TELUS Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 13 speakers on the call.

Operator

Good day, and welcome to the TELUS 2023 Q3 Earnings Conference Call. I would like to introduce your speaker, Mr. Robert Mitchell. Please go ahead.

Speaker 1

Hello, everyone. Thank you for joining us today. Our Q3 2023 results, news release, MD and A financial statements and detailed supplemental information were posted on our website this morning. On our call today, we'll begin with remarks by Darren, Doug and Zainal. For the Q and A portion, we will be joined by other members of our executive leadership team.

Speaker 1

Briefly, prepared remarks, slides and answers to questions contain forward looking statements. Actual results could vary materially from these statements, The assumptions on which they are based and the material risks that could cause them to differ are outlined in our public filings with securities commissions in Canada and the U. S,

Speaker 2

Thank you, Roscoe, And hello, everyone. In the Q3, our TELUS team once again demonstrated execution strength in our TTEC business segment, Characterized by the potent combination of leading customer growth alongside strong operational and financial results. This was complemented by sequential EBITDA improvement and margin expansion in our DLCX segment. Notably, we achieved our strongest quarter of telecom customer growth on record with total net additions of 406,000, Up 17% on a year over year basis. This was driven by strong demand for our best in class portfolio of bundled services.

Speaker 2

Our all time record customer growth is reflective of our dedicated team who are passionate about consistently delivering customer experience excellence, Leveraging our superior service offerings and digital capabilities over our world leading wireless and PureFibre Broadband Networks. In the Q3, we delivered solid consolidated operating revenue growth of 7.5% and resilient EBITDA growth of 5.5% In spite of the macroeconomic challenges, TELUS International continues to manage through globally. Let's turn now to our TTEC mobile operating results. TELUS achieved leading and record wireless customer growth 339,000 net additions in the 3rd quarter, up 24% over this time last year. This included strong mobile phone net additions of 160,000, up 7%.

Speaker 2

Notably, this represents our best Q3 on record and our best quarterly result since the Q2 of 2,008. This strength was driven alongside our continued focus on profitable and margin accretive customer growth. Indeed, this consistent and disciplined approach will continue throughout the Q4 and into 2024 To ensure our net adds exclusively drive EBITDA and cash flow accretion. It also included leading An all time record quarterly connected device net additions of 179,000, which was up 44% on a year over year basis. This reflects continued strong momentum with respect to our 5 gs and IoT B2B solutions That is so critical for the future.

Speaker 2

Importantly, our team delivered another quarter of industry best loyalty results, Which continues to be the hallmark of the TELUS organization and is emblematic of our customers first culture in action. While splendid mobile phone churn of 1% and postpaid churn of 0.84% were up slightly against the backdrop of Heightened competitive activity both represented industry best results. Notably, our postpaid churn Is now in the 10th consecutive year at less than 1% and will soon be entering its 11th year. To close on mobile, 3rd quarter ARPU of $59.19 was down slightly year over year As a result of intense promotional activity in the market and heightened activity in the flanker space. This was mitigated, however, by our long standing focus on AMPU accretive loading, driven by our team's passion for winning and retaining Profitable customers.

Speaker 2

At the same time, we are maintaining a keen eye on efficiency by remaining highly disciplined On device subsidies and leveraging our leading digital capabilities. Furthermore, connected devices and will increasingly be an important contributor to network revenue, ARPU and AMPU growth in the quarters ahead. Indeed, our solid ARPU and leading churn continued to drive our industry best mobile phone lifetime revenue, Which consistently exceeds our national peers by a considerable margin. This is reflective of the combination of our continued focus On high quality customer growth and leading client loyalty enabled by our highly engaged team Who passionately delivers superior service offerings over our world leading broadband networks, offering customers the fastest, Most Expansive and Most Reliable Service in Canada. Let's turn now and take a look at our fixed operating results.

Speaker 2

TELUS delivered another quarter of robust external fixed net additions of 67,000 in the 3rd quarter. This represented an industry leading result of the company's reporting to date. Moreover, it included strong and Steady Internet net additions of 37,000 powered by the significant advantages of TELUS' extensive PureFibre network. Our leading performance reflects the continued strength and success of our unique and highly attractive bundled offerings Across our truly unmatched portfolio of products and services. These are buttressed by our ever expanding globally leading pure fiber And 5 gs Networks, all of which are backed by our long standing customer centric culture.

Speaker 2

I'll turn the call over to Zainal in a moment to provide further color on our Consumer TTEC performance. Let's turn now and take a look at TELUS Business Solutions or TBS, which continues to contribute meaningfully To the success of the wider TELUS organization. Notably, this includes delivering another strong quarter With continued revenue and EBITDA growth, our performance reflects the strength of execution and cost transformation And our highly differentiated solutions, market segment and geographic diversification. It is also indicative of how we uniquely extend our social purpose through our Stand With Owners brand promise, including technology solutions That empowered businesses to thrive in an increasingly digital world. During the quarter, our TBS team secured several Notable wins to bring our highly differentiated assets and capabilities to meet the evolving needs of our customers.

