TELUS Corporation (T) Earnings Call Transcript & Summary

Good afternoon, everybody. Thanks for joining us. And my particular welcome to Doug French, Chief Financial Officer of TELUS. Doug, thanks for joining us.

Thank you.

Before we get into start, please note that all important disclosures, including personal holding disclosures and the Morgan Stanley disclosures, appear in the Morgan Stanley public website at www.morganstanley.com/research. Disclosures are at the registration desk.

So lots to talk about. TELUS has made a number of moves here in the last year or 2 and has had a pretty clear strategic path around network leadership and perhaps just start with the priorities for 2020 and beyond.

Yes. I think it's a good news story and a consistent story. I think the exciting part about 2020 is it's building on all of the direction and things that we made within 2019, continuing to focus, as you mentioned, on having the best networks both wireline and wireless with our fiber and wireless network superiority leading into our growth trajectory on our assets such as TELUS Health, TELUS International and some of our other emerging-type markets and the customer-first focus. So never losing sight of what matters and ensuring that the customer is foremost in every single decision you make. And I think our execution around all of that has really been the consistency of what 2020 momentum will bring.

Great. Well, maybe we start with the wireless business if we could. We were -- one of the things I get a lot is how come penetration is so low in Canada? So the whole market opportunity continues to be pretty large. You've obviously got -- delivered strong growth over the years. But what do you see for the ability to take that penetration up to U.S. levels and TELUS' edge in the market?

Yes. So I think the opportunity for us, still we're in the 90% range, give or take as compared to the 110%, 120% plus in the U.S. I think it goes back to multiple products in Canada and continuing to build on that. That being said...

You mean 2 devices?

Two devices. Yes. Absolutely. We changed our definition, though. So a tablet for us doesn't count as a connection anymore. And we put it in the connected device category, no difference in IoT because it really has the same principles as we believe is in that factor. So Canada may actually have a slightly different trajectory now than the U.S., as an example. But we've really been focusing on value and making sure that economically, we go for economic loading but offer services to our customer base and which is relevant to them. And that's back to that customer-first initiative, having all of our multiple brands provide whatever service the customer needs at whatever price point. And that's really been the focus with our customer service. Having the lowest churn rate in Canada has also helped on that front for our organization in building the momentum on continuing to take that level up. But we're definitely seeing immigration grow faster than certain other countries. So the pool keeps filling back up again. And then the age continuum. I think we've been slow to adopt the age continuum of younger ages and older ages on that front, but continuing to build on that.

Okay. Great. Competition, so we've had some breakouts, if you like, intense competitive activity, some from the newer entrants and some from some of the existing players. So just talk about how you see that evolving over the next few quarters. And what's the first quarter been like so far?

Yes. I think we've seen a typical momentum of intensity. Q1 is always a little bit slower than other quarters because you're coming off Black Friday and the Christmas season, which is very, very, one, high intensity and high volume. So we generally see lower volume into Q1. That being said, it's continued to be intense. I think when there was adoption of the unlimited plans and the device financing plans in the summer of 2019, I think, there is still confusion around the multiple rate plans that were out there. And that we actually saw a lot of subsidy plans while continuing on device financing. And I think there's confusion in the market overall. I think it's sort of stabilized a little bit more as we've gotten into Q1 with more consistency and, I think, more adoption of those plans on a very consistent basis versus the ad hoc in and out of -- pulsating in and out that happened in the intensity levels that happened in Q4. So we're seeing very similar, I would say, to other quarters but seasonally low as normal.

And you are -- you try to be disciplined about how and to what extent do you match or come in on that. So just how do you make that judgment about to give up maybe gross ads because you just don't see the economic value there?

Yes. So we've worked very closely with our marketing team and sales team. And I think it really comes down to long term, economic value is what matters. And matching initiatives in which you breakeven in 23, 24 months on a 2-year contract is not in anyone's best interest at the end of the day. So we've continued to stay out and say, "Let's give our customers other options. Let's give them opportunities to reuse their used handsets, bring your own device and other means." While we've changed our internal processes as well. So when we changed our definition that said we're going to have connected devices versus mobile phones, taking away the habit to always gravitate back to when the going gets tough, we'll go to tablets; when the going gets tough, we'll go to $25 rate plans. That's not necessarily where we went. And so what we continue then to focus on, let's focus our channel on higher-value opportunities. Let's focus on what our customers want. And let's forget about the classification of having that top-loading number. Let's drive for the top economic number and quality of loading. And that's really how we've handled it.

