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 of 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 of 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 growth, 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, the 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…

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…

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 harbor 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 two 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 two 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 two 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 they'll 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.

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…

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 third 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.

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 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 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 three 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…

Very much so.

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, a 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…

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…

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 perspective 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 two third to 70% zone, we're in…

Last question will come from Maher Yaghi from Desjardins.

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 the 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…

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 on 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 seeing of and then hopefully, if we can continue to deliver, impressed with. Because when 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…

So thanks, Maher, for the question. That sure was a very good, thorough answer. So if you have any follow-up questions as well, 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.