Telus Corp (TU) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS 2018 Q2 Earnings Conference Call.

I would like to introduce your speaker, Mr. Darrell Rae.

Please go ahead.

Good morning, everyone, and thank you for joining us today.

TELUS' second quarter 2018 results news release, quarterly report and detailed supplemental investor information are posted on our website, telus.com/investors.

On the call today will be President and CEO, Darren Entwistle, who will provide opening comments; followed by a review of our second quarter operational and financial highlights by Doug French, our CFO.

After our prepared remarks, we will conclude with a question-and-answer session.

In consideration of your day, we're going to try to keep this call to under an hour.

Let me direct your attention to Slide 2. This presentation, answers to questions and statements about future events, including our 2018 targets, outlook and assumptions as well as intentions for dividend growth and capital investments and the performance of TELUS, include forward-looking statements that are subject to risks and uncertainties and are made based on certain 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, in particular, our second quarter Management's Discussion and Analysis and in our 2017 annual MD&A Sections 9 and 10 as well as filings with securities commissions in Canada and the United States.

As a reminder, our results for 2018 reflect the January 1 adoption of IFRS 15 while the results for the comparative period in 2017 have been adjusted for the retrospective application of the new accounting standard.

Unless indicated, results outlined today reflect the new standard.

The appendix of this presentation and Section 11 of our second quarter MD&A provide definitions and reconciliations to the non-GAAP measures that we use.

Let me now turn the call over to Darren, starting on Slide 3.

Thanks, Darrell, and good morning, everyone.

As you've seen today, TELUS reported second quarter results that reflect strong operational and financial performance, including healthy revenue and EBITDA expansion in both our wireless and wireline product portfolios, in concert with robust customer growth across the business.

Our continued strong performance is anchored by the TELUS team's ability to achieve record performance results and wireless and wireline customer loyalty which drove our strong lifetime revenue.

In the second quarter, consolidated operating revenue increased by 5.3% while EBITDA was up 3.6%.

On a pre-IFRS 15 basis, consolidated revenue and EBITDA increased 5.8% and 5%, respectively.

Notably, the robust customer growth that we delivered in the quarter included 135,000 new wireless, Internet and TV customer additions, up 29% year-over-year.

This was driven by the best combined retention levels on record in respect to postpaid wireless, high-speed Internet and TV and by the ongoing generational investments we are making in our leading broadband networks.

Turning to wireless.

We achieved solid growth in the second quarter revenue and EBITDA [goals ,] which were up 3.5% and 3.3%, respectively, or 4.7% and 6.4% on a pre-IFRS basis.

Postpaid wireless net additions of 87,000 and total wireless additions of 91,000 represented healthy and high-quality second quarter loading.

Postpaid churn in the second quarter was an industry-leading 0.83%.

Consistently strong customer loyalty is, of course, a hallmark of the TELUS organization with our team having delivered a postpaid churn result below 1% for 19 of the last 20 quarters, putting us in our fifth year of churn being below 1%.

This clearly demonstrates the success of our decade-long and ongoing journey to put our customers first in everything that we do.

This unrelenting commitment to our customers first promise is buttressed by the significant investments that we are making in our broadband networks and technology.

Notably, TELUS was once again recognized as having the fastest wireless network in Canada as measured by the consumer-initiated Ookla Speedtest.

This acknowledgment comes on the heels of the J.D. Power ranking TELUS highest in overall network quality performance in Ontario, British Columbia, Alberta, Saskatchewan and Manitoba.

Moreover, earlier in the year, TELUS placed #1 in wireless download speeds on a national basis and amongst the fastest globally in the 2018 OpenSignal report.

These leading network rankings, each received consecutively for 2 years or more, reinforce the superiority of the networks available to citizens across this country, whether it's coverage, whether it's reliability, whether it's speed or whether it's quality in terms of the client experience.

In addition, these multiyear recognitions underscore an important differentiator for the TELUS organization and validate the incredible value of the significant ongoing strategic capital investment that we are making in broadband technologies and our customer service excellence thesis.

The second quarter blended ABPU, which includes amounts collected for the recovery of handset subsidies, was $67.24, up 0.6%.

As we anticipated and forecasted, ABPU growth has moderated.

However, we continue to expect ongoing ABPU expansion driven by robust growth in data usage, but with the expectation that it will increase at a slower pace going forward compared to what we've seen in past quarters.

The more modest growth is a result of a number of factors.

Factors including the lapping late last year of the success that we experienced in respect of our Premium Plus offerings.

It includes the evolving customer mix continuum and shift towards nontraditional wireless devices.

It includes some lingering pressure that we're experiencing in B2B and lack of strength in Alberta business activity.

And perhaps most significantly and importantly, lower chargeable data usage due to competitive activity that is fueling larger inclusive data buckets and extra gigabyte promotions.

These larger data buckets and promotions risk prematurely consuming the major capital investments this industry is making in spectrum and network capacity and coverage.

Our organization is working diligently to better monetize data growth while simultaneously delivering significant value for money to our customers.

To this end, we continue to focus intensely on quality loading and AMPU, coupled with enhanced cost efficiency and profitable, margin-accretive ABPU and customer growth.

We are doing this through our consistent strategic execution of premium smartphone loading, inclusive of driving higher-value data and share plan adoption.

The combination of ABPU expansion and our best-in-class churn rate drove Q2 blended lifetime revenue per client of close to $6,700.

By this measure, the economic value of our average customer is up to 53% higher than our national peers.

Moving now to our wireline business.

TELUS delivered a strong performance once again in respect of revenue, EBITDA and subscriber growth backed by our proven, diversified and evolving product portfolio and the technologies that underpin them.

Wireline revenues increased by 7.6% while EBITDA grew 4% in the second quarter.

On a pre-IFRS basis, wireline revenues were up 6.9% and EBITDA was up 2.1%.

Impressively, this marks our 23rd consecutive quarter of wireline EBITDA growth, a performance that is unrivaled amongst our global peers.

