TELUS Corporation (NYSE:TU) Q2 2023 Earnings Call Transcript

TELUS Corporation (NYSE:TU) Q2 2023 Earnings Call Transcript August 4, 2023

TELUS Corporation misses on earnings expectations. Reported EPS is $0.14 EPS, expectations were $0.18.

Operator: Good day, and welcome to the TELUS 2023 Q2 Earnings Conference Call. I would like to introduce your speaker, Mr. Robert Mitchell. Please go ahead.

Robert Mitchell: Hello everyone. Thanks for joining us today. Our second quarter 2023 results news release, MD&A, financial statements and detailed supplemental investor information were posted to our website this morning. On our call today, we will begin with remarks by Darren and Doug. As usual for the Q&A portion of our call, we’ll be joined by range of other executive leaders; Zainul Mawji, Consumer Solutions; Navin Arora, Business Solutions; Jim Senko, Chief Product Officer; Tony Geheran, COO; Jeff Puritt, President and CEO, TI; and Sid Kosaraju, President, TELUS Health. Briefly, this presentation and answers to questions contain forward-looking statements. Actual results could vary materially from these statements. The assumptions on which they’re based and the material risks that could cause them to differ are outlined in our public filings with the Securities Commissions including second quarter 2023 and annual 2022 MD&As. With that, Darren, over to you.

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Darren Entwistle: Thanks very much and hello, everyone. In the second quarter, TELUS team once again demonstrated execution strength in our TTEC business segment, characterized by the potent combination of leading overall customer growth, complemented by strong operational and financial results. The robust performance in our communications technology business continues to be underpinned by our globally leading broadband networks and, of course, our customer-centric culture. This enabled our strongest second quarter on record, with total customer net additions of 293,000, up 19% on a year-over-year basis, driven by strong demand for our superior product portfolio and service excellence. Our leading customer growth is reflective of our consistent industry-best client loyalty across both mobile and our fixed product lines.

The TELUS team’s passion for delivering customer experience excellence contributed to blended and postpaid mobile phone, pure fiber Internet, and residential voice churn all being below 1% yet again this quarter. Notably, postpaid mobile phone churn is now in the 10th consecutive year of being less than 1% and fiber Internet has been below the 1% threshold for 14 consecutive [Technical Difficulty] I’ll pick it up here on the interruption. I was speaking to the fact that mobile phone churn is now in its 10th consecutive year of being less than 1%, and our pure fiber Internet product has been below the 1% threshold now for 14 consecutive quarters. This is quite the unique combination that certainly bodes well for the future of the organization.

In the second quarter, we delivered strong consolidated revenue growth of 13% and resilient EBITDA growth of 5%, in spite of the macroeconomic challenges impacting TELUS International. Alongside that, we generated strong free cash flow growth of 36%. Let’s turn now to have a look at our mobile operating results at TELUS. TELUS achieved leading wireless customer growth of 234,000 net additions in the second quarter. This included strong mobile phone net additions of 110,000, our best second quarter result since 2010. Notably, this strength was driven alongside our continued focus on high-quality and profitable customer growth. It also included record second quarter connected device net additions of $124,000, which were up 35% on a year-over-year basis.

This reflects continued strong momentum with respect to our 5G and our IoT B2B solutions that are so critical for the future. Importantly, our team delivered another quarter of industry-backed loyalty results, which continues, of course, to be the hallmark of the TELUS organization and is emblematic of our customers’ first culture in action, in terms of the empirical results it generates. Blended mobile phone churn was an industry low 0.91%. Moreover, our industry-leading postpaid mobile phone churn of 0.73%, represents the 10th quarter out of the last 14 that we have earned a customer loyalty rate below 0.8%. This clearly distinguishes TELUS from our competitors and indeed, it is a result that is unsurpassed in North America with a churn rate that is amongst the lowest globally.