Speaker 2

This included a significant strategic deal with Flow to provide TELUS' world leading connectivity To the most extensive electric vehicle network footprint in Canada, as well as underpinning a record setting quarter For Connected Devices performance. Since announcing the move of TELUS Agriculture and Consumer Goods or TAC To TBS, we've begun executing a robust strategic plan, leveraging the strength of both organizations To capture the market opportunity across the business, also allowing us to streamline our focus, Align the right talent to key leadership roles and of course, as always, improve our cost structure. Whilst TAC revenues of $83,000,000 in the quarter were relatively flat against the backdrop of ongoing macroeconomic headwinds, We remain strongly confident in the positive outlook for this exciting business. Notably, our consumer goods business Had its strongest sales quarter in over 3 years with a strong sales funnel to continue that momentum going forward into 2024. TAC is exceedingly well positioned as the globally leading provider of digital technology and data insights, Leveraging its superior products, platforms, distribution channels and enviable client base To scale this business into a true asset of consequence and deliver meaningful and sustained growth for the TELUS organization.

Speaker 2

Furthermore, we are accelerating efforts to build AI capabilities into the full suite of product offerings To capitalize on data commercialization and monetization across animal agriculture, agronomy and rebate management Let's turn now and take a look at our TELUS Health business. We achieved 3rd quarter revenues of $422,000,000 in TELUS Health Alongside 20 percent EBITDA growth normalizing for LifeWorks. We continue to execute on our global growth strategy And progress towards our goal of being the most trusted well-being company in the world, accelerated by the acquisition of LifeWorks. And this includes our healthcare services and programs now covering nearly 70,000,000 lives around the world, An increase of more than $9,000,000 on a year over year basis. It includes supporting health outcomes on nearly 100 And 51,000,000 digital health transactions during the Q3, up more than 5% over the same period a year ago.

Speaker 2

And it includes increasing our virtual care membership to 5,500,000 up nearly 40% Over the prior year, as we evolve to answer the needs of our customers worldwide, we foresee TELUS Health Continuing its double digit growth over the medium and longer term. Indeed, since acquiring LifeWorks, Our team is committed to driving $427,000,000 in annualized synergies by the end of 2025. This includes $327,000,000 expected to be realized through operating cost synergies From continued integration and optimizing our organizational structure, systems and our real estate portfolio. Furthermore, we continue to anticipate $100,000,000 from longer term revenue synergies driven by cross Selling health service products within our TELUS Health customer base and throughout our TELUS portfolio of assets, Including TELUS International. To date, we've achieved $194,000,000 in combined annualized synergies Towards our overall objective.

Speaker 2

These synergies will allow us to reinvest in the growth of our business And as well improve our profitability, whilst we focus on delivering efficient, secure and best in class health And wellness solutions to our customers. Notably, we continue to grow our revenue opportunities globally With significant wins in Canada, the U. S. And Europe exemplified by deals won year to date representing over 4 $1,000,000 in total contract value. Indeed, in the Q3 alone, we closed several material deals across Our employer line of business, our payer and provider line of business and our retirement benefit solutions portfolios.

Speaker 2

The strength of our combined health and well-being solutions and services remain unmatched in the marketplace. Now let's turn and take a look at TELUS International. Earlier today, TI reported steady year over year revenue growth, A meaningful improvement in sequential profitability and margins and reiterated its 2023 full year outlook. Revenue growth was driven by a combination of higher volumes and the ramp up of projects across key clients, notably With Intelis International's AI data solutions demonstrating the significant potential in the AI space And portending what is to come in the quarters and years ahead. TI's adjusted EBITDA margin increased meaningfully quarter Over quarter, a positive trend that we expect to continue in the Q4 and into 2024.

Speaker 2

The strong improvement reflects the team's considerable efforts to realize the significant cost savings from our cost efficiency program Aimed at rebalancing supply and demand factors across TI's operations, most notably those in Europe. Despite the near term macroeconomic pressures that TI has faced this year, we remain highly confident And TI's investment thesis. This is amplified by meaningful opportunities in respect of digital transformation, Particularly with generative AI adoption and the continuing critical importance of differentiated digital consumer And B2B Business Experience Solutions in the overall marketplace. In this regard, Earlier this week, TI launched FuelIX, an enhanced end to end offering that integrates generative AI In the client's customer experience ecosystems enabled by TI's capability in digital consulting, TI's capability In data analytics, their capabilities and self serve applications and TI's leveraging of their AI enabled Platform integration. Critically, Fuel IX helps companies overcome This jointed data and organization silos and ensures that AI is thoughtfully embedded In the functionality of day to day client experience operations and workflows, driving better outcomes Gen AI potential with a clear path to production for companies at the start of their AI journeys, Representing a vibrant tailwind for TI's medium and long term growth and profitability.

Speaker 2

Doug is going to provide further commentary on both TTEC and TELUS International's 3rd quarter results in just a moment. The significant broadband network investments that we've made and those that we continue to make enable the advancement of our financial and operational performance And underpin the long term sustainability of our industry leading dividend growth program. The 7.1% year over year dividend increase announced today represents the 25th increase since we initiated Our multiyear dividend growth program in 2011, which is now in its 13th year. Since 2004, TELUS has returned more than $24,000,000,000 to shareholders, including over $19,000,000,000 in dividends, representing $17 on a per share basis. Our robust outlook for the continuity of our strong Free cash flow expansion portends well for future dividend growth, particularly in the context Of our dividend payout ratio guideline of 60% to 75% and the opportunity for increases As we prospectively approach the lower end of that range in the quarters and years ahead.

