TELUS Corporation. (NYSE:TU) Q3 2018 Earnings Conference Call November 8, 2018 9:30 AM ET
Darrell Rae – Investor Relations
Darren Entwistle – President and Chief Executive Officer
Doug French – Chief Financial Officer
Drew McReynolds – RBC
Vince Valentini – TD Securities
Simon Flannery – Morgan Stanley
Jeff Fan – Scotiabank
Maher Yaghi – Desjardins
Adam Ilkowitz – Citi
Good morning, ladies and gentlemen. Welcome to the TELUS 2018 Q3 Earnings Conference Call. I would like to introduce your speaker, Mr. Darrell Rae. Please go ahead.
Thanks, Mike. Good morning, everyone, and thank you for joining us today. TELUS' third quarter 2018 earnings news release, quarterly report and detailed supplemental investor information are posted on our website, telus.com/investors.
On the call today we have President and CEO, Darren Entwistle, who will provide opening comments, followed by a review of our third quarter operational and financial highlights by Doug French, our CFO. After our prepared remarks, we will conclude with a question-and-answer session.
Let me now direct your attention to Slide 2, our caution regarding forward-looking statements. This presentation, answers to questions and statements about future events, including our 2018 and 2019 targets, as well as intentions for dividend growth and capital investments and the performance of TELUS include forward-looking statements that are subject to risks and uncertainties and are made based on certain assumptions. Accordingly, actual performance could differ materially from statements made today. So do not place undue reliance on them. We also disclaim any obligation to update forward-looking statements, except as required by law.
I ask that you read our cautionary note and refer you to the risks and assumptions outlined in our public disclosures, in particular our third quarter Management's Discussion and Analysis and in our 2017 annual MD&A Sections 9 and 10 as well as filings with securities commissions in Canada and United States. The appendix of our presentation in Sections 1 and 11 number, third quarter 2018 MD&A provide definitions and reconciliations of the non-GAAP measures that we use today.
Before we begin, let me take a moment to discuss certain non-recurring items that flowed through our financial results this quarter. As previously disclosed, we recorded equity income of $171 million related to the sale of TELUS Garden with 50% allocated to each of our wireless and wireline operating segments.
Concurrently we committed to a donation to the TELUS Friendly Future Foundation of $118 of which 50% was allocated to restructuring and other costs in each of our wireless and wireline segments. Lastly, we recorded a long-term debt prepayment premium of $34 million before income taxes or $0.04 per share after taxes. The review of our results today will exclude these items unless otherwise noted.
Let me now turn the call over to Darren.
Thanks, Danni, and good morning, everyone. As you have seen today, TELUS once again reported strong operational and financial results including robust customer growth across both the wireless and wireline segments of our business. Our strong Q3 results are buttressed by ongoing excellent performance in wireless and wireline customer loyalty and lifetime revenue.
Again this quarter, the TELUS team continued to achieve industry-leading postpaid wireless churn and realized record third quarter high-speed Internet and TV retention levels.
Consolidated operating revenue in the quarter increased by 5.8% whilst EBITDA was up 6.4%. Notably, the robust customer growth that we delivered in the quarter included a 199,000 new wireless, Internet and TV customer additions, up 31% on a year-over-year basis. This was driven by our low postpaid churn, strong retention levels in respect of high speed Internet and TV, and by the ongoing generational investments we are making in our world-leading broadband networks. Moreover, the blend of lifetime revenue of our wireless, Internet and TV customers was up 17% year-over-year.
Turning now to wireless. We achieved solid growth in the third quarter in respect of revenue and EBITDA, which were up 4.2% and 6.8% respectively. Postpaid wireless net additions of 109,000 and total wireless additions of 145,000 represented healthy third quarter loading. Postpaid churn in the third quarter was an industry-leading 0.87%. Notably, this is 22 and 27 basis points better than our national peers.
Consistently strong customer loyalty is, of course, the hallmark of the TELUS organization with the team having delivered a postpaid churn result below 1% for 20 of the last 21 quarters, putting us now in our sixth year of churn below 1%. This clearly demonstrates the success of our decade long and ongoing journey to put our customers first in everything that we do.
Our teams' unrelenting commitment to our customers first promise is bolstered by the significant investments that we are making in broadband networks and broadband technology. Notably, TELUS was once again named as having the fastest mobile network in Canada by PCMag. This repeat acknowledgement comes on the heels of TELUS being recognized as having the fastest wireless network in Canada as measured by the consumer initiated Ookla Speedtest.
Moreover this builds on our outstanding record of achievement with respect to network excellence, having earned the top spot in all four major mobile network reports this year including JD Power and OpenSignal. These leading network rankings each received consecutively for two years or more reinforce the superiority of our networks, whether it's based on coverage, speed, reliability or overall customer experience.