Our consistently strong performance is powered by a highly engaged team who passionately deliver superior service offerings and digital capabilities over our world-leading broadband networks, offering customers the fastest, most expensive and most reliable service in Canada. To close on mobile, industry-leading second quarter ARPU growth of 1.8% over last year was supported by roaming improvements as a result of increased international travel. It was also buttressed by higher domestic monthly recurring revenue, as well as our industry-based churn rate, whereby we are retaining our highest value customers in addition, of course, to growth in connected devices and IoT revenues. This, once again drove strong industry-best organic network revenue growth of 6% in the quarter.

Notably, our leading mobile phone lifetime revenue continues to exceed our national peers by up to 70%. This has been a consistent story at the TELUS organization for a very long time. This is reflective of the combination of our continued focus on high-quality customer growth and leading client loyalty delivered consistently as is the hallmark of our company. Turning now to our fixed operating results where TELUS delivered industry-leading second quarter wireline customer growth. Our team achieved leading Internet net additions of 35,000 in the quarter, up 3% on a year-over-year basis, powered by leading customer loyalty in combination with the significant advantages of TELUS’ expensive pure fiber network. We continue to drive leading growth in our TV product line with net additions of 17,000 and which was up 13% on a year-over-year basis.

Furthermore, residential voice losses were again an industry low at 8,000 and were relatively flat over this time last year. Notably, this leading performance reflects our continued momentum with respect to multiproduct intensity and the inherent churn benefits that have been so consistently successful for the TELUS organization. Healthy and leading security net additions of 15,000 further reflect our successful strategy of driving profitable customer growth and multiproduct penetration. Overall, we drove robust and industry-leading external fixed net additions of 59,000 in the second quarter. This performance is indicative of the strength of our unique and highly attractive bundled offerings across our truly unmatched portfolio of products and services buttressed by our ever-expanding globally leading pure fiber and 5G networks, all wrapped within our customer-centric culture.

Indeed, the generational investments that we’ve made in the global best network technologies that are the cornerstone of our leading customer growth and the significant ongoing profitable market share gains that we have driven over so many years and will continue to do so on a go-forward basis. Furthermore, these investments will continue to drive important and extensive socioeconomic benefits for our communities and Canadian citizens for many, many, many decades to come. Let’s turn now and take a look at TELUS Business Solutions. Our team within TELUS Business Solutions continues to deliver on its track record of contributing meaningfully to the success of the wider TELUS organization. Notably, this includes delivering another strong quarter with 6% revenue growth and profitable EBITDA contribution growth across our B2B product lines.

This is enabled by a team that is absolutely dedicated to propelling its position as one of the leading B2B organizations on the planet and it’s a story of differentiation at TELUS versus our peers. During the quarter, our team secured several notable wins to bring our highly differentiated assets and capabilities to meet the evolving needs of our customers. This included a significant deal to deploy our intelligent smart building technology that will modernize retail operations for H&M, one of the world’s leading retailers. We recently moved our TELUS Agriculture and Consumer Goods business, or TAC, into TBS. This will clearly support enhanced efficiency and effectiveness measures and is reflective of our collective commitment in respect of realizing quantum growth in our compelling TAC business.

Second quarter TELUS Agriculture and Consumer Goods revenues of $79 million were relatively flat on a year-over-year basis, and this disappoints us. It reflects headwinds in our agribusiness vertical due to softness related to macroeconomic challenges and as well it reflects onetime professional services revenues that were realized in the second quarter of 2022. We continue to expect progress on our top line and to see that flow through to profitability in this business for the second half of 2023, resulting in positive annual growth. The TELUS Agriculture and Consumer Goods team will leverage the expertise, the leverage the experience, and to leverage the high-performance culture and talent of our TBS team, ensuring that we are well positioned to accelerate our customers for sales marketing, channel and holistic go-to-market efforts, including exciting and plentiful cross-selling opportunities.

