Telus Corp (TU) 2015 Q2 法說會逐字稿

(Operator Instructions)

Conference recording has been turned on. Good day, ladies and gentlemen. Welcome to the TELUS 2015 Q2 earnings conference call. I would like to introduce your speaker, Mr. Paul Carpino. Please go ahead.

Good morning, everyone. And, thank you for joining us today. The Q2 news release and detailed supplemental investor information are posted on our website TELUS.com/investors. On the call today will be Executive Chair, Darren Entwistle, who will provide some opening comments. Followed by a review of operational highlights by Joe Natale, President and Chief Executive Officer. John Gossling, our CFO, will then provide a review of our financial results for the second quarter. After our prepared remarks, we will conclude with a question-and-answer session.

Let me direct your attention to slide 2. This presentation answers the questions, and statements about future events, such as 2015 annual targets, intentions for dividend growth and future share purchases; are subject to risks and uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made today. So, do not place undue reliance on them. We also disclaim any obligation to update forward-looking statements, except as required by law. I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosures and securities filings with Canadian and US regulatory.

Let me know turn the call over to Darren, starting on slide 3.

Thanks, Paul. I'm very pleased to report that TELUS once again delivered another quarter of strong financial results and industry-leading operating performance. As our track record has demonstrated for more than fifteen years, our team's focused execution of our winning long-term strategy continues to drive consistent and superior financial and operating performance; deliver on our number one priority of putting our customers first each and every day; foster global leading employee engagement; and equally important, create value through the relentless returning of significant capital to our shareholders.

In this regard, we've once again built upon our multi-year leadership within the following areas this past quarter. Achieving leading total market share gain amongst our Canadian peers in combined new wireless postpaid high-speed Internet and TV customers. Building exceptional customer loyalty where TELUS is the only carrier amongst our North American peers to deliver a churn rate below 1% for eight consecutive quarters.

Driving topline and profit growth in both our wireless and wireline businesses and earning the distinction of being one of the few wireline companies anywhere in the world to show growth in subscribers, growth in revenue, and growth in EBITDA. Joe and John will take you through our strong quarterly performance in more detail. But, impressively, the long-term consistency of our quarterly performances has been built by executing successfully on a winning strategy with deep longevity.

At the heart of this strategy is our disciplined and consistent approach to investing in our core wireless and wireline businesses that grow shareholder value. A clear example of this in the second quarter was our purchase of 40 MHz of valuable two dot five gig spectrum nationally in Industry Canada's auction in April. Given our industry-leading lifetime revenue per customer, increasing customer base, growing ARPU, strong client loyalty, and the significant appetite of customers for more data and faster speeds, it is indeed clear how this core investment is essential to support our Customers First focus and drive future growth for investors.

Additionally, this wireless investment was complemented by meaningful investments in our wireline assets as well. During the second quarter, we announced our single largest fiber optic investment in the history of our Company with a major gigabit-enabled network in Edmonton. When completed, the network will deliver initial speeds of 150 megabits per second right to the door of more than 300,000 homes and businesses, as well as medical, educational, and community facilities. These wireline and wireless investments will dramatically improve the way our customers live, work, and socialize in the digital world.

Moreover, the investments epitomize the essential long-term investments that drive our shareholder-friendly and ongoing multi-year dividend growth model and share purchase programs. Indeed, our disciplined approach to investing in our core businesses, has allowed TELUS to establish one of the most robust and transparent dividend-growth models of any public company anywhere. In 2011, against the backdrop of economic uncertainty and nascent income growth opportunities for investors, TELUS stepped forward and announced a one-of-a-kind, three-year, double-digit dividend growth program that is now running through to 2016.

Certainly, the unique growth window we are able to provide shareholders, has been facilitated through the consistent execution of our long-term strategy that's been embraced and executed by the people at TELUS. Through this prolong investment of -- prolonged investment in terms of an environment of low interest rates and economic uncertainty, our dividend growth model has indeed been prescient and delivered significant income growth for investors along with major capital appreciation. Impressively, since first establishing our dividend growth model, TELUS has consistently delivered against the expectations we set with nine semi-annual dividend increases realizing annual growth rates of 10% or better.

Beyond this strong income growth, our performance has been further enhanced over this period with exceptional capital appreciation, including 79% share price appreciation, an CAD11 billion increase in market capitalization, and a total shareholder return of 111%. In the first seven months alone of 2015, TELUS has returned CAD1 -- CAD1 billion to investors. (sic - see press release "CAD1.1 billion"). Building upon the CAD3.4 billion returned to investors over the past two years. And, CAD11.5 billion or more than CAD19 per share over the past decade.

Importantly, and key to our strategy, this initiative has been implemented synergistically with our annual CAD500 million stock repurchase program in each of those years. Cumulatively, our share buybacks have eliminated CAD125 million in future dividend outflows. The dollars returned to shareholders through these, and other shareholder friendly programs, over the years have become a hallmark of TELUS' share ownership.

I'm very proud of our teams unrelenting execution of our longstanding strategy, which firmly underpins our Customers First priority and remains steadfastly focused on the multi-decade nature of our business.

Let me now turn the call over to Joe and John for some additional highlights on the quarter.

Thanks, Darren and a good morning. The TELUS team continues to drive strong results in the second quarter. Starting with wireless on slide 5. TELUS reported postpaid wireless net additions of CAD76,000, representing 47% of net loading by the major national carriers. Our unmatched, focused, and momentum on customer loyalty has allowed us to lead the industry in wireless postpaid market share gains for the last six consecutive quarters.

