Telus Corp Q4 FY2022 Earnings Call

Good day, everyone. Welcome to the TELUS 2022 Q4 Earnings Conference Call. I would like to introduce your speaker, Mr. Robert Mitchell. Please go ahead.

Thanks, everyone for joining us today. Our fourth quarter and year-end 2022 results news release, MD&A, and financial statements and detailed supplemental investor information were posted on our website this morning at telus.com/investors. On our call today, we will begin with remarks by Darren and Doug. For the Q&A portion of our call, we will be joined by Zainul Mawji, President, Consumer Solutions; Navin Arora, President, Business Solutions; Jim Senko, our Chief Product Officer; Tony Geheran, our Chief Operating Officer; Jeff Puritt, President and CEO of TELUS International; John Raines, President of TELUS Agriculture and Consumer Goods; and Michael Dingle, Chief Operating Officer at TELUS Health. Briefly, this discussion and answers to questions contain forward-looking statements. Actual results could vary materially from those 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., including in our 2022 annual MD&A. With that, over to you, Darren.

Thanks, everyone. Throughout 2022, TELUS achieved strong operational and financial results across our business, leading our North American peer group with respect to 2022 operating revenue, adjusted EBITDA, and free cash flow growth, along with most operating metrics. This is a trend that the TELUS team has consistently demonstrated over the longer term. Our robust performance in the fourth quarter and for the full year reflects the chemistry of our globally leading broadband networks and customer-first culture, driving our hallmark combination of profitable customer growth alongside strong financial results. Industry-leading telecom net additions of 301,000 represented our best fourth quarter on record and concluded another year of industry-leading expansion of our customer base. Indeed, in 2022, we delivered all-time record customer growth, surpassing total annual net additions of more than 1 million for the first time. This included another best-ever year for fixed subscriber growth of 274,000 and the highest mobile phone net additions for our organization since 2010 with 401,000 net new customers. Our industry-leading growth reflects the consistent strength of our operational execution unmatched by those product offerings across mobile and home, and a team member culture focused on delivering exceptional customer experiences over our globally leading PureFibre and 5G networks. Our team’s passion for delivering customer experience excellence has once again contributed to strong client loyalty across our key product lines, including blended mobile phone, PureFibre Internet, Optik TV, security, and voice churn, all below 1% for the year. Also for the full year, operating revenue growth of 8.6% came in above our revised guidance of approximately 8%, while EBITDA growth of 9.5% landed comfortably in the midpoint of our revised guidance range. Moreover, we achieved strong free cash flow growth of 64% for the year, exceeding our original free cash flow target. In addition, CapEx was in line with our target and reflected the final year of our accelerated broadband build program that has been considerably successful. Strength in our core telecom operations continues to be bolstered by continued strong operating momentum in our highly differentiated technology-oriented businesses: TELUS International, TELUS Health, and TELUS Agriculture and Consumer Goods. Let’s now turn our attention to the fourth quarter. TELUS once again achieved industry-leading operating revenues and EBITDA growth of 12.6% and 11.3% respectively. Looking at mobile, TELUS achieved strong customer growth of 218,000 net additions in the fourth quarter. This included healthy mobile phone net additions of 112,000, which was similar to last year. Notably, the strength continued to be driven primarily by growth in our premium brand, reflecting our consistent focus on profitable customer growth. It also included leading and record fourth quarter connected device net additions of 106,000, up 31% on a year-over-year basis. Importantly, our team delivered another quarter of industry-best loyalty results, which continues to be the hallmark of TELUS organization. Blended mobile phone churn was an industry low of 1.22% in the fourth quarter, reflecting a year-over-year increase as a result of the intensely competitive Black Friday promotional environment. Looking at our industry-leading postpaid mobile churn, this was once again below 1% in the quarter, indeed at 0.75% for the year and relatively flat over last year. 2022 represented our ninth consecutive year of industry-leading postpaid wireless churn below 1%. One key factor behind this consistent industry-best performance is the superiority of our world-leading networks. In this regard, in 2022, TELUS once again earned numerous accolades from independent third-party organizations. Notably, global analytics company Opensignal out of the UK recognized TELUS with five industry awards in the year for both our 4G and 5G networks, making TELUS Canada’s most awarded network by Opensignal for the 11th consecutive time. Similarly, TELUS was honored with three awards from U.S.