TELUS remains steadfast in our objective to accelerate and significantly scale our Tax business into a potent asset of consequence, focused on becoming the world’s largest global independent provider of digital technologies and data insights, connecting customers from producers to consumers across the agricultural products, food and packaged goods industries. Let’s turn now and take a look at our TELUS Health business unit. We achieved second quarter revenues of $428 million in TELUS Health, up 212%. Notably, when normalizing for LifeWorks EBITDA grew by 11%. These results reflect the continued growth and increasing scale of our health operations since our acquisition of LifeWorks in 2022, enabling us to make meaningful progress on our goal to be the most trusted, well-being company in the world.

And this includes, covering more than 68 million lives around the world with our healthcare services and healthcare programs, an increase of nearly $46 million on a year-over-year basis and includes supporting health outcomes on nearly 153 million digital health transactions during the second quarter, of 2023. This was up more than 5% over the same period a year ago. It includes increasing our Virtual Care membership to $5.3 million up nearly 50% over the prior year. We expect TELUS Health to continue its sustained growth and a sustained expansion, underpinned by the integration and innovation of our diverse product suite and care delivery that enables us to support the evolving needs of our customers around the world. Importantly, since acquiring LifeWorks, our team has now committed to driving $425 million in annualized synergies by the end of 2025, up from $250 million.

This includes $325 million expected to be realized through operating cost synergies and from continued integration, continued optimizing of our organizational structure, systems and of course, optimizing the real estate portfolio of TELUS Health within the wider TELUS home. Furthermore, we expect to drive at least $100 million from revenue synergies over the same period, fueled by cross-selling health services and the potent products that we have within our portfolio to our TELUS Health customer base, but also, across the wider TELUS portfolio of assets. The realization of these synergies will allow us to reinvest in the growth of the business and improve our profitability, whilst we focus on delivering efficient, effective, secure and truly best-in-class health and wellness solutions to our customers.

Notably, to-date, we’ve achieved $127 million in combined annualized synergies towards this overall objective of $425 million. Now let’s take a look at TELUS International. As we announced in July, increasing macroeconomic pressure has temporarily impacted service demand from some of TI’s larger tech clients as they aggressively address their own cost structures, slowing expected revenue and profit growth for 2023. In response, our TI team has action significant incremental cost efficiency programs, including staff reductions to address lower service volumes. TI importantly is also driving additional automation and generative AI-enabled solutions to further optimize its cost structure, and of course, its go-to-market sales opportunities, which are significant.

Despite these near-term challenges, we at TELUS remain highly confident in TI’s strategy, the team and their investment thesis. This is amplified by meaningful opportunities in respect of digital transformation, particularly within generative AI adoption and the continuing critical importance of differentiated digital customer experience solutions in the market, which remains a vibrant tailwind for TI’s medium and long-term growth and profitability. Doug will provide further commentary on both TTEC and TELUS International’s second quarter results in just a moment. Before I close, let me turn to the significant investment, which we are announcing today in an extensive efficiency and effectiveness initiative across TELUS. This is against the backdrop of rapid transformation in our industry, and the ways in which our customers want to engage with us.

Furthermore, it is in response to the evolving, regulatory, competitive and macroeconomic environment that we currently face and where we want to realize success within. Importantly, the transformational investments that we are prudently making now are building upon the sanguine investments that TELUS has made over the course of two decades in building the best culture and enabling industry-leading customer experiences over our globally leading wireless and pure fiber broadband networks, and they are allowing us to accelerate our well-progressed plans to digitally revolutionize our business and further streamline operating costs meaningfully that bodes so well for the future success of this organization. The generational investments we have made are fueling significant economic efficiencies and will ensure we remain market leaders in driving innovation and value for our customers, realizing profitable growth for our shareholders and supporting our team members and the communities within, which we live, work and serve.