Speaker 2

Indeed, this represents an attractive investment scenario, particularly in combination with our dividend growth program For 7% to 10% annual growth through 2025 and an attractive current dividend yield of well over 6%. The buttress are consistently strong performance against the backdrop of rapid transformation in our industry And the evolving regulatory, competitive and macroeconomic environment, we continue to focus On executing the extensive efficiency and effectiveness initiative across TELUS that we announced back in the month of August. Importantly, the transformational investments we prudently made over the course of more than a decade In building the best culture and enabling industry leading customer experiences over our globally leading wireless And PureFibre Broadband Networks are allowing us to accelerate our well progressed plans To digitally revolutionize our business and further streamline our operating costs. Our team's grit, resilience and ability to embrace change and continuously evolve The way that we operate have enabled us to substantially complete the targeted team member reductions. The incremental cost savings are expected to more meaningfully contribute to 4th quarter EBITDA with the full run rate expected to be felt By the Q2 of next year.

Speaker 2

Whilst this initiative has certainly come with many difficult decisions, We've leveraged our decades long track record of successfully navigating exogenous factors From regulatory and competitive to macroeconomic and most recently through the global pandemic in order to rise and answer the current challenges and future proof our business and all of our profitable growth aspirations. Importantly, your company's global leadership in social capitalism was exemplified by the recent launch Of the $50,000,000 TELUS student bursary, the largest bursary fund in all of Canada, The Telestudent bursary will enable 1,000 of young people who might otherwise lack the means To enrich their lives through post secondary education at a university, college or technical vocational school. Our annual bursary program will empower these leaders of tomorrow to pursue their ambitions, realize their And create a brighter future for themselves and their communities. Myself and our entire leadership team as well as 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. Finally, from the head and from the heart, I'd like to conclude by extending my sincere appreciation To my long term colleague and friend, Jim Senko, today marks Jim's final TELUS investor call before he retires At the end of the year, over the past 22 years, Jim's amazing dedication to TELUS and his team, Alongside his tremendous skill and expertise, have set a remarkably high standard of excellence for our entire organization.

Speaker 2

I know I speak on behalf of our entire leadership team when I say we will dearly miss Jim's considerable skill, His relentless competitive spirit and his outstanding ingenuity in respect of delivering innovative programs And exceptional outcomes for our customers. Thank you, Jim, for the many outstanding contributions And congratulations on a truly, truly, truly outstanding career. Thank you. On that note, I'll turn the call over to Zay. Zay, over to you.

Speaker 3

Thank you, Darren. Amidst an intensely dynamic market, we remain steadfast in our commitment to our consistent strategy, Demonstrated by our strong results and driven by our dedicated team who relentlessly put our customers first, Provide the best products and services in our industry and passionately believe in our social purpose. As Darren highlighted, Our winning strategy has resulted in another record quarter for mobility loading, including robust share within the new Canadian and other key In addition, our household intensification strategy is yielding impressive results. This has translated into industry leading customer retention rates and strong customer loyalty. Our leading postpaid churn is resulting in an industry best customer lifetime value of over $5,900 Our focus on product intensity has yielded superior churn and also optimized acquisition and retention costs.

Speaker 3

While ARPU momentum has softened by competitive aggression, deceleration of roaming growth versus pre pandemic performance And askew in loading towards lower ARPU segments, we remain disciplined on quality profitable loading. Growth in the Newcomer segment has been predominantly through our public and KUDO brands, which are heavily digitized and have a lower cost We have achieved our 10th consecutive quarter of year over year network revenue growth, Supported by a 60% year over year growth in the percentage of our base on 5 gs enabled devices. Mobility direct margin growth is outpacing revenue growth by 35% or 4.2% versus 3.1 Percent, respectively. Our device subsidy per subscriber is declining at a 3 0.5 times faster rate than ARPU as customers step up to access device discounts. And as a result of our transformative cost evolution, we have reduced overall cost to serve by 4% year over year.

Speaker 3

This underscores our historic commitment to focus on profitable customer growth, And Acxiom that has served us well in the past and one we will continue into the future. In fixed, customers continue to choose TELUS over our competitors. We have achieved year over year growth In 5 of the last 6 quarters enabled by our network superiority with PureFibre as we expand our premium leadership in the West Through the launch of symmetrical 3 gigabit per second high speed, which is 20 times the upload cap of the competition on a vastly This has supported a 19% year over year growth in the percentage of our base on 1 gig plus plans. In August, U. S.-based PCMag named Telus the fastest Internet service provider in Canada for the 4th consecutive year And the best Internet service provider for Alberta and British Columbia.

Speaker 3

This demonstrates our commitment to connecting Canadians To the people and information that matter most and underscores the tremendous value of our generational investments In world leading wireline and wireless network technologies, PureFibre continues to yield superior results, Including markedly higher products per household, 68 6% higher margin per household. PureFibre Internet churn is 31% lower than copper, driving higher customer lifetime value. Our long track record of positive subscriber growth in video also continued in Q3 With our strongest growth in over 10 quarters, this hinged on the success of our industry leading video platform, Which offers bundled premium and OTT content in addition to the success of Stream Plus, Our affordable OTT aggregation offering for cord shavers that is resonating significantly Among customers across the country. As Darren conveyed, our focus on innovation to provide the most comprehensive We have a very strong suite of products in the industry underpins our leading bundling strategy. We will continue to enhance the breadth and depth of our portfolio, Offering unparalleled value to our customers with smart home security and automation, Stream Plus and our unique suite of consumer health products Like TELUS Health, MyCare and MyPet.