Wireline data revenue encouragingly grew by 13% driven by strong high-speed Internet and TV customer growth and solid performance in both TELUS International and TELUS Health.

High-speed Internet net additions of 29,000 in the second quarter were up 12,000 or 71% over the second quarter of 2017.

TV net additions of 15,000 were up 10,000 or 3x what we reported in the same period last year.

Notably, a key driver of this robust customer growth was the strong performance we achieved in high-speed Internet and TV churn, which both improved markedly on a year-over-year basis.

This continuing momentum in respect of wireline customer loyalty is certainly encouraging.

Indeed, it clearly demonstrates the efficacy of our expanding PureFibre footprint and the operational success we are deriving from this strategic fiber build program, alongside our unwavering focus on customer service excellence.

Moreover, improving residential NAL net losses continue to represent a very positive story for TELUS, coming in at just 10,000 net losses in the second quarter.

This is down by a significant 9,000 NAL losses or close to 50% over the second quarter of last year.

It is indeed important to note that this represents our third consecutive quarter of moderating losses and the fewest residential NAL net losses that we've experienced since 2004.

Given these access lines come with higher margins, this performance supports wireline EBITDA sustainability and resilience, which, in turn, funds the growth initiatives that we want to deliver to shareholders in respect to TV, high-speed Internet access, TELUS SmartHome security and automation, including what we can do on the home health front.

In total, we earned 34,000 wireline net RGU additions in the second quarter, representing a material improvement over the second quarter of 2017.

Our strong and consistent wireline operating and financial results clearly highlight the strength of our consistent focus on delivering customer service excellence combined with cost efficiency and technology excellence.

They also underscore the attractive bundled offers available to customers across our differentiated product portfolio, including the superior attributes of our Internet, Optik TV and Pik TV offerings.

As well, they reflect our team's focus on leveraging the competitive differentiation inherent in our PureFibre broadband network.

In this regard, during the second quarter, our team expanded our PureFibre coverage to approximately 55% of our Optik footprint.

This ongoing expansion will enable more customers to access our leading broadband technology and benefit from a corresponding improved client experience across all products within our portfolio.

The strong performance driven by our enhanced broadband network and PureFibre offering will support the continued and sustainable growth of wireline and wireless services, including the advent of 5G.

Thanks to our generational investments in advanced wideband wireline technology which have positioned Canada as a global leader in fiber deployment, we are providing Canadians with the most advanced technologies and solutions to succeed in our digital society and our digital economy.

Finally, in wireline, let me turn to TELUS International or TI for a moment.

As we indicated previously, we intend to provide incremental disclosure on our business growth portfolio on a periodic basis in order to help investors understand the value that we are building with these assets.

This quarter, we will provide some additional color on TI and look to provide an annual snapshot of TELUS Health in the quarters ahead.

For context, TI has evolved over the past 13 years from a single contact center in the Philippines acquired to meet our own internal needs to become a global customer experience innovator that designs, builds and delivers next-generation digital services for some of the world's most demanding, discerning and disruptive tech brands.

Since its inception, TI has been an extension of TELUS and the team at TI embodies our caring culture and unwavering commitment to putting our customers first in all that we do and honoring that promise day in and day out.

Today, TI has more than 30,000 inspired team members, work from delivery centers across North and Central America, Europe and Asia as well as new sites in Ireland, the U.S. and India.

They enable more than 200 million customer interactions annually in over 35 languages for many of the world's leading global brands across targeted verticals of technology, financial services, the gaming industry, travel and hospitality, and importantly, health care.

With an ever-expanding client list, TELUS now represents about 1/4 of TI's revenue.

Through their cash flow and the cost savings they've enabled, TI has been a meaningful source of funding for TELUS.

Notably, we've been able to invest this funding in strategic growth areas of our organization.

As you may recall, in 2016, we sold a 35% stake in TI to Baring Private Equity Asia in a transaction that valued the business at $1.2 billion.

The value of that business today has doubled.

Baring Asia brought the capital and expertise of a strong partner to help drive growth while $600 million was made available to TELUS to support ongoing transformational investments that we have been making in our core broadband networks in Canada on the wireline and wireless front.

In 2018, we expect TI to surpass total annual revenue of $1 billion, including revenue derived from TELUS and inclusive of the fast-growing overlay of Voxpro and Xavient to TI's organic growth.

While margins over the past 12 months have been impacted negatively by the downsizing of certain clients in response to the unique challenges in their businesses as well as by the Voxpro and Xavient acquisitions, we aspire to achieve margins in the 15% to 20% range for this business, which would be a best-in-class result for that sector.

Given typical mid-single digit capital intensity with continued strong execution and integration of recent strategic acquisitions, TI is well positioned to be a meaningful contributor to our cash flow growth in the years ahead.

To conclude my remarks this morning, through the success of our broadband investments, we continue to demonstrate our ability to consistently drive long-term customer growth alongside revenue and EBITDA expansion while simultaneously delivering on our dividend growth model and maintaining a robust balance sheet.

Notably, strong free cash flow is up 62% year-to-date.

This is clearly aligned with our previously stated objective to return to a positive free cash flow position on a chronic basis after dividends this year.

This free cash flow accretion is being driven by moderating capital investment as we move past the peak of our elevated CapEx program in 2017, which is now in our rearview mirror, in concert with continued EBITDA expansion as well as lower cash taxes.

Our return to positive free cash flow after dividends is a testament to the TELUS team's ability to execute on our extremely consistent, transparent and what has been tremendously successful strategy.

In this regard, we're continuing to build on our track record of providing investors with the industry's best multiyear dividend growth program, targeting annual dividend growth between 7% and 10% through the end of 2019.

Importantly, the ongoing consistency in our results enables us to achieve this dividend growth objective while simultaneously making significant growth-oriented investments on the capital front to ensure sustainable growth at the profit level for years to come.