-based Ookla in 2022, including being named North America’s fastest mobile network, according to results from their speed test. Moreover, Canada-based Tutela recognized our wireless network with four national awards for excellent consistent quality, core consistent quality, 5G excellent consistent quality, and 5G core consistent quality. Likewise, our wireline network also received praise, ranking it the fastest nationwide internet service provider in Canada amongst major carriers by PCMag for the third consecutive year. These acknowledgments clearly illustrate TELUS’ leadership in providing our customers the fastest, most expansive, and most reliable service in Canada across both our wireless and PureFibre networks. Moreover, this recognition of TELUS’ National Broadband Network leadership underscores the tremendous value of our generational investments in world-leading network technologies, including our now concluded accelerated broadband expansion program undertaken over the past couple of years. Importantly, these investments will continue to drive extensive socioeconomic benefits to Canadians in communities from coast to coast for decades to come. To close on mobile, industry-leading fourth quarter ARPU growth of 2.2% over last year was supported by roaming improvements as a result of increased international travel. It was also supported by strong performance on our premium brand, also supported by strength within our MRC, and of course, supported by our low churn rate keeping our premium customers. Notably, mobile phone lifetime churn and the revenue that we generate continues to be up in terms of lifetime revenue by 48% higher than our national peers, reflective of the critical combination of our consistent focus on high-quality economic customer growth and leading client loyalty. Now, let’s take a look at our fixed operating results, where TELUS delivered another quarter of industry best wireline customer growth. Our team achieved strong fourth quarter internet net additions of 42,000, up 5% on a year-over-year basis. We continue to drive strong growth in our TV product line, with industry-leading net additions of 17,000, relatively flat over the prior year despite modestly higher churn. Furthermore, residential voice was again a very positive story this quarter, with industry-low line losses of only 4,000, which was down 60% on a year-over-year basis and represents our best fourth quarter results since 2002. Notably, this reflects our momentum with respect to our product intensity or product bundling, if you will, and the inherent churn benefits associated with this strategy that are proving to be so successful for TELUS. Strong and leading security net additions of 28,000 further reflect our successful strategy of driving profitable customer growth and multi-product penetration. Overall, our robust industry-leading external fixed net additions of 83,000 represented our best quarterly wireline customer growth on record. These performance attributes reflect the strength of our unique and highly attractive bundle offers across our unmatched portfolio of products and services, products and services that are supported by our ever-expanding broadband networks, our leading customer-centric culture, as well as our strong and highly differentiated social capitalism attributes that truly underpin the strength of the TELUS brand and culture. Now, let’s take a look at our TELUS Health business. In 2022, health services revenue increased by 75% nearing the $1 billion revenue milestone, including four months of contribution from the acquisition of LifeWorks at the beginning of September. As we progress into 2023, we continue to focus intensely on integrating and scaling our global health operations to build the healthiest communities and workplaces on the planet. Notably, we recently united LifeWorks with TELUS Health under the TELUS Health name and one brand going forward, aiming to integrate the best of the global brand and culture from across both LifeWorks and TELUS. The expanding scale of our healthcare programs within our integrated TELUS Health organization includes covering 68 million lives, an increase of more than 47 million over last year. In addition, digital health transactions were up over 5% in 2022 to more than 580 million. Furthermore, we welcomed 1.7 million new virtual care members in the last 12 months alone, increasing our membership to 4.5 million, up 61% over the prior year. For 2023, we anticipate strong growth at TELUS Health, including solid organic growth as we continue to integrate and expand the business into an asset of scale and significant global consequence. This will be supported by our intense focus on crystallizing meaningful synergies of $200 million or more that we expect to drive over the next 3 to 5 years, inclusive of revenue synergies from cross-selling and $60 million in near-term cost synergies. Of course, TELUS International has a critical role to play to help us achieve these results and meet the targets that we have set for ourselves. Before we close on health, I am pleased to share the appointment of Sid Kosaraju as our President of TELUS Health. With more than 20 years of global experience leading organizations with a focus on innovative healthcare technology and services, Sid is exceedingly well-positioned to lead the ongoing transformation and scaled growth of TELUS Health. Indeed, leveraging his tremendous expertise, Sid will drive product innovation, distribution strength, and an engaged culture that puts customers first across our healthcare business. Myself and the executive leadership team look forward to supporting Sid and our TELUS Health team as we accelerate our transformational strategy of leveraging data analytics and dynamic insights to revolutionize access to advanced healthcare services, including preventative health and wellness optimization solutions, driving remarkable health experiences for the benefit of the clients and individuals that we serve in Canada and worldwide. The economic growth that stems from that will put us on the IPO trajectory that we all find so exciting. Turning to TELUS Agriculture and Consumer Goods, annual revenues of $354 million were up 24% in 2022 over