In addition, these multiyear recognitions underscore an important differentiator for TELUS and validate the value of the ongoing strategic capital investments that we are making in broadband technologies and in our capabilities in respect of customer service excellence.
Third quarter blended ABPU, which includes amounts collected for the recovery of handset subsidies, was $68.64. Flat ABPU growth in the quarter reflects declines in chargeable data usage and competitive pressures driving larger allotments of data in addition to other moderating factors including the lapping of our two-year premium plus contracts that were first introduced in June of 2016 and as well the popularity of data sharing plans and as well increased customer friendly and ABPU efficient data usage notifications, and finally an evolving customer mix shift towards non-traditional wireless devices.
These factors are being offset by continued robust customer growth and increased overall data usage, data usage including customers selecting higher rate plans with larger data buckets, data growth related to a larger share of higher value smartphones in the gross addition and retention mix, and finally an increased proportion of postpaid customers in the subscriber mix over the previous year.
Whilst the general trend towards moderated ABPU growth compared to what we've seen in past quarters is as anticipated and forecasted, we are working diligently to better monetize robust data growth while simultaneously delivering a strong value for money proposition to our customers. To this end, we continue to focus intensely on quality margin accretive customer growth and strong ABPU performance through our consistent strategic execution of premium smartphone loading inclusive of driving higher value data and share plan adoption.
Moreover we're embracing the other levers available to us in an environment of moderating ABPU growth to ensure that we are delivering attractive growth at the EBITDA level in respect of wireless. This includes continuing to drive volume growth through high quality loading on the back of strong ongoing industry growth with net additions up approximately 30% year-to-date. It also includes seeking new sources of wireless revenue such as Internet of Things or Internet of Everything, machine to machine and security applications.
It also includes securing new channel strategies with attractive associated economic characteristics. It includes pursuing smart bundling across wireless and wireline to achieve better economies of scope and enhance lifetime revenue for customers. And finally, we are focused on driving better roaming growth by further encouraging customers travelling abroad to adopt and use our Easy Roam offering, which now covers a 127-plus countries as well as securing in-roaming opportunities as the rest of the world comes to Canada.
Finally, and as we have discussed previously on these calls which is important, we are working persistently to enhance the efficiency of the flow from revenue to EBITDA or the flow from ARPU to ABPU in order to buttress and enhance our operating margins.
Of note in this regard, in early October we announced an organizational and management structure streamlining and have subsequently increased our investment and restructuring this year by approximately $50 million to provide for this efficiency and effectiveness program. In addition to the margin efficiencies that we will harvest from this initiative, our new organizational structure will enhance our effectiveness in delivering an elevated customer experience and, of course, the economic results that flow from that.
The combination of healthy ABPU and best in class churn drove third quarter blended lifetime revenue per customer to close to $6,700. By this measure, the economic value of our average customer remains up to 49% higher than our national peers.
Moving now to our wireline business. Wireline revenues increased by 8.1% driven by data services' revenue growth of 15% supported by strong high speed Internet and TV customer growth, and an improved performance in both TELUS Health and TELUS International. Wireline EBITDA growth of 5.7% in the third quarter was driven by growth in Internet and TELUS Health margins as well as an increased contribution from our TELUS International organization. Impressively and certainly on a differentiated basis versus our global peers, this marks our 24th consecutive quarter of wireline EBITDA growth for some six years now, a performance that is unrivaled amongst our global peer group.
Looking at our wireline customer growth, high speed Internet net additions of 36,000 in the third quarter were up 17,000 or 90% over the third quarter of 2017. TV net additions of 18,000 were up 9,000 or double what we reported in the same quarter last year. Notably, a key driver of this robust customer growth was the strong performance we achieved in high-speed Internet and TV loyalty, which improved markedly on a year-over-year basis, representing record Q3 retention levels.
This continuing momentum in respect of wireline customer loyalty is certainly encouraging and it will buttress the performance of this organization prospectively. Indeed, it clearly demonstrates the efficacy of our expanding PureFibre footprint and the operational success that we are deriving from the strategic fibre build program alongside our unwavering focus on customer service excellence.
Moreover, improving residential NAL net losses continue to represent a very positive story for TELUS, coming in at just 12,000 net losses in the third quarter. This is down by 8,000 NAL losses which is a notable 40% improvement over the third quarter of 2017. Importantly, this represents our fourth consecutive quarter of significantly moderating NAL losses. Given the higher margin characteristics of these access lines, this performance supports wireline EBITDA sustainability, which in turn funds our growth initiatives with respect to high speed Internet, TV, security and home automation including on the home health front.
In total, we earned 42,000 wireline net RGU additions in the third quarter of 2018, representing material improvement over last year or more than 5x what we reported in the third quarter of 2017. Our strong and consistent wireline operating and financial results clearly highlight the strength of our consistent and longstanding focus on delivering customer service excellence.
