TELUS International (Cda) Inc. Subordinate Voting Shares

Good morning. Ladies and gentlemen, welcome to the TELUS International Second Quarter 2023 Investor Call. My name is Jonathan, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question and answer period. If you'd like to ask a question at this time, please press star 11 on your telephone. If you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. I'd now like to introduce your host for today's program, Mr. Jason Meyer, Head of Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin the call.

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q2 2023 Investor Call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer, and Vanessa Canoe, our Chief Financial Officer. As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa who will provide some key financial highlights. We'll then open the line to questions from pre-qualified analysts before turning the call back to Jeff for his closing remarks. Before we begin, I'd like to direct your attention to slide two of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com slash investors. The statements made during this call may be forward-looking in nature, including all comments reflecting expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections. We assume no obligation to update any forward-looking statements. Jeff and Vanessa will also discuss certain non-GAAP measures that the management team consider to be useful in assessing our company's underlying business performance. An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release issued this morning and regulatory filings available on CDAR and EDGAR. I would also like to remind everyone that all financial measures we're referencing on this call and in our disclosure are in U.S. dollars unless specified otherwise and relate only to TELUS International results and measures. With that, I'll now pass the call over to our President and CEO, Jeff Piritt.

Thank you, Jason. Good morning, everyone. As discussed on our July 13th investor call when we provided our preliminary Q2 results and shared a revision to our full-year outlook, the second quarter of 2023 marked a particularly challenging time for TELUS International. While we generated revenue growth of 7% year-over-year, adjusted EBITDA declined 20% year-over-year in what I would characterize as a perfect storm of near-term and temporary profitability pressure, which we'll discuss in more detail in our remarks today. Indeed, as we've discussed with many of our stakeholders over the last few weeks, there are a few points I'd like to re-emphasize. The first relates to TI's outlook revision. What in particular changed now versus earlier in the year and whether the revised outlook is de-risked given the profitability pressure in Q2. To address what changed, I'll first point to even more aggressive near-term cost-cutting behavior by some of our large tech clients in particular. Earlier in the year, we had anticipated and reflected some of this softness in our annual outlook. However, as an example, we experienced a sudden and larger than expected reduction in content moderation services, which disproportionately impacted our European operations. This, in turn, strained the pace of our revenue growth and added temporary pressure on our profitability. When we've encountered demand softness from clients in the past, our scale and growth trajectory enabled us to repurpose our highly skilled team members to other growing client accounts. Unfortunately, we were unsuccessful in this regard in Q2, and as a result, we were faced with an unfavorable ratio of labor costs to revenue, which created a temporary drag on our profitability. Adding to the complexity of this particular challenge was the labor regulations in certain countries in Europe that impeded our ability to scale down as quickly and efficiently as we were required to in response to the decreased demand. Despite this, we have now successfully actioned meaningful cost savings and have other efforts currently well underway to right-size our team member count with current client demand. We believe these margin pressures in the second quarter were largely due to isolated issues that we have now either already addressed or have a clear line of sight to remedy. Due to the strong progress and execution of these and other remediation efforts as reflected in our updated outlook, we expect to quickly return to our typical 20-plus percent adjusted EBITDA margin for the balance of the year. That said, based upon what we currently see in our sales funnel, have heard from our clients, and have observed in a broader macroeconomic environment, a revised annual outlook reflects a much more cautious view. With respect to our pipeline, Our sales funnel remains very healthy at over $2.9 billion as of June 30th, albeit with an increased aging profile of the opportunities within it that we ascribe to the longer-than-typical delays in decision-making due to macroeconomic uncertainty impacting clients' budgets. Fortunately, we have not seen many funnel opportunity cancellations, and indeed our global sales team continued to win incremental business in the second quarter, attracting new logos such as a B2B human resources software company a multi-utility service provider, a subsidiary of a multinational IT and consulting