I'd like to close, as I always do, by congratulating the TELUS team for building a company that delivers on our commitment to our customers, our commitment to our investors and of course, the community that we serve.

I'll now turn the call over to Doug to provide some additional color in respect of our second quarter results.

Thank you, Darren, and hello, everyone.

Let's begin with our strong wireless results.

Wireless network and equipment revenue rose by 2.7% and 3.9%, respectively, while adjusted EBITDA grew by 3.3% or 6.4% on a pre-IFRS 15 basis.

Network revenue growth resulted from growth in our postpaid subscriber base, a larger portion of customers renewing on rate plans with larger data buckets, partially offset by declining chargeable variable usage and a larger impact of IFRS 15 on network revenue due to strong loading and renewal volumes in 2017, including our focus on retaining our high-value subscribers under contract.

Equipment revenue resulted from higher postpaid gross additions of 16,000 and an increased portion of higher-value smartphones being sold.

This was partially offset by a 4% decline in retention volumes as compared to the prior year.

Adjusted EBITDA growth reflects higher network revenue and an improvement in our equipment margins.

This was partially offset by higher operating costs, including the costs to support a growing subscriber base, increased noncash commission amortization associated with previous periods gross loading and retention volumes and higher roaming expenses.

Excluding the effects of IFRS 15, adjusted EBITDA grew 6.4%.

The pre-IFRS growth is higher because lower retention volumes have a more favorable impact on EBITDA than under IFRS 15 accounting.

Notably, wireless simple cash flow, as measured by adjusted EBITDA less CapEx, increased 11% or $60 million over last year due to higher EBITDA and lower capital expenditures.

Moving to wireline.

External revenue grew 7.6% to the prior year, reflecting data services revenue growth of over 13%.

That was driven by increased Internet and enhanced data service revenues from high-speed Internet subscriber growth and higher revenue per customer; higher revenue from TELUS International, including the recent business acquisitions; higher TELUS Health revenues, primarily from organic growth; increased TELUS TV revenues from subscriber growth and certain rate changes; and revenue from our new TELUS SmartHome and Business Security line of business.

Adjusted wireline EBITDA increased by 4% due to growth in data service margins, including Internet, TELUS Health, partially offset by declines in legacy voice revenue.

Excluding the effects of IFRS 15, adjusted EBITDA growth was 2.1%.

Wireline EBITDA growth was higher under IFRS 15 accounting due to a lower impairment allowance for contract assets and higher deferred commissions.

On a consolidated basis, TELUS achieved revenue growth of 5.3%.

Excluding restructuring and other costs, adjusted EBITDA rose 3.6%.

Excluding the effects of IFRS 15, consolidated revenue and adjusted EBITDA were higher by 5.8% and 5.0%, respectively.

Basic EPS was $0.66 and $0.70 on an adjusted basis.

Higher EBITDA growth was offset by higher depreciation and amortization, reflecting the investments we have made over the past few years, including our broadband network as well as those arising from business acquisitions.

Please see our appendix for a breakdown of EPS and adjusted EPS.

In June, we issued USD 750 million 30-year debt and concurrently entered a cross-currency interest rate swap for a fixed effective rate of 4.41%.

We also exercised our right to early redeem on August 1, 2018 all of our $1 billion 5.05% Series CG notes that mature in December 2019.

The long-term debt repayment of approximately $34 million before income taxes will be recorded in third quarter.

The earnings per share in Q3 is expected to be impacted by approximately $0.04.

In addition to the interest savings of over $10 million, we also remove the risk of refinancing this maturity at higher rates in the future.

We now have no 2019 bond maturities remaining.

After the redemption, our average term to maturity of long-term debt is 12.7 years, up from 10.7 at the end of 2017.

Consolidated CapEx was $791 million for the second quarter, a decrease of 2.3%.

At the end of the quarter, 1.65 million premises now have access to our PureFibre network, up from approximately 1.26 million from the same period a quarter ago (sic) [a year ago].

Free cash flow before dividends of $329 million is higher by 27% over last year, reflecting strong profitable growth and focused capital investments.

As a reminder, the difference between post-IFRS 15 accounting and pre-IFRS 15 accounting is noncash impacting.

You will see that in the breakdown of our free cash flow calculations in the appendix of our slide presentation.

Importantly, we remain on track to achieve our 2018 targets, including our revenue and adjusted EBITDA growth of 4.6 -- 4% to 6% and 3% to 6%, respectively; earnings per share of up to 6% and our targeted CapEx of approximately $2.85 billion.

Let me turn the call back to Darrell for Q&A.

Thank you, Doug.

Mike, can you please proceed with questions from the queue for Doug and Darren.

(Operator Instructions) And the first question comes from Phillip Huang from Barclays.

First, I just wanted to -- great color on the TI front.

I just want to clarify in terms of the margin for 15% to 20%.

I was wondering, A, where TI's margin is today; and B, your expected time line to achieve the 15% and 20% margin level.

And then my question is on the wireless side.

We are certainly seeing more bonus data included in pricing plan promotions this year, which is, as you mentioned, contributing to the slowdown in ABPU growth.

Do you think this level of ABPU growth is the new normal given the pricing environment that you operate in and where your ABPU level is relative to your peers?

So I'll kick it off and we've got Josh Blair here with us this morning, who's the Chair of TELUS International.

He can give you some additional color.

In terms of where we're at right now, we're just below the 15% to 20% zone.

And if you look at the average margin within this particular industry, it tends to hover between 10% and 15%.

Traditionally, we've been above the 15% level at TI.

We've operated above 15% for quite some time, between the 15% and 20% zone.

That has changed of late for 2 reasons.

One is, a couple of our key customers, brand name customers have experienced some challenges within their own markets.

And because of those exogenous impacts, they reduced their business profile with us, which has caused a temporary hit for us on the margin front.

And then the second area is as a result of 2 significant extremely attractive acquisitions that we've done with Voxpro and Xavient that I'll ask Josh to give you some color on.