They also underscore the attractive bundled offers available to customers across our highly differentiated product portfolio including the superior attributes of our Internet, Optik TV and Pik TV offerings. As well, our strong results also reflect our team's steadfast focus on leveraging the competitive differentiation inherent in our PureFibre broadband network.
In this regard, during the third quarter, our team expanded our PureFibre coverage by another 100,000 premises to now stand at a coverage level of 56% of our overall Optik footprint. This ongoing expansion continues to enable more customers to access our leading broadband technology and to benefit from the corresponding customer experience enhancement across all of our product portfolios that leverage the fibre connectivity and the bandwidth that we provide.
The strong performance driven by our enhanced broadband network and PureFibre offering will support the continued and sustainable growth of wireline and wireless services, including the advent of 5G. Indeed, as we know, TELUS is a global leader with respect to wireline broadband deployment.
As a result of the outstanding work of our team over the past year, we've increased TELUS' active fibre connections by 36%, outpacing the OECD average of 15% year-over-year growth by close to 2.5 times. Consequently, we now have 37% of our wireline broadband connections on PureFibre today, approaching 2x the average broadband services penetration, up 23% in other OECD countries.
Importantly, our expanding PureFibre footprint and customer base that it underpins, support enhanced efficiency in terms of increasingly lower OpEx and economy of scale benefits. This is further bolstered by the lower churn and higher revenue characteristics of our PureFibre clients, which lead to elevated broadband customer economics. Notably, this will be complemented by the efficiencies that we expect to harvest from our organizational and management streamlining as well as by the resulting enhanced effectiveness in delivering exceptional customer experiences which is a way of life for the TELUS organization.
To conclude my remarks this morning, through the success of our broadband investments and the skill of the TELUS team, we continue to demonstrate our ability to consistently drive long-term customer growth alongside revenue, EBITDA and free cash flow expansion. Simultaneously, we're delivering on our dividend growth model and at the same time maintaining a robust balance sheet.
Strong free cash flow growth of 41% in Q3 and 55% year-to-date is clearly aligned with our objective of returning to a positive free cash flow position after dividends this year. This free cash flow accretion is being driven by moderating capital investment after reaching the peak of our elevated CapEx program in 2017 year, now in our rearview mirror, in concert with continued EBITDA expansion as well as lower cash taxes. Notably in this regard, we anticipate CapEx in 2019 to be similar to our guidance for 2018, up to $2.85 billion with capital intensity decreasing by approximately 100 basis points on a consolidated basis.
In addition, we expect annualized savings from our recently announced organizational and management restructuring of more than $50 million, again on a consolidated basis beginning in 2019. Our positive free cash flow after dividends is a testament to the TELUS team's ability to execute on our extremely consistent and transparent investment strategy in broadband networks and data services, which of course has been tremendously successful for us to date. In this regard, we're continuing to build on our track record of providing investors with the industry's best multiyear dividend growth program.
Our dividend increase announced today reflects the 16th since we established our first three-year program way back in 2011. Moreover, today's increase represents the fourth dividend increase in our third and most recent three-year dividend growth program targeting annual growth between 7% and 10% through the 2019 year. Our track record of delivering on our industry-leading shareholder friendly initiatives continues to generate significant value for our shareholders. Notably, TELUS has now returned $16 billion to shareholders including close to $11 billion in dividends representing some $27 per share since 2004. This represents the most attractive, longstanding, consistent and transparent dividend growth program in the global telecom sector.
Also of note, since 2010, the year prior to our first three-year dividend growth program, TELUS' cumulative dividend performance as a percentage of beginning share price leads that of all major North American telcos at a notable 78%. That's an impressive track record and we look forward to updating investors on the progression of our program next May, at our 2019 Annual General Meeting. Importantly the ongoing consistency in our results enables us to achieve our dividend growth objectives while simultaneously making significant growth-oriented investments on the capital front to ensure sustainable and profitable growth for many years to come.
I'd like to close, as I always do, by congratulating the TELUS team for continuing to build a company that delivers on our commitment to our customers, our commitment to investors and, as Darrell mentioned at the beginning, our commitments to our communities in which we live, work and serve.
I'll now turn the call over to Doug to provide some additional color in respect of our third quarter results.
Thank you, Darren, and hello, everyone. Let's continue with wireless. External wires revenue increased 4.2% driven by network and equipment revenue growth of 2.2% and 11% respectively. Network revenue growth was driven by continued growth in our postpaid subscriber base, which is up 354,000 over the last 12 months and a larger portion of customers stepping up to higher rate plans inclusive of larger data buckets. This growth was partially offset by declining chargeable variable usage due to more bonus data being included in rate plan promotions.