the prior year. Through a combination of organic growth and the impact of business acquisitions in 2021, our team continues to integrate and grow this compelling global business. We are creating significant value as the leading provider of agriculture and consumer goods technology solutions around the world as we advance the sector’s efficiency and effectiveness, including food quality production, waste reduction, food and retail execution, trade promotion optimization, and doing it all through advanced data analytics and dynamic insights that help our customers from agribusiness to food retailing. In 2023, we look forward to strong progress and double-digit revenue growth in this business. Now, let’s take a look at TELUS International. Despite a challenging macroeconomic environment, this morning TELUS International announced strong 2022 results, including double-digit revenue growth, leading profitability, and robust cash flow for the full year. Indeed, TELUS International’s strong results and outlook also reflect the important relationship with TELUS as an anchor customer, enabling TELUS to deliver superior customer service excellence and power our digitization strategy, a unique relationship that significantly benefits both organizations and one that is expected to continue growing and realizing the success of that mutualism. TELUS International’s continued focus on profitable growth powered by an attractive end-to-end set of digital capabilities positions it as a trusted advisor for premier digital customer experiences and IT services for its over 650 global clients. Earlier in January, TELUS International consummated the acquisition of the full-service digital provider WillowTree, significantly bolstering TELUS International’s front-end development and design competencies, and importantly, unlocking unprecedented and deeply attractive cross-selling opportunities for both organizations. The transaction resulted in the addition of new marquee customers that further diversify TELUS International’s enviable list of client partners. Importantly, TELUS International and WillowTree also support the acceleration of TELUS’ ongoing digital transformation and key product development across the totality of our business, but in particular in health and agriculture and consumer goods. Doug is going to provide further commentary on both TTEC and TELUS International’s fourth quarter results in just a moment. In closing, the TELUS team’s ability to consistently drive profitable growth over the longer term on the back of a differentiated asset base, best-in-class customer experiences, world-leading networks, and our unique growth businesses provide us with our confidence in the robust outlook for our business and our ability to deliver on the ambitious annual targets that we announced today. For the year, we are targeting industry-leading operating revenue and adjusted EBITDA increases of up to 14% and 11% respectively. As previously announced, we expect a very meaningful drop in core capital expenditures to approximately $2.6 billion following the successful completion of our accelerated broadband investment program. This will represent a CapEx intensity ratio of circa 13%, which represents a historic low for TELUS and is amongst the lowest globally within our peer group. As a result, we expect free cash flow of approximately $2 billion, up close to 60%, supported by strong EBITDA growth and the material capital expenditures step down. Our targets will be supported by the healthy guidance for 2023 announced this morning by TELUS International, once again targeting double-digit revenue and EBITDA growth alongside leading margins as they continue to drive solid and profitable operating momentum. TELUS International’s financial objectives will be backed by their end-to-end design capabilities as they build and deliver these capabilities to meet the accelerated need for premium digital customer experiences, digital transformation, content moderation, and AI data solutions across its strategic industry verticals on a global basis. Importantly, the unparalleled skill, innovation, grit, and execution excellence of our team in progressing our consistent and winning strategy underpins our leading multiyear dividend growth program, now unbelievably in its 13th year, and extending that particular ambition for annual growth of 7% to 10% through to the end of the 2025 financial year. Finally, I’d like to take this opportunity to recognize our team for the way they continue to exemplify our social purpose in action. In 2022 alone, our team members and retirees donated $125 million and volunteered close to 1.5 billion hours in support of charitable and community organizations. This is more than any other company in Canada. Indeed, since 2000, we have demonstrated our global leadership in social capitalism by gifting $1.5 billion, including 2 million days of global volunteerism. Myself and the leadership team continue to be inspired by the unparalleled compassion of our TELUS family and their dedication to making the future friendly for all of our stakeholders. They are indeed the best exemplification of our brand values in action. Before I came to TELUS, I spent 10 years in global telecom searching for value in most places on the planet. So, it is with some degree of familiarity that I say the growth profile that we have is truly unmatched on a global basis. I don’t know of a global peer that can match the strength and, critically, the sustainability of our revenue growth, our EBITDA growth, our cash flow growth, and our dividend growth. And that’s not just the story for 2023, it’s the story for 2024, 2025, and beyond. And that truly makes us unique. And on that note, I will hand the call over to Doug.

