the way.

So when you look at the open signal report, and you think, okay, that's wireless. But think about the implications that it has, as we take our Optik capability mobile, with our clients, and really live in a converged wireless and wireline world. And I think that's the way investors have to start looking at the market, as integrated wireless and wireline, broadband supporting the delivery of applications that are critical for consumers, for business customers, and for key sectors that we're looking to address on a differentiated basis like healthcare, and the primary care ecosystem.

The other thing that, when we're looking at the market, I think is important is, yes, you can talk about wide band capabilities. You can talk about product innovation, features, and functionality, but if you don't back it up with the best customer service going, you're not going to be successful. Or you're not going to make the margins that you would like to make on a sustainable basis.

I think the fact that since 2008, we have had the mentality of client service excellence and putting customers first, allows us to drive a solution set in the marketplace that will be superior to all of our peers, in terms of the quality of service that we afford our customers. So when you can complement, technology capabilities with product innovation, and a best-in-class customer experience, I think that particular continuum from a differentiation and a winning market proposition point of view, is going to be unassailable.

And then, when I look at the market going forward, I think – though confidence that we have, which is considered and bridled, is reflected in the guidance that we have set out for 2017, which I think a strong guidance both absolutely, on a relative basis. And it's great that that guidance is not based on one tenet, but reflects a near parity of contribution from both the wireless and the wireline sides of our business.

And when we look at the market, on the wireline front, one of the things that I always like to remind people is that we have the benefit of diversification. Diversity is indeed a beautiful thing. And to reflect on the fact that what we do on wireline in a ILEC market like Alberta and BC, is just one component of our business. We've got about a 57% overlap with our cable competitor.

They've got about a 92% overlap with TELUS, such as the diversification of our national revenue and EBITDA sources across the business market and wireless and wireline. So I think all of those factors come into play in the market front, but I'm bullish in terms of what we can achieve on a go-forward basis. But we're going to try to be a bit conservative in terms of our expectations.

Phillip Huang

Yes, thanks for that, Darren. I think you've been pretty constant with your CapEx plans over the next several years. But I thought I'd would ask you to give us an update on your thoughts for plans in 2017, should we assume CapEx will remain around the CAD2.9 billion level? Thanks.

Darren Entwistle

I think we’ve actually shipped it from transparent to details and prescriptive when it comes to our CapEx guidance going forward. So, just to go around the houses on this one more time, one of the hallmarks of TELUS and the avoidance of write-offs at our organization is that the CapEx which has been mostly organic over the years has always been focused on our core business, core technology, mostly on the broadband front. Very data centric because that’s where we saw the growth coming from on both wireless and wireline; effectively very much national focused versus pursuing any type of international strategy of significance when it comes to CapEx investments.

I think the other thing that has been helpful for investors is the strategy that we are pursuing today in 2017 is identical to the one that we communicated to the Street back in 2000 and I think that consistency when it comes to investing is a powerful thing, particularly when the strategy has been backed up by excellent operational and financial execution along the way. And so when you look at TELUS for 2017 – and I try to choose my words carefully in my opening remarks – the view that we are giving in terms of circuit CAD2.9 billion in 2017 and commenting that it’s at parity with what we did in 2016, it is really indicative of what you can expect TELUS over the next four to five years in terms of our spend rate.

And as I said previously, we really do believe that the time is right for this particular investment. We've got advantageous positioning in terms of cost of capital. We’ve got a favorable regulatory environment in terms of the investments that we're making. We’ve got beautiful synergies across wireless and wireline as it relates to the wireline broadband built, but it’s not just built to support TV and HSIA, but it’s going to be the fronthaul and the backhaul for our 5G wireless network into the future. It’s a fiber investment that’s not just for consumers but for businesses, for public sector, and for the important trust that we got on primary care health.

I think we are earning our way to this investment. It’s an important hallmark at TELUS. If we were looking to invest at this rate, but we weren't backing it up with our financial performance, weren’t backing it up with our operational performance, and weren’t backing it up with our capital return program, that would be a different thing. But the fact of the matter is we’ve earned the investment, we are generating not just good financial and operational results, but when you look at the financial results whether its revenue and EBITDA growth in 2016 or what we're postulating prospectively in terms of revenue and EBITDA growth in 2017, it’s best-in-class.