And how are you -- how does your guidance assume that the ARPU evolves with the move to unlimited plans and the elimination of overhead?

Yes. So our overage is under 5% now. And we've continued to migrate as our customers want to migrate to the unlimited plans. So we're still going to be pressure initially on ARPU in the first few quarters. We're hoping that the step-ups will more than offset the step-downs for a better term. As we're seeing -- we assumed the mix, as we mentioned on our last call, was closer to 70% step-downs and 30% step-ups. We're closer to 50-50. And as you get through the larger, the end tail of the higher overage, which most of that has already made its way through, your step-ups and step-downs are getting significantly closer to each other in value. And that's where you'll see the stabilization and a little bit more of a turnaround on customers getting significantly more value in their $75 plan and price certainty.

But you've been able to keep it fairly stable. You haven't had a big step down.

We have not. And -- well, we had some. We've seen pressure. We've got a negative ARPU for a little bit. And I think that's -- we're going to see more of the same, I think, into the first half of the year. And Q3, Q4 will be a great example of what I think you'll see in Q1 and 2 on the network growth and ARPU trajectory.

Which is sort of what we saw in the U.S. when they had to make the change there. We've just concluded hearings on the MVNO study in the last few days. So what's your takeaway so far in your team? Are they nervous? Are they happy? What should we be looking for?

I think it would be naive not to be nervous. But I think it really just comes down to we need to be prepared for whatever outcome happens. I think when you look at the discussion that we had around the cost to build networks in Canada both from an input perspective, from a spectrum perspective, from a population density perspective, we are different than other countries in what we have to build out for the population that we have. I think that was well heard. It'll come down now to what is the decision, and we'll have to adjust accordingly. And whether that is our investment thesis, whether that is our cost structure, whatever that looks like, should there be something down that path, we'll have to adjust accordingly and to be seen when the ruling actually comes out.

But it seems like the industry was pretty united on the need for infrastructure.

Absolutely. I mean infrastructure costing that we've used in the past in facilities-based pricing has continued to do Canada well. And we have the best networks in the world, right, back and forth with South Korea on speed. And when you go to coverage and value, we actually rank very, very highly. And so to give that up to the extent of artificially lowering a price that would cause that kind of takeaway of infrastructure, I think, is not good for anyone. But that being said, we'll obviously just have to go with the flow. And -- but we're very positive on what we've accomplished and where our networks sit, and we hope that continues to gain momentum.

So we'll hear more later this year?

We expect to. And I think it's up to the regulator now to decide when they announce and what they announced. We're looking forward to a few announcements that come across that front, including the spectrum rules. So...

So the spectrum, when would -- when do you expect the rules? When do you expect the auction?

So the -- we expect the rules, I think, to have -- the promise was to have the auction in 2020. So to do that, we pretty much need the rules before the end of the month. So we're expecting the rules before the end of the month. And then we would expect the auction late in 2020. And whether we have spectrum by 2020 or early '21 when all is settled and done, I would say, in that time frame.

Okay. So it'll be a little bit ahead of the U.S. in that regard?

On 3.5. We don't have millimeter wave yet either though, and that will be a 2021 event.

Okay. But that's -- you see that as an important 5G layer, presumably, that 3.5?

Absolutely. Absolutely. And it goes back to both speed and latency. And then you can put it across your macro network, as you're well aware. So I think that one is obviously very important to us.

And was that part of the rationale for the financing recently?

It was. So we did the financing for a few fronts. One, to prepare for whatever spectrum auction was there; two, bring leverage down a bit to maintain a flexibility of the future, but then continue to have room to invest in our growth engines where required or where necessary. When you think of our TELUS Health opportunity, double-digit growth. We're growing into other areas of TELUS Health, including virtual care and business-to-business type opportunities. We are going to continue to look at those. TELUS International continuing to grow as we lead into the IPO. The ADT acquisition and integration to what investments required to bring that up to the customer service and quality that the customers deserve require some investment, both some organic and some inorganic. So looking at all those, we felt it was the right time to build the flexibility to achieve those outcomes.