company, and a facilities-based technology and communications company. Again, whilst not at the pace we expected, we also continue to expand services with our existing clients in the second quarter, including with Google, our third largest client, as well as secured incremental volumes with an integrated power company in the U.S., a leading North American financial institution, a major American telecommunications provider, and a North American integrated retail electricity and power generation company. I also want to touch on WillowTree. While the integration continues to progress quite well, WillowTree's business has been subjected to similar pressures brought about by the macroeconomic environment, with many clients deferring decision-making in connection with their near-term digital transformation projects until the economic climate improves. These headwinds are not intrinsic to WillowTree, but appear to weigh heavily on the broader IT services industry, manifesting themselves as project delays, lower volumes, and slower decision-making by clients. I'm confident these pressures will subside in time. However, it's worth noting here that our deal thesis for the acquisition of WillowTree, like any other acquisition, was always predicated upon a longer-term outlook, and I remain extremely confident in the opportunities ahead, to further bolster TI's front-end design and build offerings and to extract incremental value from our combined capabilities, especially as it relates to the continuing support of our largest client, TELUS Corporation, due to their unwavering focus on customer service excellence as we help to enable their digital progression. Without understating the magnitude of our July 13th pre-announcement, I want to reiterate my belief that TI's long-term investment thesis is very much intact and our competitive positioning remains strong. Indeed, there are meaningful opportunities ahead in digital transformation and generative AI in particular, which I'll touch upon more momentarily. Areas where TI is uniquely positioned and credentialed to design, build, and deliver differentiated, responsible, and market-leading solutions for our clients. On that note, let me now provide some insights and updates regarding generative AI as the technology and its seemingly limitless applications continue to drive extreme interest across all markets, including CX outsourcing, with some expressing a level of existential concern regarding the industry's continued viability. I believe that, like so many technological evolutions that have preceded it, The advent of Gen AI will benefit organizations that are able to adapt with greater pace and agility, but also with purpose and thoughtfulness. The CX environment has changed many times before, and back in 2018, I paraphrased a quote that said, having a digital strategy will soon seem as silly as having an electricity strategy because of how ubiquitous and ingrained we predicted digital channels would become in our clients' customer support strategies. Today's digital CX landscape has evolved from in-person voice only support to incorporate bots, automation, machine learning and AI to name just a few of the technologies and innovative applications that have become the norm in how we design, build and deliver our leading services and solutions. Indeed, according to Gartner, 89% of all companies have either adopted a digital first business strategy or are planning to do so and 91% of businesses are engaged in digital initiatives. There is no doubt that the CX industry is evolving once again as generative AI dominates the headlines and disrupts almost everything. Notably, TI is not merely a backseat passenger in this disruption, nor have we been in the past. We invested in Lionbridge AI employment years ago to capitalize on the growth in need for AI data annotation and computer vision services, the picks and shovels, as I like to call them, to help our clients leverage AI opportunities. More recently, we invested in WillowTree to incrementally grow our digital advisory capabilities and our bench of top tech talent that could help to create market-differentiating brand experiences. Generative AI is now already expanding the scope of CX tasks that can be automated and augmented to assist employees in their work, and it will continue to do so at an accelerated pace. As TI has done during previous tech-fueled iterations, we are simultaneously expanding our range of solutions and upskilling our workforce at an accelerated pace in order to meet the changing demands of our customers. This includes new ways of structuring our client engagements with a mix of professional services, outcome-based pricing, and even software-as-a-service licensing elements depending upon the solution. We see generative AI as a net positive development for our business thanks to our existing capabilities and the benefits we stand to realize by deploying generative AI solutions within our own operations and on behalf of our clients. To this end, TELUS International has a comprehensive suite of data-driven, end-to-end generative AI solutions that integrate the best of gen AI capabilities and human expertise to transform digitally-led customer experiences across the entire customer journey. Let's look at GenAI through the lens of our design, build, and deliver approach. Within