Okay, welcome back, everyone. Thrilled to have Doug French here. I think many of you in the room know who Doug is. He's the CFO of TELUS. Doug, welcome. Thanks for coming.
Thank you.
Look, I thought we'd start with the capital allocation question. It is very topical with investors, given the current interest rate environment. You know, you've made some changes on free cash flow or whatnot. Maybe just give us a big picture how you're thinking about capital allocation and ultimately the dividend growth model that you've been you know executing on for so many years now.
Absolutely. Thank you. So just our free cash, our free cash flow change that we made was all related to the restructuring initiative that we had announced last quarter of approximately 6,000 team members. And it was across the board between TI, finalization of some integration costs, cost rationalization with digitization, and the competitive environment and regulatory environment as an overtone. So, 100% of it was related to that. It's actually a little less than that. We actually backstopped some of the free cash flow impact of that with our operations, so part, it wasn't a one-for-one on the cash flow impact. But when you look back through, what that will generate is our confidence level in long-term free cash flow.
So we've decreased our capital guidance this year and highlighted that it's gonna be approximately that next year and beyond, so or potentially going down. And so between the two of operations cash flow, more efficient and effective through the restructuring reserve that we had, restructuring program that we had done, our confidence in our product sets and our growth, we are very positive on where our free cash flow is going and why we have confidence that our dividend growth initiative will continue. We still have a year or two left in our initial one, and we have confidence we'll be able to do that in a very strong way. Our capital allocation hasn't changed.
We focus on the three legs, one being your current invest in your business, where it's appropriate to do so and make sure you're relevant and executing for the future. Dividend return and shareholder return would be number two leg, and then number three is a strong balance sheet in ensuring that you have the right cost of capital and debt as you make those investments in the next step. So hasn't changed, and our confidence in this restructuring has actually helped in making sure that we leverage all of our tools and our investments to date for future margin profitability.
Maybe just as a segue, can you frame your leverage targets and the progression on how you hope to achieve those? What drivers you see on that respect?
Yeah. It'll be probably two or threefold. One, first would be EBITDA growth continuing to grow, and making sure we have the investments in our product sets to do that. When you looked at the investments we made in digitization, as an example, and the margin that came with that, as we've highlighted numerous times, the only telco that didn't go negative EBITDA during COVID was because we were leveraging our fibre enhancements, the efficiencies of fibre, leveraging our digitization and the efficiencies of digitization. So continuing to take that to the next step is gonna help significantly down that path. We then look at some of the, call it regulatory impacts that have happened in the past on spectrum auctions.
They should be a little bit more favorable with the spectrum cap, and no set -aside, so that, you know, for the first time ever, certain people are paying fair market value for spectrum and not receiving the subsidy. But that will be a little bit more balanced because there's more spectrum at the table as well. Same with millimeter wave. When it comes, there's enough spectrum for all. There really shouldn't be overpaying, let's say, paying to the past, that we paid the highest spectrum costs in the world.
Mm-hmm.
And so I'd expect both of those to be more rational. And then, as maturities come forward, we have the option of do you just pay down debt? Do you refinance? And what do you do on that allocation between, shareholder return investments and, and, dividend or, yeah, shareholder returns, debt reduction on/or investments in the business? So looking at all three of those into the future, 'cause we will have optionality, as we look forward.
What sort of targets are you hoping to get?
We'll keep delivering, and I would, I'd say we'll be with the spectrum auctions this year, we probably end up with millimeter wave and 3.8 GHz in 2024. Having to pay for both, we would expect probably in the lower 3s GHz as we progress into 2025, but I would say, we won't be back into the 2s GHz , I wouldn't think, till 2026.
Okay. All right. Look, there's been some pressure at one of the businesses, TELUS International, and there is, you know, I think, some concern among the investment community with respect to how that will play out for TELUS Health, and down the road, TELUS Ag. Maybe do you... Just refresh everyone on how you're thinking about those sort of non-telco businesses, given what's happened at TELUS International this year.
Yeah. So I would say the macro impacts on TELUS International has not impacted our vision and strategy of where we're headed on Health and Ag. TELUS International, you know, a lot of learnings came from that, which are good, and the main one being customer concentration. And when you look at the macro impact that happened to a lot of the hyperscalers, which were two or three of their largest customers, including, and TELUS being, you know, one of the others. When they had to downsize and the downsizing to TELUS International happened, that industry was also really focused on revenue. And as free cash flow became more and more important to that industry, we all know that that industry was hit a little bit harder than the others.
