TELUS Corporation (T) Earnings Call Transcript & Summary

Thank you. Thank you, and welcome, everyone. Welcome back to our Desjardins Conference. We are thrilled to welcome Doug French from TELUS at our conference. Unfortunately, he couldn't make it live. So we arranged a live streaming of the conference here this morning. Doug, thanks for joining us.

You're very welcome and good morning.

So let's start with the strategy. TELUS has delivered very strong growth in 2022. You are also guiding to industry-leading revenue and EBITDA growth for 2023. Now we have potentially a quite significant industry shift that is coming into the industry as a result of the Shaw-Rogers transaction. How do you maintain -- how do you plan to maintain the growth you are guiding for?

Yes. We're going to continue a lot of what you've seen from our organization in the past. We're going to continue to focus on our customer service, our leading customer service, which we have the lowest churn rates and some of the best AMPU of our customers across the world for that matter. We're going to continue to focus on the best networks. We have the best wireline and best wireless networks in the world, and again, leveraging those tools to continue our growth. We've been able and very successful on bundling and ensuring that our customers have more than one of our products, which, again, gives value to our customers, but also makes the churn rate lower for the long run. We're leveraging all of our assets and our diversified asset mix, including TELUS International, TELUS Health, TELUS Agriculture, have curated our 5G networks for IoT growth and growth in our business segment. And then lastly, continue to leverage our culture of how we get things done. We are one of the leaders in ESG. We're the most giving company in the world and leverage those relationships. And our engagement level is second to none amongst our team members. So you're going to see a lot of the same even in markets with high volatility or changes in competition, we've shown that our execution cadence by keeping to our strategy has been very strong, and we performed well through those uncertain periods.

Great. Now moving to wireless. Wireless net adds in the industry over the last few years has beat our expectations consistently in Canada and in the U.S., and we're always wondering if the party is always going to keep going there. What do you think is going to happen with this trend? And do you have an opinion on the trend of your market share maybe in the coming year?

Yes. So we're going to still see a lot of immigration in Canada. I think they were estimated over 500,000 new Canadians over the next 12 months again. And so there'll be a lot of growth coming from that, both in our wireline and wireless products, considering our offerings and all interest in penetrated market in Canada. And so continuing to penetrate the market at all levels of age continuum will also allow for some growth. So I think you're going to still see that. And it's hard to ever estimate market share per se. As mentioned at the beginning, I think we're going to continue to focus on what we do best, high-quality networks, high customer service, high value for the home when you bundle our products where you get significant value. And I think we're going to continue to do very well under that front.

Okay. Great. Now moving to the fixed side of your business. You've been deploying fiber very aggressively over the last several years, more aggressively than anyone in Canada. Now you're slowing down the investments significantly this year. We've seen it with your CapEx guidance now that you've reached your goals of deployment. How should we think about the growth of your fixed operations now that you are not investing as much in fiber networks?

Yes. We're going to continue to see a lot of good growth in our wireline products. We accelerated our capital over the last 2 years, as you're aware, which a significant portion of that went to fiber to product development, to simplification. And so we have an opportunity in those regions that have been recently built out to expand our market pen. We have a significant opportunity to continue to migrate some of the newer regions from copper to fiber of existing customers, which also drives a lot of value, both at the cash flow and EBITDA perspective. And so you're going to see that. And then you're going to see bundling again. We have -- we're doing very well at making multiproduct customers, but the continued enhancement of our products and services through home automation and even some of our more self-serve TV offerings are making it easier and easier for self-install while getting the packages you really want. So I would say you're going to see a lot of that as well. So I still expect our growth to be quite strong. And as mentioned, our business segment for a little while was on negative EBITDA trajectory. They're actually on a positive on wireless and just breaking through on wireline. And so you're going to see positive wireline growth in biz as well and I think the combination of a lot of strength in our business segment is going to be very beneficial for us.

Okay. Great. Now still on the fixed side, we had a bit of a curve ball from the regulatory side 2 weeks ago with the CRTC initiating a review of the wholesale rates and the immediate reduction in rates there. Wholesale has not been as important out West historically. Do you think this could change the dynamic there? Do you expect a change in terms of the trends of wholesale? And if you can just talk about the regulatory environment as a whole.

