TELUS Corporation (T) Earnings Call Transcript & Summary

Okay. Welcome back, everyone. Thrilled to have Doug French here. I think many of you in the room know who Doug is. He's the CFO of TELUS. Doug, welcome. Thanks for coming.

Thank you.

Look, I thought we'd start with the capital allocation question. It's very topical with investors given the current interest rate environment. You've made some changes on free cash flow or whatnot. Maybe just give us, big picture, how you're thinking about capital allocation and, ultimately, the dividend growth model that you've been executing on for so many years now.

Absolutely. Thank you. So our free cash flow change that we made was all related to the restructuring initiative that we had announced last quarter of approximately 6,000 team members. And it was across the board, between TI finalization of some integration costs, cost rationalization with digitization and the competitive environment and regulatory environment as an overtone. So 100% of it was related to that. It's actually a little less than that. We actually backstopped some of the free cash flow impact of that with our operations. It wasn't a one for one on the cash flow impact. But when you look back through what that will generate is our confidence level in long-term free cash flow. So we've decreased our capital guidance this year and highlighted that it's going to be approximately that next year and beyond or potentially going down. And so between the two of operations, cash flow, more efficient and effective through the restructuring program that we had done, our confidence in our product sets and our growth, we are very positive on where our free cash flow is going and why we have confidence that our dividend growth initiative will continue. We still got a year or two left in our initial one, and we have confidence we'll be able to do that in a very strong way. Our capital allocation hasn't changed. We focus on the three legs: one being invest in your business where it's appropriate to do so and make sure you're relevant and executing for the future; dividend return and shareholder return would be number two leg; and then number three is a strong balance sheet and ensuring that you have the right cost of capital and debt as you make those investments in the next step. So it hasn't changed and our confidence in this restructuring has actually helped in making sure that we leverage all of our tools and our investments to date for future margin profitability.

Maybe just as a segue, can you frame your leverage targets and the progression on how you hope to achieve those, what drivers you see on that respect?

Yes, it will be probably two or threefold. One, first, would be EBITDA growth continuing to grow and making sure we have the investments in our product sets to do that. When you look at the investments we made in digitization, as an example, and the margin that came with that, as we've highlighted numerous times, the only telco that didn't go negative EBITDA during COVID was because we're leveraging our fiber enhancements, the efficiencies of fiber, leveraging our digitization and the efficiencies of digitization. So continuing to take that to the next step is going to help significantly down that path. We then look at some of the, call it, regulatory impacts that have happened in the past on spectrum auctions. They should be a little bit more favorable with the spectrum cap and no set asides so that, for the first time ever, certain people are paying fair market value for spectrum and not receiving the subsidy. But that will be a little bit more balanced because there's more spectrum at the table as well. Same with millimeter wave, when it comes, there's enough spectrum for all. There really shouldn't be an overpaying, let's say, to the past that we paid the highest spectrum costs in the world. And so I'd expect both of those to be more rational. And then as maturities come forward, we have the option of do you just pay down debt, do you refinance, and what do you do on that allocation between shareholder return investments and dividend or shareholder returns, debt reduction or investments in the business. So looking at all three of those into the future because we will have optionality as we look forward.

And so what sort of targets are you hoping to get?

Well, keep delevering. And I'd say, with the spectrum auction this year, we'll probably end up with millimeter wave and 3.8 in 2024, having to pay for both, we would expect probably in the lower 3s as we progress into '25. But I would say we won't be back into the 2s, I wouldn't think, until '26.

All right. Look, there's been some pressure at one of the businesses, TELUS International. And there is, I think, some concern among the investment community with respect to how that will play out for TELUS Health and down the road, TELUS Ag. Maybe just refresh everyone on how you're thinking about those sort of non-telco businesses given what's happened at TELUS International this year.