Equipment revenue resulted mainly from higher smartphones in the gross and retention mix. Adjusted EBITDA grew 6.8% reflecting higher network revenue as well as an improvement in equipment margins. This was partially offset by higher marketing expenses including commissions related to increased customer loading, increased network operating cost including roaming. Excluding the effects of IFRS 15, adjusted EBITDA of $866 million was higher by 6.5%.
Notably wireless simple cash flow as measured by adjusted EBITDA less CapEx increased by approximately 13% or $78 million over last year due to higher EBITDA and lower capital expenditures as planned.
In wireline, external revenue grew by 8.1% compared to the prior year, reflecting data services' revenue growth of 15% which was primarily driven by increased Internet and enhanced data service revenues resulting from ARPU growth as well as an increase in our high speed Internet subscriber base which is up 108,000 over the past 12 months, higher TELUS International revenue from acquisitions and the recovery of organic growth and increased TELUS Health revenues.
In addition, TELUS TV revenues resulting from subscriber growth and revenues from our recently launched home and business security service offerings also contributed to our higher wireline data revenue growth.
Adjusted wireline EBITDA increased by 5.7% due to growth in our Internet and TELUS Health margins as well as an increased contribution from TELUS International. This was partially offset by our ongoing declines in higher margin legacy voice services. Excluding the effects of IFRS 15, adjusted EBITDA growth was 2.1%.
Putting it all together, TELUS delivered consolidated revenue growth of 5.8% and adjusted EBITDA growth of 6.4%. Excluding the impact of IFRS, consolidated revenue and adjusted EBITDA were higher by 5.6% and 5% respectively.
Earnings per share was up – was $0.74 on both the reported and adjusted basis driven by higher EBITDA growth, partially offset by higher depreciation and amortization reflecting the investments we have made in the past few years, including our broadband networks as well as also those arising from business acquisitions as well as higher financing costs. Please see the appendix for a breakdown of EPS and adjusted EPS.
Consolidated CapEx was $762 million for the quarter, a decrease of 7.2% driven by a lower CapEx in both wireless and wireline as planned. At the end of the quarter, we covered 1.4 million premises representing 56% of our 3.1 million Optik footprint that now have access to our PureFibre network. That's up 410,000 premises over the past 12 months.
Free cash flow before dividends of $303 million is higher by 41% over last year, reflecting strong profitable growth and lower capital investments. Year-to-date, free cash flow is up nearly $1.1 billion or 55%, reflecting $383 million increase.
As outlined in our Q3 disclosure today, we are raising our full year 2018 assumption for restructuring and other costs to approximately $300 million from $135 million from the prior year to reflect the TELUS Future Friendly Foundation as well as the $50 million incremental target or streamlining our business and enhancing our efficiency and effectiveness of serving our growing customer base. The incremental $50 million will continue drive annualized cost of more than $50 million in 2019.
As we head into the final quarter of 2018, we remain on track to achieve our full year 2018 targets for revenue, adjusted EBITDA, basic earnings per share and our CapEx target of approximately $2.85 billion.
Let me now turn it back to Darrell to start the Q&A.
Thank you, Doug. Mike, can you please proceed with questions from the queue for Doug and Dan?
Sure, definitely. So the first question comes from Drew McReynolds from RBC. Please go ahead.
Thanks very much. Good morning. Darren, I was going to ask you about ABPU, but I think you've covered that off pretty extensively. I just want to look at the CapEx guidance for 2019. I was just wondering if you could just peel it away a little bit in terms of where you think you will be on fibre to the home. Are you interested in fixed wireless initiatives, et cetera? What does – what would this CapEx profile look like for TI and TH? And just a quick follow up I guess for you, Doug. On the cash tax outlook for 2019, I was just wondering should we normalize cash taxes or are there other kind of puts and takes we should consider?
Thanks for the question, Drew. So importantly as I conveyed in my remarks, we are looking to deliver an overall CapEx envelope in 2019 that is highly similar to what we are postulating for this year, $2.85 billion. We are looking to ratchet down our CapEx intensity by about 100 basis points. Over 50% of our CapEx program in 2019 will be a success-based or performance-based in its orientation. The key drivers in terms of 2019 CapEx is going to be quite similar to what you've seen from TELUS over the last few years in that the preponderance of the capital is going to be invested in broadband technologies.
So on fibre front, as per your question specifically, we are going to carry on with what is a multiyear program. That really should take us through to above the end of 2021 with a significant ratcheting down thereafter. By the end of 2019, I would expect our fiber coverage which stands right now at about 56%, 57% of our Optik footprint or about 1.8 million homes in totality, that by the end of next year we should be around 66% to 70% covered in that regard, which is good for what we want to do on the Future Friendly Home product suite from voice and Internet and TV.