Speaker 3

These results demonstrate our company's ability to drive consistent growth, Deliver strong customer loyalty and maximize household lifetime value. In what is anticipated to be a seasonally competitive Q4, we will maintain our long standing focus on quality, profitable customer growth That will deliver positive financial outcomes, including AMPU and cash flow per subscriber. Finally, if I could take a moment to echo Darren's comments and thank Jim for his unwavering dedication to our team. Jim, your outstanding leadership has set the team up well for the future. I am grateful for your partnership and support.

Speaker 3

We wish you all the best in this next chapter. Now I'll hand it over to Doug.

Speaker 4

Thank you, Zainal, and hello, everyone. Mobile network revenue increased 3.4% year over year driven by strong subscriber additions, which has been supported by Canadian population growth. ARPU growth declined by 0.5% in Q3, given the competitive environment, particularly within flanker And as roaming revenue growth slowed. Overall, AMPU was strong as we predominantly focus on profitable loading, Cost reduction and service delivery, managing device subsidies to higher value loading and as we leverage our leading digital capabilities. Our strong AMPU performance is further evidenced by our strong mobility direct margin contribution increasing by 4 point 2% in the quarter, notably exceeding mobile network revenue growth of 3.4%.

Speaker 4

On a year to date basis, ARPU is higher by 1 point And for the Q4, we anticipate ARPU on a year over year basis to improve relative to Q3 Through our continued focus on profitable loading, strong base management, leveraging our product superiority and bundling and including strong growth In connected devices, fixed data service revenue grew by 4.9% year over year, driven primarily by strong customer growth Internet, security and TV and higher but moderating revenue per Internet customer. Within fixed data, Residential Internet grew 10% year over year, a leading result primarily driven by continued market share gains. Health service revenue increased by 88% or $197,000,000 over Q3 last year, Reflecting the contribution from LifeWorks as well as continued organic growth. As a reminder, we have now lapped the LifeWorks acquisition On a year over year basis as of September 1. EBITDA contribution in our Health business area, which excludes Shared services from TELUS continues to grow at a very good rate.

Speaker 4

In the mid teens, which will include any Which we expect to increase in 2024 and beyond, benefiting from organic growth, revenue cross sell synergies And significant cost synergies. Overall, TTEC operating revenues were up 7.8% over last year And adjusted EBITDA grew by 7%. Dlcx operating revenues from external customers were up 5.8% year over year, Driven by additional services provided to existing and new customers, including those from the acquisition of WillowTree, A strengthening of both the Canadian sorry, the U. S. And European dollar against the Canadian dollar also benefited revenue growth.

Speaker 4

DLCX adjusted EBITDA was down 6.5%, primarily due to revenue pressures from some of their larger Technology customers, partially offset by the rightsizing of their cost structure. During the Q3, Our international team executed against its significant and ongoing efficiency plans to meaningfully right size that cost structure. Notably, as compared to the prior quarter, the LCX EBITDA improved 12 percentage points to adjusted EBITDA margin And increased 4 10 basis points to 21%. Heading into the 4th quarter, these ongoing efforts TI in a strong position to continue to build on this momentum. Overall consolidated operating revenues increased by 7.5 And adjusted EBITDA of 5.5.

Speaker 4

On an adjusted basis, net income was lower by 21% While we have substantially completed our targeted headcount reductions that we announced in August, including approximately 4,000 in TTEC and 2,000 We anticipate consolidated restructuring and other costs to remain elevated in the 4th quarter Of up to approximately $175,000,000 all within our revised outlook that we gave last quarter As we continue to implement our efficiency programs, including non labor initiatives. Free cash flow in the quarter was up $355,000,000 increased by 7.3%, driven by lower CapEx, higher EBITDA And partially offset by our higher restructuring costs and cash interest paid. Our balance sheet remains strong as evidenced by our Successful multi tranche 1,750,000,000 debt offering in September, including our 5th sustainability linked bond, Which contributes to TELUS position as the largest SLB issuer in Canada. The average cost of our long term debt stands at 4 point In addition, we have our long term debt to maturity of 12 years and our ratio of fixed to floating is at 85%. As we progress through the seasonality, competitive final quarter of 2024, we remain in a strong operating and financial position.

Speaker 4

Today, we reconfirmed our 2023 financial targets. Our positive outlook reflects the confidence we have in our business Our outlook is further supported by our significant investments in our cost efficiency, which we are expected to begin yielding more notable savings in the 4th quarter And well beyond. Furthermore, our go to market strategy remains consistent in prioritizing strong economic and financial outcomes, Including EBITDA and cash flow accretion balanced against the focus of profitable customer growth. With that, I'll turn it back to Robert.

Speaker 1

Thanks, Doug. Mihai, we're ready to proceed with questions, please.

Operator

Yes, of course. First question comes It's from Maher Yaghi from Scotiabank. Please go ahead.