design, we provide CX strategy, experience design, and digital consulting services that leverage our deep expertise in understanding the customer journey throughout the entire CX lifecycle, including how GenAI can be responsibly leveraged through thoughtful data governance to optimize client experience. Our build capabilities around GenAI rely upon our unique ability to structure and operationalize customers' data to empower digital CX supported by GenAI to reach its maximum potential. Specializing in AI dataset sourcing, annotation, testing, and validation for AI models, our team members are the H in RLHF, reinforcement learning through human feedback, that ensure high-quality data for optimal AI performance. We responsibly create, source, and utilize diverse and trusted data sets to ensure that our clients' GenAI solutions are built upon a foundation of inclusive and accurate data. And in terms of the delivered domain, our data-driven CX solutions, powered by GenAI, enable businesses to achieve enhanced productivity with improved customer satisfaction, driving exceptional outcomes in today's competitive landscape. With operations across five continents, including a global community of more than a million annotators and linguists, TELUS International provides global reach and local expertise to deliver exceptional gen-AI enabled solutions. Because of its implications on society, I believe the responsible development and progression of generative AI must be underpinned by a humanity in the loop approach, not simply human in the loop processes. whereas the latter helps optimize AI models and algorithms through human intervention and contribution, the key to TI's unique humanity-in-the-loop approach is our commitment to codifying diversity and inclusion into all stages of generative AI's design, development, and implementation, from creating high-quality datasets to establishing policy guardrails that protect rather than detract from the complex ecosystem that connects us all. For example, we're currently supporting a leading conversational generative artificial intelligence chatbot developed by one of our hyperscaler clients by actively driving the expansion efforts across multiple initiatives. While I'm limited in the level of detail I can provide regarding this engagement, I can share that we're helping our client with prompt research and leveraging TI's global AI community of subject matter experts for the prompt and response creation. Our team is also involved in their generative AI evaluation and data set tuning, as well as benchmarking and analytics. We've been providing generative AI support across the span of this client's language coverage and supporting multiple gen AI engineering efforts throughout the year. We anticipate expanding the scope of the services we're providing to all of more than the 500 languages and dialects we support. This is a large-scale, complex engagement for our AI data solutions team that builds upon our long-standing partnership with this client that spans well over a decade and also includes CX support services and a joint go-to-market opportunity supporting digital transformation strategies and digital customer experiences. Another enterprise-grade AI use case is with our parent company, TELUS Corporation. We're currently engaged on hundreds of programs for TELUS's fast-growing, tech-enabled lines of business, including our support of TELUS Health, as I shared on our investor call in May. Today, I'll provide an example of the exciting work we're doing for TELUS agriculture and consumer goods. When it comes to adopting technology, the agriculture industry has always exhibited a pioneering spirit. In fact, beef producers have been using artificial intelligence to augment productivity, profitability, and improve performance in crops and cattle for decades. In this particular engagement, the end customer is a large North American beef producer with more than half a million cattle. The client wanted to mine its extensive data regarding the genomic and expected progeny differences of cattle, meaning the likely characteristics of an offspring. in order to uncover correlations between the specific cattle characteristics and production data in order to drive performance improvements. In particular, the client wanted to assess what factors had a significant impact on the healthy growth of their cattle. For TI, this meant creating a specific task to identify disease resistance attributes in animals to decrease mortality incidents that in turn would increase production efficiency. This client also sought our support to identify other statistical correlations in its data assets in order to leverage AI to disrupt its conventional business model to position the business to be more proactive, productive, economical, and competitive. For this project, TI is using an AI technology stack from Google Cloud Platform, which leverages tools to handle complex challenges related to the AI pipeline. From data ingestion, preparation, storage, and exploration, to training and generating insights, it supports the complete journey of the AI loop. This project brings forth some unique challenges, given the sheer amount of data involved and its volatility. But by leveraging AI, we were able to employ techniques that simultaneously evaluate multiple factors and