While those acquisitions will be extremely margin accretive over the medium to longer term, they're margin dilutive on the near-term basis.

So where we stand right now is just below that 15% mark, but improving quickly.

And in terms of your question as to when we're going to be in the 15% to 20% zone going forward, I would say extremely quickly.

In the next 12 months, I would expect that we will be within those bookends of 15% to 20% for 2 reasons.

One is, we've absorbed the challenge of the downsizing of some of our customers that have had disruption in their own markets.

And our sales funnel within TI is extremely attractive in terms of organic growth that we're pursuing.

And then secondly, the J-curve profile on the Xavient and Voxpro acquisitions is going from dilutive to accretive extremely quickly.

And we're pleased with the EBITDA expansion that we're seeing in the early days post the acquisition of those assets.

So within the next 12 months, I would expect that to be within that particular 15% to 20% zone.

And I think that's encouraging for overall wireline holistic results.

And it's also encouraging for the cash flow profile of TELUS given the light CapEx intensity of the TELUS International business.

And the cash flow story is a very strong one for us across both wireline and wireless.

I think, Darren, you covered it exceedingly well.

The only thing I might add is the early performance out of Voxpro and Xavient is very impressive in terms of year-over-year growth.

So when Darren said it will take 12 months to get back into that ZIP Code of 15% to 20%, we're just going to do that thoughtfully, ensuring that, that expansion continues while we realize the synergies on an astute basis over that time frame.

Very helpful.

And the second question related to ABPU, I believe?

Yes, the wireless pricing environment, yes.

Yes.

So I guess our view, I referred to this in my comment this morning is, this is the new normal.

A moderated ABPU or ARPU environment given what's transpiring within the competitive landscape and also certain aspects as it relates to regulatory intervention.

So I think the key for us is, within an environment of moderate, slowing ABPU growth, what you need to do to ensure that you're delivering very attractive growth at the EBITDA level in respect of wireless.

And in that regard, I think there are lots of opportunities that are available for us to avail ourselves of.

Firstly, continuing to drive volume growth.

In an environment where you're seeing slowing growth, moderated growth or even static growth, to the extent to which you can drive higher unit results because of the volumes flowing through to the revenue and EBITDA, it's a front of mind consideration here.

And it's encouraging to see an industry where the wireless expansion, looking at the half-year mark on a postpaid basis, the industry is up a healthy 40%.

So point number one is, in a moderated ABPU environment or even static, drive revenue and EBITDA growth on a volume basis through additional loading.

Secondly, look for new sources of revenue that you can add.

One clear one is in the world of the Internet of Things or the Internet of Everything.

As we get into a world where the machine-to-machine wireless sensors are more significant in number than smartphone wireless devices, ensuring that we capture that wireless IoT, IoE revenue as the growth of sensors significantly outstrips the growth of smartphones is a key area for us to focus on, on both the retail level and at a wholesale level across key verticals that we think are attractive.

Thirdly, we want to look at channel strategies that have attractive economic characteristics to them to the extent to which we can grow and cultivate a prepaid base and harvest that base as it relates to pre to post migration and expand our revenue profile with the customer, that's a smart thing for this organization to do.

Next looks at what can we do to improve the flow from revenue, the EBITDA or the flow from ARPU to AMPU.

And there are a number of, what I call, micro cost-efficiency improvements that can have a very positive effect, increasing the flow between the ARPU and the AMPU line.

So for a given level of ARPU get a better flow through the AMPU level through those micro cost efficiencies that are available in a digital world with our wireless business.

Next, I think the micro cost efficiencies have to be complemented by macro cost efficiencies, the same way we undertook transformational cost changes on our wireless business when we were experiencing price commoditization and margin compression.

That's true as it relates to streamlining the productivity of our wireless business at a macro level and to do it holistically from our business to our customer-facing channels right through to our supply chain.

And then lastly and critically, making sure that we are fully availing ourselves of the economies of scope that are available to help improve holistic margins by smart bundling of wireless and wireline services.

We can draw material EBITDA improvement even in a moderated ARPU, ARPH environment by leveraging the economies of scope on wireline and wireless bundling.

And we've got lots of exciting opportunities to pursue in that regard.

And not only do we get better characteristics on that front on the bundling basis, but we get holistically a better lifetime revenue per client because of the positive churn traction that we see on a bundle basis.

And if you look at our results this quarter, I think they're indicative of the potency of driving growth holistically on a diversified basis across wireline and wireless.

Our 135,000 net adds across postpaid, TV and HSIA are up almost 30% on a year-over-year basis.

And I think that speaks well to the robustness and the quality of the underlying performance of TELUS and our prospects for generating even better profit growth into the future.

Next question comes from Simon Flannery from Morgan Stanley.

On the wireless side, how are you thinking about loading and share of gross adds?

Do you target getting 1/3 or 30%?

What's your philosophy there?

And then on the NAL erosion side, those were great numbers.

Do you think it's something in the competitive environment?

Do you think it's sustainable?

Are we reaching something where just the rate of erosion is just going to slow from here?

Be interested in your perspective.

Okay.

I'll take the NAL question first and then move on to loading.

A few things are helping us on the network access line loss front.

One is the attenuation consideration with the maturation of the losses over the years.

I think there's a natural settling down factor, if you will, in terms of what we've lost historically versus what we're going to lose prospectively.

Secondly, when I look at customer service excellence, it's always been very much a story on wireless, wireless, wireless because when you generate churn rates of 0.79% like we did this quarter last year or 0.83% like we did in 2018, it's a fantastic story for the organization, both in terms of the churn rate, but also the overall economics that it gives us.

The efficacy of that approach in a customer service excellence front is to gain increasing traction within the wireline business as well.

And we've applied the same formula, the same level of focus, the same level of investment.

And we've been seeing improvements continuing to gain traction.

And it's not something that's relegated just to the NAL.

