TELUS Corporation (T) Earnings Call Transcript & Summary

Good morning, everyone. We're really happy to have with us TELUS' CFO, Doug French. Doug, thanks for joining us again at the conference this year. I'm glad to have you virtually talk to us about the TELUS story.

Thank you. Happy to be here.

And maybe we could -- if you could just start off with a top-level overview. TELUS is obviously a very unique company with the right mix of growth, vertical integration and a portfolio of ancillary growth assets like TELUS International, Health and Agriculture. So maybe a good place to start would be a strategic overview of how these pieces fit together? And how these technology-oriented businesses fit into your vision going forward?

Sure. Thank you for that. Our strategy has been very consistent, really focusing on data and wireless throughout our history. With that, you sort of marry customer experience leadership in the best networks. We've also built that off a foundation of leading culture and customer excellence while being a social purpose leader around the world. So that foundation is applicable to all of our offerings and all of our areas in which we do business. TI specifically is a customer service excellence, data and digital enablement. And when you look back at where TELUS has come and where it's going, digitization, data management, both in health and ag and let alone in some of the more enhanced IoT services and where we're headed into the future, TI becomes more and more instrumental in helping TELUS evolve into more digitized and more effectiveness of the offerings and the data that we actually have as an organization, let alone they've been very, very instrumental in us having some of the best customer service in the world. Health and ag have similar principles. They are very much a platform-based, application based, but driving a significant amount of data and insights as well through connectivity and providing outcomes. And so health and ag both had significant needs where they were underserved in connectivity, underserved in applications and connections and underserved in data insights, providing better outcomes and better efficiency and effectiveness across both streams. So when we were working through our strategic vision, building them into where ag is a need and it leverages the tools and assets that TELUS has built over time and beyond. It actually allows us to have a very significant diversified product offering. It allows us to continue to build internationally beyond even just the Canadian borders. And it's going to drive future opportunities for enhanced partnerships and enhance potentially monetization's like we did with TELUS International. So looking forward, it's very exciting for us to that these products are going to continue to grow. I think you're going to see more global interaction with us in those areas. I think you're going to see a consistent bundling of the products that we have and the usage of these assets, both in Canada and abroad. And I think you're going to see TELUS International as being a key enabler to a lot of the TELUS deliverables and aspirations of where we're heading into the future.

Great. We'll touch on health and agriculture in a bit, but maybe we could start off with the wireless business and an overview of where that's headed. 2022 has been a great year for wireless in Canada, and there's been strong growth across the entire industry. Could you talk a little bit about what's driving the strength? And to what extent it can continue into next year? And looking at more short-term trends, I mean, we just got through Black Friday and now we are heading into the holiday season. So any early observations around Q4 would be great as well.

For sure. So what we've seen and we're very, very happy with the year-to-date mobile growth we've had of over 290,000 loads and our very significant connected device loading. We continue to focus on profitable growth and obviously, customer-leading churn or industry-leading churn. And our network revenue growth, this is a refresh, is continued to grow throughout the year at 4.9% in Q1, the 6.4% in Q2 and 6.8% in Q3. So the trajectory is also very good on network revenue as we know that's a key driver in the wireless area. We've seen a lot from the perspective and continue to focus on our product intensity through all of our product offerings. And we just talked about some of those opportunities that you think of product intensity only between Internet wireless as an example or TV and wireless, but we also have security nationally and the leading security provider in Canada. We have health and ag where when you're providing health solutions of running organizations or ag to run organizations, they have the telecom services come with it, including wireless, where we can be an enhanced provider and bundle more and more of that incremental product sets. We've seen significant immigration in Canada, as you've seen. And we expect that to continue, 450,000 to 500,000 probably new permanent residents annually coming into Canada in the next few years. We don't expect that to slow down as it did slow down a little bit throughout COVID. And so that's kind of what we've seen to date and the initial. I think there's lots of room as we look into 2023 and where it's headed. I talked about immigration. We're going to continue our product service offerings of bundling. We've been continuously rated as the top networks in the world. So quality matters, and our customers are going to get the benefit of that speed and reliability. We see 5G as being an enabler. And as you're aware, Canada was a little behind in getting spectrum. So we're a little behind the U.S. in rolling out our 5G networks, but continuing at full pace as we speak. Opening doors for more upgrades on services, including IoT, and we expect roaming to continue to grow. And so I do expect ARPU as an opportunity to continue to enhance throughout 2023. I think loading will continue to be strong on the back of immigration and our bundling intensity and product superiority. And so it looks like '23 will continue under a path than what we saw in 2022. During Black Friday, as you're aware, Q3 was very, very competitive. So even prior to Black Friday, we had what we typically see a Black Friday pricing we saw in some of the back-to-school in September. And so the competitiveness was very strong. It continued into Black Friday, and competitiveness was, I would say, very intense. It did promote significantly more on the renewal and contract renewal front that we had seen -- hadn't seen for a while during COVID and sort of the backdrop of a potential economy slowdown. We saw less and less consumer and business handset renewals, et cetera. And we saw a pickup of that late in Q3, and that continued into Black Friday as well. We still have Christmas in front of us and Boxing Day. So there's still a lot of the quarter still to come. But I would say Black Friday was similar to the tail end of -- we saw in September during back-to-school, lots of transactions and potentially lots of movement of customers throughout that period.