Turning to slide 6. Our customer loyalty results are among the best we have seen since becoming a national carrier over a decade and a half ago. Through years of company-wide team emphasis on earning customer loyalty, we have continued to gain our customers' trust. There is no better illustration of this dedication than our leading monthly postpaid churn rate of 0.86%. This represents another four basis points of year-over-year improvement. A tremendous achievement for our team. Particularly, as we work through the heightened market activity in the double-cohort period.

Our postpaid churn rate has been below 1% every quarter for at least two years. And today, our wireless customer loyalty is the best in North America. In addition, we delivered churn improvement, while maintaining retention investments at 12% of network revenue. We started our Customers First journey in 2009. I can't emphasize enough how proud I am of the deeply customer-focused culture our team has created. Our work in this area represents a key differentiator for TELUS. And, it positions us well going into the second half of the year, where we expect an acceleration in retention volumes associated with a double cohort, combined with the usual seasonality around the back-to-school period and anticipated iPhone launch, and Black Friday, and the holiday season.

Moving to slide 7. We reported our 19th consecutive quarter of year-over-year blended ARPU growth, up 3% to industry average leading CAD63.48. This continues to be driven by our consistent strategy of focusing on high quality subscriber loading, robust data growth, and customer adoption of the latest smartphones, increasing penetration of Your Choice rate plans, and our best-in-class wireless network.

Turning to slide 8. Our leading lifetime revenue per subscriber increased once again this quarter, up 20% to over CAD5400 and up to 39% better than our peers.

Turning to wireline on slide 9. TELUS continues to be one of the only major telecommunications companies globally to report ongoing growth in wireline, customer connections, as well as wireline revenue in EBITDA. This growth is underpinned by the significant investments we are making in our broadband network to enhance speeds and to bring fiber directly to homes and businesses. TELUS reported second quarter TV net additions of 17,000. With our customer base expanding 10% year over year.

The consumer demand for our premium Optik TV service remains healthy and we continue to expand our market share and drive great pull through growth in high-speed Internet. High-speed Internet additions -- net additions of 22,000 were up close to 50% over last year bringing our base to more than 1.5 million customers. Residential access line losses again remain relatively stable at 20,000. Combined TV and high-speed Internet additions of 39,000 exceeded residential line losses for the 20th consecutive quarter, or five years in a row, by a factor of two-to-one.

While our consumer business remained strong, we continue to see a technological shift by business customers associated with the conversion of voice lines to IP services which, is not typically accompanied by parallel revenue decline. The 9000 business line losses in the quarter reflected this. In addition, increased competition in the small and medium business market, and economic impacts associated with both regional and national economies.

In closing, I'd like to thank our team for their tireless focus on putting customers first. I am very proud of how our team consistently proves that expecting more from ourselves translates into strong results for our customers and our shareholders.

And, with that, let me turn the call over to John.

Thank you, Joe. Good morning, everyone.

I'm on slide 12. Second quarter wireless results continue to reflect our strong operational execution. Network revenue growth of 6.1% was driven by strong data revenue growth of 18% reflecting subscriber growth, increased adoption of higher rate two-year plan, higher data usage from the continued growth in smartphones and other data-centered devices, increased data roaming, and the expansion of our 4G LTE network.

Reported EBITDA increased 1.5%, as network revenue growth was offset by significant restructuring and other like costs. Which, was higher year over year by CAD33 million, due primarily to the planned closure of all Black's Photography retail stores. Excluding restructuring and other like costs for both periods, EBITDA was higher by 6.3%. Reflecting a stable margin of 43.5% of total revenue.

The strong growth in network revenue is partially offset by a 13% increase in retention volume resulting in higher retention costs and higher customer service and distribution channel expenses during a period of heightened competitive intensity. As Joe referenced earlier, we expect retention volumes to remain elevated as we head into the seasonally important third and fourth quarters. Capital expenditures were unchanged year over year, as we continue to make investments in wireless broadband infrastructure to enhance our network coverage, speed, and capacity,. including the ongoing deployment of 700 MHz spectrum.

Moving to slide 13. Revenue in our wireline business increased by 2.4%. Due to data revenue growth of 7.8% reflecting high-speed Internet subscriber growth and higher revenue per customer; and as well, growth in business process outsourcing services, a higher TELUS TV subscriber base, and increased TELUS Health revenues.

Reported wireline EBITDA decreased by 0.9%, due to a CAD15 million increase in restructuring and other like costs. When including those costs from both periods, wireline EBITDA increased by 2.9%, with a margin of 27.0%. And, that's up 20 basis points year over year. This EBITDA growth reflected improving margins from Internet, TELUS Health, and business process outsourcing services, as well as ongoing operational efficiency initiatives.

Capital expenditures increased over the same period last year due to continued investments in broadband network infrastructure, including connecting more homes and businesses directly to our fiber optic broadband network; expand the region functionality of our healthcare solutions; investments in system resiliency and reliability; and to support business service growth.

As noted on slide 14 consolidated revenue and EBITDA, excluding restructuring and other like costs, both showed strong growth of 5.1%. Basic earnings per share of CAD0.56 decreased by 9.7% as underlying EBITDA growth and lower shares outstanding from our ongoing share purchase program was offset by significant restructuring and other like costs as previously discussed.

Unfavorable income tax-related adjustments, resulting from higher enacted corporate income tax rates in Alberta, offset by a favorable adjustment from the reassessment of prior-year income tax issues and an asset retirement charge for the planned closure of Black's Photography retail stores. Excluding these items, EPS was higher by 4.8% to CAD0.66. The EPS drivers are available in the Appendix.