Thank you, Darren, and hello everyone. Our fourth quarter results extend our track record of delivering leading operational and financial results supported by our high-growth and diversified asset mix. In the quarter, we continued to see strong growth across all areas of our business. In mobility, we delivered network revenue growth of 6.5% driven by strong customer growth and higher ARPU. Furthermore, as compared to the pre-pandemic Q4 2019 period, mobile network revenue is 11% higher, showcasing our strong consistent growth and customer service excellence. We continue to see a steady improvement in roaming revenue, with a Q4 amount of approximately 122% as compared to pre-pandemic levels. We remain focused on driving sustainable ARPU growth by maintaining our consistent focus on high-quality customer growth, executing on our 5G monetization strategy, excellent base management, diligent cash management on handsets, and leveraging our leading churn profile within a competitive and dynamic market environment. Fixed data services revenue grew 5.9% year-over-year or nearly 6.8% when considering the divestiture of the financial services business in December 2021. Within fixed data, residential internet revenue grew 8.4% year-over-year as we continue to drive market share alongside higher ARPU. Customers are continuing to move to our high-speed tiers recognizing the superior customer experience on our PureFibre network, while the compelling value of symmetrical speeds and reliability leads in this product set. Health services revenue of $411 million increased by $270 million over the prior period, reflecting the contribution from LifeWorks as well as continued organic growth. As we progress into 2023, we remain very focused on the LifeWorks integration and executing on the significant synergies and health outcomes our combined organizations can unlock together. Early in January 2023, we announced the successful acquisition of WillowTree as highlighted by Darren. Together, these transactions represent important steps we are taking to scale our high-growth technology-oriented business, further setting us apart from our global peer group while adding capacity for value creation and diversification of our overall business. At the segment level, TTEC operating revenues were up 13% year-over-year. As a reminder, in the fourth quarter of 2021, we recognized a $410 million gain from the sale of our financial services business to flow through other income. TTEC adjusted EBITDA grew 10% for the quarter, and capital expenditures declined by 28%, reflecting the conclusion of our accelerated capital program. DLCX operating revenues from external customers were higher by 9% year-over-year, primarily driven by growth in our tech and game clients arising from additional services provided to existing customers and the addition of new customers. DLCX adjusted EBITDA was up 23%, while margins improved by 200 basis points to approximately 25%. Consolidated operating revenues increased by 13% year-over-year and adjusted EBITDA growth by over 11%. Furthermore, our annual EBITDA growth in each of 2020, 2021, and 2022, our cumulative EBITDA growth was over $1.3 billion since the pandemic started, while most of our industry peers are still cumulatively negative. We did not go negative in any year. Consolidated net income was down 60% year-over-year, while EPS was down 64% due to the disposition of the financial services business I highlighted earlier. Excluding the impacts of our virtual power purchase agreements, financing costs in Q4 were primarily higher due to higher indebtedness over the past 12 months, along with higher interest rate environment. On an adjusted basis, net income was slightly higher, while EPS remained unchanged at $0.23. Free cash flow of $323 million in Q4 increased by $280 million driven by a decline in capital expenditures and higher EBITDA, partially offset by higher mobile contracted volumes during a highly competitive Black Friday period and higher cash interest in the period. Looking ahead, we have set leading annual financial targets while advancing our leading growth profile and building on the momentum of strong and consistent operational momentum. In 2023, our operating revenue growth is expected to be 11% to 14% and adjusted EBITDA growth of 9.5% to 11%. Our financial outlook reflects continued healthy growth within our telecom business, including profitable customer growth and continued demand for our superior bundled products over our broadband networks. In 2023, we anticipate growing contributions from our unique high-end businesses, including TELUS International, which is highlighted by Darren, who released their targets today, as well as TELUS Health and Agriculture and Consumer Goods. Not included in our formal CapEx target of our core capital is $75 million earmarked for real estate development. As we progress through our copper decommissioning program and work to deliver on our strategy of divesting certain surplus real estate assets within the footprint, we will monetize those in the future. Our portfolio in real estate holdings will continue to increase over time with commercial, residential, and industrial sites. Lastly, free cash flow for 2023 is forecasted to increase by over $700 million or 60% over 2022 to approximately $2 billion. The increase is industry-leading and materially higher than our peers driven by EBITDA and lower CapEx. This is partially offset by a couple of non-operating items such as higher cash interest as highlighted, an increase in cash restructuring to drive margin accretion, higher handset investments from the continued growth of our high-value customer base, and higher taxes with our higher operating income. These details are elaborated in our MD&A. We are confident in our ability to continue generating strong free cash flow for years to come, benefiting from an industry-leading growth profile and consistently showcasing our superior asset mix and operational execution. Our continued strong operational and financial performance supports our robust balance sheet and liquidity position. We have a strong debt maturity schedule with an average debt maturity of over 12 years and only $500 million of debt maturing in 2023. The average cost of long-term debt remains low at 4%, while 86% of the debt is fixed. Additionally, our balance sheet strength will further be enhanced by the strong cash flow as highlighted. The strong position will further support our dividend growth that will now be in place till 2025, along with the deleveraging of our balance sheet and supporting strategic investments. Robert, over to you.