Speaker 5

Great. Thank you for taking my question. Darren, can you provide some context around your wireless net adds in the quarter? I mean, I ask Just because your numbers were strong even though you stayed the path on handset financing, sitting at a higher price point than your peers During the quarter, so what is it that allowed you to hit these numbers? And just as a follow-up on ARPU, You indicated that you expect ARPU to improve, Doug, next quarter.

Speaker 5

I'm trying to just understand What are the reasons behind the deterioration that we saw in Q3? Is it like mix shift, lower overage or general decline in pricing across the different price points? Thank you.

Speaker 2

Given that it's his last investor call, I'll give Jim the opportunity to hit the ball out of the park on this one as it Relates to not just the loading answer, but the ARPU and the AMPU answer. Why don't you tackle both, Jim? Thank you.

Speaker 6

Firstly, I want to thank you, Darren, Zanehl and Doug and TELUS. I'm completely humbled by the words today. I really appreciate that. So despite the highly competitive environment, we saw strong customer growth And accelerating AMPU or margin in the quarter. We had our best Q3 mobile phone Net, so we were up 10,000 year over year, and that was driven largely by the new to Canada loading and strong bundling.

Speaker 6

But also we had best ever connected device additions, which bodes well for future ARPU. And we do expect Improving ARPU going into Q4, and that's really being driven by 2 things. 1 is our step up programs are gaining momentum and Compounding and we're lapping aggressive rate promotions from last Q4. So when you look at the loading, we are seeing and expect to see And though that growth is lower in ARPU, it's predominantly coming In our public and Kudo brands, which are heavily digitized and have a lower cost to serve, when you look at it, public mobile, Which we're excited about public mobile, but public mobile has no retail commissions, no call center costs So no subsidies. So we're getting we're tapping into that volume, but our costs are coming down with that lower ARPU profile.

Speaker 6

We also are doing well and expect to continue to do well from bundling, which is driving great household churn outcomes, Not just for mobility, but across all of our products protecting both our wireline and wireless, and they also come with The characteristic of lower device subsidy as Zainal talked about earlier. The combination of the subsidy discipline, Bundling and digital customer experiences are driving the meaningful EBITDA flow through and cash flow. And as Zaneul mentioned earlier, our device subsidy is declining at a rate 3.5 times faster than ARPU. So In Q3, when you look at it, our device subsidy per subscriber declined by $1.05 year over year, which is quite a dramatic number. And we expect this to continue along with the growing pre owned device volumes that we're seeing.

Speaker 6

So yes, So we're getting that growth in the Newcomer segment and through our bundling. A lot of that growth is coming Without a device, but we're keeping our churn down through the bundling and the intensification across our product lines. And that lower device subsidy combined with the operational efficiencies is resulting in mobility direct margin growth that is Significantly outpacing our revenue growth. So we have a nice dynamic happening there, which is tapping into where the growth is Coming from but also driving down device subsidy and our operating costs so that we're getting the volume, but we're also getting the margin as well. And I'd say from an outlook perspective, we expect TELUS to continue to prioritize profitable loading over volume.

Speaker 6

Our ongoing focus will be AMPU. And as an example, we continue to drive step up to 5 gs and 5 gs plus plans to unlock device promotions. And then finally, I'd say, we see promising revenue growth in the future from all the connected devices and IoT I believe there's even more future upside on 5 gs business applications, especially in this world fueled by artificial intelligence and automation. So net net, we're tapping into where the loading volume is coming from. We're driving the cost down, And we're very focused on Amput.

Speaker 2

Thanks, Jim. I think that covers it very, very well.

Speaker 5

Thank you very much.

Speaker 1

Thanks, Meyer. Next question please, may I?

Operator

Yes, of course. Next question comes from Vince Valentini. Please go ahead, Vince.

Speaker 7

Did I hear correctly that wireless EBITDA was up 4.2% year over year this quarter or was that Some other metric.

Speaker 4

Hi, guys. It's contribution margin. So in our financial statements, we disclose as part of segmented info The direct contribution, so that would be revenue minus, call it, direct costs. It does not include the allocated costs below direct margin.

Speaker 7

Okay. Thanks, Doug.

Speaker 2

And that's up 35% versus the revenue component in terms of the margin growth.

Speaker 7

That part, Jared. Thank you. And I want to ask, I mean, you are going to painstaking lengths to give us a lot of metrics To show how good the profitability is and I fully agree these all digital brands can't be judged just on ARPU, if the profitability is good. But why give us so many metrics when every other company just gives us one simple metric called EBITDA and then we can see how well you're doing in terms of EBITDA growth versus revenue growth.

Speaker 4

We continue to drive synergies and rely on our bundled products Within our wireline and wireless environment, and when you can actually do co selling, co operations and co customer Service in each of those streams, your overall cost structure comes down on an integrated area. And so when we Brought wireline and wireless together on a consumer and business level. Years ago, we've been monetizing those benefits and providing better customer touch points. So we actually don't go down to that level on an individual product level anywhere.

Speaker 7

Okay. And just to make sure we're clear, the guidance on ARPU for the Q4, you're not saying ARPU will be up from Q3. What you're saying is the rate of year over Your decline will improve versus the 0.5% we just saw in Q3. Is that fair?