Okay. So 5G, you've announced you will be starting a 5G rollout with Huawei. So just talk about the timing and what you're looking to learn from that? And then where the government -- what the latest on that is?

Yes. I mean we're still in the RFP process for the long-term vendors with the 5G rollout. We really want to roll out a network that is real 5G, which is going to be more associated with the 3.5 spectrum auction. And we will announce exactly when and how we're doing that. I think once we get the more insight to the auction rules and when we will get the spectrum. We continue to have multiple vendors for most of our infrastructure at TELUS, and we'll continue to do that. And we're in a bit of no hurry at the end of the day that if we hold off on the RFPs for vendor or vendors that lineup with spectrum, the 3.5, and build out accordingly. And we just don't want to light up and have 5G on your phone, yet no incremental services to what you had before.

Just sort of what we have here.

Yes. Well, exactly. And we had -- in the last OpenSignal and some of the international ratings, we're at 75 meg downloads right now, which actually is exceeding other countries' 5G rollout. So we'll be beating speeds that have 4G LTE on them with -- even though 5G has been rolled out in other areas. So we're going to take our time, do it right and make sure our customers experience real 5G.

Do you think the decision in the U.K. around Huawei might be kind of a blueprint for what Canada might do?

Yes. I think probably. I think it actually is a model that Canada talked about and worked through with the government years ago. So when we actually chose Huawei to be a part of the RAN, it was actually that. No core. RAN only. And that was -- the build-out was working with the government on that to certify that. So the European adoption of that is just really limiting how much of the RAN then could be potentially through Huawei. So will that be a blueprint? Potentially. And again, to be seen. And the fact that we're still in the process of RFP, we'll adjust accordingly. But the whole objective of having multiple suppliers and having capabilities to have a very efficient network build does depend on competition, and we hope that competition will continue.

Good. And just remind us on the network sharing with Bell. So how does that work when you're designing something like a 5G network? You just do your regions and they do their regions?

That's correct. And we both have to live to a certain standard. So we look at that arrangement. One has been extremely beneficial for ourselves and our customers and our country, for that matter of the speed, we can actually roll out networks that...

And you're seeing it in China now. It's a model that -- as we go to...

Absolutely. And so yes, it will be. We do our own components. And we just have a certain standard to meet and a certain interoperability to meet, but I have no doubt the performance to date on either side will continue to be first class.

And I mean you talked about the speeds and that 4G can do a lot of what current 5G can do. What sort of use cases are your engineers and your marketing folks kind of really focused on right now for 5G down the road?

Yes. I think it unleashes some of the IoT applications that currently requires speed and low latency. So I think that was probably #1. I think health care falls into that category, where low latency is essential. You look at uploading capabilities for video and gaming and things like that. That will also be enhanced through the -- through 5G. So it's going to be, I would say, IoT, health care being a very good indication of that, smart cities being another good indication of that where speed and low latency matter. And I think this is going to open more doors on that front as we go forward. And we're making investments now to help build on the momentum to monetize those.

Okay. Great. So let's turn over to the wireline business, if we can. So update us on the fiber build. You're kind of in the kind of latter stages, I guess, on the capital to...

Yes. 70% done, our Optik footprint. We expect to be close to 80% by the end of the year, continue to invest as we build out Calgary and some of the other significant cities in Western Canada that were a bit delayed for regional reasons. But now it's a clean, clean sailing. And that gives us a good runway, let's say. And as we get into the 80% to 85% range, I would expect us to continue to see that decline. Still building where necessary, still building capacity. Still dealing with population growth in areas that we may not have covered the first time, but we'll be able to decline capital going forward, and you'll see more investment, obviously, in the short-term in 5G. And -- but we put out our capital guidance that we'll be flat for this year and next year.

Okay. And you mentioned Calgary has the economy out west at the moment.

It's still somewhat challenged but improving so seeing some good signs there, but still not there where it was before the oil downturn.

And the competitive environment was sure. They've got a little bit more aggressive in some areas.