Thank you, Doug. Carl, please proceed with questions.

Certainly. The first question is from Maher Yaghi from Scotiabank. Please go ahead.

Thank you for taking my question. Maybe I will start with the question on health. By my calculation, I am getting around 5% organic growth in the business on the revenue side and 2% on LifeWorks. You discussed in your MD&A that demand for health and well-being services has never been higher than it is right now. So I am trying to figure out if this is a pricing issue that you guys are having that is pressuring the top line from growing faster and when you talk about your expectation for 2023 with the integration with LifeWorks. Can you talk a little bit about what you expect this business to look like in 2023? Thank you.

Okay, Doug will kick it off and then Michael will do the follow-up.

As you can see in our KPIs, yes, there is significant demand for our products. Our KPIs continue to grow. There was a re-rate in one of our more material customers as we renewed for a long period of time. That is generating significant long-term value. The opportunity in front of us, as Michael will highlight, will be the integration and cross-selling that is in its infancy with LifeWorks at the moment. So, Michael, maybe I can have you talk about that.

Thank you, Doug, and thank you for the question. That’s right. While Q4 did see a slight slowdown in respect of one segment in the health business as a result of a customer reprice on a renewal, Q4 also saw our team laser-focused on two priorities: the first being servicing our global customer base and the second being increasing the pace of our post-acquisition integration activities with respect to LifeWorks. In addition to our post-acquisition integration efforts, the TELUS Health team has been hard at work partnering across TELUS to seize opportunities for collaboration, as highlighted by our substantial partnership with TELUS International, which is focused on customer experience and digital transformation, including bringing AI to TELUS Health’s market-leading digital health solutions. In Q4, we deepened our partnership with TI by partnering on over $100 million in business, which affords us the opportunity to deliver increased customer value through enhanced customer service levels across our business units. We are ahead of our integration plans, which sets us up very well for 2023 and beyond. As Darren shared earlier, 2023 sees us going to market under one brand, TELUS Health, underpinned by our strategic intent to be the most trusted wellbeing company in the world. Expect strong contributions from TELUS Health in 2023 and beyond. Combining the skills and capabilities of TELUS Health and LifeWorks creates a globally leading end-to-end digital-first employee wellness platform that now covers better than 68 million lives. Our teams continue to drive strong growth fueled by the LifeWorks acquisition, as evidenced by cross-selling and upselling velocities across our global customer base today. We are focused on the pursuit of our unparalleled opportunity in TELUS Health to become a global leader in EFAP alongside data-driven preventative healthcare, wellness, and mental health. Finally, I will say we work tirelessly to extend our social purpose every day. Our recent collaboration with TELUS Agriculture and Consumer Goods is a good example of this, as we partnered to bring mental health services to Canadian farmers in a partnership with the Canadian Center for Agriculture and Wellbeing.

Thank you, Maher. Next question, please, Carl.

The next question is from Jerome Dubreuil from Desjardins. Please go ahead, Jerome.

Yes, thanks. Thanks very much for taking my question. Mine is on the strategy update you gave us a year ago. I wonder if you can update us on this. Basically, the points you were making is that we are looking to maintain tech leadership, resurrecting B2B, and reducing costs as well as scaling the tech ventures. I wonder if there is any tilt or shift in these strategic priorities, or will you sail on the same roadmap basically? Thank you.

We are on the same roadmap, Jerome, explicitly in that regard. Navin, maybe given the improving EBITDA trajectory of our B2B operations, why don’t you provide a succinct response to that component?

Yes, thank you, Darren. As you said, Darren, the B2B has had a very strong 2022, and we expect that trend to not only continue but accelerate in 2023. And what you know, what I think is notable, especially as we look across other global B2B communication service providers, is that TELUS’s B2B team delivered strong growth not only on an EBITDA basis but also revenue, margin, and cash. Another key highlight is that this profitable growth came from across all B2B segments, from small business through to enterprise and public sector. Looking ahead, we feel quite bullish on where the business is going. We expect strong and consistent growth over the next several years. Underpinning that growth are a few important contributors. So first, digitization and automation are helping to concurrently improve our cost structure, remove non-value-added work, all while improving the customer experience. TELUS International will play a very important role in enabling this digitization capability. We look to the recent WillowTree acquisition to help further both their capabilities and our digitization efforts in B2B. Next, leveraging our significant investments and coverage in both PureFibre and 5G, which both reduce costs and improve service quality, we feel we’ve got a lot of opportunities to continue to drive further penetration and growth in these core connectivity areas. Also tied to 5G, we’re keen to see new revenue growth through vertical and horizontal-based industry solutions, as well as the data monetization opportunities. And as part of these industry solutions capabilities, we see some really strong adjacencies with both health and agriculture in terms of how we go to market, and those adjacencies also drive some very significant differentiation in the market. Finally, we have strong geographic segment and product diversity which gives us several levers to drive growth with significant market share upside. All this to say, we expect strong cash contribution as well as accelerating revenue margin EBITDA growth in 2023 and beyond. So I will pass back to you, Darren.