Free cash flow of CAD300 million increased by CAD90 million or 43% as higher EBITDA and lower income tax payments offset higher capital expenditures due to our ongoing strategic investments in wireless and wireline broadband to support TELUS' long-term growth.

Before passing the call back to Paul, I want to highlight four notable changes to our 2015 consolidated guidance and assumptions. First, we are increasing our consolidated capital expenditure guidance for 2015 to approximately CAD2.5 billion. The increase reflects continued investments in broadband infrastructure to support the increasing demand for data services and higher network speeds.

Second, we are increasing our restructuring other like cost assumption by CAD50 million to approximately CAD125 million to support ongoing operational efficiency initiatives.

Third, 2015 EPS will be negatively impacted by net unfavorable income tax related adjustments, including the reevaluation of deferred income tax liabilities from the recent increase in corporate income tax rates in Alberta. As well as a CAD50 million increase to our original restructuring at a like cost assumption. However, excluding these items, TELUS still expects full-year EPS to be within our original range of CAD2.40 to CAD2.60.

Finally, our cash income tax payment assumption was revised down to a range of CAD200 million to CAD260 million, from the original assumption of CAD280 million to CAD340 million. The change reflects the deferral of the 2015 installments to 2016. And, higher refunds from the settlement of prior year's income tax related matters.

At this point, let me turn the call back to Paul.

Thanks, John. Peter, can you please proceed with questions from the queue for Darren, Joe, and John.

Okay. Thank you very much.

(Operator Instructions)

Drew McReynolds, RBC Capital Markets.

Thanks very much. Just a couple from me. First, just on the wireline side, noticed a sequential acceleration in wireline data growth. Just, versus the past three quarters, up about 50 basis points. John, just wondering if there's, kind of, anything special in there that you can flag?

Well, Drew, I think there's several things happening within the data line. So, definitely have s -- increases in the subscriber basis in TV and in high-speed Internet. And as well, some nice traction on our ARPU.

Particularly, on high-speed Internet with more and more usage. I think that's the biggest driver. And as well, we do have some other smaller pieces that are moving as well. Some of our business process outsourcing activities in that line and that's also been growing quite nicely. And as well, the health business, as we mentioned, either -- I think it was two calls ago. The health business is growing in the low double-digits as well. So, that also is helping.

Okay. Now, that's great. A little bit of a housekeeping item. Just, in terms of, I guess, the taxation dynamic.

Can you just quantify how much the installment deferral is? And then, as we look, kind of, longer-term. Obviously, we're seeing you invest more CapEx into the business. Just wondering what impact that ultimately could have on, kind of, cash taxes looking out beyond this year?

Yes, so, the in -- sorry, the decline in the range for 2015 is really split partly from 2015 ongoing effects. So, that's mostly the installment impact. And, the other half is really from settlement of the prior year issues. And, there was some cash associated with that, that will come back into the system. That's 2015.

I think it's a very good point on going forward. Because, we're in a situation right now where 2015 is, I don't think, I shouldn't say artificially low. But, 2015 has benefited from, really, a bit of an echo effect from the use of the public mobile tax losses. So, we saw that benefit in 2014 on a cash basis. That means we have a lower installment base in 2015.

But, what happens when that occurs -- because, of course, our taxable income is still growing nicely in 2015. We'll be in a situation in 2016 where we have two things that will happen. One is, we'll have the final payment for 2015. Based on a lower installment base that we've seen this year. And then, we'll also have a higher installment base in 2016.

So, we're going to get a bit of a double impact of increases next year. A bit too early to quantify. We're still, obviously, working on that and we're still working on our financial plans for 2016. But, we do see that coming and there will be an increase, for sure, next year.

Okay.

But, you're right. On the capital investments, that will provide a little bit of air cover on the capital cost allowance side. But, if the impacts of this, sort of, double impact of the public mobile tax losses we'll be much more significant.

Okay. Thank you for under -- thank you.

All right. Thanks, Drew. Next question, Peter?

Thank you. Greg MacDonald, Macquarie Capital Securities.

Thanks. Good morning, guys. I want to ask a question that I think a lot of investors are wondering about the industry overall, not just TELUS. But, it is this question of what the potential for sustainability of ARPU growth is? You're growing ARPU nicely. Bell is growing ARPU nicely. Rogers seems to be getting back on track a little bit on this.

I know a big part of this is mix. I wonder -- and I know you're not going to give us any specifics, Joe, on -- for competitive reasons. But, I wonder if you might just talk qualitatively about this issue. Whether it's, kind of, mix of Koodo versus TELUS loads, i.e., that's improving toward the TELUS brand? Whether that's -- as Bell seems to talk about, the percentage of customers on LTE and the fact that as that grows, you get higher and higher ARPU because people have higher usage.

And, what I'm trying to get, Joe, is just, are you willing to talk about the potential for sustainability of actual ARPU growth one to two years out? Do you think that's still feasible? And then, I have a quick follow up. Thanks.

Thanks for the question, Greg. I think, first of all, it's very hard to predict ARPU that far out. Some much of it depends on consumer behavior. I depends on competitive behavior around how data plans are priced, et cetera, going forward.

But, I do feel there's still opportunity for upside on the ARPU front. And, why don't I just give you my qualitative views on what is driving ARPU up and then the factors that are providing a dampening effect on ARPU. And that's -- we've certainly have modeled all things -- all these things in detail. I'll give you my qualitative thoughts on it and that hopefully helps you put it into perspective.

So, in terms of what's driving it up, overall. The -- we have a very strong focus on high quality subscriber loading. In other words, in a world of seasonal churn; in the world of double cohort; in the world of, just, customers leaving, customers coming; we've worked hard to index our marketing efforts towards higher-quality subscribers. That come with greater smartphone usage. That come with share plan usage. And -- versus lower quality subscribers as a whole. So, that's number one.

