Telus Corp (TU) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS 2021 Q1 Earnings Conference Call.

I would like to introduce your speaker, Mr. Robert Mitchell.

Please go ahead.

Thanks, Mike.

Hello, everyone, and thank you for joining us today.

Our first quarter 2021 results, news release, MD&A and financial statements and detailed supplemental investor information were posted on our website this morning at telus.com/investors.

On our call today, we have remarks by Darren Entwistle, President and CEO; François Gratton, Executive Vice President, TELUS Health, TELUS Agriculture and TELUS Quebec; and Doug French, Executive Vice President and CFO.

As well for the Q&A portion of today's call, we will be joined by Zainul Mawji, President, Home Solutions; Jim Senko, President, Mobility Solutions; and Tony Geheran, EVP and Chief Customer Officer.

Briefly on Slide 2. This presentation and answers to questions contain forward-looking statements that are subject to risks and uncertainties and made based on certain assumptions.

Accordingly, actual performance could differ from statements made today, so we ask that you do not place undue reliance upon them.

We disclaim any obligation to update forward-looking statements, except as required by law.

And we refer you to the risks and assumptions we've outlined in our public disclosures, including our first quarter 2021 MD&A, our 2020 annual MD&A and filings with securities commissions in Canada and the U.S.

With that, over to you, Darren.

Thanks, Rafael (sic) [Robert], and hello, everyone.

For the first quarter, TELUS once again achieved strong financial and operational results in both of our operating segments, TELUS Technology Solutions, or TTech, for short, and Digitally-Led Customer Experiences at TELUS International, DLCX, for short.

Our continued execution excellence, realized against the backdrop of the unprecedented operating environment, was characterized by the ongoing combination of robust, high-quality and profitable customer growth, alongside strong financial results throughout our business.

This solid performance reflects the efficacy of our world-leading performance culture in action, underpinned by our highly engaged team, and their dedication and passion for delivering outstanding connected experiences for our customers.

This contributed to industry-leading customer net additions of 145,000 and globally leading customer loyalty across our T-Mobile and fixed product lines.

Moreover, our results were buttressed by a highly differentiated and potent asset mix geared towards high-growth, technology-oriented verticals, which I'm going to have the opportunity to discuss in a moment.

Looking at our consolidated financial results for the first quarter.

Revenue was up almost 9% year-over-year, whilst EBITDA increased by 1.9%.

This performance reflects continued resilience and execution excellence and bolsters our unmatched capabilities and competitive position as we look ahead to the anticipated postpandemic recovery, one that we're all looking forward to.

Taking a look at our mobility operating results.

We achieved once again industry-leading customer growth.

This included healthy mobile phone net additions of 31,000, which was up close to 50% over last year.

For connected devices, we realized strong net additions of 63,000, up almost 30% on a year-over-year basis, reflecting continuing increased demand for TELUS' IoT solutions.

Importantly, our team delivered another quarter of best-in-class loyalty results.

Blended mobile phone churn was 0.89%, representing a 5 basis point improvement over this time last year.

Underlying this result, postpaid churn of 0.72% puts us in our eighth consecutive year of leading postpaid mobile phone churn being below 1%.

This performance is backed by strong digital capabilities and superior service offerings over our world-leading broadband networks.

At a time when network connectivity is more important than ever, TELUS was once again recognized as the best mobile network in Canada for the ninth time in U.K.-based Opensignal's Mobile Network Experience report for February 2021.

TELUS took first place across 7 key metrics.

Opensignal further acknowledged our next-generation 5G network with 6 awards for superiority in respect of wireless speed and coverage in their Canada 5G User Experience Report.

Similarly, Canada-based Tutela named TELUS as the best mobile experience provider nationally in their Canada: State of Mobile Network March 2021 report.

Furthermore, Seattle-based Ookla subsequently named TELUS the fastest mobile operator in Canada for the third quarter in a row in their Global Index Market Analyses for Q1 2021.

These continuous awards earned by our team are a testament to the significant investments that we are making in our world-leading networks as well as the passion and skill exemplified by the TELUS team in putting our customers and communities first in everything that we do as an organization.

In respect of our mobility financial results, ARPU declined by 3.7% in the quarter.

This, of course, reflects industry-wide pressure on roaming associated with pandemic-related restrictions and reduced travel, which we will lap in Q2 of 2021.

Partially mitigating this, we continue to thoughtfully migrate our base to our endless data plans whilst holding the line on our premium brand ARPU.

Notably in this regard, more than 65% of rate plan changes in the quarter were either step-ups or remain flat.

Despite continued pressure on roaming, we again drove a sequential improvement in mobile network revenue, the lowest decline amongst our national peers as we continue to successfully strive to manage these aspects and manage these impacts in the throes of the pandemic.

Excluding pandemic-related roaming impacts, network revenue was up approximately 3%, driven by high-quality customer growth and strong underlying ARPU improvements reflective of our high-quality customer growth and the upgrades that we are realizing.

Turning now to our wireline operating results.

TELUS once again delivered another quarter of robust customer growth, which was industry-leading across the board.

First quarter Internet net additions of 33,000 represented an increase of close to 30% on a year-over-year basis.

This was aided and embedded by a churn rate well below 1% for our Internet product line.

Alongside a double-digit percentage increase in monthly recurring revenue for new customers, this continues to bode exceedingly well for future lifetime economics of our fast-growing, fiber-based Internet product line at TELUS.

Additionally, we realized healthy TV net additions of 11,000, which was up close to 40% on a year-over-year basis, also being supported by strong loyalty with churn well below 1%.