Speaker 4

That is correct.

Speaker 7

Okay, perfect. Thank you.

Speaker 1

Thanks Vince. Next question please, may I?

Operator

All right. Next question comes from Jerome Dubreuil from Desjardins.

Speaker 8

Hi, thanks for taking my questions. The first one I have is coming back to Darren, your comment about the payout ratio in the future trending toward the lower end of your comfort zone. I think it was 65% to 75%. Just want to confirm that this does not include any DRIP going forward. And then related to that, maybe for Doug, what are the Maybe free cash flow implications for next year, not asking for guidance, but maybe directionally in terms of The items we don't think about too often like cash taxes and interest rates, and what would be these assumptions Behind that payout ratio comment.

Speaker 2

Okay. So, the ratio is not 65 to 75, it's 60 to 75 in terms of the payout ratio on the cash front. The comment that I made indeed I indicated specifically in the quarters and years ahead that we expect through our EBITDA growth That we will be delivering complemented by our significantly moderated capital profile That we will be pushing on the bottom end of that range, particularly when you do the calculation on a prospective Basis. So you can do your calculations in terms of our 7% TTEC EBITDA growth this quarter Our reconfirming of guidance for the full year, and where you think we would be shooting for in terms of EBITDA Guidance in 2024, if you run those numbers, we would be hitting or falling through The lower end of that payout ratio range of 60%. And the point there, of course, is that, That bodes well for the affordability of our 7% to 10% dividend growth model.

Speaker 2

It also is indicative of our confidence in the free cash flow picture for this organization. We don't just expect to see significant free cash flow growth in 2024, but beyond 2024 as well. And we see that as a synergistic combination with the affordability and the expansion potential expansion of our dividend growth model. Finally, in respect of the D DRIP, our view here within management is that It's a necessary mechanism at the present point in time. We look forward to the future of turning that D component of the D DRIP off given the free cash flow expansion strength of the organization And what it portends for the strength of our balance sheet.

Speaker 4

And maybe just adding to the capital and EBITDA that Darren covered. The next three main ones will probably be handset investments on renewals. And I would say we don't see a Material change in that going forward. It would be cash taxes to your point. And again, I think there'll be no surprises on that front.

Speaker 4

And then restructuring, and I think the only item to highlight is there probably be some of the restructuring that we've executed this year or where the cash will be paid out next year. And when we give out guidance, we'll be clear on The cash versus expense component to free cash flow next year, but other than that, I would say it's very straightforward and clear as Darren discussed.

Speaker 2

And no repeating of union payments. Correct.

Speaker 5

Great. Thank you.

Speaker 1

Thanks, Jerome. Next question, please.

Operator

Right. Next question comes from Drew McReynolds from RBC. Please go ahead.

Speaker 9

Yes. Thank you very much. Good morning. 2 for me. First, maybe for you, Doug, just on the cost savings That were actually realized in Q3.

Speaker 9

Obviously, they will ramp up in Q4. So just wondering if you could A highlight for us just what percentage we did see here in the quarter? And then secondly, in a bigger picture question, maybe for you, Darren, you've alluded to the transformation period that the industry is in. It's probably always in some kind of Transformation period, but would love to get your just high level view looking out 3 to 5 years on Kind of where you see the major changes in the industry, whether it's competitive regulatory technology. And Why I'm asking this question is, it looks like your playbook differentiates itself from your Canadian peers.

Speaker 9

And when I think about the contributors to growth that Equity shareholders want to see, maybe you have a different Definition of where those growth drivers come from over that medium term. So just at the high level, I'd like to get your updated thoughts on that one.

Speaker 2

Okay.

Speaker 4

Go ahead. Go on savings first. Yes. On savings, it would we'll be at full run rate as we suggested by Q2 of next year. I would say we will probably exit the year a little greater than 50% to 60% And in quarter then, if you prorated it backwards, it would be substantially less than half this quarter and approaching an exit rate of Above the halfway run rate in Q4.

Speaker 5

Thank you.

Speaker 2

We really appreciate that Tight question that you gave me on a first booking basis. Let me just try and Tackle this efficiently. I think the investments that we've made on the broadband front, both wireline and wireless will be key in the years ahead, Leveraging whatever the environment at that juncture will entail. For sure, Our goal to commercialize and monetize those investments is going to be key. So when I look out, I look at 5 gs and to date beyond Faster speeds and bigger buckets, it's not really delivered on its promise on the productization front, Particularly within the B2B and B2B2C space, I am cautiously optimistic that over the years ahead, the product We're optimistic that over the years ahead, the productization on 5 gs is going to be a big value generator for our business because it's going to be a big factor within the private sector, the public sector And Consumer Lifestyles.

Speaker 2

I think with that also comes the massive opportunity because of the data volumes generated For the data analytics commercialization and data monetization opportunity. So, I just see that as being massive. On the wireline front, I think it's all about economies of scope. When you spend $7,000,000,000 Positioning fiber, I think the goal is how many differentiated RGUs that are meaningful to clients Can you deliver over that particular mechanism to get the desired ROI, Which is why you see us going from voice and data and entertainment into the areas of into the areas of health, into the areas of energy and home automation on both the wired And wireless basis. TELUS launched a strategy 23 years ago saying that the future was all about data Both on wireline and wireless, and I think it's true or more true today than what it was 23 years ago.