We're seeing improved traction on churn on HSIA, improved traction on churn on our TV service, as well improved traction on churn as it relates to our network access line losses.

And this is a result that's the best result for us in well over a decade.

And people say here that Friends was still on the air the last time we had a NAL number in this particular ZIP Code, if you want to put a piece of humor on it.

But we've seen 3 consecutive quarters of improvement on that front.

And I do think it's encouraging.

It also is a situation where when you've got an 11-fold increase in your overall wireline net RGUs from low single digit this time last year to plus 34,000, there's a halo effect that comes from the HSIA and TV success that's extremely beneficial to our network access line loss performance overall.

The other thing that has helped us is the advent of some new products.

So we offer our OTT, our value-based TV solution with Pik.

And we came up with that on Pik solution, yes, because we thought there was an opportunity to tap into a growth market, but there was a big defensive component to that product thesis, to protect a client where we had single or just dual product relationships.

So where we had, what we call, naked HSIA client or stand-alone client from a NAL front where we could bundle in a voice relationship, an Internet relationship with an OTT relationship on the TV front with our Pik offering.

And that's been beneficial for us.

The other thing that has helped us is mobile and home bundling, wireless and wireline together.

And I think it's had a protective impact on our network access line losses, which has been helpful for us.

And then lastly has been our fiber program.

And the success of our fiber program has been extremely strong.

And we see churn rate on fiber that are 25% lower than copper.

And that's encouraging, 35% lower in HSIA and 15% lower on TV, 25% lower on average.

We're seeing reduction in repair volumes to the tune of 40%.

We're seeing a nice improvement in revenue per home of close to 10%, which gives us great lifetime revenue characteristics.

But when you see that lower churn and low repair rate, that's great for the economics of fiber, but it's also very protective of our NAL relationship.

And then finally, the thing that has been encouraging for us is, when we're out there selling fiber and people think, okay, we're focused on selling symmetrical HSIA, like we are.

Uplink speeds that are equivalent to the downlink speeds.

We're out there selling our TV solution and prospectively, SmartHome security and the like.

Well, within the fiber bundle, we're now selling voice services.

So we're getting network access line additions on our fiber sales.

In a world where we've been used to network access line losses and to get some NAL net adds on our fiber sales thesis has been another thing that ameliorated the line losses.

So does that, Simon, get that one adequately for you?

Very much so.

Okay.

On the wireless front.

In terms of loading, and this goes back to TELUS Mobility pre-Clearnet acquisition and TELUS Mobility post-Clearnet acquisition, we were always an organization that didn't focus on the loading number, we focused on the quality of loading and the financial and economic characteristics associated with the loading.

So we don't target a particular level of market share.

We target a level of quality so that we can have a long relationship with the customer on a sustainable basis with attractive retention characteristics and attractive ARPU characteristics, which is why we lead the industry at the ARPU level.

So TELUS, traditionally, if you want to know how we think.

Well, we traditionally led on ARPU and we traditionally led on churn because we want to lead on lifetime revenue per client.

And our lifetime revenue per client is 26% better to 53% better than our peer group.

And when we do that and do it well, and when we are smart, efficient and effective on our CapEx expenditures, we have historically generated a lot of very strong cash flow from our wireless business.

So that's the way we want to think about it.

Having said that, you have bookends.

It's not that market share is irrelevant.

It's just not the top priority for our organization within a realm of reason in terms of the ZIP Code that we pursue.

So if you look at what we have done this time, we're seeing a healthy growth within the industry.

But that's growth that's not just inclusive of smartphones, that's growth that includes tablets and wireless home phones that have less attractive economic attributes associated with them.

In TELUS, our growth was actually up 6% on a postpaid basis.

But we were disadvantaged by our churn rate going from 0.79% to 0.83% at the net level.

I think it's somewhat encouraging looking forward that our total net adds on wireless were up 10%.

And we're seeing improvement in our prepaid performance.

And I think improved prepaid performance as a feeder channel for T plus X postpaid performance will do well in terms of our loading prospectively, again, hopefully, with attractive ARPU and churn characteristics to go along with it.

As it relates to our 87,000 net adds, the quality of the loading, as it was in Q1, was once again excellent, good smartphone expansion within that number.

And our tablet growth was flat on a year-over-year basis.

And then lastly, when we think about loading, we really do think about it holistically, postpaid plus HSIA plus TV.

These are the key digital products for this organization.

And so delivering that total number of 135,000, which is a big step-up for us on a growth basis, as I say, almost 30%, I think that's encouraging.

When I'm getting an operational loading growth flow-through to the cash flow level on wireless where the cash flow growth was 11%, I'm pretty pleased with that coming on the back of our differentiated lifetime revenue performance.

And then lastly, don't judge our loading performance by a quarter.

There's been a lot of loading ebbs and flows over the years in terms of how we have done.

And many, many, many times we've been in the loading leadership position buttressed by our great growth in net flow-through because of our globally leading churn result, which has now been below 1% for 5 consecutive years.

So it's not front of mind, but it's not out of mind in terms of how we do on that front.

And you don't have to look back too far.

Take 2017 as an example, go and have a look at how we did on postpaid net adds in 2017 versus our peer group to get a sense of what we can achieve in that result.

So there's going to be a lot of ebbs and flows along the way.

We want to make sure that our loading is strong and that we're in a zone, if you will, of market share, but we want to put at a premium the level of quality and the sustainability of the economics that we can mine from that customer relationship.

And that's really the psychology of our organization in that regard.

And the cash flow picture is not just at the 11% on the wireless front.

As we noted, it's 27% holistically for the organization.

And I think that's an encouraging story when we're looking at prospective dividend accretion.

Next question comes from Jeff Fan from Scotiabank.

Darren, I just want to follow up on a comment you made earlier to Phil's question regarding ARPU and pricing.

You mentioned regulatory intervention.

And I guess there has been a little bit going back and forth with the commission.

