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Good morning, ladies and gentlemen. Welcome to the First Quarter 2019 Conference Call for Morneau Shepell Inc. Please note that this conference will contain forward-looking statements, which reflect management's current beliefs and expectations regarding the corporation's future growth and results of operations. Actual results can differ materially from those anticipated.I would now like to turn the meeting over to Mr. Stephen Liptrap, President and Chief Executive Officer of Morneau Shepell Inc. Please go ahead, Mr. Liptrap.
Thank you, Laurie. Good morning, and thank you for joining us today. On the call with me today is Scott Milligan, our Chief Financial Officer. Yesterday, after markets close, we released Morneau Shepell's financial results for the first quarter of 2019. Like always, you can access the news release, financial statements and our MD&A on our website at morneaushepell.com.Later this morning, as you know, we're holding our Annual Meeting at our Markham office starting at 11:00 a.m. At that time, we'll be reporting in more detail on how the company performed in 2018 and in the first quarter of this year. We will also talk about our strategic growth plans. So for those of you either not attending or dialing into the AGM, on this call, I'll provide a more concise version of that story. Scott will then cover off our financials. And then we will open up the call for questions.As we noted in our earnings release issued yesterday, we're pleased that 2019 is getting off to a good start. We delivered a 22.2% revenue increase over the same period in 2018. Adjusted EBITDA increased 33.2%, while adjusted EBITDA margins also showed solid growth to 21.8%. The main contributor to our quarterly growth was LifeWorks acquisition as well as the Prudential Retirement win. We also closed a number of other administration client wins over the past few months in the United States that turned into revenue last quarter.At this point in the year, our business is tracking to expectations. All our businesses are performing solidly, and our sales funnel is showing impressive growth since the beginning of the year. Our margin improvement was related to our transformation project, LifeWorks synergies taking effect and IFRS 16. In the quarter, we also made very good progress with our product road map to support the evolution of our cloud-based platform, which is a key part of our strategic growth plans. We're also pleased that once again we delivered double-digit organic growth in the U.S., which, as you know, is a critical part of our strategy and our growth story.Let me mention a few key business wins for the quarter. In the U.S., we brought in a number of new pension administration mandates in private and public sectors. In the well-being business, which includes what was formerly our employee support solutions business, integrated with the LifeWorks team. We won several sizable contracts in Canada, including a very large public sector client.With LifeWorks in the mix, we're pleased by the reaction we're getting from clients to our platform approach for integrating a broad continuum of well-being services to support people in the workplace. Also in our well-being business, Wells Fargo in the United States, the global financial institution, renewed its EAP contract and extended it to 15,000 employees in India. We expect more growth with North American multinationals requiring global support in providing well-being services for their employees. In this context, it's vital we keep evolving our cloud-based platform to scale our solution for these global opportunities.Also, in the quarter, we delivered a cross-sell opportunity with Hydro One, with an upsell for an absence and disability management solution. With several large clients in Canada, we delivered cross-sell opportunities that are still under nondisclosure. Also, we're featuring the upsell of an absence and disability management solution of just under a $1 million for a large transportation company.So where do we go from here? In different segments of the HR industry, there are clear leaders with strengths, market share, technologies and brand to build a sustainable competitive advantage. We have the opportunity to be the power brand in the employee well-being space, and I'll have more to say about that at the annual meeting. But consider these indicators of where we are today and how they support our view that our company is moving forward confidently. We have converted over 1 million lives to our new core well-being platform over the last few months. Today, we are the only organization that integrates solutions for the 4 critical key pillars of well-being: mental, physical, financial and social. Building on our large market share in employee and family assistance programs and well-being solutions, the LifeWorks acquisition makes us the world's largest solution provider in these converging market spaces.We're the largest provider of integrated absence management solutions in Canada, including our [ ability ] iCBT solution that has secured some significant government wins, including a recent $2 million government contract.Finally, we are the largest administrator of retirement and benefit plans in Canada with a fast-growing U.S. business with some 7 million people in our plans in total. And that number is projected to increase substantially in the United States, thanks to the agreement we announced Monday to acquire Mercer's U.S. large market health and defined benefit pension administration business. We're really excited by what this planned acquisition means in delivering on our growth story.In closing, a few general words about the year ahead. We expect our Canadian business to keep producing growth in the mid-single digits, with double-digit growth expected in new technology products in the United States and in emerging markets. In addition to driving organic growth from our core businesses, you can expect us to keep focusing on acquisitions when they make sense to supplement our growth and enhance our strategic advantages in markets where we want to compete. As we move forward, we do so with the confidence that Morneau Shepell is well positioned strategically, operationally and financially to deliver profitable growth for many years to come.On that note, Scott Milligan will review the financials.