That being said, TI is a great funnel. They're great product sets. They're evolving to more and more customer service, which is AI-driven and digital-driven, more bot development. So helping companies evolve to what TELUS has been doing from pure, people answering phones to a digital end-to-end experience. And when you can develop and, and implement, those solutions, you become relevant for everyone around the world, both in agriculture, healthcare, telecom, and other industries. So, their funnel's strong. I think they're going through a customer diversification as we speak and, and building that funnel with new, new logos. They are very important to TELUS. They've been our, our biggest outsourcer and an amazing partner on helping us get to where we are.
And so there's been a significant win there and a lot more to come as we look through that component. On Health and Ag, very different. We have to obviously learn on making sure we don't have the concentration they had. But beyond that, it's all going to be, again, right time, and the right growth rate. So you have to earn the right to bring in partners. You have to earn the right to go public. And we've got a great path and trajectory for health, being it's more international based now as well. Employer-based healthcare is becoming a way of life around the world, as most governments can't afford healthcare when your GDP it's over 50% of your GDP in most company or countries.
And so as we've developed that and developed it internationally, we do see significant growth opportunities. So we're not just capped by 40 million Canadians. We're actually offering our services around the world now to the billions and billions of people around the world, in an area that's needed more today than it's ever been. And some of the mental health applications that we're launching as well, again, extremely important. When you're on wait lists of three, six or nine months to see and get mental health treatments around the world as well, having some automated tools that at least get you some quicker solutions and recommendations is essential. So I see that one being good trajectory, market condition relevant.
You could, you could bring in a partner, you could go public, but at the end of the day, we have to earn the right to grow. We have to earn the right to show you the value that comes from that, which I think is gonna be more and more evident in the future. And the same would apply for Ag. Just I think Ag is a little bit behind now on scale, as it had a little bit more headwinds, but they are really application and data companies. So when you think of where the future's going on application, data, insights and AI, perfect partner for TI as well with both of those. So that's how I would see it going.
I'd see health in the sooner to trigger some of those events, but again, they have to be right growth rates, right leadership team. I think they have the right strategy. It's just making sure the positioning and the market conditions are relevant or right at the time.
And so the kind of template that TI set in terms of a path to a monetization event, we should still sort of hold TELUS Health to that kind of frame?
Absolutely.
Yeah.
Absolutely, and I'd say it'd be a year to two years ahead of Ag.
Okay.
At the moment.
Yeah. Back to your comments on the balance sheet, managing the balance sheet. I mean, certainly in TI and in Health, you have been fairly active in M&A. Is it fair to say that you're... We should expect you not to be that active in terms of, going forward?
We're still gonna be opportunistic in our M&A as appropriate. You can bring in, do an M&A transaction and bring in a partner at the same time. That could also be it, where you issue shares of TELUS Health to become them to becoming your partner. But we don't want to starve the business back to that one leg of invest where appropriate. That being said, at higher interest rates, you have a higher hurdle rate and a higher bar. So making sure that you actually align those acquisitions and the expectations of profit, the expectations of generation of free cash flow as well. So would we be as many J-curve type investments that we did to get off the ground? No, unlikely not. That would not happen.
But is there still potential for more scale, more growth, more product? Absolutely, there is, and the right structure and the right price.
Okay. Let's shift and talk about TELUS Corp, the, for lack of a better word, the legacy telco business. A lot of changes in the marketplace, given transactions and whatnot, what's your assessment of the competitive environment out there?
I would say it's been very intense. I think both wireline and wireless have been, I'd say, more competitive and more volatile than I've seen for a long time. I think the last little bit stabilized again. So, it's not getting continuing to be surprised every other day. But it has been pressurized. And I think you would expect that, you know, when the regulator had to approve the acquisition, and, you know, there were promises made on reducing prices, you would expect this. And we sort of talked about this even a year ago, that we would expect some initial intensity in the market, as a new entrant, Videotron gets established and as Rogers -Shaw gets integrating.
Some of the bundles that are currently happening are also, you know, leveraging the new customer set that Rogers -Shaw has. And so there is intensity across the board. I think we continue to do what we've done best. We focused on our bundle, focused on the best networks, best customer service and economics. And high ARPU isn't always, you know, the driver of economics. You can do very well, and our Public example is a good one for that, where, you know, we're 100% digital, so no phone, no customer service, no hands-on activation. So you're substantially, it's the cost of your network is the only cost to that business. So in doing that, obviously, you're now getting higher margin and lower ARPU.