And I think we have shown through that track record and as well spend money on investments but also carried on with capital returns in terms of our dividend program, we’ve earned the right to make this particular investment. We got a strong balance sheet, I think those comments were oppressing. We're inching closer to that 2 to 2.5 times net debt to EBITDA range. And as I said previously, I think we'll get there in the near-term in terms of that particular leverage ratio and I think that’s a positive thing for this organization.

The other thing that I think you want from us is you do not want us to pop in here and talk about non-recurring events that supported a singular strong quarter. You wanted an organization that’s going to be able to come forward and say, strong 2017, strong 2018, strong 2019, strong 2020. And our ability to deliver those strong financial operational and capital return programs over the three-year to five-year period is contingent upon the investments that we're making today and the returns that we extract from them in a responsible fashion.

And then lastly, I've highlighted and I’ll do it again that we expect to be free cash flow accretive in 2018, materially so; and then growing thereafter, of course, normalizing the Board, singular events like spectrum auction along the way. And so I think the time is right to break the back of some generational investments, particularly as it relates to fibre-to-the-home. Because at the end of the day, you have an opportunity to build in a sustainable level of competitive differentiation versus your peers on the technology front in a data centric world, economy and society, I think that’s a pretty smart thing to do for investors over the longer term.

Phillip Huang

That’s very helpful. Thanks Darren.

Paul Carpino

Great, thanks. Mike, next question please.

Operator

Next question comes from Aravinda Galappatthige from Canaccord. Please go ahead.

Aravinda Galappatthige

Thanks for taking my question. On the wireless side, Darren, I mean, obviously things show very strong ARPU growth, and now there’s been a bit of discussion already around data overages. Given some of the [indiscernible] that you’ve had in the past, is that even a factor in terms of driving ARPU at this point? And can you just touch generally on the industry strength that we've been seeing both in the wireless ARPU and also postpaid net add? So what’s been your take over the last three quarters which is a surprise to the Street to the upside?

Darren Entwistle

Okay. Let me take the last part of your question first. In terms of contribution to industry subscriber growth, I think it’s important to highlight, number one, it’s nice to see. So, at the end of the day to seek strong performance for the industry, I think it’s a good thing for investors and I will recognize the results at our peers. In terms of some of the factors that are underpinning it, I will highlight a few for you are, clearly we are seeing the population of Canada growth from immigration. I think that development that is having an impact along the way.

Secondly and importantly, we are seeing an expansion in particularly in certain demographics of our society related to our digital economy and digital society and where we have got multiple RGUs per human being I think would be a good way to describe it. That can be reflected in many areas whether it is the name where people have one device for business and one device on the personal front or whether they have got a multiplicity of devices that relate to things like healthcare connectivity by the way of one particular example.

The next thing that I think people need to think about is, it is just not smartphone connections. One of the things that has been left out is that we’re seeing more and more obviously tablet connections to go along with the smartphone connections both on its entry and on a mobile basis. The other aspect that I don’t think has been discussed as much and this has been de minimis for TELUS. So this is not reflected in our loading. But I think increasingly we are seeing wireless loading that’s related to wireless home phone. That is showing up in subscriber numbers. It’s not a factor, it’s not a factor in 87,000 that TELUS did. But I do think it is a factor for the industry and probably as it relates to some of our peers.

The other thing that’s helped us along the way at TELUS is that the dilution from Alberta has gone from dilution that we were experiencing in 2015 to a very modest net accretion and loading in 2016, when you look across both business and consumer. So the avoidance of the dilution from the economic downturn that we experienced in 2015 and seemed very modest accretion in 2016 but nice delta of 2016 versus 2015. I think that factor has been helpful along the way. So that’s a thumbnail sketch of some of the things that are important.