Speaker 2

And how well do you position yourself for that Digital Revolution and leveraging everything from legacy AI opportunities to generative AI opportunities. And I believe that they are truly profound within both our telecom business and our emerging business. And they're profound because they can help us on the customer service upfront, better service for less money spent. They can help us on product development, New sources of revenue, they can help us on what we need to do to materially reduce our cost base. So our story of our margins growing 35% faster than our revenues isn't a story that's isolated to Q3 2023, but a story that's indicative of what happened over the next 5 years.

Speaker 2

And we got to be an organization through TELUS and TI That's out there helping our B2B customers with their digital and AI transformation journey along the way. I also think people look at the sector plays that we've made on agriculture, consumer goods and health, those are really just data plays. They're A digital thesis in action to drive value creation to leverage the advent of these capabilities and what they're going to mean In terms of driving better health outcomes, better food outcomes along the way. As it relates to the regulatory environment and God forgive me for saying this, but I see over the longer term The environment moderating. I think a lot of the goals that the federal government As had on the regulatory front have effectively been answered.

Speaker 2

And I think this is an era To allow free market forces to determine competitive outcomes, not regulatory Or government intervention. I'm not saying that it's going to go away. I believe strongly that it's always going to be there. But I believe that on the whole, The regulatory environment of the future will be more moderate or benign versus what we've seen in the past. And if you look at whether it's the competitive landscape, the number of offerings that are out there in the competitive landscape, the number of competitors Ori, if you just want to go down to the key metrics like has the affordability objective been achieved?

Speaker 2

Well, There's one hell of a dichotomy right now within the Canadian landscape where if you look at the magnitude of General inflation on the CPI front, it's a non trivial number and you can see You know what, federal governments around the world are doing as it relates to quantitative tightening. On the flip side, Prices on telecom have come down appreciably to the tune of like 17% to 20% within the wireless industry alone. So, it is quite a Deflationary, inflationary dichotomy as it relates to telecoms versus general goods and services along the way. And then lastly, I think the organization that best executes the technology play Does it with the best culture of execution and the best customer centricity, manages its cost base Really well, and finds the type of sustainable sources of growth that you see within the complexion of the TELUS portfolio And bundles those solutions in a way that's very elegant and meaningful to clients, I think that they're going to win. And so, That's the best I can give you on a concise basis for the purposes of this call.

Speaker 2

Thanks,

Speaker 9

Darren. Thanks, Darren.

Speaker 1

Thank you, Drew. Mihai, next question please.

Operator

The next question comes from Stephanie Price from CIBC World Markets, please go ahead.

Speaker 3

Good morning. You posted solid Internet net adds in the quarter. I'm just curious about what you're seeing in the West in terms of competition, but also what sort of contribution your non Western footprint

Speaker 2

Okay. Maybe after my last answer, I'll hand it over to Zane To do this one, Stephanie. Zane, go ahead.

Speaker 3

Thanks, Darren. So Stephanie, I think it's Important to highlight that what we're seeing in the West is pretty consistent. Our value propositions are resonating. We're continuing to drive bundled economics and bundled households as we've talked about. And as Jim reinforced as well, that's giving us some retention momentum that serves us well on the net adds.

Speaker 3

Momentum that serves us well on the net adds front. And there are areas that we're continuing to build new Fiber capability, even though our CapEx is declining, there is still some fiber new footprint as well as tenured footprint that we're growing into. And we're seeing a lower sort of rate of or a higher rate of occupancy across Cross footprint, so that's continuing to add to growth as well. I would say that the Eastern side is Humble at this point. We're really looking at that in terms of we've been providing home security and automation Nationally for several years now, in some areas, having a solid Wi Fi and High speed service is the backbone of that.

Speaker 3

And we're also seeing bundling economics helping us With wireless base management in those areas as well. So we'll continue to look at that and again really focus on Profitable net growth based on the rate at which we're able to access facilities as well as the bundling economics of the base. Thanks. And then maybe just one other one for me, just on TELUS Health and its trajectory now that the rebranding has been completed. It looks like revenue growth was solid in the quarter and it was obviously very strong EBITDA growth.

Speaker 3

How should we think about the changes you're implementing in the business to drive growth and the trajectory here?

Speaker 2

I think there's lots of opportunity within the TELUS Health arena. I think we've spoken at length on the cost synergy front and provided on the $327,000,000 cost goal alone within the $427,000,000 envelope, Stephanie. And we've already realized $194,000,000 of the $427,000,000 goal along the way. The revenue and the cross sell funnel is voluminous in the TELUS Health space. All of our products are hunting well within all of our theaters of operation Canada, the U.

Speaker 2

S. And Europe. And I'm particularly bullish about the opportunity specifically within Employer Health Solutions, Both at the physiological level, but also at the mental health level. And it's not just the remediation component of that, but what we can do to Promote and optimize wellness from an employer health perspective, which fits beautifully with our Existing thesis on workforce productivity. The AI From legacy degenerative AI opportunity in TELUS Health is extremely attractive.