The second thing I'd say to you, is that there are still upgrades. ARPU lift coming from smartphone upgrades. We will see anywhere from a CAD7 to CAD10 ARPU lift is we go from an old generation smartphone to a new generation smartphone in that upgrade cycle. And, this comes with the fact that the phone is more capable. Often operating, most of the time, operating at LTE speeds.

And, therefore, more responsive. And, therefore, we have a very strong upgrade program looking to, kind of, assimilate the base. And, there's still lots of opportunity within that base to drive that upgrade as a whole. We still see some benefit in the move from three-year to two-year contracts. We're certainly working through that cycle. Will be in the next couple of quarters as we work through double cohort.

But, I think it's fairly clear to people that as we move from three- to two-year contracts that there is an ARPU lift associated with that happening. If I look broadly at the market for share plans as a whole, we're seeing share plans, really, have an emphatic place in our business and drive overall ARPU for the individual account, but also, for the family account as a whole. And, that's, sort of, driving things up. There will be some dampening of ARPU mathematically. Because, as we load more tablets and things of that nature, than that doesn't necessarily come with a lower ARPU on their own.

But, as I've said to you in the past, Greg, our focus as a company has been very much on a AMPU and looking at the margin associated with it. We have some low ARPU devices that we add to our business in various segments that come with tremendous margin. At some point we're going to have to find a way of communicating that more adequately and more specifically as that base grows. But, we're -- AMPU is, sort of, the marching focus for us. So, that's, sort of, the best I can offer overall.

In terms of the mix between Koodo and the TELUS brand, we're happy with that mix. We're happy now with the more solidified distinction between plans and programs around our premium TELUS brand. And, the price points, et cetera, around the Koodo brand. A couple years ago, we saw some of that, kind of, bleed together in the marketplace, based on competitive behavior, and now there's more of a distinction. And, we've added more service capability to the TELUS brand. Therefore, making it more attractive for certain types of customers.

Okay. Thanks, Joe. That's actually pretty good stuff. More than I expected I would get. The second follow-on has to do with the economy in the West. I wonder -- we've heard some kind of anecdotal evidence.

But, I worry about things like this because business customers tend to come back at companies with a hammer with times are tough. And, Bell's, kind of, communicated a little bit that, that had an impact on data services on the wireline side of the business this quarter. Can you talk about whether customers are coming back? And, asking for reprices? Is this not -- is it just a volume issue in the West? Or, is there a reprice going on? And, have you seen any evidence of that on the wireless side at all? Thanks.

Okay. We talk about the situation in the West. Alberta, specifically. It's -- on the consumer side of the business, I will tell you that it remains very healthy. In fact, some of the slowness that we're seeing in enterprise in business, that I'll talk about in a minute, is being completely offset by the resiliency of our consumer business in the West, both wireless and wireline.

We're seeing a very strong performance around ARPU. Around churn. Continued growth in subs, both wireline and wireless. So, the view from us is that our diversification of revenue amongst the various aspects of our business has become a very helpful factor. Diversification between consumer and business, of course. Diversification between some of our verticals around health where things are going very well, in fact. And also, diversification between Alberta and BC. Very naturally.

The BC economy is doing very, very well. The government's running at a surplus. And, therefore, there's a strong offsetting factor there as well. I do believe that, on the consumer front, our services, smartphones, Internet, TV are countercyclical. And, we're seeing people take discretionary spending and say, maybe we won't go to a restaurant, won't go out for a night on the town. Maybe, we'll stay home and see what's on Optik TV and order something in.

And, we're seeing that behavior play out in terms of the consumer marketplace. With respect to smartphones. Smartphones have become an essential part of peoples' lives. I think they really are no longer a discretionary item for a large, if not the majority, of the population overall. And, a lot of the overage in the plans -- it used to be there years ago, have been washed through with these all-in plans that now are the norm and the data growth is actually, kind of, helping prop up the ARPU like we talked about earlier. And, we see no real significant difference in the West and Alberta, versus anywhere else. I shift to the business space.

I would say there are two phenomenas going on. One is in the enterprise space. A large oil company's -- they have slowed some of their capital expenditure. They haven't eliminated it. But, last year at this time, we were building out camps in Northern Alberta. Outfitting them with TV and Internet for some of the camp workers, et cetera. That has slowed or been delayed. Not cancelled, but, slowed or delayed. So, we're seeing that phenomena.

The -- in the middle market, small- and medium-sized companies have support for the oil industry. Yes, they're calling us. They'll looking to cancel lines. They're looking to right-size their portfolio. It's, sort, of a natural occurrence. A lot of them are having a problem with jobs, et cetera, and they're looking for all cost categories.

I'll tell you that, that downward push is very manageable for us as an organization. And, it's something that is being supported by the other elements of our business that we've talked about. The other factor on business now is, just, more broadly, is -- nothing to do with Alberta or the economy, overall. It's the movement and acceleration of IP services. We once lived in a place where a voice connection was a individual circuit switch. And, now we live in a place where people are taking centric services, voice services en masse, and moving them to IP.

Where the revenue and the loyalty elements are still very compelling for the TELUS organization, but the circuits don't count in the same manner. Therefore, there's downward draft on some of the nows. And, I think, business nows as a whole, is becoming a less relevant measure, given that we're in the enterprise end of the market. I hope that puts it into perspective, Greg.

That's a lot of good info. Thanks a lot, Joe.

Thanks, Greg. Next question, Peter.