their interactions, enabling our clients to uncover reliable correlations in the data. AI algorithms help our team to efficiently rank critical factors that impact profitability, including factors around animal health and quality of production. This client also requested extensive handcrafting of their production data features, a process called feature engineering. We're currently in the proof of concept stage on this particular project, but by analyzing the data sets and employing AI models, our team will be able to identify the critical traits that define outperforming cattle characteristics, which will help generate actionable insights for performance improvements, including preventive cattle health interventions and procurement strategies. Once our team successfully moves this project to the next stage, will employ an outcome-based gain share model with a multi-year contract worth several million dollars. More broadly speaking, TI has been developing and employing digital tools to automate our clients and our own operations for many years now. Among our more recent case studies is an example that relates to robotic process automation, or RPA. TI implemented a bot solution for a diversified construction company to help process and manage up to 48,000 purchase orders annually. Previously, processing each invoice and inputting needed details into the client's enterprise platforms was a tedious manual task, whereas now our bot is able to free up resources, save our client money, and allow their teams to focus on more complex and higher-value tasks. We deployed similar RPA solutions for another client, a North American waste management company with multiple digital coworkers. One of our bots for this client is working on purchase order creation, as well as vendor setup, along with automating workflows that are repetitive, labor, and time-consuming. Importantly, the bot can also proactively flag any missing data inputs for human colleagues to follow up on. Another digital co-worker we deployed for the same waste management company took on the manual process of reconciling transactions for one of the client's partner banks. The bot is able to process multiple files and accurately input needed data into our client's bank reconciliation application with the capability to generate on-demand reporting and summaries for clients. And one last example this past quarter relates to a Canadian food company for whom we deployed an RPA solution to support their supply chain operations to take on repetitive manual tasks around scheduling appointment dates for the client's multiple warehouses. Our bot receives emails from individual warehouses and inputs or revises appointments into the client's scheduling platform. The bot then sends confirmations to notify specific warehouse teams to confirm the appointment details. The details our bot handles are fairly comprehensive, including not only the date and time of appointment but all the details of the shipment in question, including trailer, estimated loading and unloading time, dock location, and carrier comments previously submitted to the bot via the order email. These RPA examples have saved our clients money and improved productivity in a meaningful way. And with the continued evolution and integration of GenAI, our bots will get smarter and add even more value for our clients. In addition to continuing to evolve our service capabilities, We've also recently enhanced our executive leadership team with the appointment of Jose Luis Garcia as Chief Operating Officer. Jose Luis brings 30 years of experience leading service delivery operations in the telecommunications, digital IT and tech sectors and a track record of excellence and focused expertise overseeing end-to-end digital transformation for complex global enterprises. As our new COO, Jose Luis will play a key role to further advance and evolve TELUS International's global operational delivery model. And finally, before I hand the call over to Vanessa, I'd like to reference a few of the awards we received in the second quarter, recognizing the significant efforts of our global team. For the third consecutive year, our proprietary intelligent bot platform was named the best informational bot solution at the AI Breakthrough Awards. This year's win placed us amongst the most notable and well-recognized AI companies, including OpenAI, Microsoft, Palo Alto Networks, Verint, and an impressive list of top startups from across the industry and around the world. We were also named the Elite Eight winner of the 2023 Achievers 50 Most Engaged Workplaces Award in the category of Purpose and Leadership. And our team at Willowtree won another Webby Award this year, this time in the category of Best Public Service and Activism for an app we created in partnership with Meals on Wheels of Charlottesville. These awards truly showcase our team's ability to bring our culture to life through our inspirational workplaces that encourage our people to think differently, innovate, and evolve. Day in and day out, our teams demonstrate their unwavering commitment to supporting the well-being of the citizens and the communities where we operate. With that, I'll now invite our CFO, Vanessa Canute, to share details of our financial results, and I'll return to answer your questions as usual. Vanessa, over to you.