Residential voice line losses came in just below 10,000 in Q1, representing the fourth consecutive quarter at or below 10,000 and a 23% improvement over the prior year.

Demonstrating incredible consistency in our customer loyalty, churn for residential voice lines also came in sub 1%, a true testament to the exceptional customer service delivered by our frontline team members.

Furthermore, we delivered security net additions of 17,000 in the first quarter of 2021, up 13% on a year-over-year basis, likewise, also supported by a churn rate once again being below 1%.

Notably, our security results represent a North American industry-leading result as it relates to the excellence of our security operations and execution and what we are delivering on a net adds basis, buttressed by our sub-1% churn rate.

In summary, our leading overall fixed RGU net additions of 51,000 were up 15,000 or more than 40% on a year-over-year basis in terms of 2021 vis-à-vis Q1 of 2020.

These results, in my opinion, underscored the unique and attractive bundled offers available to customers across our superior product portfolio, coupled with our team's focus on leveraging the distinctive competitive differentiation inherent in our pure fiber network.

TELUS' wireline revenues were driven by data revenue growth of 11% through a combination of higher revenues from our diverse service and solution offerings, including robust growth in Internet and third wave data services, resilient performance once again from our TV offering, strong growth in home and business smart technology, inclusive of our security solutions portfolio, and increased revenues from our agriculture technology solutions business.

Our wireline revenues were also driven by 10% year-over-year growth in health services revenue.

This was supported by the accelerated demand for virtual care, in spite of clinic visits, preventative health services and claims processing moderating substantially through the pandemic-related lockdowns.

Today, TELUS has introduced increased disclosure related to our health care business, a sign of things to come on the ag tech front as well.

We are confident that this will provide investors meaningful insight into the valuable asset we are creating as a world-leading provider of digital health care technology solutions.

Indeed, we've assembled a portfolio of digital health assets that is second to none on a global basis.

I'll turn the call over to François shortly to talk more about our unique and compelling health care business and the significant future and potential for value creation inherent in this portfolio.

Overall, revenue for TELUS Technology Solutions, or TTech, which, as a reminder, includes both our mobile and fixed products and services, increased by 6% year-over-year, whilst EBITDA was up 1.8%.

Doug is going to provide more details on TTech financials in just a moment.

Turning to our Digitally-Led Customer Experiences, or DLCX segment, which incorporates the result of TELUS International's products and services.

For the first quarter, we once again achieved healthy double-digit year-over-year revenue growth with a strong and resilient bottom line profitability profile, adjusting for onetime items in respect of TELUS International's successful IPO.

Earlier today, Jeff and our team at TI reported robust first quarter results and announced annual guidance for 2021.

Indeed, for the full year 2021, TI is targeting strong double-digit revenue and EBITDA growth, complemented by a sub-5% CapEx intensity environment within this line of business for TELUS.

This showcases, in my view, the significant global opportunities available to our organization, global opportunities in respect of driving digital performance journeys for our existing and prospective clients globally and enabling those customers to more quickly embrace next-generation digital technologies to deliver better business outcomes, thanks to the capability set that we're bringing to bear at TELUS International.

Doug is going to provide further details on TI's financials during his commentary.

Before handing off to François, I'd like to take this moment to address our accelerated broadband investment program that we had the opportunity to announce in March, which is going to significantly bolster our already leading position in terms of network infrastructure and technology across wireless and wireline.

Our successful equity offering completed in March will underpin the unique strategic opportunity that we have to pull forward the expansion of TELUS' leading pure fiber network in Alberta, British Columbia and Eastern Quebec as well as the accelerated rollout of our national 5G network and the digital experience capabilities that we're bringing to bear from customer service through to our channel operations.

Investing from a position of considerable strength and leadership, these generational investments are going to further bolster TELUS' leading customer experience and our superior competitive position.

This includes the enablement of up to 225,000 additional urban and rural premises with fiber technology as well as enhancing the speed, coverage and quality of our world-leading wireless network with 5G capabilities on an expedited basis in terms of our national footprint.

These strategic investments represent $750 million of incremental annual CapEx over and above the $2.75 billion planned in each of 2021 and 2022, buttressed by proceeds from our equity offering undertaken to fund this important strategic opportunity, vending into the momentum, if you will, that we already enjoy.

These transformational investments will fuel enhanced customer growth and underpin significant operating efficiencies, supported by the accelerated decommissioning of legacy copper infrastructure.

In turn, this will drive positive revenue, EBITDA and cash flow benefits as we complete our expedited build-out.

The outstanding performance we've achieved on fiber over the past 8 years clearly illustrates the significant opportunity in respect of this important program.

Notably, by way of example, with fiber, the number of products within a customer's home is 25% greater than copper.

ARPU per home is approximately 50% higher.

Churn is lower by 30 basis points.

And operating expenses that support fiber are approximately 25% lower as compared to copper.

Indeed, these are compelling economics and competitive differentiating factors on a holistic basis.

Given the synergies and economies of scale and scope between fiber and 5G, this investment program will have a meaningful positive impact in terms of further fueling our B2B activities and building product ecosystems in respect of 5G in this regard.

But also the fiber and 5G combination is going to propel our digital health care solutions and our digital ag tech solutions in a way that's deeply meaningful, and it will unlock significant value expansion opportunities in these 2 critical sectors for TELUS.

Furthermore, as a result of the pull forward of our broadband investments, the trajectory of our CapEx decline will be steeper than previously expected.

Commencing in 2023, our annual CapEx is expected to decline to $2.5 billion or less.