Are you getting more concerned about the regulators getting more involved with wireless pricing?

Wonder if you can just elaborate on that a little bit.

So it's a comment that I made actually -- I can't remember if it was on the last call or the call before on how we think about our business.

And this is really important for people to understand.

And I laid it out as a triumvirate or a triangulation of 3 factors that you need to be cognizant of in terms of managing the wireless business for long-term growth and economic value rather than short-term aggrandizement.

And the topology on the triangulation was, number one, to think about client satisfaction.

What does it mean in terms of value for money, quality of service, speed, coverage, reliability, the innovation that we're bringing, the affordability and the sustainable economics that we can achieve.

And the sustainable economics in terms of the comment that I made are, in a moderating ARPU environment where we do well on lifetime revenue given our churn and we look for growth by market expansion.

So taking the Canadian penetration rate, which stands at about 87% versus 100% in the U.S. and well over 100% in other global jurisdictions, take that from 87% to 100% to 110%, 120% and enjoy that volume-based growth rather than price increases and unit-based accretion at the ARPU level.

So that's kind of the thought, number one.

Second is, we need to think about CapEx.

Within wireless, it seems we have been consistently camped out on just the P&L and have lost sight sometimes of the balance sheet in the way that we communicate the attributes of the industry.

One of the things that we need to do is do a better job monetizing data growth prospectively versus larger data buckets for the same price or less or gigabyte promotion that are just dilutive to the economics of the data services that we're providing.

And I make that comment because we spend a lot of money from a CapEx perspective on buying spectrum and deploying new technologies.

And when we're giving away data, we are prematurely consuming the underlying economics of our spectrum acquisitions and our network technology investments.

And I think it's important that we keep one eye on the ROI that we get on the CapEx front and generating an acceptable economic return from data growth, data growth that exhausts our spectrum and our network.

And then the third area, which really gets to the point of, if you're thinking about modeling in significant ABPU, ARPU accretion as if it's going to happen indefinitely, chronically at material unit improvement levels, I think eventually it just, correlated with that, invites more and more and more government intervention.

And I think we've shown as an industry that we can make a lot more money for shareholders and do a lot better for customers through strong competitive intensity amongst the players of the industry versus near-term profit aggrandizement that invites regulatory intervention, which is much more punitive to the valuation characteristics of our business.

And so what I'm saying here is that to be mindful of inviting that eventuality by being overt in our expectations that ARPU accretion can happen on an endless basis.

And so it's those 3 things that I think about holistically, the client component and all the attributes, the ROI on the CapEx and having an industry that fosters healthy, competitive intensity where we see the right equation between value for money and innovation.

And government intervention is not only unnecessary, it becomes benign.

I think that's a smart way to manage the business.

So it's not that it's something that's happening now, but something in terms that I find deeply, deeply disconcerting, but something that I would like to avoid on a basis going forward by making decisions at the pricing level and at the volume growth level that are for the long term, not to hit a particular ARPU result in a given quarter.

And if you look at the areas that I talked about, yes, I talk about monetizing responsibly data growth, but responsibly reflecting the triangulation, topology of considerations that I've articulated.

I think the volume component is still a big opportunity for us given the penetration comment and the fact that within this digital society and digital economy, a single human being frequently now has a multiplicity of revenue-generating devices.

I think the machine-to-machine sensor world is a huge upside for us.

And I think we responsibly, in a more moderating ARPU environment, even in a static environment, I think we have lots of levers to pull to improve the ARPU to AMPU flow-through in terms of micro-cost management and lots of learnings and levers to pull in terms of cost transformation at a macro level that can give us a richness of EBITDA growth on the wireless side of our business for a very, very, very long time without the necessity of material increases in ARPU to buttress it.

Is that clear, Jeff?

Yes, that's clear.

Maybe just a very quick one on the TV adds of 15,000 this quarter.

You took away, I guess, the reporting of the wholesale satellite.

Wondering if how the 15,000 compares to the last year's 5,000 and how that might be different if we included some of the satellite losses.

It would be de minimis, Jeff, on that.

So we would be, let's just say, well over 31,000 in the absence of that removal from our base.

And I would argue even better because we put a stop sell on satellite on April 1. So at a net level, we had no gross to buttress the net churn because of the stop sell.

And even with that, the impact was de minimis on the 34k.

We would be north of 31,000.

And on top of that, to show you the quality of the strength of that 34k performance, we have really lost our loading on HSIA over LTE because of supply chain issues that I'm not going to go into that are temporary in nature, but have temporarily thwarted our ability to continue in the rural areas, loading HSIA over LTE until we deal with that supply chain issue.

So that was not buttressing our results this quarter.

So the authenticity on the 34k is extremely strong.

And then for the avoidance of doubt because I'm worried that this might show up in someone's note, that 34k has 0 security loading in it.

So it's not benefiting from any home security loading whatsoever.

That's about as authentic a result as you're going to get.

And it does reflect the strength of our performance on the fiber front where we're now at 1.7 million homes of coverage and in 100 municipalities.

Next question comes from Aravinda Galappatthige from Canaccord.

Two follow-ups.

First of all, on the capital intensity side.

Darren, you alluded to sort of the CapEx spend earlier in your answer.

So it's been in that 13% range for a few years now.

As we think through 5G and sort of the incremental spend and investment that's involved there, is there enough clarity now as to what that number could step up to just to get a sense of what the longer-term free cash flow outlook is.

And then secondly, going back to ARPU, I think you gave a pretty good answer on the overall picture there.

But I was curious geographically, was there a significant variance when you look at sort of the different regions in terms of the ARPU trends over the last couple of quarters?

Sure.

So on the CapEx intensity and the fiber leading to 5G, there'll be an opportunity where right now or there is right now where we're actually building 5G small cells concurrently with the fiber build.

There will be potentially a small uplift in 5G equipment required to implement full 5G, but will be offset by some of the reductions in fiber that we see over time.