Thanks, Stephen, and good morning. It was a solid first quarter to start the year. The company reported $204.7 million in revenue, an increase of 22.2% or $37.2 million from the same period last year. These results were primarily due to the revenue increases from the LifeWorks acquisition and significant growth in our pension and benefits administration business.Adjusted EBITDA increased by 33.2% to $44.7 million, up from $33.6 million last year. The increase here is primarily due to business growth resulting from the LifeWorks acquisition and the impact of adopting IFRS 16. Adjusted EBITDA margin was 21.8%, a solid improvement compared to 20% in Q1 2018. Adjusted EBITDA per share was $0.68, a 13.3% increase compared to $0.60 per share in Q1 2018. As expected, the LifeWorks acquisition was accretive to adjusted EBITDA per share.Profit was $8.7 million compared to $14.2 million in Q1 2018. The decline for the period is directly attributable to LifeWorks-related acquisition expenses of $9.1 million, including $7.4 million of intangible amortization. At this point in the year, we are tracking to expectations with the LifeWorks acquisition -- LifeWorks integration into our existing business. During Q1, the company generated normalized free cash flow of $24 million compared to $16.8 million in Q1 2018. The improvement is mainly due to increased cash provided by operating activities as a result of higher adjusted EBITDA and improved working capital management. The company is maintaining its policy of paying a monthly dividend of $0.065 per share. All-in-all, the first quarter was very solid, in line with our expectations and bodes well for how we go forward.Before I hand the call back to Stephen, I'd like to briefly refer to our business model that year-after-year supports our growth and profitability. It's built on strong recurring revenue, strong cash flows, consistent margins, a solid track record of successfully integrating acquisitions, best-in-class client satisfaction, and finally, strong employee engagement levels from a very talented team across the business.And with that, I'll turn the call back to Stephen.
Thanks, Scott. I'd like to thank everyone on the call for your time so far today, and we'd be pleased now to answer your questions. Laurie, please go ahead and open the line.
[Operator Instructions] And the first question is from Stephanie Price from CIBC.
Looked like organic growth was down a little bit sequentially. I was just wondering if you could talk about some of the puts and takes in the quarter. It doesn't sound like there's any change to the outlook, but maybe talk a bit about it in terms of future growth as well.
Yes. I think organic growth ended pretty much where we thought. It was nicely in the double digits in the U.S., and Canada might have been slightly lower than mid-single digits, but kind of within the range of what we would expect. We did have some projects to wrap up in Canada for some large admin clients within the quarter, and we did have some extra projects in the U.S. So it was really a mix between the 2. I would expect we will continue to see double-digit organic growth in the U.S. and mid-single digit in Canada.
Great. And then in terms of organic growth at LifeWorks, can you talk a bit about what you're seeing and if LifeWorks is tracking in line with your initial assumptions?
Yes. I think from a LifeWorks standpoint, it's tracking exactly where we would expect, that we're on track with synergies, we're on track with the product road map, we're getting very good client reaction to the road map. And we're seeing the pipeline grow. It was up substantially in Q1. Obviously, the work is closing that pipeline in terms of sales. But so far, everything is in line with our expectations.
Perfect. And then just one final one for me on the U.S. administration business. Sounds like you had some wins in the quarter. Just wondered if you could chat a bit about that business.
Yes. And it was a really good quarter for our admin business in the U.S. Obviously, Prudential Retirement was a key piece of that, but we also saw some other wins, both on the pension side and the health and welfare side. So we continue to be buoyed by the size of the market or opportunity, and we continue to grow down there. So it was a good quarter for that business.