The accelerated program we are announcing today will yield expected cumulative annual cost savings of more than $325 million, building smartly upon the terrific digital progress that this organization has made on a leading basis over the last few years, aided and embedded by the TELUS International Organization. Whilst this investment will temporarily dilute our strong free cash flow in 2023, importantly it will support stronger free cash flow expansion in the years ahead, as well as the progression and affordability of our leading multiyear dividend growth program. Given the scale of this incremental program, it is with a heavy heart that we are proceeding with 6,000 staff reductions across our global footprint, including approximately 4,000 in TTEC and 2,000 at TELUS International, including offering early retirement and voluntary departure packages.

As a result of these extremely difficult decisions, we now expect incremental restructuring investments of up to $475 million in 2023. Our winning strategy at TELUS remains unchanged. And our transformational efforts will be buttressed by our decade-long track record of successfully navigating exogenous factors from regulatory and competitive to macroeconomic, and most recently, through the global pandemic, where we distinguished ourselves so admirably. Our resilience and ability to embrace change and continuously evolve the way we operate our cornerstones of our TELUS culture and the technology that we deploy in combination and these two things will continue to fuel our future and all the success that we will realize. In closing, I’d like to extend my since your appreciation to our more than 80,000 team members, retirees, family members and friends who have collectively volunteered in 260 communities across 32 countries thus far for our 18th annual TELUS Days of Giving making 2023, our most giving year yet.

Indeed, since 2000, our TELUS family has contributed 2.2 million days of volunteerism, more than any other company in the world, helping to improve the lives of people across the globe that need a helping hand. Myself, our leadership team and the TELUS Board of Directors remain exceedingly grateful for our team’s passionate efforts to support our global communities as we strive to deliver outstanding results for all of our stakeholders, exemplifying our world leadership in social capitalism. And on that note, I’ll hand the call over to Doug.

Douglas French: Thank you, Darren, and hi, everyone. Mobile network revenue increased by 6% year-over-year, our ninth straight quarter of strong year-over-year growth, driven by high-quality customer additions, which has been supported by record population growth, along with higher mobile ARPU. Our growth has been also supported by our superior product bundling across home and mobile, customer service excellence and globally leading networks. Our ARPU growth of 1.8% in Q2 reflects 1.8% in Q2 reflects the continuing roaming benefits, however, at a lower level as we lapped the Q1 recovery. We anticipate roaming to remain a positive contributor to growth in Q3 and Q4, but in smaller increments. Despite a highly competitive operating environment, particularly in the flanker space, we delivered positive year-over-year growth in domestic ARPU in the second quarter, reflecting high-quality loading and strong base management.

As we progress through the back half of the year, we are targeting ARPU growth approaching 2% for 2023. Fixed Data Services revenue growth grew by 6.2% year-over-year, driven primarily by strong customer growth across Internet, security and TV and higher revenue per Internet customer. Within fixed, we also achieved strong B2B growth of 5%. Our leading fixed customer growth reflects our superior bundled offers and our leading pure fiber network. Customers are continuing to move to our higher Internet speed tiers, recognizing the superior customer excellence of our pure fiber network, the compelling value of symmetrical speeds and the value and reliability of our leading portfolio bundled offerings. On the B2B front, inclusive of both, mobile and fixed services, we continue to see positive financial results, with revenue and EBITDA contribution up year-over-year.

In Health, revenue increased by $291 million in Q2 over last year, primarily reflecting the contribution of LifeWorks, as well as organic growth. EBITDA contribution in our health business area continues to grow steadily, along with margins in the mid-teens, which we anticipate to increase over time. As part of our broader cost efficiency program, our health team is improving their cost structure as we actively and complete the LifeWorks integration. Longer-term, we continue to anticipate meaningful health revenue synergies from cross-selling opportunities and continued margin expansion benefiting from the cost optimization. Overall, TTEC revenues were up nearly 14% over last year and adjusted EBITDA grew by 8.1%. In TI, we pre-released the second quarter results on July 13.