As a result, in 2023, we expect consolidated CapEx intensity at or below 14%, which would represent the lowest capital intensity result on record for our organization, having broken the back with the coverage that we want on our broadband footprint on both wireline and wireless.

Furthermore, free cash flow will be bolstered by the expected CapEx decline of at least $1 billion over 2022 as well as the EBITDA growth from additional customers and services and the incremental cost efficiencies associated with our digital transformation program, which is a distinguishing characteristic of TELUS versus our peer group.

Importantly, this initiative will further support the advancement of our financial and operational performance, strengthening our confidence in the robust outlook for our business and amplifying the valuation of our emerging growth businesses.

Moreover, it will bolster the long-term sustainability of our industry-leading dividend growth program now in its 11th year with a dividend increase of 8.6% that we announced today.

In closing, as we all continue to navigate very unfamiliar and certainly challenging territory, the TELUS team remains committed to supporting Canada's COVID-19 relief efforts.

By way of one example, nearly 1,800 dedicated TELUS team members are supporting the health and well-being of our fellow citizens through the government of BC's immunized BC initiative.

Due in part to our team's efforts, our unwavering efforts, we've been able to significantly accelerate the phased vaccination rollout, booking more than 1 million vaccination appointments for eligible British Columbians and providing hope for better days ahead.

We're also offering further assistance through 8 of our 13 Health for Good mobile clinics across Canada, which have provided 18,000 COVID-19 assessments for marginalized populations who need a helping hand, who are the most impacted by the nefarious reach of COVID-19 during this particular pandemic.

On behalf of the Board and the leadership team and all of our 80,000 TELUS employees, I remain exceedingly proud of and grateful for the entire TELUS team and the culture that they exude in action to deliver the type of results that we posted for all stakeholders.

On that positive note, François, I'll hand the call over to you to talk about the exciting progress and the exciting outlook for our health care business.

François, over to you.

Thank you, Darren, and hello, everyone.

For the last 13 years, TELUS Health has invested more than $3.2 billion to build a set of innovative capabilities that we imagine the way health care is delivered to and then experienced by Canadians, positioning TELUS Health as the largest and leading integrated health care services and technology company in Canada.

Indeed, in 2020, revenue derived from the health vertical, including from our diversified portfolio of digital health technology solution, health care centers and broadband connectivity, totaled over $800 million.

Importantly, over 50% and growing is coming from our health care services and solutions.

While results in 2020 were impacted by the COVID-19 pandemic, particularly in our health care centers, we have seen significant accelerated adoption for our digitally enabled health care tools as a result of the health crisis.

Most notably, demand for virtual care has grown exponentially since the onset of the pandemic, helping bridge gaps in access to health care and ensuring Canadians are supported through these difficult times and keeping everyone safe.

Collectively, our TELUS Health virtual care services reach more Canadians than any other provider in the country.

Notably, our virtual care members base of approximately 2 million has nearly tripled over the last 12 months, covering more than 4 million lives when including family members within a household as consumers embrace digital health solutions to conveniently access medical care and as employers recognize the critical importance to support the physical health, mental health and well-being of their team members.

In addition, our virtual visits module integrated into our electronic medical records have allowed physicians to stay connected to their own patients, scheduling over 585,000 consultations in just over a year while assuring the continuity of care during this critical period.

Indeed, with a number of health care systems across Canada feeling tremendous pressures from the third wave, our digital health solutions are helping bridge gaps in access to care, enabling Canadians to connect with care teams from the comfort and safety of their homes, assuring the continuum of care and allowing hospitals to focus on the most urgent cases.

For the quarter, health services revenue of $123 million increased by a healthy 10% year-over-year.

Importantly, the revenue and operating KPI disclosure that we announced today reflect the higher growth technology solutions, including -- inclusive of our 3 primary areas of focus.

First, we have our primary care services, including 16 health care centers, across Canada and synergistic combination with our virtual care services across the consumer and employer to employee verticals as well as our connected care solutions such as our home health monitoring solutions and our consumer-oriented services such as our LivingWell Companion.

Collectively, this represents approximately 35% of our health services revenue disclosed today and is expected to be a growing contributor to our results as virtual care continues to scale rapidly and as consultations within our health care centers return to growth as we manage our way through the pandemic.

Second, we have our health care provider solutions, which includes our physicians and pharmacy solutions, 2 key areas that together represent over 30% of our disclosed revenue today.

Notably, through a recent integration, TELUS Health virtual care is also the first service in Canada to be able to securely share patient information with the appropriate consent with any one of the 32,000 clinicians who are using our electronic medical record or collaborative health record solutions that together digitally connect and support more than 14 million Canadians, thus ensuring improved continuity of care.

Furthermore, 6,500 pharmacists across Canada use our pharmacy management systems, while our recent acquisition of Alliance Pharmacy positions us well to tap into the online pharmacy services.

These services represent an exciting growth opportunity that complements our TELUS health ecosystem and continuum of care with the ability to leverage our tremendous reach developed with our virtual care services, our health care centers and the physician community using our electronic medical records.

Lastly, health benefits management, or HBM, for short, an important and mature business, represents approximately 20% of our health services revenues.

Notably, the scale of our reach in terms of lives covered and digital health transactions in TELUS Health as a whole differentiate us from any competitor.

Indeed, in the -- at the end of the first quarter, TELUS health care services and technology reached a total of approximately 17.5 million lives covered and generated approximately 133 million digital health transactions across HBM, virtual care and EMR as well as digital pharmacy, enabling better preventative care.

There is a bright future ahead for digital health.