Thank you. Simon Flannery, Morgan Stanley.

Great. Thank you, very much. So, you -- I think you had -- you referenced the success in Optik TV of pulling through broadband adds. But, we're seeing a lot of changes in the bundles in Europe and in the US. So, quad play is all the flavor in Europe.

And, we've seen AT&T roll out wireless plus DirecTV bundles in the last couple of days. There's a lot of focus about skinny bundles and about over-the-top. So, it'd be great to get your perspective. Given that you've got a presence in a lot of the major product sets. How do you see this evolving over time? And, what do you think are the bundles that really resonate? Is there a role for some evolving in the product sets and the bundles over time? Thanks.

I think, first of all, there's always room for evolution, Simon. In the way we got to market. You think about this industry 10 or 15 years ago and what was hot, or, what was the exciting bundle offer. And, what it is today has changed dramatically.

I think the most important thing I would say to you is that we believe we've got a platform in Optik TV that meets the current definition of capability, future performance, bundling, et cetera. That is working very well for us. And, it's also a platform that is flexible. It's an IP-based platform that's flexible overall. Just to put a few specific points down. We've had a very thin basic package since the beginning of TV.

We really believe that giving consumers choice is at the heart of our value offering. And, we've always believed that by adding the ability for customers to choose -- in fact, they can choose their offering from the remote control. If they want to add or subtract channels. We have sixteen theme packs attached to the basic offering. We've always been OTT friendly from the beginning. And, we're offering Netflix on our TV service and that's going well for us as an organization.

And, the results, kind of, speak for themselves in very specific terms. 97% of our TV customers have at least one other home product that they've taken with them when they've bought TV. Almost all of them, from that perspective. 83% added home phone, high-speed, or both, at the same time that they added TV. And, here's the biggest kicker of all, I think, is that 80% of our new TV customers were not former TELUS residential customers. They've come to TELUS for the first time or come back to TELUS.

So, I think that speaks to the validity of our offering. We've got a great marketing team. They're always looking at ways of adding feature set. We've got a great technology team involving the platform. We're not standing still with respect to the capability of Optik TV and we'll continue to, kind of, do the right things in the marketplace.

And, what about wireless? It seems like that's more of a triple-play focus? But, is wireless something that -- where it belongs in a bundle more forcefully than it has in the past across North America?

Wireless resonates very well for some people and not so well for other people. I'd say that our experience has been that about a third of our residential-based liked the idea of a bundling wireless together. We certainly have some very good wireless-included quad play offers, if you want to call it that. A third of the population doesn't like the idea because of a number of factors. They may want individual choice within the household of carriers, handsets, contracts, et cetera. The -- those particular obligations may not be coterminous. They may not want to, kind of, look at it in a whole -- from a fullsome perspective. For whatever reason.

And, a third are just, kind of, indifferent right now. They're trying to figure out what it means. The key for us as a provider is that the bundled needs to be about a compelling set of converged ideas and solutions. The bundling that goes on in the world is all about price. That's not very creative. Price bundling is not very creative.

And, it doesn't really, kind of, speak to the capability of the technology. So, we're going to push bundling through the power of things like, on-the-go TV, like Optik on-the-go. Through the power of some of our smart home applications and ideas that we see that operate inside and also outside the home. Through the power of some of our healthcare applications that are coming that will give people support to their healthcare needs both inside the home and on-the-go. So, as those things mature, as those things become the reason why, you might want to consider a wireless bundle. I think the game changes completely from just a price discount play.

Great. That's helpful Thank you.

Thanks, Simon. Next question, Peter.

Thank you. Jeff Fan, Scotiabank.

Thanks and good morning. My question is on the CapEx. If you guys can just help clarify the increase? And, where that -- the source of the increase is coming from? Whether it's wireline or wireless? It sounds like it's wireline. But, just wanted to clarify.

And, the second part of the question is just on the fibre spending looking ahead. I'm wondering if you can, just, help us qualitatively talk about the returns? And, how the return of that investment going to look compared to some of the previous opportunities that you guys have had? Knowing that you guys have been very prudent and successful in deploying capital. I just want to understand how they return will look on some of the extra capital spending that's going on. Thanks.

Hi, Jeff. The augmentation in our capital is coming from growth broadband wireless and broadband wireline. I would say, quite clearly, we feel that TELUS is earning its way to this augmented investment through the growth that we're delivering on revenue, EBITDA, and on the subscriber front across both wireline and wireless. And, I think it's well-evidenced by our industry-leading operating results, coupled with the fact that our wireline growth that attributes across revenue, EBITDA, and subscribers, are quite unique on a global basis. In terms of where we have been for 15 consecutive years now.

The entirety of our CapEx is being directed at our core business. And, it's been focused on broadband technology and infrastructure deployment. In the case of your question, broadband wireless and broadband wireline. And, it's our view that these on strategy investments support our long-term growth thesis and the continuing robustness of our synergistic dividend growth model and NCIB programs.

And, Jeff, there are not many corporations in the world in any industry that can invest ardently for the future and simultaneously return significant amounts of cash to shareholders. At most companies, those are mutually exclusive. At TELUS they're mutually inclusive.

In terms of fibre, it's early days. And, this, for us, is a generational investment. So, this is not an incrementalist approach, but a quantum move forward for our Organization. And, in terms of your question as it relates to a return. I would say, if the fibre generational investment mimics the generational investment that fibre has been, fibre will drive value for both customers and investors for many, many, many decades to come. And, it will also future proof our network and all the services and applications that we would support long into the future. And, if you look at the way we've approached the fibre build.