The next question is from Graham Ryding from TD Securities.
Just the recent acquisition, what's -- unless I missed it, what sort of details can you provide on revenue impact and margins or earnings?
Graham, it's Scott. Yes, we're -- that's still in finalization and the reason we were silent on it in the press release. As you can imagine, there's a number of significant marquee clients. And we want to be certain about renewals before we lock down the number. And so the time between signing and closing is in fact largely about that, and that reach out has begun already, and feedback has been positive. But the purchase price, the size of the acquired business is dependent on those discussions. So we'll have more to say as we get more certainty.
Okay. Can you give us an indication, like, is it reasonable to assume that, from a margin perspective, this business would fit with your existing business?
Yes. For me, it would be comparable.
Okay. And then the purchase prices just could be dependent upon how many of these clients you actually end up bringing over. Is that right?
Correct. Yes.
Cross-selling of LifeWorks. Is the focus really the enhanced services? Is that what you're trying to cross-sell into your existing clients? And is there any traction or color you can provide on -- from the quarter?
Graham, it's Stephen. We kind of look at it in phases. So the first thing we're doing is we're taking legacy LifeWorks clients and legacy Morneau Shepell clients in the EAP field and moving them from the legacy systems over to our core platform. So the platform was pretty new when we bought them, so even legacy LifeWorks clients were not on the new platform. Once we get them over to the core, then it's really about having a discussion about moving them onto the enhanced platform. And then there is a third piece, which is really our vision of the future, which is talking about getting pension information, benefit information, absence information on that platform. In terms of the first phase, in the last couple of months, we're quite pleased because we've moved over 1 million employees of our clients onto the platform, and they're up and running and interacting, and we're learning a lot from that. The first phase though will be continuing to move more onto the core platform, but we are having discussions about enhanced platform after that. We have a couple of clients starting to move to enhance, but small number at this point, as you would expect.
Okay. And just to be clear, the core platform, this is the platform that you acquired through LifeWorks, and you're moving clients onto that platform. Is that right?
Yes. It's a little bit more than that because the team has done an exceptional job taking the real deep clinical expertise from Morneau Shepell and integrating it onto what was a platform that we purchased from LifeWorks. The other thing is we've also taken that platform and made it far more global, added on other languages and added on some global clients. So the platform has already evolved substantially from what it was when we purchased it.
Got it. Okay. And then my last question, if I could. Just thinking about your margins, there's lots of moving parts going on with transformational savings, LifeWorks synergies and then also IFRS 16. So I'm just wondering if you can maybe give us a bit of an outlook on -- historically, you've been a 19% EBITDA margin business. Where you see those margins in '19 and '20 after you factor in those 3 different moving parts?
Yes. Graham, it's Scott. I mean, yes, you're right, there's a lot of moving parts. And I think the easiest way to think about that is, and I'll start with IFRS 16, we think that's probably $11.5 million pickup in year this year. So that'd just give you a sense of what that means on our base. And so that will be the biggest piece. We're on track for the $10 million of synergies on LifeWorks that we counted on. And I think we talked last about $6 million-or-so of transformational savings. I think all of those will happen in year. So I think we're -- if you add those all up, I think we're up 180 basis points in the quarter. I think that's a pretty good place to start. And I think we'll exit the year with what we expected from those 3 pieces of savings.
Okay. So 180 basis point lift now, but it should be higher exiting 2019 as sort of you sort of hit the run rates on LifeWorks and transformational savings. Is that right?
I would say, yes.
[Operator Instructions] The next question is from Jaeme Gloyn from National Bank Financial.
First question is just back on the Mercer transaction. I'm wondering if you can give us a little bit more color about their underlying business, what kind of clients they have. Is there any that are -- are they all additive to the Morneau base? What does this mean for market share. Maybe just talk about the market, in general and how Mercer fits into it.