As the leading end-to-end integrated health care services and technology company in Canada, combined with our leading broadband networks and data analytics capabilities, we are indeed uniquely positioned to continue transforming how Canadians experience health care, and we are not done innovating.

Our TELUS Health team is excited about our opportunities to drive technology innovation and, in turn, continue delivering better health outcomes and strong financial results.

And we look forward to sharing our progress with you through our regular quarterly disclosure.

Let me now pass the call over to you, Doug.

Thank you, François, and hello, everyone.

Consistent with our track record, our Q1 results reflect the superior asset mix, leading network and customer experience and strong operational execution.

Roaming revenue declined approximately $50 million as compared to Q1 2020 from continued reduced travel.

Our mobile phone ARPU decline of 3.7% also represents the third consecutive quarter of sequential improvements.

Looking ahead, we anticipate returning to positive ARPU growth starting in Q2 and with quality loading will result in network revenue growth.

This will recover -- this recovery will be driven by the lapping of COVID impacts in addition to our strong underlying trends from our sustained focus on smart base management and profitable customer additions and upgrades.

In addition, the impact from lower data overage revenue continues to steadily decline as we are approaching a steady state that will no longer represent a notable year-over-year impact.

Customer activity was strong during the quarter, and mobile equipment revenue growth of 27% benefited from upgrades and new customer growth.

This higher-than-expected activity had an upfront cash flow impact of approximately $60 million as more customers took premium devices on their financing plans.

On the fixed side of our business, we continue to showcase our superior customer growth with 51 total net additions, continuing the momentum that we built throughout 2020.

Impressively, we posted more than double-digit revenue growth in both fixed data and fixed equipment.

Clearly, our high-quality customer additions are driving important revenue and EBITDA contribution, particularly on the Internet product to help offset the pressure we're continuing to face from our legacy business services.

In total, TTech revenue grew 6% and to just 1.2% -- compared to 1.2% in Q4 of 2020.

Additionally, despite the challenge of COVID-19 as well as scaling up costs within ag tech and virtual health care, our TTech adjusted EBITDA grew 1.8% in the quarter, a sizable improvement from the negative 3.8% in Q4.

DLCX revenue grew 33%, and adjusted EBITDA grew 3%, driven by growth across targeted high-growth verticals such as tech and games, communications and media.

The DLCX results includes an unfavorable foreign exchange impact of approximately $8 million on the translation of DLCX operations into Canadian dollars.

Excluding this FX impact, DLCX adjusted EBITDA growth was approximately 10%.

For clarity, while our DLCX segment entirely represents TELUS International's operations, there are notable reporting differences under TI's own public disclosure.

These differences are due to TI reporting under a different currency, the U.S. dollar, as well as slightly different definitions on certain financial metrics.

To help reconcile the differences on revenue and adjusted EBITDA, we provided a walk down reconciliation in the appendix of our posted investor deck.

Free cash flow was $321 million, down from the prior year.

Recall, we were able to defer cash taxes in March of last year, driving a portion of the $96 million increase in tax -- cash taxes in the current period.

This year, we also had higher payments related to certain DLCX, ag tech and health acquisitions.

Meanwhile, the cash impact from higher-than-expected customer loading included -- and including strong upgrade activity, which was up almost 20% over last year, impacted free cash flow by $60 million, as previously noted.

With our strategic acceleration of the $750 million in additional CapEx in 2021, we now expect our annual free cash flow to come down by the same amount.

As highlighted by Darren now, this acceleration was prefunded by our equity offering.

While there is a near-term free cash flow dilution, our track record has shown that these investments will drive a very strong outcome for our organization, as highlighted by Darren earlier.

These include our mobility and home bundle across our footprint, leading to loading gains contributing higher ARPU and lower customer churn; augmenting operational efficiencies, including accelerating in our copper to fiber migrations; and amplifying our cash flow in conjunction with an accelerated CapEx decline beginning in 2023.

In addition to our successful equity offering in March, we completed a well-received debt transaction.

The 30-year debt offering represented TELUS' lowest 30-year coupon -- second lowest, sorry, 30-year coupon on record.

Our weighted average interest rate on long-term debt is now at 3.8%, down 12 basis points from the previous year.

As well, our average term to maturity decreased slightly to 12 years.

Notably, our leverage ratio improved to 3.15x compared to 3.45x at year-end as we continue to delever to our targeted range as planned.

Additionally, our healthy balance sheet, combined with our positive outlook, gives us confidence to continue our long-standing dividend growth program as we have done today in our announced dividend increase.

As outlined in our disclosure today, innovation, science and economic development approved our acquisition of certain 3,500 megahertz spectrum licenses.

Through commercial transactions during the period, including 50 megahertz in the urban area cores of Edmonton, Kitchener -- or Kitchener and Guelph, London, Ottawa and Winnipeg.

Additionally, during the quarter, we also obtained the use of AWS for licenses from the original licensees in Hope, Victoria and Vancouver.

To conclude, our Q1 results represent a very strong start to the year.

Our momentum will continue to deliver outstanding long-term value creation for all our stakeholders.

And with that, Robert, I'll turn it back to you for Q&A.

Thank you, Doug.

Mike, can we please proceed with questions from the queue?

First question comes from Jeff Fan from Scotiabank.

A couple of maybe questions related to TELUS Health and then a bigger picture question for Darren.

On TELUS Health, the quarter saw 10% revenue growth.

Given all the positive momentum that you're seeing, both from the virtual side as well as a recovery on COVID, I'm wondering if you can provide some commentary about where the growth will continue to accelerate through the rest of the year.

And then maybe some comments on margin related to TELUS Health.

It's a mixed bag of business in their different revenue streams.