Yes. And I think it goes, like any industry, right, on -- we've seen aggression in wireless. And we've seen aggression with Shaw as well. And I think we just have -- we've shown we can compete with Shaw both on the quality of our networks, the multiple products of our networks and our customer service. And I think that is going to continue. So leading with fiber, best networks, leading with customer service and then the bundle. I think we're extremely proud of what we've built from a customer product perspective both on TV, having the multiple spectrum of high and low packages, over-the-top opportunities. Our new security assets are very valuable to a bundling opportunity that gives customers more value in their home and then leading into even using that in Eastern Canada with the wireless assets and another opportunity that we look at. But specifically, it will be the same dealing with whatever competition comes. And right now, you're right, it's intense. It's probably one of the lowest pricing in Canada at the moment in that region. But again, we just have to continue to deliver value, continue to differ customer service in multiple products which meet our customers' needs.

There's been a lot of talk about over-the-top here and streaming, and there's new products coming out, Peacock and HBO Max and all. So we have seen TV ads slow some. So what's the outlook there for the industry and for TELUS?

Yes. We've focused on -- we've adopted a lot of the over-the-top application into our TV platform...

Spent a long time on it. Yes.

And a lot of our loading now is even on the $20 or the entry rate plan. And so for us, it is, again, give customers what they want, not what we want them to have. And as long as we keep that mindset, we'll continue with being one of the only companies in Canada, let alone the world with positive TV loading. And that's what we've seen. We're actually loading still TV. And it's evolving to yes, lower packages, smaller packages, more specified multicultural packages or what individuals really want to watch in conjunction with their over-the-top apps. And I think that is probably where the future is going to continue to evolve to. And we just have to make sure we participate and offer that was valuable yet reasonable packages for our customers.

Okay. So you announced you're going to be changing the segmentation of the business and breaking out, I guess, TELUS International stuff like that?

Yes. Later in the year.

So just talk us through the kind of the rationale behind that, and just to make us all change our model.

Yes. I promise I'll help you with that. But we looked at it, we've had convergence discussion within our financial disclosure for a while. And as you're getting into more and more where fiber is really the backhaul and the heart of what 5G is going to look like as well as your wireline infrastructure. Our capital builds are getting more and more shared between wireline and wireless as we look to where broadband is going to be delivered and how we deliver it in the future. We have options. So as we went through that discussion and that thought process, we've been wondering, what is the right time where you actually make all of -- every decision you have is really a combined decision between wireline and wireless. And we feel as the 5G converges and as we're getting further down our fiber build completion that, that is really where it's merging. And the products we offer independent now of how we deliver. And so that was the #1 on wireline-wireless convergence. Concurrently, we have TELUS International and the President and CEO of TELUS International is over here with me today and -- Jeff Puritt. And we felt at that time as well, we are making a different strategy play with TELUS International. It's a digital innovation, digital transformation company that has been growing and our last investment that we made in CCC, obviously helped accelerate that. And so breaking them out separately based on the scale they bring to our organization, our desire to take them public in the next 12 to 24 months and the way we actually manage the business and allocate our resources, is changing to being significantly independent for TELUS International. And so that was the rationale behind that.

So what's the best comp set out there for these kind of public companies for TELUS International? People want to understand what it looks like in other companies.

All right. We met with someone earlier today, we're comparing the 40x, that's why I looked at Jeff, and I said, [ "Oh no." ] And looking for comp ratios, I don't know, but it ranges -- that where you are in the digital transformation continuum. So we're very happy with the mix that Jeff has developed, and our team has developed more than -- significantly more than 50% of their businesses fits into those categories. We'll continue to look at how that fits into the IPO and the multiple, but that will be higher than the typical -- significantly higher than the typical telecom multiples. And you'll see it mid-double digits or closer to 40, if I can get, Jeff, on that page.

And what's TELUS' end-state -- desired end-state with that? Will you still be a majority owner? Or would you like to sell down to a competitor?

Yes. We're going to stay a majority owner for the foreseeable future. We look at TELUS International as not only, obviously, our subsidiary company but they're a partner. They've actually done significant partnership work with us to help transform our organization both in IT, infrastructure, digitization and the customer experience, simplification and digitization. So -- but the best thing is they have the same culture that we do. So part of the benefit is they have the same standard. They actually have competitions with our onshore team of making sure we're the same customer service. The same field that has made TELUS differentiate itself from our peers. And we don't want to lose that. So we will definitely stay arm in arm, based on they have a lot of value to bring to us. I think we have a lot of value to bring to them in being a marquee customer and continue to transform our organization to learn and benefit and transform others. And I think that would be why we would continue to keep it. The objective, though, really is to have a currency for TELUS International. So TELUS International could have its own trading currency to continue to grow and expand and invest where it needs to. While we continue to take the TELUS investments further into TELUS Health, TELUS AgTech, IoT and business infrastructure. And so building those 2 currencies, we believe, is going to be strategically beneficial to us in the long run at TELUS International.