Yes. So I would say the macro impacts on TELUS International has not impacted our vision and strategy of where we're headed on health and ag. TELUS International, a lot of learnings came from that, which are good, and the main one being customer concentration. And when you look at the macro impact that happened to a lot of the hyperscalers, which were two or three of the largest customers, and TELUS being one of the others, when they had to downsize, and the downsizing to TELUS International happened. That industry was also really focused on revenue. And as free cash flow became more and more important to that industry, we all know that industry was hit a little bit harder than the others. That being said, TI is a great funnel. They have great product sets. They're evolving to more and more customer service, which is AI-driven and digital driven, more bot development, so helping companies evolve to what TELUS has been doing from pure people answering phones to a digital end-to-end experience. And when you can develop and implement those solutions, you become relevant for everyone around the world, both in agriculture, health care, telecom and other industries. So their funnel is strong. I think they're going through a customer diversification as we speak and building that funnel with new logos. They are very important to TELUS. They've been our biggest outsourcer and an amazing partner on helping us get to where we are. And so there's been a significant win there and a lot more to come as we look through that component. On health and ag, it's very different. We have to obviously learn on making sure we don't have the concentration they had. But beyond that, it's all going to be, again, right time and the right growth rate. So you have to earn the right to bring in partners. You have to earn the right to go public. And we've got a great path and trajectory for health, being it's more international based now as well. Employer-based health care is becoming a way of life around the world as most governments can't afford health care when it's over 50% of the GDP in most countries. And so as we've developed that and developed it internationally, we do see significant growth opportunities. So we're not just capped by 40 million Canadians. We're actually offering our services around the world now, to the billions and billions of people around the world, in an area that's needed more today than it's ever been. And some of the mental health applications that we're launching as well, again, extremely important. When you're on a waitlist of 3, 6 or 9 months to see and get mental health treatments around the world as well, having some automated tools that at least get you some quicker solutions and recommendations is essential. So I see that one being a good trajectory, market condition relevant. You could bring in a partner. You could go public. But at the end of the day, we have to earn the right to grow. We have to earn the right to show you the value that comes from that, which I think is going to be more and more evident in the future. And the same would apply for ag. I think Ag is a little bit behind now on scale as it had a little bit more headwinds, but they are really application and data companies. So when you think of where the future is going on application data, insights and AI, a perfect partner for TI as well with both of those. So that's how I would see it going; obviously, Health, the sooner, to trigger some of those events. But again, they have to be right growth rates, right leadership team. I think they are the right strategy. It's just making sure the positioning and the market conditions are relevant or right at the time.

And so the kind of template that TI set in terms of a path to a monetization event, we should still sort of hold TELUS Health to that kind of range.

Absolutely. And I'd say it'd be 1 year to 2 years ahead of Ag at the moment.

And back to your comments on the balance sheet, managing the balance sheet, I mean certainly, in TI and Health, you have been fairly active in M&A. Is it fair to say that we should expect you not to be that active in terms of going forward?

We're still going to be opportunistic in M&A, as appropriate. You can do an M&A transaction and bring in a partner at the same time. That could also be it where you issue shares of Hills Health, them to become your partner. But we don't want to starve the business back to that one leg of invest where appropriate. That being said, with higher interest rates, you have a higher hurdle rate and a higher bar, so making sure that you actually align those acquisitions and the expectations of profit, the expectations of generation of free cash flow as well. So would it be as many J-curve type investments that we did to get off the ground? No, unlikely not. That would not happen. But is there still potential for more scale, more growth, more product? Absolutely, there is, in the right structure and the right price.

Okay. Let's shift and talk about TELUS Corp, for lack of a better word, the legacy telco business. A lot of changes in the marketplace given transactions and whatnot. What's your assessment of the competitive environment out there?

I would say it's been very intense. I think both wireline and wireless have been, I'd say, more competitive and more volatile than I've seen for a long time. I think in the last little bit, it stabilized again, so continuing to be surprised every other day. But it has been pressurized. And I think you would expect that. When the regulator had to approve the acquisition and their promise is made on reducing prices, you would expect this. And we sort of talked about this even a year ago that we would expect some initial intensity in the market as a new entrant, Videotron gets established and as Rogers & Shaw gets to integrating. Some of the bundles that are currently happening are also leveraging the new customer set that Rogers & Shaw has. And so there is intensity across the board. I think we continue to do what we've done best. We focus on our bundle, focus on the best networks, best customer service and economics. And high ARPU isn't always the driver of economics. You can do very well. And our Public example is a good one for that where we're 100% digital, so no phone, no customer service, no hands-on activation. So substantially, the cost of your network is the only cost to that business. So in doing that, obviously, you're now getting higher margin or lower ARPU. And so making sure you bring in that relevancy depending on what the market needs where you can still generate economic value across the board. And that's really been our focus is play in all areas, focus on economics, don't chase loss leaders but make sure you're relevant across the spectrum of the price continuum.