In terms of your question on data overages, that is not a factor for TELUS. And that is not through happenstance. That is purposeful because as I think you may be aware, at the midpoint of 2015, we launched our real-time reading and notification program with clients, so they could better manage their consumption within their established data packages and we did this despite the fact that it had a J-curve with it. It was near-term dilutive, longer-term accretive because we thought it was the right thing to do, if we were going to put our money where our mouth was in terms of putting customers first and focusing on client service excellence because the number one to satisfy for our customers was overage and frequently those angry customers would call into our call center generating OpEx of where TELUS.

And in many situations we would do, what we should have done in the first place and undertake a rewrite. And so giving them the information on a real-time basis, delivered right to their fingertips if you will to better manage to usage within their established data packages. We felt was a smart thing to do, better client set, better loyalty and retention along the way. Better client set, fewer calls into our call centers, better OpEx management along the way. And then also thinking about, okay, but it’s also feature that particular capabilities. So that if they are hitting the upper echelons of their data package usage, then let’s offer them an opportunity to either permanently moved to a larger data package or top up just for the month which would be a nice economic opportunity for them in terms of its a nice price and they are in control of the decision versus what we have seen historically as it relates to overage. And we get a nice ARPU pump whether it is on a non-recurring basis because it’s an in month top up or in a recurring basis because they stepped up to a higher data plan on a more permanent basis.

When I look at our growth overall, the 3.9% in terms of ARPU, I think some factors here are interesting. Number one, these would be true for 2016 but also prospective in terms of what we would expect to continue to develop for 2017. Firstly, something it doesn’t get chatted about very frequently when you talk about ARPU robustness, but I’m going to go to churn because if you have better churn on your higher ARPU customers, you’ve got a better base to build upon and you have got less ARPU dilution and TELUS if you look at the churn delta between us and our peers and in particular how will we do on loyalty and retention with our higher ARPU customers that’s a big factor to our ARPU resiliency on a go forward basis.

Second thing relating again to your question on data. We are getting increasingly larger proportion of our customer base on higher rate – share plans and that’s being reflected on the ARPU front. We’re seeing an adoption of larger data buckets and participation in data upsell programs such as the ones that, but I just articulated, such as the insatiable appetite that people have for data applications when we are giving them increasing swathes of bandwidth to use with the smartphone devices and tablets, kudo is making a tidy contribution to growth in terms of our ARPU.

We’re – what is deploy a new technology, the more and more LTE, LTE advanced devices that we get out there we see a direct co-relation with higher data growth and the data ARPU flows from it. And then lastly, we’re seeing an improved data roaming. There are other factors that I think are worth chatting beyond data as it relates to ARPU robustness and we’re seeing a shift at the higher value clients whether it’s prepaid or postpaid or lower tier postpaid to higher tier postpaid within our client base.

And I think it’s overall important to point out that when it comes to sub-expansion at TELUS client expansion, TELUS which we would expect to continue obviously in 2017 we’re not so focused on pure operational loading growth but the quality of that loading growth in the contribution that it makes to sustainable ARPU and EBITDA along the way. The next factor that is important for us, of course, is we’ve launched our new premium plus program that is becoming an increasing portion of our postpaid client base.

And that’s a program where with premium plus, we’re driving higher ARPU but it is offset as a higher subsidy that we’re absorbing within the rate plan. The other thing that we talked about for years, and I’ll tell you, which would be going faster, but it’s incrementally improving each step of the way it’s international roaming. At the midpoint last year, we expanded easy roam to 127 countries. I would expect that to make a growing contribution into the future.

And then, the last thing to watch for, its modest now that, we would be increasing the future. It is way three applications, particularly as it relates to the data of binocular. IOT, a machine to machine within the wireless world is going to be a long-term growth tenant for this organization consistent with the data focus that we’ve had every step of the way, consistent with wireless, wireline integrated offerings, consistent with the ubiquity of our wireless network and when you look at the attributes that we have on speed, coverage, reliability, the management of latency, we’re well-positioned to develop a significant positive economic market share position on machine to machine applications across both business consumer and wholesale.

Aravinda Galappatthige

Great, thank you.

Paul Carpino

Thanks, Arvind. Next question Mike.

Operator

Next question comes from Vince Valentini from TD Securities. Please go ahead.