So we're not actually seeing a significant step-up in capital intensity.

As you go into the 5G world, it will be small amounts here and there on a [prospective of higher, lower,] but it's not going to be a significant step.

I think it's important for people to understand that 5G is an overlay technology on the 4G network to underscore the comment that Doug's been making.

Where we've guided people holistically once we make that transition, we expect our wireless CapEx intensity to be in that 11% to 13% zone, but it is an overlay deployment.

And then the other thing that when you think about CapEx intensity that I would guide you on for 5G, you need to be smart about the bifurcation between wireless and wireline because 5G will be, yes, a macro mobility technology as we know it today, but we'll also be using 5G to complement our fiber build where we can look at it as an alternative access technology to improve the economics of broadband connectivity with certain areas that we don't feel it's prudent to address through our PureFibre thesis.

And when you're getting trial speeds as we have on the 5G front at 28 gigabits per second, 5G has the ability to be a very complementary access network technology on the wireline front to complement what we've done on PureFibre, supporting our relationship with a household on the HSIA, TV and on the security front.

And we know that wireless as an active mechanism gains traction because historically, we've done well on HSIA over HSPA and HSIA over LTE loading.

So just look at the CapEx intensity on a bifurcated basis.

But on the wireline front, I think it can help improve our CapEx intensity because the capital assets out on the wireless access is going to be less expensive than what we have achieved on the fiber front.

And given that the fiber build by the end of 2019 is going to be in that 2/3 to 70% zone, we're in a great position of optionality, choosing the access technology that gives us the best holistic economics and the best client experience combination in that regard.

On the ABPU comment, I think you asked, but correct me if I'm wrong, about the geographic component on ABPU.

Let me make a couple of comments.

No, there's nothing that is concentrated as it relates on ABPU pressure, that's tremendously geographic in nature, other than the fact that Alberta for years and years and years and years was front of line in terms of driving ARPU growth for TELUS.

We had a good ARPU story nationally, holistically, but frequently, Alberta would be in the lead.

And while Alberta has been improving on both the consumer and at the business level, it's not pulling ARPU the way that it did previously.

So that would be the one component related to the economy of Alberta where it's improved.

It's doing okay, but it doesn't have that leadership pull that we saw historically.

And as Alberta continues to improve, we're looking to see that recovery come through on the ARPU front.

Reading between the lines in your question in terms of ABPU pressure, it wasn't ABPU pressure geographically that would come from, let's say, a new entrant like Freedom.

That would be a wrong conclusion to reach.

I think the ABPU pressure is related to the competitive intensity between TELUS, Rogers and Bell.

And amongst that group, the entities that are leading rate-based promotions and the data dilution that we've seen in terms of growth in the data bucket for the same or less money reflective of things like massive gigabyte promotions that are dilutive.

In the first half of the year, 23 of the 26 weeks we saw rate-based promotions on the data front.

And rate-based promotions are a little bit new for our industry given the bias traditionally has been on the discounting of the device.

And that's really been a reality amongst the established players.

And that's been the more pressurizing effect, if you will, on ABPU than anything going on geographically or relating to the developing players within the wireless business.

Last question will come from Maher Yaghi from Desjardins.

Thank you, Darren, for giving us more information on TI.

Can I ask you maybe to give us an idea on what the revenue growth profile of that business is currently witnessing?

And if we exclude acquisitions, basically on an organic basis and also talking about organic growth, could you tell us what your Canadian wireline business, excluding TI and health care, would be growing at right now on an organic basis, excluding M&A?

And finally, just a quick question on your triangulation for the wireless business and holistically how you're looking at it.

Have we stepped into a place where wireless pricing could jeopardize that holistic view that you have or we're still in, let's say, the safe zone?

So I think right now we're in a pretty good zone, should be given the wholesale wireless review that the government did, reaffirming infrastructure-based competition.

So that should be for investors, tick in the box.

Secondly, we got more competitors in the wireless industry in Canada than just about any country in the world.

So in terms of having competition and free market forces usurp the need for government intervention, I would say tick in that box when I do a count of the number of players that we have in the wireless industry for a country of Canada's demographics.

That's a lot of players in a country of 36 million people and a pretty expansive and challenging topography and quite differentiated from what I'm seeing in other developed countries around the world, particularly with maturation aspects of the wireless industry.

So tick in that box that the number of competitors and the intensity of competition negates the need for regulatory intervention.

And if you want a case in point, when you have 3 weeks out of 26 where you don't have a rate-based promotion, we did have a device-based promotion in those 3 weeks, and 23 weeks of extremely aggressive data promotions, I would say the competitive intensity is not just healthy, but bordering on irrational.

So that should be encouraging in that regard.

When you have a number of initiatives aimed at improving affordability for key constituencies at a political level such as income-challenged Canadians in terms of the type of rate plans that are out there right now, ranging from $25 to $30 for 500 MB to 1 GB and a number of those rate plans give you access not just to a limited geography, but to a strong national network amongst the established players, I would say, well, in terms of the affordability component, tick in that particular box.

And then when you look at what you can do on the technology front as it relates to [VOIP,] tick in that box.

If you can look at what you can do on data offloading within a WiFi environment for additional affordability, tick in that box.

I would say objectives well achieved on that particular front.

What I'm saying is, we should price for the long term in this industry, not for the short term.

That we should price reflective of not just the P&L, but the balance sheet given the capital amount that we spend on spectrum and network technology that keeps getting exhausted, growing over and over and over, but we shouldn't do it at a level that's egregious.

We should do it at a level that allows us to make a reasonable return so that we've got the money to invest for the future in terms of new technologies that come along.

And this is one of the -- unbelievably, the most underserved story in the history of Canada that we have a country here on wireline and wireless that leads the world on quality when it comes to technology deployment, leads the world as it relates to deploying new technologies from 4G and soon to be on the 5G front.