We're kind of through back to school now, what's your assessment of the promotional activity? And how do TELUS fare through that important season?

Yes. I think we fared very well. You've seen us make sure we've not gone to the finance floor that our peers have. So expect a little less on the network or the handset revenue, we haven't been matching the floor on that front. To get a handset renewal with us, you're a little bit higher on the Koodo front and/or the T brand front. Showing the value prop of a $2,000 handset being financed at these interest rates comes with a cost. So you go too far down that finance floor, you don't make money on that customer. And so when I say focus on economics, we're focusing on the balance between ARPU and the cost of those handsets and the financing that comes with that. So I would say you're still seeing great momentum in Canada with growth in immigration. I think we're doing very well in the multi-tier products, right, from Public to Koodo to TELUS, focusing, obviously, as much on TELUS as possible but leveraging the other tools where appropriate and then leveraging our bundle. We've got the most product-intense organization in Canada when you throw in the fact that you can bundle Health and Ag with our wireline and wireless services. If we're running your pharmacy or running your doctor's office or providing you EAP to your business, why wouldn't you consider us for your telecom services concurrently. And so you can actually end up bundling not just your typical security, TV, et cetera, you can actually bundle those other product sets, which has been very useful for us. And you don't have to be quite as aggressive on matching every single price for that day. So pressure on ARPU is definitely going to continue to be there. I think you've seen a lot of the $39 and $40 and $45 pricing, so expect that to continue. But I would say we're very happy with our continued momentum.

And you've mentioned that there's such a focus on the bundle. In your core market out West with a new competitor and an ability to bundle, I mean, there's an expectation, I think a reasonable one, that Rogers will be a better bundler, if you will, from that perspective. What's your sense of the marketplace early days?

Yes, early days, it has been impacting pricing a bit in the West with that bundle. A lot of the customers who are bundling though were never TELUS customers in the first place. So if you think a wireless customer that didn't have TELUS in the West, odds are they're with Bell or Freedom or Rogers themselves, that they're bundling between Rogers and Shaw. And so you're seeing a little bit more of that, and so we're still holding very well. We have an intensive fiber footprint and continuing to finish that, and yes, so smaller scale because we're way down the pipe. But that product superiority is also doing very, very well for us. You can't beat a fiber connection. You can't beat the best wireless network in the world. You can't beat our best security and the most scale we have on security. And some of the new offerings we're bringing to home automation, self-install and TV are fantastic from a cost structure perspective but a customer experience concurrently. So you can plug and play easier than you've ever had before without having a truck roll, without someone in your house for 4 hours. So all of those items are contributing very well to that. But I would say, again, there's been a little bit more pressure on the price side. I think we've seen reductions in that bundle of our competitors of $30, $40 compared to what it was prior to them buying Shaw.

Any questions from the floor? So following up on that, I mean, one of the things that I think investors have taken notice of is some language from the regulator. Can you tie maybe your strategies into what you're thinking about with respect to, I guess, the wholesale review? I know there's not a lot of wholesalers out West and also the current issue around MVNOs. How does TELUS think about the regulatory landscape as you push forward these initiatives?