Yes. I mean the best thing for industry and investment is certainty within the regulatory environment. And having changes that are surprises obviously, are not great for the industry. That being said, we've been able to manage through any of those changes as they came across our organization from an operational execution perspective. From the perspective of why there's been less wholesale in Western Canada, the rates were lower. And the scale is also lower on the population density. And a lot of the wholesalers that don't need to put a significant amount of investment into their networks are going to go to the highly populated areas where the rates are the highest. And that's always been Eastern Canada. So with the change, it could implement a little bit more of that wholesale within Western Canada. But from our perspective, we're still very confident that especially over COVID, customers learn that the quality of their networks, the quality the customer support is more important than ever, especially when you're working from home, you can't have volatility in your Internet when you're working from home. You can't have outages or repair times that take days. And so working with an organization that has the fiber that we have, and we've seen repairs of outside repairs down over 70% on fiber, inside home repairs are down over 30%, and you get symmetrical service in the hundreds of megabytes or even a gigabyte or plus on symmetrical service that is very reliable. It doesn't matter if your neighbors are using it all at the same time. And so I think that wholesale component, yes, may have a little bit more on the market intensity front, but I do believe the products that we offer, the value we're bringing through the bundle and the lower pricing in Western Canada will help us on that front because we tried to show value to our customers from day 1.

Great. On this fiber and wholesale dynamics, there has been this perception or expectation that TELUS had maybe a bit more headrooms in terms of margins and its telecom operations at some of the peers. Now that you've completed your fiber build probably in the last few years and even still there, we're seeing significant investments in marketing and advertising. But how do you expect the margins might be trending in the telecom side? And what are the main sources of these efficiencies?

Yes. So our efficiencies are going to be built through the cost reduction that I referred to. So the cost to repair is actually down. The cost of customers calling to our call center is significantly down. And then the value of the customers actually -- customers on fiber generally will take more products and more products will then lead to a better long-term margin opportunity. The churn rate is lower. And so again, lifetime revenue, you get a bigger payback on the initial investment because some of the investments of installing Internet or TV or security are not cheap, and you need to get recovery of those assets or having a lower churn rate in cherries to get a longer rate as well. And so from that perspective, you're going to see our margins continue to grow. On the business side, as I highlighted, we're getting more margin on the business side as they've been turning to profitability, moving from legacy to more digital services. And then you're going to see from the copper to fiber migration. And as we complete that as well, being one of the first in the world to complete that, there'll be another wave of actually shuttering some of the COs and maintenance costs of actually keeping some of the CO acquired for, and so there will be another wave of cost reduction that can come from maintenance and hydro and property taxes, et cetera. And then we've talked about our development of land where there could be a monetization further out.

Great. Now moving to your tech ventures, probably everyone here knows that you're heavily invested in the health vertical. You've added to that bet with the LifeWorks acquisition. Can you maybe provide us with an outlook on the health business for 2023 as now we're probably out of the pandemic now that we can see what a truly normal year looks like? And maybe what are the milestones that we might be looking for in terms of the potential road map towards an IPO?

For me, obviously, our focus has been on the integration of LifeWorks and there's multiple phases to the integration. I think we've done extremely well on the integration of the team, the integration of the organization and being able to take some cost efficiencies of it being a public company to a nonpublic company, shared suppliers, et cetera, and the cost savings that we've had on a run rate basis have been identified up 100 rates going extremely. We're working on as we speak, the platform integrations and ensuring that we can offer multiple services on an integrated basis through the platforms, and that's going to be probably a little bit longer period over the next 12 months. And then the revenue synergies are also starting as we speak. They were a little bit slower than the cost synergies. The cost synergies were a little bit more low group. And so you're going to see also accelerating in the second half and later in the year. So I think from a benchmark perspective, we're still looking very much at double-digit growth on both revenue and EBITDA for the foreseeable future. We're looking at then potentially when is the right time to have a strategic brand potentially scale or abilities to the table. And then after that, it could be a potential IPO. So partner could be any time, I believe, in the next 12 to 18 months and then an IPO would follow.