Thanks, Navin. Thanks, Jerome. Carl, next question, please.

The next question is from an unidentified caller. Please proceed.

Thanks for taking my question. I wanted to focus a little bit on TELUS Health. Thanks for the color early on, but setting aside the synergies and I recognize that’s material with LifeWorks. I wanted to get a sense of how we should think about the shape back towards perhaps stronger organic growth that TELUS Health and what the construct of that would be? And then connected to that, I know that 12 to 18 months from now, you are looking at the prospect of an IPO, maybe a strategic partnership on the latter option, maybe a little bit of definition around what kind of partnership you are looking for, which areas, what criteria to the extent that you can disclose right now? Thank you.

Okay. So firstly, 12 months to 18 months is not the IPO time cycle, but it could be the time cycle for bringing in a strategic partner. If you are wanting color on what that model looks like, I think the example that we set in 2016 with Baring coming into TELUS International as a precursor to what we would eventually do on the IPO front is a very good model to draw inference from. The one area of important differentiation that we would be looking for is a partner coming in not just from a cash and evaluation point of view, but what they could add to the business strategically and commercially. In that regard, there are two key things that matter to us in terms of potentially seeking a partner: What can they do to assist us in the area of products and technology, and what can they do to assist us in the area of distribution channels and global reach in terms of scaling our customer penetration and global customer growth. Those are the attributes that we would be seeking if we chose to strike the partnership. It would be fair to say that we do like the two-step model, establishing a partnership first, creating a semblance of independence of the business. Whilst, of course, still integrated in terms of the operations with both TELUS and TELUS International, we think it’s a good discipline in terms of getting the business to stand on its own two feet in a run-up to eventually earning the right to an IPO. One of the things that we implemented with TELUS International that we would emulate again with TELUS Health is that we had a TI pre-flight IPO checklist of things that needed to be achieved by TELUS International if they were going to earn their way to the right of IPO in the business, in servitude to the strategy. The other thing that we would be looking at, which gets to the first part of your question, is a business where we deliver very strong organic growth, double-digit organic growth at the revenue level, and at the EBITDA level. That, of course, allows us to earn our way to the M&A opportunities because when you have a strong organic underpinning from a growth profile, you make better acquisition decisions because they are discretionary rather than necessities. When you have stronger organic growth, you integrate those acquisitions significantly more effectively. If you look at some of the choices that TELUS International has made in terms of its acquisition path, and how well those choices were and how well those acquisitions were integrated, that, of course, is going to be indicative of the strategy with TELUS Health. If we are going to do an IPO, it’s going to be for a high valuation, because clearly an organization like TELUS, we are going forward. The sources of cash are going to significantly and chronically exceed the uses of cash. It’s not for a need of money, it’s to establish a great valuation and a transaction currency that increases or amplifies the addressable market of acquisition opportunities that we can pursue. Given the multiple that we have established with our transaction currency, we are only going to realize that high level of multiple if we have great execution results with TELUS Health in 2023, 2024, and 2025. Those will be underpinned by excellence in organic growth, but also by harvesting the synergies with LifeWorks. Those synergies are deeply significant. We have given you lots of color on that, $200 million plus holistically and $60 million in the near-term on the cost front. The strength of what we can do on the cross-selling side of things, the strength of combining EAP with virtual care, and the strength of what we can do on new product development, and of course, underscored by the significant efficiency opportunity, I think that’s going to buttress the growth profile that we want to have in terms of the TELUS Health IPO.

Thank you.

Thanks. Carl, next question please.

The next question is from Drew McReynolds from RBC Capital Markets. Please go ahead, Drew.

Yes. Thanks very much. Maybe for you, Doug. With respect to free cash flow, obviously a lot of growth year-over-year and nice to see CapEx come down. I don’t know if everyone on this call understands, but your free cash flow definition is probably the most conservative among your peers. I think all the analysts understand that. When you think about the $2 billion in 2023, with respect to your earmarked CapEx, your taxes, the contract assets, all kind of the moving parts. Is that $2 billion, in your view kind of more of a normalized level, or are these things still kind of swinging back and forth, a little bit more volatile than usual?

Less back and more forth. Over to you, Douglas.