Vince Valentini

Yes, thanks very much. Question on wireless and your sub adds. So postpaid adds, we’re obviously very strong for you guys, I think you said up 40% year-over-year. But still you are number three in market share for the fourth quarter in a row. Are you just have satisfied that your numbers are really strong in the market share ranking doesn’t really matter. Or could we potentially see you take little bit more of an aggressive stands with pricing and promotions to try to get up to number two or number one on market share. And just one clarifications part of that, public mobile offer in the quarter for $40 with those subs have been counted as prepaid or postpaid? Thanks.

Paul Carpino

So let me cantor through the questions, Vince. I would say in terms of Q4 we’re satisfied with our performance and comfortable with our positioning. Don’t take that to be that – we are not completive when it comes to loading or that we don’t have the continuous improvement mentality where we are always looking to do better. But I am pleased with the quarter. And I’m comfortable with our positioning.

I guess the authenticity the comment is reflected in the back in my previous answer, I articulated that for us it’s about profitable revenue growth rather than where we rank on the loading league table in any particular quarter. Sure, we’ll strive to do better. And I think if you look back over the last five or six years there have been periods where we have led on the loading front. There is been periods where we have taken a disproportionate market share in the loading front. But I think the consistent piece for us is the quality of loading and the economic value on a sustained basis that we can generate on that.

Secondly, as a result of our churn rate, we can be pretty discriminating when it comes to our choices because we don’t need to generate the investment at growth level to deliver a very good net adds results. When you are 37 and 47 bips better on churn than your peers as it relates to postpaid, that gives you a lot of economic latitude that’s quite positive. And when I talk about value and putting the metrics to the test and I talked about churn and its importance. I think it’s important to have a look at what the combination of ARPU and churn does for us when you look to lifetime revenue per client.

To be in a position, we’re $1,100 better than one competitor and $1,400 better than another competitor on lifetime revenue per client. I think that’s a pretty smart position to be in particularly in a world where COA and COR chronically more expensive than what it used to be. So, that’s very much the focus for us. I wouldn’t want to see the gap widen if you will and you’ve got our representation that we’ll do our best to compete ardently. Maybe the league table will shift from one quarter to the next.

But I’m going to tell you right now, don’t expect that we are going to do something silly, uneconomic, foolishly irrational as it relates to pulling certain discount price levers or going even more crazy than what we already are on device subsidy just because I want to close a notch on a league table ranking that’s not really the strategic pieces of the TELUS organization. And in terms of public mobile, it’s prepaid.

Vince Valentini

Thank you.

Paul Carpino

Thanks, Vince. Next question, Mike. Next question, Mike.

Operator

Next question comes from Richard Choe from JPMorgan. Please go ahead.

Richard Choe

Great, thank you. Just wanted to go back to guidance, revenue guidance is a little bit higher than last year. Is this mostly driven by wireless and with wireline flattening out with especially the data revenue? Are we expecting to see an acceleration in wireless or could wireline rebound? Thank you.

Doug French

Its Doug, We are seeing growth in both wireline and wireless. There will be a prominent in revenue growth of wireless over wireline now. So we’ll be more skewed to the higher end for wireless. But we will definitely see growth on both of our products sets of wireline and wireless.

Richard Choe

And in terms of the fiber footprint, can you give us an idea on what market shares like within the footprint for older markets versus new ones and versus out of footprint. And where could that footprint go overtime?

Doug French

I think, we’ll leave it that we’re doing very well without giving specificity on the market share front per community that we cover. That’s a bit competitively sensitive to us, including postulating as to where that might go in terms of share overtime. I guess, what I would guide you towards is that our performance has been strong in terms of loading. The performance of our fiber connectivity is better than the average. So when you look at our loading that’s our holistic loading the performance of our fiber to the home solution is even better than what you see in the overall reported loading.

I don’t think we need to get into where we can take that too. But you can do some existing share calculations, TELUS versus our competition. And I don’t think we need to prime the pump anymore aggressively. I think the current course and trajectory is prudent for TELUS. I don't think we need to spend into the aggressive zone. And I go back to our thesis, we're going to focus on product innovation, and we're going to focus on client service excellence, and we're going to focus on getting you an economic return on the CapEx that we're investing, to support the fibre program.