But it's also key for new services that we are looking to layer on top of that including security services, home health services and home automation, and that's a big competitive differentiator for us. And then with that degree of penetration of fiber into our access network, it's not just great for our Future Friendly Home product suite, but of course the right foundation for 5G in terms of wireless frontal delivery and backhaul redistribution of that wireless traffic.
So that should give you a sense of where we are at on the fibre front. And I think that will also continue to de-buttress the loading performance of the organization in terms of the growth. Secondly, it will support strong retention characteristics. We've got an excellent performance in the fibre front and also better cost efficiency flowing from that. So just to give you a bit of a quantitative view of that, our churn on HSIA where we've got customers on PureFibre is about 25% better than copper and our average revenue per home is 35% higher on fibre than on copper, and the blend of that particular quotient gives us a 60% lift in respect of lifetime revenue.
The other thing that's key is cost reduction for us. We are seeing about a 40% cost reduction through the better reliability, resiliency, self-provisioning, self-serve characteristics of fibre. So I think we're in a pretty robust position in that regard and pleased with the overall performance of that business and that's, I think, quite telling. Lastly, in terms of where we're going next year on the CapEx front, you can see a good performance in terms of wireless CapEx intensity, but we don't talk as much about.
But clearly within our global industry, we're a world leader in that regard. It speaks to the efficacy of the network sharing agreement that we have in place. And even when you look at where we're at on a year-to-date basis in terms of wireless CapEx intensity in 2018, which is good indicator of where we'll be in 2019, that 10% CapEx intensity on wireless includes a portion within that of the fibre load because as I said earlier, fibre is not just for FFH but it's also there to support the 5G progression.
If you back out that fibre from our wireless CapEx intensity, the number would be closer to 8%. So we're getting pretty good efficiency on the cash yield as a result of that from our wireless business. And then lastly, you made a question about the TI CapEx component, seeing an improved performance from TI in Q3, which was encouraging, a very strong performance actually organically at a TI at the EBITDA level. And one of the attractive aspects of TI is that when you can get a strong EBITDA growth of that nature, it's typically coupled with low CapEx intensity. The CapEx intensity on TELUS International is in the mid-single digit. So it's a nice cash yield story and of course we can recycle that cash yield to support our broadband operations on both wireline and wireless.
And then lastly, in 2019, I don't see really anything happening on the fixed wireless front. We've got a spectrum auction happening at the 600 level and that low-band frequency will be important. But to really get going on leveraging 5G, not just as a macro mobile service, but as a fixed wireless service to complement what we're doing on the PureFibre front, we really need to get access to 3.5-gig and millimeter wave. Those will be the two key frequencies that we will use when we're thinking about 5G, not just in terms of macro mobile, but to complement PureFibre as an access mechanism, and in some cases with superior economics because of the cost efficiency. And given that the 3.5-gig auction won't happen until 2020 and millimeter wave thereafter, those are really the two prerequisites to amplifying and scaling 5G as an alternative access mechanism with attractive economics associated with it. So that's going to be kind of 2021, 2022.
I think the exciting story here for investors is the headroom that we have to ratchet down CapEx. I think that's a deeply underestimated attribute of the TELUS cash flow story. The fibre program has been such a significant capital investment that we've got lots of headroom to ratchet that program down and still make considerable investments in both PureFibre and 5G. And that's the story that I think we're going to dine out on for many, many, many years to come in terms of how moderating capital will flow through to the cash flow yield of the TELUS organization.
And on that, the cash tax side, so in 2019 you will see increased cash taxes. They would obviously be more reflective of the effective tax rate that you would have seen disclosed in the financial statements. And then in that first year of where you end up having to pay installments and the incremental tax, there will be a slight premium to that in 2019 and we'll disclose more of that when we put out our guidance in February.
All right. Our next question comes from Vince Valentini of TD Securities. Please go ahead.
Yes, thanks so much. Let me ask about the wireline side and your video and Internet business. The ARPU you talk about is 37% higher for homes that are on fibre versus copper. I'm wondering if you see that as being able to close the gap that exists in ARPU for both video and Internet in Alberta B.C. versus what we see in Ontario? Maybe you can update us on your views on that, given that neither you nor Shaw really give us video Internet revenue every quarter, but sometimes you're willing to update us on how big that gap is. And do you think fibre is the solution to closing that gap over the next couple of years?
I don't really want to comment so much on our pricing strategy, Vince, prospectively. But the answer directly to your question, do I think that fibre can address the gap that you're referring to and provide superior economics prospectively, the answer is categorically yes. The explicit number that I gave was a 35% lift on the ARPH on fibre versus copper coupled with a 25% churn improvement and a 40% cost efficiency improvement. So looking at those things in combination and the fact that the product attributes are so attractive on both Internet and TV in terms of differentiation from our peer group, I like what that's going to deliver for the organization prospectively from loading to the economic characteristics of that loading, which is why we've given some guidance to the street in terms of where we want to take our wireline margins.