Exactly. There are definitely a few one-off items in there. The restructuring cash that we anticipate for 2023 would assume a decline over time. Again, that would be more accretive outside of the 2023 timeframe. I think with handsets, and thank you for pointing that out, we have assumed that intensity levels we saw in Q4 will continue into the first part of 2023. Including an investment in high-quality loading is exactly what we should be doing, and we were transparent in our assumptions around that. Because the COVID period was a bit of a lull, once we get over 2023, we should see a normal run rate or more of a normal run rate on handsets. I think the climb back out of COVID would be somewhat limiting this year, but 2024 and beyond should see a year-over-year neutral basis. When you examine our CapEx continuous growth we have talked about in EBITDA, we are going to have nothing but accelerated growth on free cash flow in the future.

And interest.

Oh, and interest as we de-leverage, you are right. After the WillowTree acquisition, we are at a bit of that peak. You will see us de-leverage over the next few quarters, and as the year progresses into the next few years. With that, interest amounts will also be more managed or reduced.

Understood. Thank you.

Thanks Drew. Carl, our next question please.

The next question is from Vince Valentini from TD Securities. Please go ahead, Vince.

Yes. Thanks very much. Question on connected devices and the impact they are having. The first time you gave us disclosure was 2018, there were about 1.2 million devices, and now it’s more than doubled to 2.47 million devices. Is that starting to have a meaningful impact on your service revenue and ARPU? Maybe you could just clarify or verify for me that you include that in service revenue, but it’s not counted as subscribers. So, it should be inflating ARPU with the extent that number gets bigger.

Absolutely.

Yes, thanks, Darren. I agree fully. We are very bullish on IoT connected devices and actually the industry solutions capabilities that will ride on top of that connected device and connectivity capabilities. As I mentioned previously, this is a meaningful nine-figure business for us. It has double-digit growth on the IoT and industry solutions side, and we are getting some good traction in the market across several key verticals and horizontals. Just before I give some examples, we really like how 5G IoT and PureFibre are driving some nice adjacencies across our health and agriculture business units, again, providing significant market differentiation. One example would be how we are taking advantage of our Western incumbency and the logical linkage to key natural resource industries. TELUS was selected to help build one of the largest private wireless network solutions for a mining operation in Canada. Another key area where we are focused is on transportation. Recently, TELUS was selected as the exclusive 5G connectivity partner for Project Arrow, which is Canada’s electric vehicle manufacturing initiative. One other example of where we are partnering with academia and industry is we just announced a $5 million investment with the University of Windsor to accelerate the development of 5G technology applications in agriculture, advanced manufacturing, cybersecurity, and connected vehicles. As Darren said, we are not only bullish on the revenue growth in this space, but we really like the margin profile. That’s mainly driven by a high volume business with a lot of automation, a lot of self-service, and end-to-end digital capabilities. Scaling that revenue growth holds huge potential with very little cost increases, so we definitely like the economics of this business. With that, I will pass it back to you, Darren.

Also with sticky churn in terms of client retention, another attractive feature, which helps you achieve attractive lifetime revenues out of the IoT sector. And then secondly, the biggest opportunity going forward is leveraging the data analytics over all that data volume. Okay, let’s go to the next question. Thanks Vince for the question.

Next question please, Carl.

The next question is from Stephanie Price from CIBC World Markets. Please go ahead, Stephanie.

Hi. Good afternoon. I was curious if you could share your strategy around the acquisition of two small internet service providers in Ontario? Just curious to know how this will impact your wireless plus wireline offering in Ontario, and more broadly, how you think about the growth sectors in telecom post the potential Rogers-Shaw merger?

Thanks, Stephanie. Zainul, do you want to take that question?

Sure. So, Stephanie, we have been doing small tuck-in acquisitions in specific areas where we have competed for a number of years. These are no different. We have a very significant and growing smart home security business as an example. These particular acquisitions are helping to advance our capabilities in that area. They are relatively consistent with the types of acquisitions we have done in the past, both in Ontario and nationally.

Thanks, Stephanie. Next question please, Carl.

The next question is from David Barton from Bank of America. Please go ahead, David.

Hi. It’s Matt sitting in for Dave. Thanks for taking the question. I was wondering just on two points, if I could. I know you just released 2023 guidance. But if I look ahead a little bit, can you talk about what your expectations are for maybe improving flow-through of your EBITDA growth to free cash flow as you move forward with some of these acquisitions in your plan? And secondly, on the $75 million of CapEx for the real estate opportunity, can you touch on whether or not this includes also a partner? I know that’s been a discussion in the past, you might bring in a partner to absorb these things. Also, what should we expect in terms of the lag between when you would make these investments and when you might see a return, like how many years is the right measure to expect for this type of activity? Thanks.

Doug, why don’t you take that?