Wondering if you can help us for purpose of try to get some valuation for TELUS Health on what the EBITDA margin looks like.

And then the bigger picture question is around the commentary about CapEx and investment post this acceleration.

Very encouraging, Darren, to hear about the plan beyond '22, especially given where fiber coverage for you is going to be.

But there is a lot of talk about the transitioning of telecom networks to the cloud.

So I'm just wondering if that's an initiative that's included in your pull forward investment.

Or was that something that's not likely to be that material as you look ahead the next few years?

Okay.

François, why don't you handle the first part of the question for Jeff?

And Doug, if you want to kick in as well, you can.

And then I'll take the last question.

Okay.

Well, Jeff, and thank you for the question.

We do expect to continue to see strong growth for 2021.

Some aspects of our business, like the health care centers who have experienced the impact of the sanitary restrictions across the country, have been impacted negatively from a COVID-19 perspective.

And the same thing with the drug claims adjudication or dental claims adjudication business who have seen as well a reduction of volume because of the same sanitary measures.

We expect those businesses and those lines of business to pick up as we get out of these measures.

And we also expect the virtual care aspect of our business or even the online pharmacy aspect of the business continue to grow significantly in the future.

So we are ambitious about the future, and we are seeing strong growth for the remainder of the year.

From a margins perspective, it is a mix of different assets in terms of maturity.

On the HBM side or the provider solutions side, you're seeing a much more mature business with healthy margin.

While on the virtual care side of things, online pharmacy side of things, these are businesses that are still in the investment phase, but are seeking to grow profitably into the future.

And holistically, when you look at -- to make a point on margins holistically, when you look at TELUS Health, also that -- I also think that's a differentiator to other competitors in the marketplace where the business and the ecosystem reinforces each other within the ecosystem and are growing profitably into the future.

And maybe just a quick top-up, Jeff.

So the margins were challenged a little bit during COVID as we highlighted on the revenue component as well.

And we would see recovery of that as we scale back up and recover, as François and Darren had highlighted.

I think you could also -- to François' comment, we had previously disclosed that the health margins were very similar to the old wireline margins.

And I would suggest, as we build the portfolio, grow the portfolio, there's an opportunity that would be that or potentially more.

But the bigger item that continues to be foremost in our products, that is the bundling and the value that all of these assets bring to the -- our telecom assets concurrently.

As you remember, a lot of these customers are also wireline and wireless for the old term customers and providing or using those services.

So it helps reduce our churn rate.

It helps increase the value of our organization across the board, which would be margin accretive even further.

So Jeff, to give you a completely conclusive answer to your question, that in respect of our transformation to the cloud or what we call our digital program, that is included in both our base budget of $2.75 billion as well as the incremental $1.5 billion prospectively over 2021 and 2022.

So the answer is yes, it's included in that investment.

And not just the accelerated component, but it was already in the base investment.

And maybe just to underscore that comment for investors to understand what we've done on the capital acceleration.

90% of the accelerated capital is being directed to high-performing programs that are going concern activities, not J-curve investments, and that's focused on fiber, 5G and accelerating our digital transformation.

Those are the 3 headlines in terms of the CapEx investments.

And maybe to break down what 2023 looks like beyond the sub-$2.5 billion CapEx spend and the 14% or lower CapEx intensity.

If I had to simplify it into 3 categories, I would say, watch for the accelerated capital to expand profitable customer growth with its attendant economic attributes on revenue, EBITDA and cash flow.

And of course, that's underpinned by our expansion in fiber, by our expansion in 5G and our expansion of our digital capabilities.

Secondly, what perhaps has not got enough of airtime is the cost efficiency component of our capital acceleration.

And this is where your question on digital transformation is extremely significant.

If you look at the cost efficiency component of the accelerated CapEx, this involves our digital transformation as it relates to customer service and what we're doing within our RPA or robotic process automation environment, our BOT capability set.

It's a digitization of our go-to-market channels.

And not just on a digital basis, on a stand-alone point of view, but the synergy of our digital capabilities with our physical channels.

Our digitization program is going to support new RGUs from a product development point of view as we leverage the voluminous data analytics and dynamic insights coming off the traffic generated by fiber and 5G.

So digital is not just about cost efficiency, but it's also about profitable revenue growth at the same time and doing it all while elevating our customer experience.

And then the secret weapon within TELUS is that our digital program is aided and embedded by TELUS International.

With their Digitally-Led Customer Experiences, that is their thesis to assist companies with their digital transformation.

And they're not just doing it with external customers that are helping us in that regard as well.

And when you complement that with what we're doing on copper decommissioning and the cost efficiency benefits, if you look at the cost efficiency profile of 5G vis-à-vis 4G, extremely exciting.

And then as I said in my remarks, look at what fiber does for us as it relates to cost efficiency from a home serving point of view, whether it's fewer truck rolls, whether it's lower churn, whether it's self-serve capabilities, whether it's better economies of scope, it's extremely significant.

And then the third leg of that particular component is reduced CapEx in 2023 and prospectively.

So when you add profitable clients supported by our technology investments in fiber, 5G and digital transformation, with cost efficiency, with reduced CapEx, it's a pretty exciting story to say the least.

And these are all going concern programs that are outperforming as we speak.

So that's where we're targeting the $1.5 million (sic) [$1.5 billion] along the way.

And I think the exciting component within that is that, that revenue growth, that EBITDA growth, that free cash flow expansion that's going to come from the accelerated CapEx supports the long-term sustainability of our dividend growth model.

And I think that's an investor story.

Frankly, that's second to none.