Operating revenues from external customers were higher by 7.6% year-over-year, driven by additional services provided by existing clients and new clients, including those from our WillowTree. acquisition. A strengthening of the US to Canadian dollar exchange also benefit the DLCX revenue growth. DLCX adjusted EBITDA was down 19%, consistent with the pre-release last month – earlier this month, primarily due to the reduction in service revenues from larger clients combined with higher service delivery costs in our AI business. These imbalances are due to the timing of some of the European labor reduction regulations and will be part of our future cost reduction initiatives. Our TELUS TI team remains firmly focused on managing through these near-term headwinds with a keen eye on efficiency and effectiveness in order to support their margin and cash flow generation.

Overall, consolidated operating revenues increased by 13% year-over-year and adjusted EBITDA grew by 5%. Consolidated net income and EPS were both down approximately 60%, due to higher depreciation and amortization from our growing asset base, including LifeWorks regulatory and our generational investments in pure fiber and 5G networks. Macroeconomics, notably our DLCX Operating segment also impacted EPS and higher financing costs from our higher debt outstanding, reflecting the investments in our growth strategy as well as higher interest rates. In Q2, net income and EPS were also impacted by higher restructuring costs as it relates to our cost efficiency initiatives. Free cash flow of $279 million increased 36% year-over-year, primarily by lower capital expenditures and higher adjusted EBITDA.

This was partially offset by the increase in cash interest paid higher restructuring, primarily due to the lump sum payments from the ratification of our TWU agreement and our ongoing efficiency programs. As announced on July 13, we revised our annual target for consolidated revenue and adjusted EBITDA to reflect TELUS International’s updated outlook. Notably, the implied annual financial target for our TTEC operating segment remains unchanged. Today, we updated our 2023 free cash flow guidance to reflect the higher expected restructuring disbursements related to the accelerated cost efficiency programs throughout all parts of our organization. While these decisions are difficult to undertake, they reflect our innovation for our customers and our required — the requirement to address the pressures from the current regulatory competitive, macroeconomic environments while embracing our significant digital progression.

Restructuring costs are now anticipated to be up to $750 million for the full year, an increase of $475 million from our original assumption. As Darren highlighted, the annual cost savings from the incremental accelerated program are anticipated to be approximately $325 million for the full year and about 80% of that will be to the TTEC segment. Of the $325 million, we anticipate a small portion of the benefits to begin accruing in the back half of this year. Consistent with our capital plan, we anticipate approximately 85% of our annual capital expenditures of our $2.6 billion target to be in the first three quarters of the year, and we reaffirmed our $2.6 billion guidance for the year on CapEx. The expected decline in our capital program in Q4 is aligned with our seasonal build plan.

Our growth profile and robust balance sheet position continue to — and our well-established dividend program will continue into the future. The initiatives we take today will be supporting all of that. We will continue to focus on executing our cost efficiency and effectiveness opportunities driving down our cost structure on a permanent basis. With that, we’ll turn it over to Robert for the Q&A.

Robert Mitchell: Thank you, Doug. Frederic, could we please proceed with questions?

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Q&A Session

Q – Jerome Dubreuil: Hi. Thanks for taking my questions. First one I have is, I’m interested in the digitization of your operations. Obviously, you’ve invested a lot in this over the last few years. Do you believe that you’re a bit in advance in terms of your digitization versus what global peers might have done?

Darren Entwistle: Jeff, why don’t you take that? And I’ll top up, if necessary.

Jeff Puritt: Yes. I think there is no doubt at all that the impact our digital transformation is having and has had on the business has given us a competitive advantage. I think it does two things concurrently, and historically, I think these have been perceived to be mutually exclusive, but we’ve demonstrated that, that’s not the case. One, it has meaningfully improved the cost to serve in terms of driving efficiency and effectiveness in those systems that we rely upon to support our customers. And then equally importantly, I think it’s improved the client experience by making it easier for them to do business with us, to procure our products and services to request changes, add additions, et cetera. And as a consequence, that’s driving better adoption, increased subscriber net adds, increased share of wallet, and lifetime average revenue.

So I think it is beyond contestation that having been an early adopter of digitally enabled interactions with our team members and our customers that gives us an advantage in the marketplace.