Yes. So, we will start with the second question first. So on the real estate, the $75 million does not include a partner at the moment. We have assumed we would get potentially partners on individual real estate opportunities where appropriate, and bring in high-quality partners to get things up and running. This really is to start to build a portfolio so that over the timeframe you’re thinking, we would have something of substance that could be monetized probably in the 3-year period is probably the appropriate ramp on that one. But we absolutely intend to bring in partners, and that number could go down as we do that. On the flow-through, I think it is and even Darren highlighted that it’s for the direction up on free cash flow and margins. If you look at the integration costs, we are currently doing for LifeWorks, our margins are going to continue to enhance. The double-digit growth we have in health is going to continue to contribute to that. I would say that some of the acquisitions we made pose J-curves, and the double-digit growth on both revenue and EBITDA, and both agriculture are now going to contribute, in addition to what Navin had highlighted. You are going to continue to see more and more flow through on an ongoing basis, both in 2023 and beyond on all of those fronts, along with strength within our core business.

If you look at that EBITDA flow-through and cash flow trajectory over 2023, 2024, and 2025, also calculate what the dividend payout ratio is of free cash flow and the headroom that we are creating as it relates to our dividend growth model. I think those figures are very interesting.

Thanks so much.

Thanks, Matt. Carl, we have time for one more question, please.

The final question is from Simon Flannery from Morgan Stanley. Please go ahead, Simon.

Great. Thanks for the question. Can you talk a little bit about the market environment for 2023? I think looking through your discussion, you are assuming a slower macro growth rate next year. We have obviously had a lift from COVID in terms of pent-up demand. It sounds like you think that will continue. But how should we think about the overall industry KPIs across wireless and across broadband? Do you think we can sustain the pacing across the industry that we have seen in 2022 and 2023, given continued immigration, etcetera? Are you expecting some sort of moderation overall?

Okay. Jim, why don’t you kick that off? Zainul, why don’t you do the part two?

Sure. We are seeing persistent promotional activity in the low end of the market. But that said, industry-best ARPU growth of 2.2% shows really good underlying domestic ARPU characteristics coming from the high-value subscriber mix, base management, and the step-up to 5G. We are also seeing industry-best churn on the back of our product intensity and our customer experience. In fact, our postpaid churn continued to be really strong, very similar to pre-pandemic levels. Our prepaid churn is elevated, but due to travelers, it is over 200 basis points better than our competitors. When we look at our nets, Q4 nets were up 80,000 versus pre-pandemic 2019. A lot of the focus we have gone on distribution, like mobile clinic and digital direct-to-consumer, are driving benefits. We expect that, that promotional activity is going to continue at the low end of the market. Still, our strength is really on the premium side of the market and bundling, and we feel that’s very robust. Expect consistent trajectory from where we are on ARPU. We see upside in business roaming. We are already seeing that in Q1. We will continue to see that high-value subscriber mix washing through the base. Our base management around 5G and Koodo Pick Your Perk step-ups is working really well. Growth in our IoT subscriber base is now contributing meaningfully to our network revenue growth, and we are not as reliant on the low-end flanker promotions, which is good. So, I feel really good on the wireless side that this will continue this trajectory and we will see that consistent growth.

Sure. Thanks, Jim. I think you gave a great summary. One thing I would add is that we have been the lion’s share of the net porting winner. We demonstrate across the board that clients are choosing TELUS. We are getting the larger premium share of the market. We have a higher level of product intensity, a lower level of churn, and a higher ARPU position. The difference between us and our peers on customer lifetime value is significant. There’s an opportunity for growth and continued growth on the back of our completion of the fiber-to-the-prem build in the west. If you take those characteristics and extend them out, we currently see higher margins per household at over 20% increase. We see significantly lower churn of 16 points. We see higher product intensity with 25% less cost and 70% fewer outside plant repairs. We have an incredible margin accretion opportunity. We also have a significant level of digitization and product development taking place, so that we can continue to grow our share and to develop new products under Jim’s leadership as well as leverage TI and WillowTree in terms of driving margin accretion across our segments, so that even in the lower end of the market, where we see significant immigration growth, we can come to the table with value propositions that are more margin accretive than our competitors. We are quite excited about the growth potential in the market. We think we are positioned incredibly well across segments and demographics. We absolutely see some customers characterized as looking for value in their bundle with higher levels of value in their purchase patterns. Because we provide solutions at every end of the market, we are really poised well for that growth.

Thanks a lot.

Thanks, Simon, and thank you everyone for joining us today. Please feel free to reach out to the IR team with any follow-up questions you may have.

This concludes the TELUS 2022 Q4 earnings conference call. Thank you for your participation and have a nice day.