Richard Choe

Great. Thank you.

Paul Carpino

Great. Thanks, Richard. Next question, please?

Operator

All right. Next question comes from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi

Yes, thank you for taking my question. Many of my questions were asked, but I wanted to ask you on margins, we saw an improvement in margins in 2016, for both the segments versus 2015. And you're expecting margins per your targets for 2017 to improve as well. Can you talk about where those margins are coming from, wireless versus wireline?

Darren Entwistle

So they're coming from both. So the same way we've been delivering, and are look to – looking to deliver again in 2017 best-in-class EBITDA growth. We did it from the industry leadership position in 2016, and we're going to strive to do it again in 2017.

A key factor underpinning that, on both wireless and wireline has been our cost efficiency programs. And you can expect to see us continue to make investments in that regard over 2017, 2018 and 2019, with CAD125 million being initiated in 2017 across that three-year period. And I think we've got a pretty good track record in that regard.

I think it's important to note that you'll see us balancing our cost efficiency initiatives, with our top priority of putting customers first, ensuring that we can have customer service excellence, and drive strong operational loading. And simultaneously improve the OpEx and CapEx profile of this organization, and the margins that are inherent from those particular activities.

If you look at the margin expansion in 2016, it's reflective of the execution of our cost efficiency programs. And we've seen margin expansion take place across the board, so margin improvements in wireless, but also margin improvements in wireline data, including TV, HSIA and health along the way.

And yes, before you ask the question, we're still on a march to get to 30% margins on the wireline side of the business. We have not forsaken that particular target. The same way that on the wireless side of the business, we talk a lot about ARPU. But when we get into the management meetings at TELUS, I think you would be comforted, to see that we talk even more about AMPU, reflecting the fact, that you can't guarantee that ARPU is going to carry on, from the growth perspective unabated forever after. And the AMPU focus on wireless has been a key for us.

In terms of the genesis that's supporting our efficiency measures, let me talk about it in three tiers. Firstly, in terms of what's going to take place in 2017, 2018 and 2019, you got to go back to the operational efficiency program that we initiated in the late 2015 period, and the early 2016 period, where we reduced some 1,500 full-time positions, that yielded annualized savings of CAD125 million-plus.

Building on top of that, and you would have seen us invest CAD174 million in workforce restructuring in 2016. And we are very circumspect, in making sure that not only is that NPV positive obviously, we treat it just like a product or technology investment. But that the discount payback period is less than three years. So we invested another CAD174 million in 2016, and we're postulating CAD125 million, in terms of efficiency initiatives that are earmarked for 2017. And so, it's really the cumulative effect of that trio of investment activities, and these annualized savings that it's generating, that's helping out this organization for sure.

And then, as we talked about previously, the lump sums that we have paid out to our team members are driving important workforce productivity improvements, that were basically galvanized within the new collective agreement with our unionized team members. And those productivity improvements relate to everything, from the operational performance of the organization, most particularly the customer service orientation of the organization and the customer, and the financial results that flow from the improvements that they support both operationally and from a client perspective and then the combined effect of that has on our financial results. I think it is also important to note that there was a significant portion of the lump sum payments that were paid out in TELUS stock.

And I think that for us reflect both our culture and action. But it also reflects the voice of the Investor because the better alignment that we have between our team members and the strategy of this organization, the better the execution of our strategy. The better the execution of our strategy, the better operational customer and economic outcomes for investors and I think that is the smart thing to do, then having general wage freezes over 2017 and 2018 and the indefinite avoidance of the compounding effect on salaries, that's, that engenders for this organization not only does that give us hard cost economics to our benefits, it also gives us a good window of opportunity to make the generational investments that we need to make in things like our fiber to the home, fiber to the business, fiber to the clinic program.

And so we think it is a smart thing for us to do so, that particular program is going to be very valuable for this organization. But just to give you a sense of its magnitude, it is well left than, a percentage point impact on the guidance that this organization is about. So when you look at something like up to 6% EBITDA guidance in 2017, the impact of this particular program is well less than 1% of that overall 6% growth. Many of the benefits reflected here are longer-term in their orientation.