We – right now if you normalize on the TI front and just look at the kind of core FFH part of our business, we're very close to 30% margins. What we want to do with TELUS prospectively, TI included, is to get our wireline margins up to 35% and that's the march that we're on in terms of wireline value creation. And there's a number of things that I think can help achieve that. One is the rightful point that you're making, that fibre growth will drive positive fibre economics in terms of our FFH base, but there are other things going on. Right now the TI acquisitions that we have done have been dilutive to our EBITDA margins. I would expect as those acquisitions mature and we harvest the value, and TI has got a margin goal of 15% to 20% because of the high quality of the service that they provide, I think we'll switch from a dilutive aspect to a margin contribution.
Secondly, our B2B business at TELUS has been soft and it has been a frustration of ours and it has been dilutive to our 2018 performance. We're looking to drive that to a neutral performance in 2019 and an accretive performance in 2020. And that will make a substantive contribution to the march to 35% on the wireline, march in front. And there's a lot of upside there to be realized and the team is working diligently towards that particular goal. And what we announced in terms of the $50 million increase in our restructuring costs, and the more than $50 million in value that we're going to derive from that in 2019 is indicative of our tenacity in addressing the improvement opportunity on B2B.
Next, I think there's lots of upside growth on the health front that will come with some very attractive margins associated with it. It's a business that's EBITDA accretive and cash flow accretive. And as we scale our health business and drive not just greater growth, but greater efficiency from the scaling of the business, I think that's also going to make a significant contribution.
And then lastly, the bookend to all the growth that we talked about from fibre to TI that helped the B2B improvement, the other end of the bookend is we just keep – you just need to keep pushing the outside of the envelope on cost efficiency. Habitualizing that behavior within the TELUS organization so that when we have a rhythm of taking out costs that matches the rhythm of launching new products and new technologies, it's just the way that we have to live within the TELUS pool, and not just on wireline but wireless as well. So those are the underpinning valuation factors that I think will support a strong wireline EBITDA growth and margin story prospectively that we're encouraged by.
The next question comes from Simon Flannery from Morgan Stanley. Please go ahead.
Thanks a lot. Good morning. Doug, I wonder if you could just talk about the balance sheet a bit. Obviously there is good momentum on the free cash flow side of things. It sounds like that's going to continue in 2019. You've got some spectrum auctions as well. So maybe you can just update us on what you're thoughts on where your leverage is today, where you'd like to get your leverage over time and how you balance the various opportunities to pay down debt by spectrum to put it towards the cash returns projects as you think about the next three-year plan?
Yes, we have – right now we have very good momentum with where we're headed on leverage and you'll see in this quarter, we continue to lever down more on the growth perspective as that ratio. We expect even with the spectrum auction in 2019, but, yes, you'll see leverage, I would say, tick up a little bit during that timeframe, but it would be still lower than the historical rates we had in 2017. So confident of where we're at, confident with the leverage ratio that it is the right cost of capital for our organization and that even with the spectrum, we'll be in a very reasonable level with the longer term still trajectoring back down to the 2.5.
And how does that tie into anything you could sort of say about your capacity to continue to do another 7% to 10% type program?
So it will all come down to our growth and execution of our operating plan. And as Darren highlighted some of the opportunities that we go through in 2019 and we'll do the renewal back in the AGM. I would say that would be the driver to the 7% to 10% and the continuation of that plan is the execution of our operational plan. There won't be limitations because of the balance sheet and Darren also talked about opportunities on free cash flow with our capital flexibility. So all of those items would contribute to that decision, which you will see in May and I think it's trending in a direction we're happy with.
Great. Thank you.
Next question comes from Jeff Fan from Scotiabank. Please go ahead.
Thanks, good morning. Couple of questions. First, more housekeeping on the wireless area. Your equipment cost this quarter looks like it has contributed to positive margin this quarter. Normally that's sort of flat to negative. I'm wondering if there is something that's happening there. Are you subsidy-related or something that might be missing? The other is just on your wireline acquisition that you made this quarter. Pardon me if we're not experts in the healthcare industry, but with this Medisys acquisition, I was just wondering how you think that fits into the health segment and may be just a little bit on the financial profile and growth. I know it's not big, but it does contribute to the overall growth story. So just wondering if you can shed some light there please.
I'll take the margin one first. So, yes, with IFRS 15, obviously margins are impacted slightly differently than you would have seen in the past, but the main reasons for the margin accretion in the wireless side on that front is fewer early renewal. So when we had early renewals in previous periods, you'd have to write off device balances and waives. We've had a higher mix of handsets, which actually have a margin to them and generally they are the higher-end handsets in both loading and renewals. And we've been less promotional in the renewal offering. So all three of those are contributing to your – the margin component and from an AMPU perspective, it's completely aligned with how we are managing the overall P&L.