Got it. And so maybe just touching on the macro environment for a bit. It's been a big area of focus, obviously, domestically in the U.S. as well as in other parts of the world. And there are 2 components to this, right? One part of it is just the inflationary concern and the cost pressure that operators are seeing to some extent. And the other part of it is just on growth and potential risk to your unit growth slowdown. Could you touch on what you're seeing in Canada on both these aspects and what kind of impacts we might expect next year?

Yes. And currently, our products remain very resilient. And there's a bit of a lag between a slowdown in our services to the extent of the importance of our services. And so we're still seeing strong demand for both our wireline and wireless services, both for health and agriculture services and even our business segment when things have a bit of a headwind or the economy pressures are there, there's more of a need for digitization, more of a need for efficiency within the business segment in which we can help with. And so initially, there's a bit more of a demand and resiliency towards services. And so we're just starting to see a little bit of the TELUS International front, as you would have seen in their results last quarter. But they have a very diversified base and they have a very strong funnel, similar to, as the market turns down a little bit, TI is well positioned to help organizations become more efficient and effective to digitize and to do the things necessary to turn the business around. So I think that headwind they had continue to be offset over time. And then I think when you have a parent like TELUS, that, as I highlighted with the LifeWorks transaction and the need for TELUS to continue to evolve its digitization, I think TELUS is going to have more demand for our TI services than ever. And you're going to see that grow in 2023 as well. And so I see TI recovering in the next year. But it will be -- it won't be definitely Q1, Q2, but it's definitely going to be a recovery period that we expect to be quite strong in those services as they look forward. On supply chain, when you look at our cost structure, it's sort of broken down between almost 40% of it is team members. And within our team members, having the culture we have, having our social purpose and having the digitization focus gives us a little bit of room to manage through that. Yet there will always be a demand for certain types of talent. We've built into our 2023 plan, and you'll see our guidance in February, appropriate fair market value measures to ensure that our team members are well treated, and we'll be extremely competitive in that side. Then the next 1/3 of our costs are probably COGS. That could be handset costs or costs that would flow to our customer traditionally. And we've been seeing better supply in that. So I don't see it being a limitation along the way. And then from a capital perspective, the good news is we're reducing our capital spend in 2023. We had a build, an accelerated build during a period of low interest rates and less economic pressures and inflation. So I think we had a significant running start at a competitive advantage to those who would have to catch up from that capital intensity level into the future. And then the remaining cost structure we have would probably be 25% of it or less is always going to be more volatile to the market conditions. But I don't think it will be overly material for us, and we'll manage through that with some of the initiatives that we continue to talk about. Some of those include our CPO, which is really refurbished handsets through mobile clinic and our channel that we have, bringing lower cost to our customers as well as lower cost of handsets to ourselves even on the perspective of delivering on that side. As mentioned, we have a very diversified asset mix. So we'll have more resiliency. And even during COVID, you would have seen we were the only organization that didn't go negative on EBITDA during COVID, and that's very much to our execution and diversified asset mix. And lastly, we've got a cost and reduction initiatives put in play. And that's really in line with our digitization program, aligned with some of the M&A transactions that we've had and the integration efforts that go with those. And I think when you supplement that cost reduction program that we'll be still well positioned for strong operating cash flow as we've discussed into 2023 and beyond.

Got it. And I guess one of the other elements in 2023, which might be a little different is your competitive environment just given the changes in industry structure. Could you talk about competitive positioning? And if there are any changes to the competitive environment that you expect going into next year? And how is TELUS preparing in terms of potential responses?

