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Good morning, ladies and gentlemen. Welcome to the Second Quarter 2019 Conference Call for Morneau Shepell Inc. Please note that this conference call 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.
Thanks, Laurie. Good morning, and thank you for joining us. On the call with me today is Scott Milligan, our Chief Financial Officer. Yesterday, after markets closed, we released Morneau Shepell's financial results for the second quarter of 2019. Like always, you can access the earnings release, financial statements and our MD&A on our website at morneaushepell.com.Today, I'll review our performance in the quarter and year-to-date and Scott will cover off our detailed financials. And then we will open up the call for questions. As we noted in our earnings release, we are pleased by our second quarter results, which are in line with our strategic plan and met our expectations at the midpoint in the year. Before we dive into the results, there are several points of emphasis that I'd like to draw your attention to. First, our accelerating geographic expansion supports our growing track record of double-digit growth in the United States, built on strong organic growth and acquisitions. At the same time, we continue to grow in Canada, traditionally our home market. The integration of LifeWorks proceeds well, as does the development of our cloud-based platform that will tie our well-being solutions together, a strategy that is generating strong support from clients and prospects alike. And we have solid continuing growth in our sales pipeline, which bodes well for the next few quarters. Onto the results. In the quarter, we delivered a 24.2% increase in revenue over last year. Adjusted EBITDA increased 36% and adjusted EBITDA margins also showed solid growth to 21.6%. Scott will cover off the year-to-date numbers, but as we indicated in our earnings release, our performance at the midpoint of the year shows good growth in our key indicators that mirror what we delivered in each of the first 2 quarters of this year. Clearly LifeWorks was a major contributing factor to the significant bump in our results, both on the top and bottom line. One year later, it's worth mentioning that we're delivering the synergies expected. We are very pleased by how the LifeWorks solutions set and platform complements our capabilities as a power brand in the well-being market space. Let me mention a few key business wins in the quarter. We continue to see strong performance in our pension and benefits administration solutions business, and in the quarter, we brought in a number of new pension and benefit admin mandates in both the private and public sectors. In the U.S., we won a sizable benefits administration contract for a large municipality in the Southwest. We won a very good pension administration contract with a large food processing company, also based in the U.S. The interesting thing here, it was a joint bid with Prudential Retirement. It's an exciting win for us that supports our view that our Prudential relationship has solid growth potential in addition to a strongly established base of business. In Canada, we won a new piece of outsourcing business for a large pension plan provider. Also, in Canada, in our health and productivity solutions business, there were several noteworthy wins. For example, working with a major health services provider, we landed a very good contract to provide iCBT therapy services. ICBT is an emerging form of Internet-based cognitive behavioral therapy that has excellent growth potential. We're providing a fully outsourced software-as-a-service, or SaaS, implementation for health and productivity solution to a public sector organization that employs front-line workers in a field known for high levels of PTSD. On previous calls, we've talked about future growth coming from North American multinationals, requiring global support in providing well-being services for their employees. In the second quarter, we signed up another U.S.-based global financial conglomerate to deliver an employee and family assistance plan to its people in the United Kingdom. So where do we go from here? Like we've talked about before, we have the opportunity today to be the power brand in the employee well-being space and we're moving forward confidently towards that goal. To date, we have converted over 1.4 million lives to our new core well-being platform and we anticipate seeing that number continue to grow. We're the only organization that integrates solutions for the core -- 4 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 made us one of, if not, the world's largest solution provider in these converging market spaces. We're the largest provider of integrated absence management solutions in Canada. And finally, we're the largest administrator of retirement and benefit plans in Canada with a fast-growing U.S. business with some 7 million people covered by our plans. That number is projected to increase substantially in the United States, thanks to the agreement we closed on Wednesday, August 7, to acquire Mercer's U.S. large market health and defined benefit administration business.We're excited by what this acquisition means to our growth story and its direct fit with our strategic plan. We are very impressed with the Mercer people joining our team, bringing deep expertise and experience in an important growth market for us. The Mercer acquisition accelerates our growing position in the U.S. corporate market for pension and benefit solutions, building on our known strengths and growing share in the public sector markets. Stepping back for a minute, we also see the value to long-term growth on a strong corporate social responsibility program. We take the CSR responsibility very seriously not just for investors, but for how our clients and our people and the communities where we operate perceive us as a company worth doing business with and working for. In today's world, having what's called a social license is very much a strategic asset in growing your brand.I'd like to share one highlight from our first CSR report. For nearly 10 years now, our company has had a commitment to the United Nations High Commissioner for refugees to provide funding for educational support to girls and young women living in the Kakuma refugee camp in Northwestern Kenya, which is home to about 180,000 refugees. That is where we started and continue to support a Morneau Shepell secondary school for girls, a badly needed resource in this region. On World Refugee Day this year, I had the privilege of visiting Kakuma and saw firsthand the inspiring accomplishments of the school in helping students benefit from access to education. Kakuma is a poignant reminder to me and to our leadership team of our commitment to our purpose of improving lives and improving business. In closing, a few general words about the years ahead. We expect our Canadian business to keep producing growth in the mid-single digits, with double-digit growth expected in new technology products, the United States and in emerging markets. As we move forward, we do so with a confidence that Morneau Shepell is well positioned strategically, operationally and financially to deliver profitable growth for many years to come. On that note, let me turn the call over to Scott Milligan to review our financials.