Darren Entwistle: And without the investments and progress that we’ve made on the digital front, the AI front and currently and prospectively degenerative AI front, we would not be capable of realizing the cost efficiencies that we’ve articulated today. We’re realizing these cost efficiencies and looking to contemporaneously increase the service quotient of this organization. And I think that’s a huge competitive differentiator for TELUS versus our peer group and the relationship between TELUS and TI has been absolutely key to realizing this position and what it portends for the future.

Jerome Dubreuil: Great. And second one I would have, you’ve updated your guidance in mid-July. Now you’re updated it again this time. Has anything changed since mid-July, or is it just that the restructuring decision and paper work had to be done after?

Darren Entwistle : Doug, why don’t you go on this one?

Douglas French : Yes. Nothing has changed from the perspective of two weeks ago. It was, in essence, bringing this forward with the overall story, and execution of our results. I think it would have been hard to do that in a pre-release. And so we wanted to have a fulsome picture of our overall operating results concurrent with the restructuring initiatives and finalizing those to the extent we discussed today.

Jerome Dubreuil: Okay. Thank you.

Darren Entwistle : Thanks, Jerome. Fredrick, next question, please.

Operator: And our next question comes from Maher Yaghi of Scotiabank. Please go ahead.

Maher Yaghi : All right. Great. Thank you for taking my question. I would like to start just by asking your question on your leverage and capital allocation priorities. Over the last year, we have senior leverage go from 3.2% to 3.8%. I mean you invested heavily in CapEx, for sure, but also in acquisitions. This ratio is now above your long-term range. And can you help us understand the expected pace of the decline that you think this ratio is going to take, especially given the upcoming spectrum auctions coming up. Any targets on leverage that you can share with us here? And just a follow-up to this question. You have supported TI in several ways, more recently through a couple of stock buyback acquisitions. Can you provide us some understanding as to how much more you are willing to TI support the specifically when it comes to stock acquisition?

Because this is a question that keeps coming up with investors and I think some clarity on that would be helpful. Thank you.

Darren Entwistle : Okay. I’ll let Doug take the first part of the question, and I’ll top-up on the second part.

Douglas French: I think when you look at our industry-leading EBITDA growth and the fact that we’ve been coming to the end of our accelerated capital spend in this year’s, the decrease in capital spend was a good example of that. You’re going to see that capital continue to be moderated into the future, with even the initiatives we talked about today on bringing down our long-term cost structure for enhanced margins. We have full confidence we’re going to delever very well into the future on free cash flow, and that these initiatives, if anything, will solidify even a stronger balance sheet into the future. So when you look at the growth areas we have confidence in EBITDA growth and value Gen in consistence with the demand on CapEx going forward coming down.

A – Jeff Puritt: I think it’s pretty clear that TELUS is now in a period where the sources of cash will chronically exceed the uses of cash, and that bodes well for the balance sheet of the organization as well as our strategic positioning from an investment thesis Secondly, as you would know, Doug and the team have done a superb job. Timing the balance sheet of the organization with the investment profiles that we have undertaken in areas like fiber and 5G, we’ve got an average term to maturity on our debt profile of 11 years. And our cost of debt is quite attractive, just to touch over 4%. And of course, that debt is tax affected given the tax paying position of this organization. In terms of TI, Yes, we have made investments in TI on the edge in the past.

We’ve done that because we have a high degree of confidence in the TI organization and its growth prospects. But it’s not just because we are confident in its external growth prospects we recognize critically, as we’ve just spoken to, that TI is a critical enabler of TELUS’ growth strategy, supporting everything that we’re doing from customer service excellence to the digital transformation of our organization that’s put us in such a strong position. We, as an organization, believe as you would expect, that TI is significantly undervalued. And as it deals up, the macroeconomic challenges in front of it with the right moves, the medium- and longer-term prospects for the organization are exceedingly strong. Having said that, we expect TI to stand on its own two feet — and that’s policy.