Yes. I think our track record has very much been proactive and resilient during competitive market changes during when we -- the industry went to unlimited and device financing, we led the market in digital offerings and our ability to deliver on that on operational execution faster than our peers during the even the launch of some new entrants in the past where they were bringing new wireless services to the market, we did extremely well as well, and ensuring that we provided value for our services, bundled services on the best networks with the best customer service. And so I think that trend continues. We accelerated our capital over the last 2 years to get more fiber footprint to accelerate our 5G build and to improve our digitization. So get -- ensure we position ourselves extremely well. We've been doing multi-product bundling and enhancements to our products and services over the past few years as well, which was a continuation, but we continue to add to that bundle, which, again, more and more of your customer base, it is on a multiproduct seeing value for the portfolio will reduce your churn rate and make you less vulnerable. I mentioned the market intensity over the past back-to-school and even Black Friday, that comes with signing contracts with the renewal process. So even though it's a short-term cash flow dilutive, it will actually solidify more of your base during that period with contracted customers. And I think, again, we're looking at it from the perspective of delivering on our social purpose. More and more of our customers right from businesses to consumers, are looking for organizations that aren't just talking about environmental issues, aren't just talking about giving back the communities in social purpose. We've been rated as one of the top, if not the top, most giving company in the world. And you marry that with the best network, the best customer service, the best product sets, and it gives us a very strong toolkit to meet the needs of our customers across the board. So I would say our diversified assets, the quality of our assets and how we do it, not just what we do has well positioned us and our track record of operational execution, I believe, is second to none in diversity, in competitiveness and whatever that market may bring.

Got it. I guess the other big topic thematically is just the 5G deployment process and currently it's, I think, at about 80% and increasing. Could you talk a little bit about the monetization opportunity across consumer as well as business? And when should investors start seeing a more meaningful contribution to the top line?

Yes. Just in Canada as a quick reminder, I think you're aware that the 3.5 spectrum was late in the auction, and it was one of the most expensive spectrum auctions in the world. The 3.8 or 3,800 megahertz of millimeter wave are going to be late 2023 and into '24. So the full, call it, continuum of spectrum for 5G, we'll be a little bit behind than other countries may be. So our build and our expenditures associated with that are also a little bit behind the other countries. That being said, we're very excited about what we've seen today and the launch that we had on our 5G network. So we are seeing consumers step up to faster rate plans and bigger speeds. We've launched products such as Stream+ offering TV programs over your wireless, including Apple TV, Netflix, Discovery and more to come on that front. We've seen enhanced fixed wireless opportunities in rural areas to ensure that we could provide faster service than current, even copper, cable or satellite offerings, allowing to serve those customers significantly better than in the past. And so from a consumer perspective, you've seen some early traction on that front. On the business side, it's probably a little bit more delayed, but definitely well underway. We're seeing definitely connected devices and IoT starting to take more and more flight, especially in the specific verticals and the verticals of oil and gas, connected cars, smart cities and manufacturing being the early adopters. We also have agriculture and health, which are following closely behind that with significant opportunities for IoT and 5G connectivity that that latency and speed is so important for. We're in the early stages of commercializing private networks, which has been into that business monetization stage, including edge computing and network slicing, which is not far behind. And so with the full gamut of options, I would think investors will see more and more of that traction to the mid- to late '23 and into '24 from a business perspective. Consumer, I think, will be continuing slow and steady as not a material amount of our base even have 5G folks. But with this -- with the more upgrading that we've seen, the new devices and all the loading that we've done, you're going to get more and more of that upside, I think, as we look forward.

Got it. Switching over to the fixed side for a bit, TELUS obviously has seen very strong broadband growth. And your pure fiber network has been behind some of the growth acceleration and you, of course, continue to bundle a lot of products such as on security, which probably also helps. How should investors think about customer growth within the fixed portfolio going forward in the context of a bit -- it slowed a little bit in Q3?