Thanks, Stephen, and good morning. As Stephen said, it was a solid second quarter. We are pleased by our accelerating growth in the U.S., while maintaining our performance in Canada. The company reported $212.7 million in revenue, an increase of 24.2%, up $41 million over the same period last year. These results were primarily due to revenue increases from the LifeWorks acquisition and significant growth in our pension and benefits administration solutions business. Adjusted EBITDA increased by 36% to $45.9 million, up from $33.7 million last year. The increase here is primarily due to revenue growth and the impact of adopting IFRS 16. Adjusted EBITDA margin was 21.6%, an improvement compared to 19.7% in the second quarter of 2018. Adjusted EBITDA per share was $0.69, a 15% increase compared to $0.60 per share in Q2 2018. Profit was $6.3 million compared to $13.7 million in Q2 2018. The decline in profit is directly attributable to LifeWorks' amortization charges and the integration costs. During Q2, the company generated normalized free cash flow of $27.6 million compared to $16.9 million in Q2 2018. The improvement is mainly due to increased cash generated from operating activities as a result of higher adjusted EBITDA. Now turning to the year-to-date, we reported $417.4 million in revenues, a 23.2% increase. Adjusted EBITDA came in at $90.6 million, up 34.6% and adjusted EBITDA margins increased to 21.7% compared to 19.9% for the midway through last year. The company is maintaining its policy of paying a monthly dividend of $0.065 per share. All in all, the second quarter was in line with our expectation 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 supports our growth and profitability. It's a model based on strong recurring revenue, strong cash flows, consistent margins, a 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 now turn the call back to Stephen.
Thanks, Scott. I'd like to thank everyone on the call for your time so far today. We'd be pleased to now answer your questions. Laurie, can you go ahead and open up the line?
[Operator Instructions] And the first question is from Stephanie Price from CIBC.
I wanted to touch on the Mercer acquisition for a few minutes. Can you talk a little bit about the organic growth that we should be expecting from that acquisition?
Steph, it's Scott. It's a closed book of business. So I don't expect pure organic growth of much size there, although we do see certainly opportunities to add additional services for the group of clients. It's a Tier 1 list of U.S. corporate clients and we've had great conversations with them through the transition and we anticipate that there could be some additional opportunities.
Okay. And then in terms of margins, can you talk a little bit about how you're thinking about them kind of trending over the next couple of quarters for that Mercer business?
Yes. The business is a low to mid-teens margin business. We see a little bit of upside in that, but we -- there's not a lot, but that's sort of where the business is.
Okay. Okay. And then on Prudential, can you walk us through that relationship a little bit? In your prepared remarks, you mentioned that you'd had a joint win with them. Just wondering if you could kind of talk about how you're going to the market there.
Yes. The way we kind of think about it, Stephanie, is Mercer gives us the opportunity to really go after the large corporate market in pension and benefits, and then in the U.S. we're already strong in the public sector market. What Prudential bid really is they're the front-end and we become the engine behind Prudential. So it was really taking over a number of their clients, administering looking after them. However, they do bid on a regular basis on a number of, I would call it, mid-market opportunities kind of below the Mercer scale and we do go to market jointly with them. If there is a DB component of a sale, then we would be -- we would pick up that DB business. I don't think it is going to be large growth, but I think there will be some wins as we move forward.
[Operator Instructions] The next question is from Graham Ryding from TD Securities.
Could you give us a bit of context, if you mentioned it, Stephen, when you went through the wins, I apologize I've missed it, but just some context on the size roughly maybe in aggregate or are any of these sort of multimillion dollar revenue per year type wins or what sort of scale are we thinking of?
Yes. The wins I went through and you'll probably pick up, we had a number in our admin business, a couple in our health and productivity and a nice global one recited from our LifeWorks business, which is the combined name for our legacy ESS and our legacy LifeWorks acquisition. They would have all been around $1 million range, kind of in that ballpark.
Yes. Okay. That's helpful. The organic growth was good in the quarter. It seems to be coming really from your well-being area and your pension and benefits admin and there doesn't seem to be any growth coming from your health and productivity or your retirement solutions. Can you give us a little bit of context on why those business lines are not growing?
Yes. I mean I think -- it's Scott, Graham. I think on the retirement solutions, as you know, we do a lot of work on regulatory pension plan wind-ups, and so that business tends to be multiyear contractual, but does go up and down over time and we're nearing the end of a large one. And that's really put a bit of a drag on the core business. The underlying rest of business is growing, but that is down and that is impacting things. And it's a little more timing related in health and productivity. As Stephen mentioned, we've got some good wins coming in that business, so we anticipate that picking up in the back of the year.
That make sense. IFRS 16, what was the impact in the quarter on EBITDA and margins?
Yes. So around 1.3%, both on a year-to-date and a quarter basis.
On the margin?
Yes.
Yes. Okay. And then just my last question is around the transformational expenses. So there was a further $3.9 million this quarter and looking over the past year, it looks like in total, it's almost $24 million of transformational expenses that are being excluded from EBITDA. Is that all related to one project that I think you're guiding towards $5 million to $6 million in run rate expenses, or are there multiple transformational projects going on here?
There are a number of individual initiatives within the broader project. I think we're nearing the end of it and the charges this quarter were predominantly the cost to implement some of the changes we're making, both severance and other similar costs. But I think we're headed towards the end of that, and I think we'll wind that down over the next couple of quarters.
Okay. And what about the -- on the Mercer side, is there any integration expenses or onetime items to be expected here?
Not a lot. There are some. Obviously, we're setting up new entities and couple of -- there's some locational things going on, but unlike the Canadian Mercer deal from 7 years ago, we're not replatforming or any of that kind of thing. So the costs would be relatively modest.
Okay. And then just lastly, on the LifeWorks, what should we expect in terms of ongoing integration expenses going forward?
Yes. I mean we set -- the original guidance was $20 million of spend, where -- I think we're at about $15 million right now. We're headed towards the end of that as well. So I think the number is going to be in line with the original expectations.
There are no more questions registered at this time. I would now like to turn the meeting back over to Mr. Liptrap.
Great. Thank you very much, 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.