It's not holistic. It's modular in nature. Which, means that we can consume the capital at a reasonable pace. We can execute effectively. We can prioritize geographies, according to competitive conditions and economic returns. We can also learn through this modular process. Learn in terms of what sales and marketing methodologies are yielding the best results from a penetration perspective. We can also learn in terms of process engineering and leveraging the technology cost curve to make sure that we've got the lowest unit cost to support the desired return that we want to generate.

The other thing that I'd have to say in terms of strategy. It's not a subject we frequently get into on these calls. But, there's a confluence of positive events that we necessarily need to be cognizant of when we're thinking about this opportunity on a generational investment front. We have the lowest cost of capital in modern economic history. And, I think we should thoughtfully leverage that if we've got great growth opportunities and we can execute effectively. And, I think our results prove just that.

And, this quarter's performance is not unique. I think it's emblematic of what we've been consistently delivering at the TELUS organization. Secondly, strategically, our product portfolio has never been stronger. Neither, has our competitive position in the marketplace. And, we should leverage that. That's a smart thing for us to be able to do.

Thirdly, there is not a technology cost curve on the civil side of fibre deployment. But, there is on the fibre side. And, I think it's a nice opportunity. Given that, the entirety of the telco fraternity seems to be going down this particular path, that we leverage that fibre cost curve. Fourthly, we used to look at fibre-to-the-home, it was to support one or two services.

If you go back to Simon's question, right? It's all about thinking about the multiplicity of services that we can deliver into the home and the breadth of our product portfolio. And, that gives us the opportunity to leverage significant economies of scope. Economies of scope, not just as it relates to data voice or high-speed Internet access or TV products, and 4K coming to fruition. But, economies of scope supporting wireless.

Because, fibre, of course, does the wireless backhaul. Whether at -- it's at the tower level, within the macro-wireless environment or backhaul for the small-celled topology within the urban neighbourhood. We also have significant economies of scope on the business and consumer front. Our deployment of fibre is not just for the consumer, it's both for business and consumer.

And, there's a significant overlap of that within our neighbourhoods across Western Canada. And then, lastly, the fibre deployment is tremendously synergistic with our healthcare strategy. When you think about building and networking ecosystems across primary care in health and acute care in health, fibre has a huge contribution to make when you're looking at moving huge swaths of health data to deliver better health outcome -- health outcomes for patients.

And then, finally, I look at the regulatory window of opportunity and I think its attractive. Over the last 15 years, that hasn't always been the case. But, I think smart companies leverage windows of opportunity. And, I think we have that on the regulatory front. We've seen a buttressing of infrastructure-based competition in recent decisions. I think that's a good thing. We've got the latitude to do what we want to do in Western Canada. I think that's a good thing. And, we should proceed with leveraging it.

And then, lastly, our fibre deployment is not just about deploying technology. It's about building a future mode of operation for our Company. That will drive a complete restructuring of the cost base within TELUS, the simplification of our product portfolio, and an emphasis on leading the way with putting customers first. And, when you combine that fibre push and you take costs out of your business and you also look to elevate and build upon the tremendous momentum that we have in putting customers first. And, you can see that in our loyalty and retention results. That's a pretty strong chemistry.

And, this particular type of thing is critical for Canada. There's no country that really does exhibit our demographics. And, that really does speak to it a necessity to leverage technology to bridge those demographics fruitfully to support our society and the productivity of our businesses. And, lastly, maybe, to give you a sense as to the magnitude of the fibre footprint as it stands. We're approaching, right now, of the 2.8 million homes across Western Canada that are Optik enabled, about a quarter of those -- approaching a quarter of those, are fibre-enabled. So, again, this is a growing program, but, I think a smart thing to do. Right.

Okay. Thanks for that.

Great. Thanks, Jeff. Next question, Peter.

Thank you. Philip Huang, Barclays Capital.

Yes, thanks. Good morning. Just wanted to touch base on the churn again. Certainly, very impressive to see that you guys have been able to reach a new low despite the double cohort. But, my question is, is there another -- what is the optimal churn level? If you think there is one? At which point, you say, you've invested enough in customer service and we're happy, kind of, keeping churn at these levels. And maybe, shift your investment focus to -- toward other areas of the business?

High five. (laughter) Oh yes, thanks for negotiating that for me right now. I really appreciate it Phil. (laughter) I can be trite and say the most optimal number is zero. And, there is sort of a point where you've got a level of involuntary churn that just really reflects economic conditions; demographics in Canada.

And, we could some point share models of where we think that number is. But the other day, I'm not like -- I don't start with a bag of money at the beginning of the quarter and say how much are we going to spend to minimize the churn. Yes, we have a COR component that is tied to subsidy. But, the driver of our churn is actually the capability of the organization around serving customers. And, that is a cultural muscle that, once it's developed, the goal is to actually keep developing it. And, once it's performing for us -- which it's performing quite well, we'll continue to, kind of, leverage it to our advantage. We've spent the better part of the last six years getting to this place. It didn't -- it wasn't like we woke up a few months ago and said, let's go fix churn.

Six years in terms of cultural investment, process investment, technology investment. All things with a long sustainability well into the future. And, at the end of the day -- and we're going to continue putting the pressure on that number. Because, it's the magic formula of our wireless business. If you were to ask our team, what is the number one metric in our wireless business from which a lot of goodness emanates, they would tell you it's churn. Churn allows us to be more disciplined when it comes to promotional periods because were not gasping for air around loading. Looked at our loading as a whole.