Yes. I think in the past up till that overtone, it's always been investment-based pricing and investment-based infrastructure in Canada, which has gotten us to why we have one of the most covered countries in the world from a wireless perspective right up to 5G and why we have some of the best fiber networks in the world, was that, that thesis was there. But I think the investment thesis when you think about how we invest in Canada, it's not just infrastructure, it's people, it's jobs, it's everything. And so I think, as we look forward, I think the wholesale rates have to take into consideration. I would believe that we've invested in fiber that doesn't -- it has a long payback period, a long life but a long payback period. So they need to consider that you have to get a return on that asset or at least break even before you would consider more assertive rates from a regulatory perspective. And I think that is a practical solution that they should be thinking through. I don't see them going far off that path, to be honest. I think it's dangerous. You look at all the job impacts already. You think of the integration that's happening with our peers, et cetera. There could be material job losses, and to compound that would be even worse if the regulatory environment went too far beyond that tone. So I'm thinking it's still going to be connectivity matters. During COVID, Canada was one of the most productive countries in the world because our connectivity was so strong, that we've got connectivity in a lot of areas. And there's still a lot more to do. Don't get me wrong. A lot more to do, but having digital leadership I think is an asset, having connectivity to areas where you can live anywhere when housing is a problem and limitations would mean you need strong networks. And so putting that at risk, there's tons of examples throughout Europe where, when you've tilted too far, wireline and wireless networks are horrible, absolutely horrible. And they still haven't recovered yet. For any of you who traveled throughout parts of the U.K., their networks are not good, and it started off with a regulatory environment that went too far down the path. And so I think it's still going to be very balanced, and we will react accordingly. There's been tons of regulatory involvement. We paid the most spectrum in the world and still bringing cost pricing down. And so we will do what it takes. But we think it's in Canadians' best interest to invest in Canada, invest in jobs and make sure we have that best digitization around the world.

Right. Now you've already moved in some respects because you did undertake a company-wide restructuring. Maybe put that in perspective for folks in the room about what will investors see out of that restructuring program you put through.

Yes. So we had a run rate savings of about $325 million from that restructuring. Majority of that being in TTech because the TI restructuring has a little bit less of, call it, attach rate to it on dollars. We expect to be fully completed that by the end of the Q4 and first part of Q1. So we expect a good run rate by the time you leave Q1 2024, a good run rate on that $325 million. It's leveraging our assets. So leveraging fiber and the fiber efficiencies that we've always talked about, less truck rolls, less calls to your call center, leveraging digitization, looking at the competitive environment and saying, "You have to have a more streamlined cost structure." So how can you leverage AI more? How can you leverage those digital assets more by preparing? Things are different today than they were. And I think we all feel a little different in that ARPU is no longer 1%, 2%, 3%, 4% up. And it's definitely under more pressure. So you have to be more efficient and effective. And so I think our shareholders will see that, is that we've future-proofed a little bit concurrent with the utilization of what we've already spent. And you'll probably see potentially even a bit more in the longer run. I know TI continues to assess their situation that when you're a business supporting customers and people are related to revenue, if revenue is not there, then you're going to have a bit more of that downsizing. So I still think it's going to be a bit more, I don't think in the same scale of what we saw in that quarter, but we'll keep managing it effectively with all the right pressures on maintaining customer service but being able to be competitive and effective in the current environment.

On that topic, what is the message to shareholders, both TI shareholders but certainly to TELUS shareholders, of how patient do they have to be for a recovery to growth for TELUS International?

I think TELUS International, and they've put out their own expectations, they're going to continue to get better. I think they had hit, from everything we have seen, knock on wood, the bottom of the impacts. But they still won't be back for a little while. I would say they're going to continue to creep back, step back into their future state of growth. But their margins, they're working hard on, so back to ensuring they align that cost structure to the revenue component where there was a bit of a delay. And they highlighted that, that certain places takes 90 days to rightsize your cost structure when your revenue goes away on day 1. Things like that is what really they've been catching up on to ensure they have that continued trajectory. So I would say continued improvement throughout 2023 and '24. And when we put out guidance in early '24, will they be back to their the state by the end of '24, I'll have to wait until that announcement.

Great. One last chance, any questions from the floor?

A couple of years ago, you sold the financial services piece. Are there any assets, like TELUS noncore assets, that's in your purview you could sell in the near term?

Yes. We, as part of this last restructuring, have been going through all of our, call it, product sets and looking at what is core, what is not core, what should we not focus on and consider divestiture. There are components throughout. When you buy as many companies, as we've done over the past 2 or 3 years, there's always a product or two or a subsegment of an acquisition that really isn't core. And so we're looking at that as we speak. I think some of the larger ones we've been back and forth on, including some of the ones that were in LifeWorks. But there's some in Ag and some even in our TBS area that we're considering, as we speak. I would say I don't think there's any that would be any bigger than financial services at the moment. So I would think it would be that or smaller, but we're definitely looking to reprioritize and focus what matters most, and some of those will start to happen in the near future.

Anyone else? And we are out of time. Doug, thanks so much.

Thank you very much.