Sure. So we had about 700,000 net additions since 2020, leading the market by a substantial portion. That was, to your point, off the back of our fiber rollout, our product intensity and our customer service that we had talked about in the previous conversation. I think we're going to continue to see growth as our fiber build is not done. We're doing some copper to fiber migrations that we've talked about. There's still a significant business fiber opportunity and enhancement that we can do. And we're still going to have a fiber build program, just to a lesser extent for the tail of what hasn't been done today that we'll continue to add to that. The customer and market penetration within certain markets, especially with our accelerated capital build that happened over the last 2 years, give us more opportunity for growth within existing markets. And then to your point, that focus on product intensity. I think we have the most opportunistic bundling opportunity with health, with ag, security, wireline, wireless. And you're going to see loading slightly different loading as well. We talked about Stream+, which is really a TV offering over wireless. We talked about 5G and wireless connectivity in more rural areas. So you're going to, I think, see as well slightly different loading profiles, potentially more bring your own device or even self-install and security to help make a lower-priced offering, so all customers can participate in that market segment. But I still see a very strong customer growth opportunity for us. The markets are penetrated fully, and we do have more market product penetration opportunities. And our fiber build being -- we're in an opportunistic position where it's on the decline, where most of it, again, was built low interest rate environment with less inflationary pressures. So I think the cost structure to do that also would be second to none to any of those trying to catch up.

And you touched on copper decommissioning and TELUS ended Q3 with 2.9 million passings, fiber passings essentially, and you are increasingly approaching full fiber coverage within your footprint, which should allow you to decommission your copper networks. Could you talk about the migration process from a consumer perspective? How are you approaching the mechanics of going to consumers and upselling faster speeds? Is this largely based on gross adds? Or are there also incentives for existing subscribers to say, transition to fiber at a faster pace? And are there other levers that you can flex to accelerate this conversion?

Absolutely. So part of the acceleration plan that we had was to ensure we migrated some of our copper customers that were in fiber footprints over to fiber. And we're now less than 5% of the customers that we have in fiber areas are still on copper and with the plan to migrate all of those in the very near future. The incentives that you're referring to, we can do lots of items to do that. We can, either through product intensity, give a value proposition to the customer to move. We can get more for less as an example, where the services that we're offering them on fiber actually enhance to copper, and they would not pay potentially more at all. They could actually just move across. The reason we'll do that with the tail is that by getting all of our customers on fiber, we can fully decommission the copper footprint. And that brings 2 levels of cost structure or opportunities for us. One, you can shut off all of the infrastructure associated with a less efficient copper network. You can then monetize the copper itself. You can monetize the real estate and you can drive a more efficient average cost network under a fiber network, which then brings down our cost structure overall, which our customers benefit from in the long run. And you then look at the benefits of fiber. Fiber actually, we get generally 15% higher ARPU, and that's generally from the upgrades that you referred to. And generally, it will be a small upgrade. So it could be $5 for 10x more the speed or capacity that you're actually getting significantly value for that small uplift in ARPU. On the AMPU side, we generally will see a 20% in margin, and that's also we had lower churn on fiber associated with the fact that the quality of service on symmetrical 1 gig doesn't fluctuate as much as copper does. And we all know that the fluctuations in the cable footprint to weather, to usage, to capacity. Fiber doesn't have that. So you have a significantly better experience of customers across the board. We get 70% less repairs and you get more product intensity that the customers are extremely happy with that, they're willing to take on and try another product or 2. So the economic benefits are there. And so being creative to ensure the customer is treated well, and that migration happens. I think there's a win-win for us in the long run. And then you've heard us talk about the real estate development where we have numerous initiatives in play and piloting different type of build programs, bringing in appropriate partners where appropriate and then potentially when we have enough scale and volume, setting up a land REIT that would now be able to be monetized fully in the market at some point. And that could be the combination of business and our corporate and consumer real estate or it could be individualized to individual portfolios of corporate or consumers. So looking forward to that as well, that's probably more midterm out. You need a scale to do that. And we're probably a year or 2 away from being able to roll that out effectively.

Got it. And so maybe we could touch on some of the other businesses that obviously have been a differentiating part of your overall strategy, starting with TELUS Health and LifeWorks. We touched on this at the beginning of the chat. But could you talk about the LifeWorks acquisition that you closed at the beginning of September, where are you on the integration part of it? And why is this a big enough opportunity for an organization as big as TELUS?