We've got 47% of the nets in the quarter compared to our large national peers, at only 28% of the gross. So, that makes us more sanguine when the time comes to jump into the froth of a promotional period. It drives a complete focus in the organization. That's the most important thing we should set our sights on when it -- when we're serving customers in our stores or on the phone, et cetera. So, I -- looking for a terminal velocity on that number, I think it's somewhere around the value of involuntary churn. And, we can, kind of, model that with you at some point with you if you want, Philip. But, we're going to continue pricing on it.

There will be seasonal ups and downs in it. Right? No question as we enter seasonally busy period. And, we've got four of them coming up, as I mentioned earlier. We've got back to school. We've got a potential iPhone launch. We've got Black Friday and the Christmas holidays. We will see some seasonal uplift in churn.

But, our goal is always to, kind of, compare on a relatively better basis from the previous seasonal period, of course. And, that's the mantra. So, I -- that's my view on it. It's a philosophical view.

No, that's helpful. I'll definitely follow up on the modeling after the call. And, maybe, just touch on the roaming side. I know you guys have been able to gain a bigger mix of higher value customers as part of your ARPU driver.

But, was wondering if you could give us some color on the level of growth you're seeing in roaming, I guess, both outbound and inbound? And, are -- is it the type of seasonality in roaming that you expect to see in your base? Is it also Q3 that we have seen at some of your peers? Thanks.

We -- I'm going to start, John, and maybe, you can pick it up. Roaming, we've -- we -- we're a relatively new entrant to the roaming market. Certainly, we've always had strong US cross-border roaming, even back in the days of CDMA.

But, in the world of LTE, and HSPA, we are relatively new player in the growing market, so it's a growth opportunity for us. And, in fact, I would add that to the comments I made to Greg MacDonald earlier around other avenues for ARPU growth for us as an organization. We just launched LTE roaming to a whole host of countries. So, that will, kind of, certainly add capability for us as well. As the global handset ecosystem of the install base goes to HSP and LTE, we'll have a greater opportunity for inroaming into Canada. As the travel seasons, kind of, spark up through different parts of the year as a whole.

And, we just launched Easy Roam. I don't know if you've caught that in some of the press that was out there. I mean -- Easy Roam is our worry free roaming service available to, essentially, any customer. It gives them cost certainty. With Easy Roam also came an enhanced ability around roaming notification. Right now, I think it's well known in the industry, that roughly, only about one fifth of people actually even attempt to roam when they leave the boundaries of Canada.

And, it's not because they can't afford to do it. They're afraid of bill shock. And, they're afraid of not having cost certainty. The ability to actually offer an Easy Roam type solution, which I think, is very customer-friendly, available to anybody who wants it, whether they're in a low priced plan, or high priced plan, et cetera. And, very, very simple. But, augmented with a systems capability around realtime notification. Around realtime understanding. A realtime buying of that roaming capability.

Like, we've got to make it easy and worry free for customers. And, I think we'll see 20, become 30, become 40, become 50. Which, is only upside for us as an organization.

Phil, and on the financial side. The impact, certainly in the second quarter, was very, very insignificant. So, you've got competing factors. And, Joe mentioned the drivers. So, yes, we're driving more adoption, more usage.

And, that's important from the customer experience perspective. And, making that better and making it more attractive for people to use the service. That will also come with some additional cost if we get more volume. And frankly, it's almost a wash at this point. We're in very, very early days of the business ramping. So, it's not a big driver of our results. Or, changes in our results at this point. But, certainly, the second order of benefits of what it does for the customer and allows them to do is what we're driving for.

Yes.

Are you to give? Sorry.

Given the relatively smaller share we've had in the market of roaming, the rerate impact for us is far smaller than some of our competitors.

Right. Got it. And, are you able to give us, in ballpark roughly, what percent of your service revenue is coming from roaming at this point?

Yes, ARPU is less than 5%. It's pretty consistent, where it's been.

Got it. Tanks very much.

Thank you, Phil. Peter, we have time for two more quick questions.

Thank you. Tim Casey, BMO Capital Markets. Hello, Tim? Hello, Tim, are you there? Maher Yaghi, Desjardins Securities.

Yes. Good morning. Thanks for taking my question. So, instead of asking you a question on your industry-leading customer loading and churn, which have been accustoming us to recently. I wanted to ask you a question regarding capital allocation.

When I look at your capital allocation plans, which includes dividends and healthy stock buybacks, I can see you can cover those allocations from your regular free cash flow production. However, we have seen you guys spend close to CAD3 billion over the last two years on spectrum. I gather those spectrum acquisitions do not repeat every year? And certainly, they are better suited to allow your communication com -- telecom services offering instead of buying media content.

However, is there a place to include in your capital allocation plans those acquisitions? Because, if we look at, let's say, over the last eight years, they averaged close to CAD500 million. So, just wanted to see how you view those capital allocations separately from your operating free cash flow every year? Sorry for the long-winded question.

No, no, I think you -- Maher, you've answered a lot of your own question. Certainly, we've been through a period in the last two years now. Very, very significant investment in spectrum that you mentioned. Between auctions and a little bit of M&A activity, we've spent about CAD3.5 billion. So, the average number you quoted is really heavily weighted to the last 24 months. So, yes, we view these as absolutely necessary generational investments for our wireless business. And, you see, today, the results and the growth we're getting in the wireless business.

I think -- one of the ways we look at this is, if we weren't able to make these investments, we'd actually be creating more risk for our wireless business. And, we'd be -- you'd be asking me about the capital intensity of our wire business. Why is it so high? Because, we don't have ability to expand capacity using these spectrum assets.