Yes. Jaeme, it's Stephen here. They've got just over 70 clients that we're talking about. They tend to be all on the corporate side. And as you know, we have a really nice position in the U.S. on the public sector side. So this makes us much stronger on the corporate side in the U.S. There are about 16 of those clients that are on both their health and welfare and their DB platform. And they're all large, well-known names that you would recognize. So we're quite excited by the quality of the clients, and we're excited about the cross-sell opportunity into those clients. Obviously, that will take time. But it really supports our strategy of significantly growing in the U.S., and that gets us nicely into the corporate sector.
Just to add, Jaeme, I think those would be all new names to us in the U.S. Some of them we would have some work we do for them in Canada for their Canadian subs, but they'll be all new names in the U.S.
Okay. And if I -- just to understand again or confirm as I understand that in the U.S., this would fall in the sort of pension benefit and consulting market space that you guys size at around $3 billion to $5 billion, of which Morneau is currently about $100 million in revenues. Is that about right? And then did I characterize that fairly?
The only -- it's Stephen here, Jaeme. The only slight tweak to that, I would say, we think about the pension and not consulting within the U.S. So it really is about the pension and -- but you've got the size and everything dead on.
Okay. Perfect. Second question is just on the costs related to the savings initiatives. Is that done now? Or should we expect those costs to continue to flow though as those savings flow through the rest of the year?
Yes. Jaeme, it's Scott. I mean what we -- that's everything we've captured so far in terms of savings opportunities. We're still working on a couple of other things. But I think they're going to be relatively minor. I'd be pleasantly surprised if they're larger. But I think, at this point, we're moving towards the end of that project.
Yes. So I think -- let me just clarify. I was talking about the other side, the expense that you're paying from, let's say, professional fee standpoint.
Yes. Sorry, that's where I was going. So the fees are contingent on the savings.
Okay. Okay. So hand-in-hand or is -- and can you share sort of what kind of percentage basis those should be as a rule of the thumb?
No.
Okay. And then last question for me is just around the LifeWorks pipeline. You mentioned that it was substantially larger today. Can you talk about what you're hearing from clients in terms of maybe potential hang-ups or concerns that might extend that sales cycle a little bit longer than what you've either previously expected or are expecting?
Yes. Jaeme, it's Stephen here. I think the first reaction, and I've been in lots of client meetings, is extremely positive around the fact that today they've got employees going to 7 or 8 different places. This gives them an opportunity to have their employees come to one place to get what they need and the fact that they're able to do it cheaper and in a more integrated fashion. We also know that clients we have converted to the platform and, again, it's close to 1 million -- or just over a 1 million employees we have on it. The take-up is fantastic. People 75% to 85% of an organization tends to be on it, using it every week, and they're on it 6, 7 times a week. So the feedback from either folks who we've moved on the platform or even new clients around the possibilities is all really, really positive. But you're exactly right, the sales cycle is longer, and it's really longer because in the old world when we sold an EAP, we had to sell to one person, which tended to be a benefits manager. As we're talking about selling the new platform, all of a sudden you have in the room the talent management team. We've moved upscale. You have the -- quite often the CFO, the CHRO. You also have IT and security. So it takes longer because there's more people involved. So it's more slow rather than not winning those sales. The other nice thing from my standpoint is, with all of those folks involved, we deliver good experiences. We know we will. It makes the business even stickier.
Okay. Great. And then just a follow-up. Looking ahead, like, what would you estimate the sales cycle to be for the LifeWorks product or, I guess, for the combined Morneau-LifeWorks product? Is this basically about a year from walking in, in the door to closing on a relationship?
I would say, the old EAP cycle -- and again, there is massively different by clients. You have large wins that seem to turn it around in a month, then small wins seem to take a year sometimes. But generally speaking, in the old world, LifeWorks would be 2 to 3 months; in the new world, we'll probably double that.
Okay. Great. And I'm sorry, I lied. I have one more just around the...
No problem.
Around the admin business. I'm wondering if -- you mentioned that there's 70 clients that Mercer is bringing to the table. How many clients does Morneau currently have in its pension admin's table?
Yes. Jaeme, it's between 200 and 300.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Liptrap.
Thank you, Laurie. I'd like to end by expressing my thanks to everyone on the call. We continue to appreciate your interest in our company. And we look forward to other opportunities in the future, including these calls to keep you up-to-date on what we're doing to drive our growth and success as a business. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.