Maher Yaghi

Thank you, Darren. And just one housecleaning question. The free cash flow on Slide 15 of your presentation expecting nice growth year-on-year on free cash flow before tax payments but also after tax payments that decline in 2017, how much of that is a one-time in nature versus something that could be recurrent?

Darren Entwistle

The tax, there is a tax decline which would be permanent. In 2016, we had a double payment of installments and tax amounts of the 3 to 600 is more of an ongoing run rate you will see that be more typical going forward. I would say from that perspective, you should include that in your model.

Maher Yaghi

Thank you.

Doug French

Thanks, Richard. Mike we have time for one more question.

Operator

All right. Next question comes from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan

Hey, good morning. I do want to touch on, just to clarify the transformative compensation agreements, maybe to Darren's comment about the benefits be more backend loaded can you help us understand how that works because maybe I'm thinking this a little bit to simply but if you are paying our $300 million in lieu of pay raises is that kind of a straight-line benefit that it doesn't sound it is so can you help us understand how this built-in to the benefit over 2017 and 2018, guess part of it was in 2016 as well.

Just a little but on the mechanics on the shares to your issuing are you buying that in the market, are you issuing that through treasury, just wonder if you can help us with that. Then, as we look out after the end of this arrangement, I know it’s a few years out. But for two years without pay increases when you look out to 2019, does than three years of increases kind of come through in 2019 salaries, how is that going to work with look at in our modeling two years out? Thanks.

Darren Entwistle

Again, we did this across the union management for the purposes of our culture and solidarity between both sides. We did the lump sum to buy the concessions that we were looking for within our collective agreement and let me give you a flavor of what we have done. Concessions that we have thought that are reflected in these lump sums, our concessions were we’ve moved from double time were over time to time and a half. When you have got a program like what we are doing on the TV and the HSIA front, with that particular generational investment having more affordable overtime was more effectively organization given competitive market conditions, it is a necessity.

So that’s a productivity release for us that’s hardwired. We made the difficult decision to remove Sunday premiums within our client customer call center of operations. We did that because our business customers want to transact with seven days a week and don’t recognize differentiation between the days. In fact for some families where you got to make people working within the home, Saturdays and Sundays are more convenient days to transact with the TELUS organization or have someone over to install our optic TV service.

We removed a day of holiday time within our bargaining unit because during this particular period of competitive intensity, the economic downturn in Alberta and the generational investments that we made in fiber, we need all hands on deck and that is our necessity for the business in the best job security that anyone can ever look for is having a successful company on a sustainable basis and that is what we're trying to achieve in every single one of those changes that we made was made with the customer in mind. What’s better for the customer? What does the customer want? How can we serve the customer better along the way? So we bought of those changes but the productivity will enjoy in perpetuity. The cost of buying out the changes is reflective in our Q4 results and it is now behind us but all of the productivity upside is ahead of us.

Second question that you have in terms of the shares, we bought the shares in the market so no we didn’t issued them out of treasury. We felt that was slightly in congruence with what we have done historically on the NCIB program. And then in terms of the continuing contribution, I think Jeff you can do the math on that. It is somewhat of an accreting improvement because as you go from 2017 to 2018 and then into 2019, the impact of the salary freezes from the CEO to all of our unionized team members grows in terms of its magnitude and its contribution at the EBITDA level.

Also I would note Jeff, as it relates to the MTV or the economic return this program, it is a significant benefit to the Investors in TELUS because the avoidance of compounding is enjoyed in perpetuity and I think that is something you do to reflect upon in terms of the economic benefit. But the EBITDA improvement contribution starts in 2017, grows in 2018 and gross in 2019. And there is not cumulative catch-up if you may be thinking that was a possibility, that is not the case.

Jeff Fan

Okay, thanks, Darren.

Paul Carpino

Great, thank you, Jeff. And thank you for joining us on the call. If there any questions please feel free to call the IR team. Thank you.

Operator

Ladies and gentlemen, this concludes the TELUS 2016 Q4 earnings conference call. Thank you for your participation and have a nice day.

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