So, we feel very comfortable. Yes, it's a big number and it's been very concentrated. But, going forward, we don't have any auctions on the horizon in Canada. And, we've been through a lot and we've been really enabled by very high quality balance sheet that we had coming into these auctions. And, we understand the benefit of starting at that place.

So, I think it's all, in a way, behind us now and we feel very, very comfortable about what's happened and where we've gone in terms of almost doubling our spectrum portfolio. And, it -- also our spectrum position in the industry has improved dramatically. We're now in second place and not far behind. So, that drives a lot of our thinking. Yes, it's expensive.

And, Darren mentioned, the cost of capital environment when it comes to our fibre investments. But, same thing applies to spectrum. They're both generational investments that we have to make for the health of our business in the long term.

Okay. Well, can just --

That's like, Al Mire is operationalizing that spectrum investment to deal with the significant data growth that we're trying to process. And, that's the number one focus for our wireless team and to deliver great services on the back of it. And, in addition, in terms of looking forward, there are no large acquisitions that we would see on the horizon that would be consumptive of capital. All acquisition activity would be small in nature. Tuck-in investments to support the continued development of areas like health.

And, Darren, just to follow up on your modular investment in fibre-to-the-home. You're running -- I guess, it follows up to the question on capital allocation. In terms of your capital investment, run-rate, which is running quite high at this point. When you talk about modular investment and fibre-to-the-home, over how many years do you believe this investment will take? Until -- before we can see, maybe, the beginning of a decline in that fibre deployment?

Well, as it relates to fibre specifically. Not talking holistically about the CapEx intensity on wireline. You can consider that modular program to be five to seven years in duration in terms of the bulk of the activity. I think, a good example, a good exemplification of the modularity of the program is the focus that we announced a few weeks ago on the greater Edmonton area where we're looking to cover 300,000 homes, businesses, and key nodes within the healthcare continuum. So, that's a project-based capital that's underway.

I would also remind you that fibre is the spectrum of the wireline business. Frequently, spectrum separated from wireless CapEx intensity. But, fibre is the spectrum of the wireline business and I think it's an investment whose time has come. And, I've -- I said previously, the two points are important here. One from a risk management perspective.

Modularity is key to ensure that the holistic environmental conditions are conducive to us getting the economic return that we want. Second thing about modularity is that it actually allows us to accentuate the economic return because we learn as we go. We get better in terms of our penetration strategies, in terms of return on the capital. And, we get better from a cost efficiency point of view in terms of the deployment of capital. And, I think, that is, for me, a reasonably smart way for this organization to proceed.

Great.

Thank you. Thank you, Maher. Peter, one last question, please.

Okay. Tim Casey, BMO Capital Markets.

Hi. Can you hear me?

Yes.

Yes.

Great. Listen, I was just wondering if you could talk a little bit about, qualitatively, how you're approaching your capital allocation to shareholders? I know we're not near the end of 2016 but -- and you're not in the guidance game for those out years. But, qualitatively, how are you thinking about your dividend and buyback allocation on a median-term basis given all your comments regarding the attractiveness of the cost of capital and you're generational view on fibre? Thanks.

Tim, actually, we are in the guidance game on a forward-looking basis. In fact, we're the poster child for that. When we stepped up at our 2011 AGM and provided a three-year view on the dividend growth model, with the specificity of two increases per year, with a target growth rate of 10% or better. That put us, not only in the guidance game, but, basically, distinguished us from all of our peers in terms of that type of forward-looking guidance from a dividend growth perspective.

And then, of course, we repeated that most recently through the 2016 time period. Again, consistent with twice a year in terms of dividend increases, with a target annualized growth rate of 10% or better. And, I think this organization intends to make good on that particular commitment through 2016. As we intend to make good on our NCIB commitment through 2016. A couple of things I think are important to hind -- highlight. We're earning our way in terms of delivering this cash return to shareholders. Because, it's underpinned by the operational and financial results of the Organization. Which, are leading amongst our peer group.

Number two, in terms of the dividend growth model and the NCIB, they are synergistic in nature. As I highlighted in my comments this morning, when you're buying back and canceling shares, shares that otherwise would have dividend growth associated with them, you can eliminate a significant cash outflow. In fact, cumulatively now, we've eliminated dividend outflows of CAD125 million a year and I think that's a smart thing too do. And then lastly, for me, I think this is the most attractive investment attribute to TELUS. Is the fact that we are completely unique. We've got the ability to simultaneously make strategic investments for the future. Not just in one part of our business.

Strategic investments to underpin where we want to take our wireless business from spectrum to infrastructure to services and the like. Strategic investments on the wireline business with the modular fibre program. Building on our great future friendly home portfolio. And, both wireless and wireline, building off the excellence that we have on the customer service front. And also invest in ancillary areas that I think will become core into the future including TELUS Health and TELUS International. We can do all of that, but we can also support the continuity of our dividend growth model and our NCIB programs. And, I think those things being mutually inclusive at TELUS is a massive differentiator versus investment choices that you have out there.

And then lastly, what's so forward-looking about this, as we get through 2016 and we finish delivering against the expectation that we've set with you in terms of share buybacks and dividend growth, the question is going to be, what are you going to do over 2017, 2018 and 2019 think? And, for us to be able to tell you a similar story in terms of dividend growth and share buybacks, then we have to make smart investments today, that are going to bear fruit, both operationally and economically into the future. To underpin the longevity of the dividend growth model and the NCIB program. And, I think we're doing just that.

Thank you.

Thank you, everyone, for joining us on the call. If there's any follow up, please feel free to reach out to the investor relations team. Thank you.

Ladies and gentlemen, this concludes the TELUS 2015 Q2 earnings conference call. Thank you for your participation and have a nice day.