Speaker 2

I talked about FuelIX on TELUS International and what we're doing with external clients. But TELUS and TELUS Health Are also buyers of Fuel IX in terms of what we can do to leverage our data thesis On steroids within TELUS Health and monetize that on a very, very attractive basis. And it's all within the field of durability within the primary care ecosystem or dealing directly with employers along the way. And we set a goal for how fast and how significant we want to scale this business into an asset Of consequence, and so the task that management has set for itself is what we call our 1450 program, where we're looking to take our monthly EBITDA within TELUS Health From the low $20,000,000 to $50,000,000 over the next 18 months, that's an exciting program. It's going to be driven by revenue growth through new product opportunities, new markets and cross selling as well.

Speaker 2

It will also be significantly aided and abetted by our efficiency programs. But when we accomplish this particular program And get to that $50,000,000 per month level or $600,000,000 on an annualized basis with the CAGR that would underpin it. I think the valuation implications are relatively obvious and We are certainly excited by those and that's the type of aspiration that we've got for this asset And I think it's doable.

Speaker 3

All right. Thank you very much.

Speaker 1

Thanks, Stephanie. Mihai, we have time for one more question, please.

Operator

Yes. Last question we have in the queue comes from Simon Flannery from Morgan Stanley. Please go ahead.

Speaker 10

Great. Thanks very much. Thanks for fitting me in. Just a couple of follow ups on 5 gs, if I could. You talked a bit about the opportunities here, IoT and other things.

Speaker 10

One thing we started to hear from the U. S. Carriers more is a lot of interest in private networks. I was just wondering to what extent are you starting to see those deployments start to gain And then the other thing we're seeing a lot in is fixed wireless in the U. S.

Speaker 10

How are you thinking about using Follow capacity in 5 gs outside of your wireline footprint as a potential broadband alternative for bundling with your wireless service? Thanks.

Speaker 2

Simon, that's a very, fortuitous question to conclude with. So I want to thank you, for it. Navin, fastball down the middle of the plate for you given the traction that we've got on the private wireless network front. So I'll hand that one over to you. And Tony, why don't you talk about FWA and How we leverage that capability within our connectivity portfolio in terms of making smart choices on connectivity and the economics associated

Speaker 11

Yes. Thanks very much, Darren and Simon. Thanks for the question. So we've actually had Significant success and had meaningful progress when it comes to commercializing a number of our private wireless network opportunities. Really, given our superior network leadership, we're very bullish on leading the market across all our segments when it comes to this important product We have a large funnel of opportunities to provide solutions and they Support critical use cases across many industry verticals.

Speaker 11

And interestingly enough, Lots of ESG related use cases to drive environmental efficiencies as well as worker safety Through autonomous vehicles, robotics, video analytics and security and safety device type applications. And while we're talking about monetizing 5 gs, as you saw, we had record loading on connected devices this And a lot of what we're doing with connected devices bodes well for the future. And as We build out greater industry solutions use cases. We expect Acceleration across that 5 gs monetization capability. So specific areas would be Smart Building Technology Solutions, you may have read the release.

Speaker 11

And of course, in Darren's comments, we talked about flow as an important new customer, new win where we've installed we're in the process of installing 50,000 intelligent electric vehicle chargers across North America. Previously, we did something similar with Jolt, up to 5,000 EV charging stations here across Canada. So and then lastly, we've got a lot going on when it comes To Smart Cities as well. So this will be an important developing story and an important contributor to Arbuh, as we move into 2024. So back to you, Darren, and then over to you, Tony, I guess.

Speaker 4

Thanks.

Speaker 2

Go ahead, Tony.

Speaker 12

Thanks, Taryn. Simon, great question. The what you're seeing in the U. S. With the millimeter wave fixed wireless access, it's something we're excited about as a capability, not yet available in Canada as the spectrum hasn't yet been released.

Speaker 12

But ostensibly, we would see broadband connectivity leveraging pure fiber where economically feasible as a first choice is By far and away the best technology to deliver a broadband experience or a wideband experience, if you will. We would leverage our 4 gs and 5 gs mobile assets For mobile broadband connectivity, and we have been using our mobile spectrum To support wireless high speed Internet in some remote and rural areas, and that will continue to be an edge And then when the fixed wireless millimeter wave spectrum becomes available, That will be probably the final piece in the connect of the jigsaw puzzle, if you will, Excluding LEO satellite service in areas where that plays a role, we would leverage fixed wireless access As one of our connectivity network measures to drive the widest possible extensible broadband coverage We can get and of course, in some of those areas, you're going to be we'll be leveraging government subsidy where it's available, as we've been doing very successfully for the past few years in remote and rural communities. So really, it's a mix of those technologies, Simon, and we would see it will have a role to play. It will extend fixed network areas where maybe the geography All the cost in a certain particular terrain is prohibitive, and I'll allow you to get that coverage.

Speaker 12

It will allow an attractive urban infill in certain circumstances, Tactically, you may want to deploy this in advance of a build that's ongoing. So we would expect to be utilizing the capability as soon as spectrum is available.

Speaker 4

Great. Thanks for the color.

Speaker 1

Thank you, Simon, and thank you everyone for joining us today. Please feel free to reach out to the IR team with any follow ups you may have. And with that, Mihai, back over to you.

Operator

This concludes the TELUS 2023 Q3 earnings conference call. Thank you for your participation.

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Earnings Conference Call
TELUS Q3 2023
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