Next question comes from Drew McReynolds from RBC.

Two for me.

Just a point of clarification on the TELUS Health disclosure.

Appreciate all the additional disclosure.

Reconciling the $450 million in health services revenue in 2020, with the $800 million more broadly for the health vertical, I mean, presumably, that's the connectivity reconciliation, but just if you could provide a little bit of color there.

And then secondly, Darren, a lot of, let's say, very good stuff coming down the pipe here on the accelerated capital program.

On the specific piece of copper decommissioning and what that road map looks like, can you just help us level set expectations here just with respect to, I guess, the timing of specific benefits from that?

And if there's anything, magnitude-wise, you're willing to kind of provide in terms of those benefits, that would be great.

Thanks, Drew.

François, Doug, again, I'll let you guys kick it off, and I'll close it out.

Yes.

Maybe, Doug, I can start on the $800 million question.

So Drew, that's absolutely correct.

That is tied to our telecom infrastructure and digital services that are added to our health-specific technology solutions.

And they are great synergies to be had, and we've seen it throughout the pandemic as we supported the health care system, hospitals, clinics, get ready for the influx of increased activity and sometimes opening new centers.

And we've seen the correlation between those asks and the actual results from a telecom perspective.

And I think you're going to continue seeing that correlation increasing in the future as we continue to invest in 5G, not just 5G infrastructure, but 5G application and solutions and services as it relates to health care and other verticals.

But health care, in particular, you will see some use cases that really changed the way in which the Canadian health care system actually leverages technology to advance better health outcomes.

And how the physicians, the practitioners continue to interact with consumers, patients more collaboratively in the future, again, leveraging the use cases that will be brought forward by 5G.

So you should see that correlation continue to increase in the future.

And the only other thing I would add would be the number is lower because of the COVID impacts that we discussed earlier as well.

So I would assume as we recover, that run rate would go up naturally versus assuming not the ongoing run rate and the comparison to the old numbers.

So I would take the COVID discount than the telecom interlock.

Drew, the CapEx acceleration is really unfolding now as we speak.

So it's about a footprint expansion.

I gave you some empiric as it relates to the 225,000 premises incrementally that are now going to be covered on an accelerated basis, both urban and rural within our fiber plan.

There's a similar acceleration of footprint expansion on 5G that will be augmented by the CapEx investments being made by our partner in that regard as well.

And of course, we are materially expanding our digital footprint, as I just alluded to, which doesn't just relate to our core telecom's operations, but expanding our digital capability set to support where we're going on digital health and digital ag tech.

I would say you'll start to see the financial benefits from that expanded footprint on the broadband or wideband basis, both wireline and wireless, supported by our digital capability set, leading to increased loading and then financial results flowing from that increased loading because, again, the loading that TELUS will be pursuing is quality loading with positive economics.

You'll start to see the financial implications manifest themselves in late 2021, but more materially at the revenue and the EBITDA level in 2022, and then significantly at the free cash flow level in 2023 and beyond at a very accelerated basis, given our revenue and EBITDA expansion, the cost reduction that I alluded to earlier and a CapEx budget that will be sub-$2.5 billion as it relates to our 14% or lower CapEx intensity, delivering, I think, very exciting cash flow growth for this organization.

But in terms of footprint driving quality loading and quality loading driving revenue and EBITDA financials, you'll start to see that creep into our 2021 results in the late third quarter, fourth quarter of 2021 and then more materially within the 2022 financial year and then free cash flow thereafter in 2023.

And Darren, sorry, just on the copper decommissioning component, maybe just 30 seconds on just level setting expectations on that road map.

I know 30 seconds doesn't do it justice, but that would be great.

An easy one to answer in 30 seconds.

So the goal of this organization is to have all of our copper decommissioned within our fiber footprint by 2023.

And if we can beat that and have it closer to the end of 2022, that's the type of ambition and execution that you should expect from this organization.

And of course, our fiber footprint is expanding dynamically as we speak.

But we're looking to retire our copper infrastructure within our fiber footprint by the 2023 time frame, which will provide very exciting economics, whether it's multi-product penetration, whether it's higher average revenue per home, whether it's lower cost to serve or very importantly, greater stickiness in terms of our client relationships that supports augmented lifetime value.

It will also support where we want to go with the simplification of our networks, moving more towards homogeneity versus heterogeneity.

And everyone always forgets about the potency of the fiber-5G combination and all that, that entails, bringing in the mobility component.

Next question comes from Vince Valentini from TD Securities.

A couple of things for me as well.

One, Doug, the spectrum you purchased, especially the 3,500 megahertz scuff, was that transaction closed in the first quarter?

Or is that money still going out in the second quarter?

And if so, can you give us any ballpark on how much you're going to have to pay for that?

The second question, we're hearing about, obviously, the chip shortages and maybe some issues with getting Internet modems.

If you continue to grow at impressive pace you have been in terms of subscribers to your forecast show that you could start to run out of modems by summer or fall, is that a supply issue that you're concerned about?

And last one, just in terms of health, I get the difference in the $450 million revenue versus the $800 million and what's in there.

But when we think about your plan that I think you've stated in the past to look for financial partners or strategic partners or maybe monetize through an IPO in the future, should we think about the base of revenue that's being monetized as being the $450 million or the $800 million?

Okay.

Why don't we -- Doug, you kick it off.

Zainul and Jim, you can talk about supply chain securitization in terms of what we're doing in that regard.

And Doug and I can maybe finalize the question on the final component.

Yes.

So it did close in the quarter.

There are some small payments to go into the future, but it would be insignificant on the total.