Do you think that's sustainable that those three factors going forward to kind of keep a positive margin for equipment going forward?
It will depend on the quarter and the intensity, but it will also depend on our pre to post migrations and some of the other initiatives that occur on a quarterly basis. So I think it will have a little bit of volatility to it depending on the quarter and what goes on in the quarter, but it is definitely something that we are looking at for a longer term margin accretion.
Jeff, just so we are clear, there is no misunderstanding. Normalizing for the acquisitions and just looking at organic growth, the wireline EBITDA growth is mid-single digit. So we're not having a flattering of that as it relates to the acquisitions. The 5.7%, the preponderance of that is coming organically. Stripping out the acquisitions, we're still on the mid-single digits in terms of the EBITDA wireline contribution. In terms of our health strategy, the Medisys' move is really one that's all about vertical integration. We are pushing hard on driving our preventative healthcare and wireless solutions and the technology that underpins it into the employer healthcare market. Not dissimilar to moves that have been made south of the border by some fairly prescient companies in that regard.
And having the Medisys' clinics gives us the opportunity to drive some interesting architectural innovation within TELUS Health by accelerating the delivery of employee centered healthcare that's backed by our broadband networks, both fibre and 5G, and allows us to actually deploy operationally our digital tools that we've been developing within Josh's TELUS Health organization. And these digital tools include the electronic medical records, they include virtual care, you saw what we did in terms of the press release on the partnership with Babylon out at the UK They include mental health applications, and of course they include capabilities and digital tools that allow us to network the primary care health ecosystem by connecting consumers and doctors and pharmacists with capabilities like e-prescribing and the processing of benefits claims on an electronic basis.
And so it really allows us to have an incubation and a lab for the deployment, the trialing and the scaling and the economics of our product portfolio and put it into practice in a way that's deeply meaningful and in an area that we see as being a high growth area in the future, which is employer-based healthcare and that's kind of the strategic efficacy that underpins the rationale in that regard.
Great. Thank you guys.
Next question comes from Maher Yaghi from Desjardins. Please go ahead.
I wanted to just go back on some metrics you talked about in your fibre to the home territory and you talked about decline in 25% in churn. Is that number sustainable in your view or it's more a reflection of the early going for the technology, i.e. it could change as the product matures and you have more competition in the territory that you're serving and newly started serving with fibre to the home with some win backs by the cable cos. So just trying to understand where you see this number going in the future as the technology matures. And when it comes to wireless, just a question on the gross loading rearview on where we are right now in terms of growth or flatness in gross loading and how do you see it going forward?
Okay. Firstly, I think it reflects well on the TELUS organization, the amount of disclosure that we do around pure fibre in terms of the precision of the coverage that we have, both on a home basis and communities basis and relative to our Optik footprint. We've also forecasted specifically the growth that we would expect to deliver on the Fibre footprint over 2019 to about 66% to 70% of the Optik footprint by the end of next year. And then lastly, the economic characteristics on cost efficiency, churn and revenue per household. So now going beyond that and providing forecast is asking a lot, but maybe I could just focus on some math here. The numbers that I'm quoting are not based on 12 months of fibre deployment. So it's not like we started the PureFibre program in 2017.
We're now 12 months into it and the most attractive returns are the early returns. And the fibre program at TELUS started way back in 2014. So when you think about 2014, 2015, 2016, 2017 and 2018, this is based on five years' worth of data that underpins the economic characteristics that I just conveyed. So I would say that that's fairly robust mathematically in terms of that weight as it relates to the economic parameters that are being conveyed. It's not a situation where we just started the fibre program and the early returns are the most attractive returns. So when you talk about sustainability, given that this is based on five years' worth of data, I would expect prospectively, I'm not going to go past 2019, but if someone said to me, do you think the churn improvement that you're getting on fibre, the efficiency improvement that you're getting on fibre and the revenue per home that you're getting on fibre, is that sustainable through 2019, I think the answer is yes, based on mathematically five years of data to draw inference from along the way.
The other aspect that is really important strategically in terms of sustainability is we're actually not that far away from having a pure broadband network. So one of the things that doesn't get discussed is copper decommissioning. And so the numbers that we're citing on PureFibre on a relative basis versus copper are actually just going to become our numbers as we have ubiquity in terms of broadband connectivity, whether it's fibre to the home and business or 5G to the home and business. And so I would expect the weight of those numbers to go from what it represents right now where we've got roughly speaking 650,000 homes connected with fibre as we drive that to near ubiquity, that's not just going to be a relative number, that's going to be the number for our base because we now have near ubiquitous coverage of broadband connectivity to the home and to the business.