Okay. Pretty clear. Now you also invest in agriculture and consumer goods. So there's potentially this kind of same blueprint that we've seen with TELUS International that we might be seeing with the health. Can you provide an outlook on the agriculture as well? And do you think that you need to make a similar sizable acquisition in the agricultural space in order to eventually make an IPO, is the significant acquisition on the blueprint as well for agriculture.

Agriculture is slightly different on its road map. We went international first on agriculture, where health was more Canadian first going international to segment sales engine and growing agriculture, both organically in Canada and around the world. And there could be some smaller tuck-in acquisitions that we would see in the very short term. I don't -- it may require a bigger scale transaction, but there's nothing at the moment that we have in play, and I would say that's in the short-term horizon. But you look at this year as an example, the first part of the year is starting off a little bit slower as they're lapping some onetime sales. So as they're doing their platform evolution to more SaaS services versus onetime sales, the results might be a little bit more volatile as well. And so building that scale, moving their revenue streams to more monthly recurring revenue, similar to what we're going to see in the first top of it in the back half of this year. That's the kind of momentum that we need to build. So it's both platform based, it'd be scale based. And therefore, I would say it'd be a longer continuum to bring in a partner or an IPO, but it's got great opportunities in front of us. They have a significant product offerings that are relevant to material transaction flows throughout the world and the market is fragmented. So why I don't see the big bang acquisition right of the gate, I don't think there is one. I think it's going to be more small midsized ones to continue to scale and bringing capabilities and it's going to be that development of those platforms. So you have very strong organic growth, and you'll see a bit more of that as we get into the second half of this year as well as the first quarter will be a little bit slower to start.

Yes. Not a market that's as mature as well. So interesting color there. Now you being very advanced in terms of your fiber deployment. It allows you to consider copper decommissioning initiatives. And one of them that you've communicated in the most recent investor update in your last result was the opportunity to maybe start pushing much harder on the real estate monetization of your central offices. You've set aside the $75 million for this year, maybe that you could be using. What are the next steps in terms of monetizing this real estate portfolio? And maybe a time line? And do you expect in the long term you would be the one operating the assets? Or is this more we're looking to monetize?

Yes, it's going to be a bit of both. I'll go to your second question first. We're going to continue to participate because we have a funnel of land that could probably continue to fill a real estate investment, whether it be a REIT or just a partnership for a long time to come, commissioning a lot of these land and properties and COs that are becoming available are in the heart of cities where affordable housing, consumer housing and even more suburban commercial real estate is very important in high demand. And so we have a long funnel for that. We currently have pilots going on all 3 fronts from our commercial, call it suburban commercial to real -- consumer real estate. And we even have our TELUS ocean that we're building that could be considered as part of a REIT type environment as well. So I look at it as, as we monetize, I think we could use the funds to either delever, return to shareholders and to reinvest in the business. That could be either through cash flows or a onetime monetization. I see it more beneficial for a long time -- a long-term cash flow generation. So yes, potentially taking into public REIT environment, but bringing in partners along the way. And that $75 million is really like seed funding to get things up and running, but we are working with partners as we speak to bring in the right partners for capabilities and bring in the right partners to share the risk.

Okay. So it sounds more like a housing opportunity than an office opportunity at this point. Am I reading this right?

Absolutely, absolutely.

Okay. Now on your free cash flow outlook, you guided -- you obviously put out your guidance. So we already have a good idea of where this is going in 2023. It was a busy day on that day because all the companies are using very different definitions. So you have us dig into our old accounting classes, and you do use a more conservative approach than your peers. But at the same time, we have to compare against all the companies and make sure all shows right on the monitors for every investors. But in terms of the longer term, do you expect another leg of growth in terms of free cash flow now that you're done with your -- well, virtually done with your fiber deployment, your accelerated fiber deployment, I should say, is there another leg of growth coming in free cash flow in later years?