And you'll see that number disclosed in the acquisitions and our new disclosure on intangible assets.

Jim and Zainul?

Yes.

Zainul, I'll talk about mobility first and then over to you on Internet?

Sounds great.

Thanks, Jim.

Yes.

Vince, at this point, our supply chain looks really solid on Apple and Samsung.

But that said, I think one of the things that we've worked really hard on is building out our certified preowned portfolio.

So all of our programs like trade-in and Bring-It-Back in mobile clinic, we have a really nice and robust CPO inventory and portfolio that we can fill in the gaps if there are any gaps.

And lastly, during COVID, with rotating lockdowns, we've seen more bring your own device type activations that are going digital.

And those are also great clients for us to sell CPO because they're looking to buy cheaper devices outright.

So we feel like we have a great plan, and we're ready for any contingency there.

Zainul, over to you.

Thanks, Jim.

Yes, so I'll top up.

We've also taken a number of proactive measures.

As you outlined, it is a global situation, but we have gotten ahead of it.

A few things that we're doing on the wireline side of the business is we've advanced our lead times.

We've added some heterogeneity into our supply chain, looking at incremental suppliers and the way in which we are servicing our customers across regeneration of activities like our WiFi deployment solutions.

And then finally, we also have quite a robust refurbishment program for our equipment as well, and we leverage that very effectively.

And we're -- we have excellent execution in terms of our reverse logistics program and how we refurbish devices back into the field.

I think, Vince, it's also worth pointing out that one of the secondary reasons that we have been so clear and certain on the capital acceleration is to lock in longer-term supply contracts within our supply chain to support both our wireless and wireline businesses.

So to provide that clarity of accelerated spend and to strike longer-term agreements with suppliers through to 2023 with that accelerated spend gives us a level of advantage and certainty within an anxious, uncertain world.

That's another positive attribute related to the CapEx acceleration program.

And as it relates to your $450 million, $500 million, $800 million question, my answer would be both.

So from a sum of the parts valuation point of view, I would say both attributes would be part of a prospective valuation.

And the multiples associated with those being different, whether it's the core telecoms multiple taking us up to $800 million or the circa $0.5 billion that we have as it relates to digital health and the intended higher multiples associated with that.

So when people are putting together the overall financials for that business and the underlying technology that supports it, we would guide people towards some of the parts valuation that recognizes that there are different growth profiles inherent within that construct.

And then finally, what we've said repeatedly, which continues to be true, is that investors can draw inference from what we have done at TI as it relates to what we intend to do prospectively with TELUS Health and TELUS Ag.

And we feel that the best way that we can have a TI-like outcome is to focus on the core principles of profitably scaling the businesses that we are building with a level of strategy, operational execution and competitive differentiation that investors will find very meaningful, and earning our way, if you will, to an IPO, if that's where we want to take the businesses in that regard.

There were about 6 criteria that TI had to hit on an earn your way to an IPO basis, and they did exactly that in spades.

And it's going to be the same mentality as it relates to TELUS Health, earn your way to future opportunities in that regard, particularly if those future opportunities involve creating a transaction currency that can take the growth of the business to yet another level.

And that's very much the philosophy being brought to bear.

Next question comes from Jerome Dubreuil from Desjardins.

Two questions on the CapEx exploration plan.

Maybe first on wireless.

I'm trying to assess what's included in 14% CapEx starting in 2020.

Does that include some buffer for expenses for future increased 5G demand or use cases that we might not be aware of yet?

And second question, also on the CapEx acceleration plan, maybe more for Zainul.

Does that have an impact on the wireline services, maybe on the future-friendly home and security products as well?

So the answer to your first question is yes.

And the 14% CapEx intensity is holistic across fixed and wireless.

It's not pertaining singularly to wireless, but it's an amalgamated CapEx intensity across both.

And so it's important for me to point that particular factor out given what we will have done on the expansion of our 5G and fiber footprint.

But it includes those prospective costs that you've alluded to.

Zainul?

Thanks, Darren.

Yes.

So I think what's important to highlight there, as Darren talked to, the capital investment supports both lines of business.

And as we've talked about as well, we're going to advance our copper to fiber migration activities.

And within that, that gives us the opportunity to add incremental products and services, which, to your point, includes smart home security and automation.

It includes consumer health.

We've launched a line of online security protection for our customers across their devices and their identity, including dark web monitoring.

And it will open us up for a number of new revenue opportunities.

But I wanted to double-click a little bit as well on the cost efficiency side of the business.

And our digitization program, combined with our accelerated capital rollout, is going to enable a number of opportunities.

And I'll add a bit of color in terms of how to think about it.

First off, we have do-it-yourself capabilities that will be enabled as we move our customers to more of a digitized infrastructure.

The second is that our data and analytics capabilities are going to give us channel synergies and loading synergies from a perspective of adding incremental product intensity and increasing the level of engagement with our products.

So can we be at the forefront of the customers, understanding how they activate services in their home?

And can we provide value in terms of their automation services and increase their level of engagement with our services leveraging data and analytics?

We can also leverage the same data and analytics to deliver self-correcting behaviors and get ahead of the assurance cycle so that our customers don't have to reactively reach out to us, but we can proactively identify issues, whether they be buffering or other service-impacting issues, and we can correct those in advance.

And finally, the open ecosystems that we will be deploying our services across enable us to offer new RGUs.

So working with our TI partners, we're advancing our platforms in the home, and those will enable us to add new products and services.

And we'll be able with our DIY infrastructure to also create premium services for installation, repair and maintenance.

So we have a number of opportunities to advance and accrete the margins from a revenue enhancement as well as a cost efficiency perspective.