Making sure you bring in that relevancy depending on what the market needs, where you can still generate economic value across the board. That's really been our focus, is play in all areas, focus on economics, don't chase loss leaders, but make sure you're relevant across the spectrum of the price continuum.
We're kind of through back to school now. What's your assessment of the promotional activity, and how did TELUS fare through that important season?
Yeah, I think we fared very well. I think you've seen us make sure we haven't gone to the finance floor that our peers have. So expect a little less on the network or the handset revenue, is that we haven't been matching the floor on that front. To get a handset renewal with us, you're a little bit higher on the Koodo front and or the T Brand front. Showing the value prop of, you know, a CAD 2,000 handset being financed at these interest rates comes with a cost. So you go too far down that finance floor, you don't make money on that customer.
And so when I say focus on economics, we're focusing on the balance between ARPU and the cost of those handsets and the financing that comes with that. So I would say you're still seeing great momentum in Canada with growth and immigration. I think we're doing very well in the multi-tier of products, right from Public to Koodo to TELUS, focusing obviously as much on TELUS as possible, but leveraging the other tools where appropriate and then leveraging our bundle. We've got the most product-intense organization in Canada. When you throw in the fact that you can bundle Health and Ag with our wireline and wireless services, that if we're running your pharmacy or running your doctor's office, or providing you EAP to your business, why wouldn't you consider us for your telecom services concurrently?
So you can actually end up bundling not just your typical security, TV, et cetera. You can actually bundle those other product sets, which has been very useful for us, and you don't have to be quite as aggressive on matching every single price for that day. Pressure on ARPU is definitely going to continue to be there. I think you've seen a lot of the CAD 39, CAD 40, and CAD 45 pricing, so I expect that to continue. But I would say we're very happy with our continued momentum.
You know, you've mentioned it. You – there's such a focus on the bundle. How is, you know, in your core market out west with a new competitor and an ability to bundle? I mean, there's an expectation, I think, a reasonable one, that Rogers will be a better, you know, a better bundler, if you will, from that perspective. What's your sense of the marketplace early days out there?
Yeah, early days, it has been impacting pricing a bit in the West, with that bundle. A lot of the customers are bundling, though, were never TELUS customers in the first place. So if you think a wireless customer that didn't have TELUS in the West, odds are they're with, you know, Bell or Freedom. And so that kind of bundling is more the... Or Rogers themselves, that they're bundling between Rogers and Shaw. And so you're seeing a little bit more of that. And so we're still holding very well. We have, you know, an intensive fibre footprint and continuing to finish that and yes, so smaller scale, 'cause we're way down the pipe, but that product superiority is also doing very, very well for us.
You can't beat, you know, a fibre connection. You can't beat the best wireless network in the world. You can't beat our best security and the most scale we have on security. And some of the new offerings we're bringing to home automation, self-install on TV, are fantastic from a cost structure perspective, but a customer experience concurrently. So you can plug and play, easier than you've ever had before, without having a truck roll, without someone in your house for four hours. So, all of those items are contributing very well to that. But I would say again, it's been a little bit more pressure on the price side. I think we've seen reductions in that bundle of our competitors of CAD 30-CAD 40 compared to what it was prior to them buying Shaw.
Any questions from the floor? So following up on that, I mean, one of the things that I think investors have taken note of, notice of is some language from the regulator. Can you tie maybe your strategies into what you're thinking about with respect to, I guess, the wholesale review? I know there's not a lot of wholesalers out west, but and also the current language around MNOs. How does TELUS think about the regulatory landscape as you, you know, push forward these initiatives?
Yeah, I think, in the past as up till that overtone, it's always been investment-based pricing and investment-based infrastructure in Canada, which has gotten us to why we have one of the most covered countries in the world from a wireless perspective, right up to 5G, and why we have some of the best fibre networks in the world. That thesis was there. But I think the investment thesis, when you think about, you know, how we invest in Canada, it is not just infrastructure, it's people, it's jobs, it's everything. And so I think as we look forward, I think, you know, the wholesale rates have to take into consideration, I would believe, that, you know, we, we've invested in fibre that doesn't... It has a long payback period, a long life, but a long payback period.
So, you know, they need to consider that you have to get a return on that asset, or at least break even before you would consider more assertive rates from a regulatory perspective. I think that is a practical solution that they should be thinking through. I don't see them going far off that path, to be honest. I think it's dangerous. You look at all the job impacts already, you think of, you know, the integration that's happening with our peers, et cetera, there could be material job losses, and to compound that would be even worse if the regulatory environment went too far beyond that tone. I'm thinking it's still going to be connectivity matters.