Yes. So maybe I'll start with short term. And we are very happy with our guidance that we put out for the $2 billion. That shows a growth rate and a good flow-through. When we looked at the borrowing costs associated with WillowTree and LifeWorks, some of the restructuring costs that were coming through from LifeWorks. And even restructuring from the perspective of we did settle our bargaining unit, and there'll be approximately lump sum payment of around $80 million coming from that, they'll be accruing in Q1 and paying potentially into Q2 and Q3. So that is one that was a bit unexpected, but well worth it because our relationship with our team members and our employees is extremely important. And so that was another -- one of the ones within restructuring that was a little bit unexpected, let's say, from the Street perspective and then the short-term as well. We're going to continue to spend our CapEx probably on a little bit of accelerated rate within 2023, so that we actually get better outcomes in '23. If you look at why we are investing in accelerated the $1.5 billion before, it was to accelerate simplification and digitization, 5G and fiber, all of which pay back and all of which give us a competitive call it leadership perspective and on all of those fronts, we see a bit more CapEx in the first half of the year than the second half as well, aligning to the values of ensuring our customers get the best products, the best services and the best opportunities. Longer term, to your point, we're absolutely going to see a significant acceleration of free cash flow. I think that the EBITDA growth that we've shown is second to none, we're not expecting to have any material increases in CapEx. So it assume it's going to be plus or minus a little bit for the foreseeable future. We'll still be investing some in fiber, but that will be absorbed within the baseline that we give as our guidance. And it will give us lots of opportunity to do the -- what's right for our growth of our organization, what's right for the strong strength of our balance sheet and what's right in the transparency in our shareholder return. But I think very happy as our -- all of our stakeholders on the opportunity we have in front of us to decide where that allocation of free cash flow goes. We're expecting a reasonable spectrum auction at the end of the year. There is no set asides and there is spectrum counts, which should then align to the government's objective of having lower rate EBITDA. We were paying the highest rates in the world on spectrum. These new rules are more aligned to what we would believe a standard that's around the world that would make it more affordable as well. So that also should put a little bit less pressure on free cash flow that you've seen in the past.

Yes, definitely, not just a story of this year's CapEx reduction. I'll squeeze one last in because you mentioned the spectrum auction and free cash flow. So the obvious next question is in terms of capital allocation. You probably have leverage that's a bit higher than your comfort level in light of the LifeWorks and WillowTree acquisition. What is the plan with regards to deleveraging or general capital allocation?

Yes, we're going to continue to delever through growth. And when you look at what's required this year from maturities of our debt, it's still not that high, it's the $500 million. But we do have some refinancings to do of some of our shorter-term debt to make it more long-term debt. So you'll see a bit of that. But at the end of the day, I'd say next year in 2024, we'll be able to then to take a look at in 2025, is it a normal paydown of debt? Is it an increase in shareholder return from the 7% dividend growth to within the range or stay within the range of higher 7% to 10%. And then what investments are required in the business to make it the leading business in growth that you see from us and 11% for a telco is still for a communications company because not really a telco, but a communications company is still leading the industry, and we want to stay there. And so making sure that we continue to invest in a healthy, vibrant organization that is a long-term win for all investors and a long-term win for debt holders and other stakeholders alike. So it will be that 3-legged stool that we continue to talk about in various -- and I love to be in the position we're in, that we're finishing our fiber build when interest rates are the lowest. We're the lowest. We finished when rates were in the 2%, 3% range. Labor was cheaper. And so we're coming to a conclusion where others between integrations, between network upgrades, between fiber builds, et cetera, are going to be paying higher interest rates and higher labor costs. And so we're going to get a better return on our assets. And when you think of the assets that we've built are going to last over 56 years. I think, again, you're going to see that flow through to long-term free cash flow that's going to be a win-win when it comes to shareholder returns, a buy/rent organization to invest in and happy shareholders. It's going to be all 3.

Yes. Looking forward for the happy shareholders, we'll make my life easier. So thanks, Doug, for your time and for the color and enjoy your day.

Thanks. Thank you very much. You as well.