And on wireless, I just want to top-up quickly.

We've been having great success on both subscriber growth and underlying ARPU management, and we see the capital investments helping us accelerate that in a number of ways.

One, continuing the trend we're on, consistent, high quality, new customer acquisition.

We're seeing a really healthy mix to unlimited and premium, and the investments in 5G are only going to accelerate that.

And we've been able to really be productive on our base management in terms of driving product intensity and great churn outcomes, but also driving good underlying revenue trends.

So able to drive step-ups and drive multi-line and product intensity.

And these investments are going to help us accelerate that.

And I think lastly, this only helps us get even better with our digital channel execution, our data-driven marketing and simplifying the journeys for our customers, which is so critical to our success.

The last question comes from Simon Flannery from Morgan Stanley.

Darren, I wonder if you could just talk about your expectations for the regulatory and competitive environment following the -- excuse me, the MVNO decision.

What impact do you think that's going to have on your business and some of the other actions that are being taken?

And then on the roaming revenue, we're seeing potentially changes in business travel trends over time.

Do you think it's reasonable that a couple of years from now, the industry is going to see roaming revenues back to prior levels?

Or do you think we're going to see some portion of that come back, but not all of it?

Thanks, Simon.

For the last 21 years, I think we've done a pretty good job as an organization navigating through a continuum of exogenous events, many of them regulatory decisions.

And I would say the MVNO decision is, frankly, no different.

We will again work our way through it.

It's a long decision with a lot of complexities inherent within it.

And we're still reviewing it, and we'll continue to do so in the days and weeks ahead, working with the regulators in that regard.

I would say on the positive side, it's a constrained MVNO or a limited MVNO in the sense that it's not broad-based.

It appears to be somewhat aligned, not as aligned as what I would like or what I think would be appropriate, but it seems to be somewhat aligned with consistent facilities-based policy coming out of our regulator.

And I think our regulator is recognizing that the regulatory policy of facilities-based competition drives the right outcomes for Canadians.

And they don't have to look very far for an empirical proof point of that.

They can look at how our networks have performed during the pandemic and how we have supported Canadians working from home, learning from home, accessing health care from home or virtually staying connected with friends and family, which, of course, is extremely important from a mental health point of view.

And I think our networks in Canada have performed at a level that is best-in-class on a global basis.

And certainly, I think the penny has dropped, that quality matters when it comes to network coverage, network performance, particularly speed and latency and network reliability in that regard.

I think it's important to note that only regional carriers are -- will have the ability and the obligation to hold spectrum assets, are going to be the entity eligible for MVNO access.

So you have to invest in licenses on a spectrum basis if you're going to be eligible to access the MVNO model that's being implemented by the government.

I think it's also a healthy thing to say that the government's not ordaining rates, but allowing a commercial set of negotiations between buyers and sellers in that regard.

And I think that's the right mentality to make sure that people get a fair return on the investments that they've made in their networks, in their spectrum, in the security of those networks and, of course, a fair markup on top of that.

So I like the fact that, that's left for commercial adjudication between the parties.

And let's wait and see what happens in that regard.

I don't expect that the MVNO decision is going to kick in until 2022.

And of course, it's sunset in terms of how long it's going to exist for with the specified time frame from the CRTC at a 7-year level.

I go back to what TELUS is thinking about and whether it's any regulatory decision, MVNO or otherwise.

Our goal is to work through it, not use it as an excuse, and to focus on keep on winning.

TELUS will do what we need to do to win, to generate the best operational results, the best customer service results, the best technology results, the best financial results and the best social purpose results for all stakeholders.

And what's so beautiful about that is our strategy is pretty darn apparent.

We're going to lead with network excellence.

And we're going to drive through network and technology excellence, so that we're second to none on our 5G network, we're second to none on our fiber network, and we're second to none on digital transformation.

And we're not going to give that up ever.

We're going to lead on customer service excellence, and we're not going to give that up.

Whether it's human or digital or human and digital combined, we're just going to lead and we're going to keep on leading.

We're going to leverage our performance culture, the level of engagement that we have.

People are our most important asset for this organization, and I think we execute second to none on a global basis.

And we've got some beautiful differentiating factors for this organization, whether it's our social capitalism thesis, whether -- sorry, digital transformation capabilities, aided and embedded by TI and what that does for this business on everything from digital transformation to labor arbitrage on cost efficiency, to what it does in terms of quality of customer service.

Because to realize those cost efficiencies, we don't have to take a dilution in our customer service equation.

And of course, we've got the differentiated growth aspects.

And I really meant what I said during my AGM comments.

I think the best is yet to come for TI, great growth to date, even better growth on the boil for tomorrow.

And I think what TI has done is emblematic of what you can expect this organization to deliver on the TELUS Health and the TELUS Ag front, leveraging our digital capability set.

And boy oh boy, I think that sets us up for some attractive returns being delivered to shareholders.

And any thoughts on roaming?

I think on the roaming front, Simon, you can expect us to return to plan in that regard.

I don't expect it, if I understand your question correctly, to be degraded.

Prospectively, I would expect the recovery to be 100% in that regard.

And I think there's lots of other roaming opportunities for this organization as it relates to IoT that we can leverage prospectively within the voluminous data environment.

Thank you, Simon.

Thank you, Darren.

And thank you, everyone, for taking the time to join us today.

Please feel free to reach out to the IR team with any follow-ups, and take care, everyone.

Ladies and gentlemen, this concludes the TELUS 2021 Q1 Earnings Conference Call.

Thank you for your participation, and have a nice day.