During COVID, Canada was one of the most productive countries in the world because our connectivity was so strong, that we've got connectivity in a lot of areas, and there's still a lot more to do, don't get me wrong. A lot more to do. But, having digital leadership, I think is an asset. Having connectivity to areas where you can live anywhere, when housing is a problem, and limitations, would mean you need strong networks. And so putting that at risk, and there's tons of examples throughout Europe where, when you've tilted too far, wireline and wireless networks are horrible, absolutely horrible, and they still haven't recovered yet. For any of you that you travel throughout parts of even the U.K., their networks are not good.
And it started off with a regulatory environment that went too far down the path. And so, I think it's still gonna be very balanced, and we will react accordingly.
Right.
There's been tons of regulatory involvement. We paid the most for spectrum in the world and still bringing cost pricing down. And so, we will do what it takes, but, we think it's in Canadians' best interest to invest in Canada, invest in jobs, and make sure we have that best digitization around the world.
Right. Now, you've already moved in some respects because you did undertake a company-wide restructuring. Maybe put that in perspective for folks in the room about how, you know, what will investors see out of that restructuring program you put through?
Yeah. So we had a run rate savings of about CAD 325 million from that restructuring. Majority of that being in TTech, because the TI restructuring has a little bit less of a, call it attach rate to it on dollars. We expect that to be fully completed, you know, by the end of the Q4 and first part of Q1, so we expect a good run rate. By the time you leave Q1, 2024, a good run rate on that CAD 325 million. It's leveraging our assets, so leveraging fibre and the fibre efficiencies that we've always talked about, less truck rolls, less calls to your call center, leveraging digitization. Looking at the competitive environment and saying, you know, you have to have a more streamlined cost structure. So how can you leverage AI more?
How can you leverage those digital assets more by preparing, that, you know, things are different today than they were, and I think we all feel it a little different in that, ARPU's no longer 1%-4% up. It's definitely under more pressure, so you have to be more efficient and effective. And so I think the shareholders will see that, that we've future-proofed a little bit concurrent with the utilization of what we've already spent. And you'll probably see potentially even a bit more in the longer run. I know TI continues to assess their situation, that, when you're a business supporting customers and people are related to revenue, if revenue is not there, then you're gonna have, you know, a bit more of that downsizing.
I still think it's gonna be a bit more. I don't think the same scale of what we saw in that quarter, but we'll keep managing it effectively, with all the right pressures on maintaining customer service, but being able to be competitive and effective in the current environments.
You know, on that topic, what is the message to shareholders, both TI shareholders, but certainly to TELUS shareholders, of how long-how patient do they have to be for a recovery to growth for TELUS International?
... I think, TELUS International, and they've put out their own expectations, but they're gonna continue to get better. I think they had hit, from everything we have seen, knock on wood, the bottom of the impacts. But they still won't be back for a little while. I would say they're gonna continue to creep back into their future state of growth. But they're working hard on margins, so back to ensuring they align that cost structure to the revenue component, where there was a bit of a delay. And they highlighted that it takes 90 days to rightsize your cost structure when your revenue goes away on day one. Things like that is what really they've been catching up on to ensure they have that continued trajectory.
So I would say continued improvement throughout 2023 and 2024. And when we put out guidance in early 2024, it'll be—will they be back to their state by the end of 2024? I'll have to wait till that announcement.
Great. One last chance. Any questions from the floor?
Doug, a couple of years ago, you had sold the financial services piece. Are there any assets like that, like non-core assets, that that's in your purview that you could sell in the near term?
Yeah, we as part of this last restructure have been going through all of our, call it, product sets and looking at what is core, what is not core, what should we not focus on and consider divestiture? There are components throughout, so to be—When you buy as many companies as we've done over the past two or three years, there's always a product or two or subsegment of an acquisition that really isn't core. And so we're looking at that as we speak. I think some of the larger ones we've been back and forth on include, you know, some of the ones that were in LifeWorks, but there's some in Ag, and some even in our TBS area that we're considering as we speak.
I would say, you know, I don't think there's any that would be any bigger than financial services at the moment, so I would think it would be that or smaller. But we're definitely looking to reprioritize and focus where what matters most, and some of those will start to happen in the near future.
Anyone else? We are plumb out of time. Doug, thanks so much.
Thank you very much.