So the churn improvement, the efficiency improvement and the revenue per home improvement will actually become standard rather than the program relative exception that we're quoting today. And there's lots of math there left to be harvested. We're in a position where we take the coverage from the 50 to the 60 to the 70 to the 80s. What we're going to be doing is pushing those weighted mathematics increasingly across our base and I think that speaks to the sustainability as well. But as fibre disappears, I think the value release on retention on growth and on efficiency is going to be super normal in its orientation and the results that we talked about just won't be felt by consumer because one of the missing parts of the conversation of the last few years has been the importance of fibre to the business community as well, particularly the midsize business community and what that will enable.
So on the loading side, just a quick refresh, the Canadian market still is penetrated about 87%. So we do see still upside to loading within the industry in aggregate and the year over year on the industry growing, it's still in excess of 20% to 30% depending on what measure you want to use. The other exciting thing for us is as our FFH loadings, the wireline loading, home automation and healthcare applications grow, we'll have more and more relationships in which wireless add-ons will contribute to that and in the quarter itself also very happy with our – the quality of our loading and the overall number. And if you remember, some of the swings between the Government of Canada loading between our competitors, normalizing for some of that will put us very close to the top in that value loading and how we look at our base in the quarter. So overall, happy and future potential still very good to grow considering the Canadian dynamics.
Thank you for the disclosure, Darren. And thank you Doug.
Okay, Mike. We’ll take our last question.
Of course. Our last question comes from Adam Ilkowitz from Citi. Please go ahead.
Thanks for taking the question. Doug, I just wanted to go to free cash flow in 2019 for one second and make sure I understand the pushes and pulls. With stable CapEx and EBITDA up, the cash tax is up as well, do you expect 2019 free cash flow to show meaningful growth next year similar to what you've seen this year? And then secondly, on the prepaid side of wireless, it seems like yourselves did very well this quarter, and also your other telco brethren, but not the market leader necessarily. Are you seeing a different return in the prepaid business or some different strategic need to be more aggressive in the prepaid business going forward?
So on the free cash flow item, we will disclose more in February when we give out our guidance. I think if we get very specific now, I'm preempting Board approval even for financial numbers for next year. So I'll hold off to February on that front and you've got CapEx and directionally where taxes are going. So we'll just have to wait for the remaining till February.
One thing I would encourage investors to think about is that longer term in terms of cash flow growth, the contribution won't singularly be coming from just the wireless business, but from the wireless and wireline business and not just because of the moderating CapEx comments that I made earlier, but by the significant growth that we are delivering from our wireline portfolio to complement what we're doing on the wireless front.
And if we can take the success that we've enjoyed on Internet and TV and mirror it with success on home security, home health and home automation, all on the back of that fibre 5G connectivity from an economies of scope point of view, that's going to be a lot of higher margin incremental revenue off of a fixed cost base. That will really support the amplification of our wireline cash flow growth to complement the cash yield that we're getting out of the wireless business.
And I think the diversity of revenue growth, EBITDA growth and cash flow growth across wireless and wireline at TELUS is a very unique story within the global context. In terms of the prepaid question that you asked, I think we did okay on the prepaid front. But I think, quite honestly, we can do a lot better. It's a developing area for us, one that we should have moved on more expeditiously historically and there's upside here to be achieved.
Secondly, we don't just think about prepaid as, a singularly a feeder channel to post on the migrations front. The new generation of prepaid has attractive AMPU characteristics in its own right and represents for us better quality loading than some alternatives within the wireless space relative to tablets by way of example. I think prepaid has a more attractive set of AMPU characteristics. And then you've got a scale or scope economy, however you want to look at it, in that you can harvest that prepaid base on postpaid migrations.
And by doing so, that can help buttress your ability to improve your ABPU performance historically as you shift, farm, cultivate your prepaid base on the postpaid migration front. So that's a very important strategic consideration for us. And then lastly, as it relates to pre – to post migrations, that was not a particularly potent story for us within our Q3 results and it represents an opportunity to do better prospectively within the TELUS organization as we both amplify the magnitude of our success on prepaid and also improve our effectiveness and efficiency in moving prepaid customers into the postpaid environment.
So those are the two comments, nice AMPU on a standalone basis and nice future migration opportunity. It's an area where we've done okay, but an area where we can do a lot better. And pre to post migrations, we're not flattering our Q3 results unfortunately.
Okay. Thanks, Adam. So if you have any follow-up questions, feel free to contact the Investor Relations team. And on behalf of Darren and Doug, thank you for taking the time out of your busy schedules to join us today.
Ladies and gentlemen, this concludes the TELUS 2018 Q3 earnings conference call. Thank you for your participation, and have a nice day.