And when we deploy new technology in wireless, we don't just do it in urban centers, which frequently happens in other national jurisdictions, but we do it on a pervasive basis across the Canadian landscape so that everyone can participate.

And we do it with a level of quality and speed that's second to none.

On the OpenSignal report that we won at the start of the year, if TELUS was a country, we'd be #3 in the world when it comes to speed.

So that's a huge benefit as it relates to Canadians and Canadian productivity with that speed, coverage combination.

And if you went and had Ofcom in Europe look at our fiber deployment in Canada, they would salivate over it.

We're a world leader in fiber deployment on a national basis in this country.

And again, I think that's to the betterment of our digital society and our digital economy.

And we need to do a better job telling that story at the government level, at the consumer psychology level because, I'll tell you right now, the international jurisdictions, they recognize that we lead on quality and innovation when it comes to broadband, wireless and wireline.

And we're the envy of our peer group.

And that should not remain a muffled or isolated story.

I think I've given enough time now with that answer to allow Josh to load up on the TI front.

Josh, over to you, and we can finish it off in terms of what it means to the wireline performance of TELUS organically.

Yes.

I mean, we've given the disclosure we want on TI.

I would say in terms of revenue growth, it is strong double-digit revenue growth.

I would also say more came from acquisitions than from the organic side.

However, the team did achieve a good turnaround from the organic revenue declines we saw last year to already be into organic revenue growth this year.

So that's been going, but our aspirations are to have stronger organic revenue growth going forward as we see a bunch of new logos coming on board with us.

And maybe just on your other question that's on telecom.

Our revenue growth on that side is low single digits, but it is growing with potential as you've seen in our loading that we disclosed today.

And that's also absorbing the pressure that we had in business.

So we're definitely seeing our HSIA growth, both from customers and ARPU.

And then we've got the pressures from business, which have been -- we're still working through some of those J curves as we migrate to new third wave type products.

So still very positive and with future potential and momentum is growing.

And I think on the wireline front, this is a story that the market will be increasingly seized of and then hopefully, if we can continue to deliver, impressed with.

Because if you just do the math and say, okay, if we can keep driving the type of HSIA growth that we've been delivering and also moving people up to higher-speed tiers, and we've seen an accretion as it relates to average revenue per home on that front, that's going to flow from the revenue line to the EBITDA line in quite a tidy fashion.

If we can continue to do that on the TV front, where our base is up 44,000 on a year-over-year basis, that's going to make a tidy contribution to EBITDA expansion.

And you look at our net RGU loading being 11-fold greater than what it was this time last year, I think that's an emerging EBITDA story on the wireline side of the business.

To the extent to which we can moderate NAL losses, that really does help us on EBITDA because those NAL losses that we experience are at 95 points of margin.

If we can slow that down, the EBITDA preservation will give us better exposure to growth on the HSIA and on the TV front that I just talked about.

Fiber is becoming an increasing component of the mix as we go towards 600,000 customers on fiber on the back of 1.7 million footprint in over 100 municipalities.

The weight of fiber is growing and growing and growing.

And the economics on fiber in terms of the hard data, when you talk about a 25% churn reduction and a 9% ARPH improvement, that's a 55% improvement in lifetime revenue per customer on the fiber front.

That will flow through to the EBITDA line.

Our truck rolls and our inbound 611 of short calls are down 40% on the fiber front.

So again, as that weight grows within our portfolio, that's going to hit the EBITDA line of the organization.

Security and SmartHome is at the genesis stage.

As I said previously, we don't even have it in our loading results.

And not only can that help us on revenue and EBITDA, but it's going to help us better on client stickiness and retention.

TI is at the inflection point.

Right now we've been sort of dilutive to margins as it relates to TI.

But as TI recovers organically and as the key acquisitions go through the low point of the J-curve and move quickly through the accretion phase, that's a very exciting EBITDA and cash flow story for us on the wireline front that I don't think is fully reflective or there's a lot that's going to be positive over the next 12 months.

And on the TI front, I don't know if you caught my comments during my opening remarks, but we have the business valued every 6 months for mark-to-market basis as it relates to some of our comp plan by KPMG.

When we did the deal with Baring back in 2016.

The value of TI was just over $1.2 billion.

The last valuation done by KPMG on the mark-to-market work had it at 2.1 billion.

So we're nearly doubling the value of TI.

And the task for Josh and the team is over the next 24 months to 36 months to triple the value of that asset.

And I think with the right moves and acting prudently, as Josh pointed out, and moving up the BPO value chain with more focus on the data component, the robotic process automation component, the chatbot component of it and IT outsourcing-type solutions, not only can we get better margins, we'll get a better multiple on that business because of a bias towards a revenue and EBITDA stream that comes from higher value-add services along the way.

The health story continues to grow at a double-digit level organically for TELUS.

Organically, that's normalized for acquisitions.

I'm still looking for the Alberta recovery to come to fruition, which is dilutive to our results rather than flattering to our results as it was historically the case.

And then last time, I gave an answer to Vince on the call as it relates to one of the biggest improvements I see on wireline for 2019 and 2020 which is our B2B business on wireline, which is right now EBITDA dilutive.

And we have an excellent plan to ameliorate that dilution, get to EBITDA neutrality and then move through to EBITDA accretion.

And holistically, these things are going to have a huge result.

But individually given the weight, the B2B improvement is going to have a material impact positively on our business.

And so I think we've got an opportunity as this comes to fruition to move our target on wireline from what's been a 30% goal historically to a 35% goal prospectively given the combination of those events.

So I'll leave it off there.

So thanks, Maher, for the question.

That sure was a very good, thorough answer.

So if you have any follow-up questions [on anything else], feel free to contact the Investor Relations team.

And on behalf of Darren, Doug and Josh, thanks for taking the time to join us today ahead of the long weekend.

Ladies and gentlemen, this concludes the TELUS 2018 Q2 Earnings Conference Call.

Thank you for your participation and have a nice day.