So what are the next steps in the disclosure segmentation? What should we be expecting from you in the coming quarters?

Yes. We're going to look at when is the right time to go and we get our systems, everything aligned appropriately. And so it will be later in 2020. We will, though, bring out some restated financials for The Street to take a look at and to understand and absorb as part of their modeling. So we won't just drop it on. And you're still going to then see on wireline-wireless, not a segment, but product reporting. So we're still going to report product so...

KPIs.

KPIs, et cetera, which really are how we still run our business and are going to be running our business. The G&A significantly more shared. The networks and the network costs start becoming more and more shared. But to the high-level revenue KPIs and those items, we'll still manage it effectively that will give good insight to our revenue generation and value generation going forward. And then TELUS International, we'll also then decide what are those key metrics that will allow insight to that business unit as we go forward in evaluating their performance.

So TELUS Health will stay within the communications sector?

Absolutely. Absolutely.

Yes. So what are the kind of the growth dynamics on that business right now?

Yes. So it's still double-digit growth on the EBITDA front. We highlighted in some of our other calls that the revenue line was a little bit softer than double digits. So we're working to drive that further up to double digit across the board in 2020. And TELUS International is really the footprint of what we think we can do with these type of assets. And Telus Health is a great asset and it's growing significantly, but still dependent on our wireline infrastructure. And so in a point in time, we continue, maybe we'll disclose more on that front or potentially do other opportunities on that front. But for right now, it's continue to build it, continue to invest in it for better outcomes for Canadians and around the world as we do see the offerings that we're doing right, from virtual care now to other management -- health management opportunities to even businesses taking more accountability for their employees as a very strong opportunity for us, but a very positive impact to Canadians overall on wellness and health.

And on the subject of health, any supply chain issues that you're seeing on handsets or anything or?

We saw a little bit on a few SKUs of consumer goods and including handsets in that category. But they sort of catch-up at a later date, and there's enough SKUs to help make up for any shortfall short term. So a little bit on that front and more concerned on how long it would go, and will that build over time or compound over time. And similar for infrastructure equipment. Nothing yet to slow you potentially down, but indications that if it extends there could be delays. And when you look at -- mostly all the manufacturers do have their plants in highly -- high-infected areas that it could impact everyone across -- all suppliers across the board at some point if it were to accept their -- a longer term. But for right now, there's -- we're still seeing good supply.

Okay. Great. And maybe just wrapping up then on the Security business. I mean you just bought the ADT Canada business. So how is that business going? And I think it's an area where we saw some of the U.S. telcos kind of get in and then get out. So what are you seeing that maybe others have struggled with?

Yes. I think what we've seen is a couple of things. One, we love the asset. The asset in itself has a very low churn rate. So you get that home -- when you get into the home and you provide quality service that -- the customers don't leave you. So we need to continue to focus on customer service. And that was part of our initiative with ADT for the next -- for 2020 is to continue to invest in ensuring our customers feel that they're getting the service they would get on our wireline and wireless services on that front. But the exciting part is really the growth you can do on home automation, in general. What marries wonderfully with security is health care. And how do you now start integrating some of our health care applications into home security? How do you start enhancing your home overall into additional products? And not just your traditional, you open the door or someone breaks a window and the alarm goes off, but more of you're now connected to your car, your security system. Your animals have trackers, your kids are there, your seniors would have health applications attached to it. That the more you can build on that home automation, I think, is where it gets more value and why I think we would not be foreseen as ever getting out to the extent we have the health assets to go with it. And I think the vision then to implement that footprint.

And you're hopeful that you can kind of get that top line moving in the right direction?

Absolutely. Absolutely. And because of that penetration similar to what you mentioned on wireless, significant penetration opportunity in Canada. And I think part of the inhibitor has been price point. And some of it has been almost the -- what you bring to the table. And I think we have the best of both now. We can...

Distribution and brand.

Distribution, brand, and we're not afraid to be a price leader in this front.

Great. Doug, unfortunately, we're out of time. Thanks so much for your time today.

Thank you. Have a great day.

Great.