Sure. So looking at LifeWorks, and we looked at our whole health portfolio and continuum. And we have a lot of very valuable health assets. And we do believe strategically that over time, employers are going to take more and more ownership and opportunity for improving their team members' health and well-being. And when you marry the LifeWorks expertise and leadership on that front with the TELUS assets, it ends up being significantly more enhanced product offering right from employer health care to our ability to fulfill wellness as well and ensure that you're not just treating illnesses, you're treating early signs. You're working for wellness where your team members will be healthier and happier, but it also allows organizations to attract from key talent to the companies that are providing those best opportunities that they care about their team members and want them to be healthy and productive, efficient but healthy, happy. And so that was the main reason is it fit well into our portfolios, but it gave us an application that we didn't have. The second half of it was a significant part of the revenue, it was international. TELUS Health prior to that was substantially Canadian. And our ability to take our platforms and offerings international were more challenged when you don't have the channel or fully enhanced partner relationship yet. So it opened doors as well internationally, where we can start to scale more where the applications are relevant on an international basis. And that also would give scale to TELUS that goes well beyond the Canadian borders. And then lastly, they had a very material focus on mental health and enhancement of mental health offerings and a digital approach to ensuring that those who need it can get it significantly faster. There's significant wait times and lead times, and it's a very inefficient process on mental health and the applications of LifeWorks with developing and very underway allows us to address, again, a need in a market, in a digitized and more timely manner than that's currently in the system. So probably trying again to deal with the need through digital applications and services. The integration is going extremely well, starting at 2 months early. We've been able to drive a run rate and identify benefits well over $50 million annually. And so we set a target of $200 million plus over 3 to 5 years with an annual run rate already over $50 million. We're going to be well on our way to exceeding that target and get some significant benefits right out of the gate. I think the exciting part about this transaction though is the scale now that TELUS Health is on. And it gives us more and more opportunity, one, to build the relationships with employers, which are every company around the world; 2, the mental health conversation we talked about, international expansion that we talked about, and then the future of partnerships and potentially an IPO when the market conditions would be right, as you now have a scale, you now have an operational model and you have an attractiveness and I believe not anyone else has around the world from the end-to-end health continuum that we have. And so we're trying to deliver that both in Canada and around the world. And I think the assets we have now in size, magnitude and asset consequence, no different than we've built with TELUS International is we're on the cusp of that with health now as well, opening more and more doors.

Got it. I mean just a quick follow-up on that. Does the acquisition speed up your potential IPO of the business, I mean, in terms of time lines?

I would say, yes, IPO and/or partnership or both to the extent you now have a material scale, you have a very strong mandate of where you're going to go that I think both of those would be sped up to the extent of the opportunity in front of us. Obviously, market conditions pending on that one.

Got it. And we are out of time, but I have to ask you the capital allocation question, which has obviously been mandatory for every telecom company. But with CapEx expected to decline beginning of '23 and cash flow being a big beneficiary of the reduction in CapEx and continued EBITDA growth, how should investors think about capital allocation priorities going forward, including the effort to delever the balance sheet ahead of the spectrum auction in '23? And maybe one more follow-up would be, given the rise in rates, does it change the way you approach the amount of leverage you carry on the balance sheet going forward?

So thank you for that. So our capital allocation, we've been very consistent with that we definitely want to make sure we invest in the business to get the long-term growth and sustainability that we've committed to the Street. And our EBITDA performance and our consistent performance, I think, has been second to none in the industry, and our allocation of investing in our business has been very much supporting that smart decisions, strategic decisions. The great thing now is a lot of that has been behind us. So we did that during a period of low interest rates and less inflationary pressures. We're now decreasing our capital spend, as you mentioned, and our cash flow continues to grow over the next few years at very strong rates. That allocation then we'll make sure that we ask, continue to feed the businesses that we've built in on strategically. So you didn't start to build an asset to starve it. We will continue to feed them and build them to a level that, again, is a material asset of consequence. We're committed to our dividend policy of 7% to 10%, and you would have seen that return profile within our recent announcements and delever the balance sheet concurrently. Through the spectrum auctions and a couple of the later acquisitions, including LifeWorks and the TELUS International potential on closing in January, WillowTree, our leverage would be higher than we would normally have it and we would definitely want to delever. So back to how much we keep on our balance sheet. The good news is we actually don't have very many short-term maturities. So I think next year is $500 million, the year after that is $1 billion. So for the next 2 years, considering we're getting more free cash flow than ever, we may not even need to go to the market for the next little bit, so reducing that debt portfolio over time. And we have most of it fixed for very long periods. And so that short-term higher rate will not impact us materially and we plan to deliver appropriately with the cash flow that we will be obtaining in the future years.

Got it. Thank you, Doug. This was great. Thanks for spending time with us today and the update.

Thank you. Take care, and happy holidays.

Thank you. You too. Bye.