Q3 2020 Morneau Shepell Inc Earnings Call
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Good morning, ladies and gentlemen, welcome to the third quarter 2020 conference call for Morneau Chappelle, Inc. Please note that this conference call will contain forward looking statements, which reflect management's current beliefs and expectations regarding the corporation future growth and results of operations actual results can differ materially from those in his anticipated I would now like to.
Turn the meeting over to Mr., Stephen Leptra, President and Chief Executive Officer of more no Chappelle, Inc. Please go ahead Mr. live trap.
Thank you Melanie good morning, and thank you for joining us on the call with me today is Grier Coulter, our chief Financial Officer.
Yesterday after markets closed we released mono chappelle its financial results for the third quarter of 2020.
Like always you can access the news release financial statements and are M.D.N.A. on our web site.
Chapelle Dot com.
Today, I will review, our third quarter business performance and highlights.
Where will then cover off our financials and we will open the call for questions.
Again, we're very pleased with the quarter. It was another quarter during the pandemic where business showed growth improved margins and resilience during these challenging times.
Overall, the third quarter is consistent with what we've been seeing since the pandemic began.
And we have started to see the acceleration of organic growth.
To historic levels.
We think of our business in three ways, one a solid core with strong recurring revenue to leavers that allow us to accelerate growth.
Three innovation and new technology.
Our core continues to perform well, although COVID-19 is still impacting some aspects of our business is where service has traditionally been provided in person we.
We have pivoted many of these two virtual delivery and that work is part of our improved organic growth. We're.
We're not 100% dock, but well on our way.
Additionally, we continue to see growth in retirement solutions disability management pension administration and the strong recurring revenue in these businesses continue.
In terms of our lever is for growth we continue to see strong sales performance from our ice CBT products, where we built from our earlier wins with two large provinces.
In the quarter, we added new government mandates and new private sector clients and although we just launched in the United States. We are in the contracting stage with our first U.S.I. CBT client.
In terms of our well being business, we want a sizable global contract to provide an FTP for a major pharma company with employees in 40 countries.
Our students support solutions business close wins at two universities in the United States.
We also closed a new win with a Canadian retail chain to provide sep two their 20000 plus employees across Canada.
In our well being business, we added more than 2.7 million lives through new client sales and now cover 13.4 million lives.
Through our FTP programs.
From just over 10 million lives last quarter we.
We also saw continued adoption of our life works platform a key part of our strategy.
We increased lives on the platform to 3.7 million, an increase of 9% in the quarter and 63% year to date.
The value of this ongoing migration is first and foremost to give more of our clients and their people in integrated user experience, while setting the stage for an up sell to additional technology modules.
We have been up selling at 10% and we increased that in the past quarter to 11% even with a large increase in the total lives available for up sell.
Another lever for accelerating growth is our us and global expansion in the quarter, we saw a high single digit organic growth in our geographies outside Canada.
A new measure that we are tracking is our technology recurring revenue measure and it includes our lifeworks platform.
T cells benefits administration technology and financial well being.
This suite of recurring revenue technology products grew at 8.3% and represents just over 50% of our revenue.
As we think about continuing to add new technology and innovation to our business during the quarter, we launched our expanded integrated Tele medicine solutions or virtual care in Canada and in the United States, It's an exciting area different from old style.
ER visits to the doctors office as we continue to see excellent adoption of our platform. It gives us the opportunity to add services and telemedicine is a good example of that it's all about our strategy of building.
Hi, Jane and partnering to add new services to our platform and be the single point of contact for the employee.
We have already had multiple wins for telemedicine in Canada, including with one of the largest clean power generators in North America and.
And within days of our US launch we are in the contracting phase for first Tele medicine sales in that market.
As we look forward our sales wins have been extremely strong and above historical levels.
Our funnel continues to be strong and is growing across all lines of business.
Our strategy is working and as a reminder, we are focused on owning the well being space access.
Accelerating growth through us and global expansion.
And driving world class delivery through people and technology.
In this context, we will continue to focus on one growing our solid core with strong recurring revenue to using our leavers to accelerate our growth and three continuing to innovate with new technologies.
Finally, we are pleased to note that we currently have the highest levels of employee engagement in the company's history and the highest level of client satisfaction and we just launched our second CSR report, where we highlighted the well being of our workforce benchmarked against the global working population.
Using criteria from our mental health index that we launched earlier this year.
While the mental health of the working population globally has declined significantly in the pandemic.
Warner Chappelle scored materially higher against a median decline.
This tells us our investments in the well being of our people in the resilience of our own workforce is delivering for us.
One of the consequences of the pandemic a positive one give that can be said is that it is really shine a light on the mental health issues in our communities associated with isolation anxiety and depression that we are already growing in the workforce.
But these have exploded since the pandemic began.
In that context, the mental health index as a global benchmark has not only a brand building asset, but a contribution we believe to addressing challenges in our communities providing insights that can really help people and governments, making policy decisions. We're really excited about the potential of the index to position us.
Globally as a leader in mental health and health organizations measure the EPS in ESG.
On that note pure Coulter will review the financials.
Thanks, Steven and good morning, It was an excellent third quarter not just on results, but in momentum going forward as we grow our business.
We delivered revenue growth of 7.3% compared to third quarter 2019, coming in at $20 million to $240.3 million.
There are three key drivers behind this revenue growth.
First organic growth of 4.3% was a significant increase more than double what we delivered in each of the previous two quarters.
That includes 8.4% organic growth and our United States International regions, a very positive development in its own right.
But even more so considering the pandemic.
Also contributing to our growth was the acquisition, we made last year of Mercers Standalone large market health and pension administration business.
As well there were some offsets in revenue and margin from the divestiture of our health benefit consulting business earlier this year.
In the quarter adjusted EBITDA increased 13.3% to 49.6 million from $43.8 million in the prior year quarter.
Adjusted EBITDA margin was 20.7% versus 19.6% and 2019.
There are onetime factors arising from the pandemic like reduced travel and training costs that boost margins.
But there are also heavy.
Headwinds, notably the divestiture of our benefits consulting business earlier this year. So overall, we're very pleased with this result.
Adjusted EBITDA per share for the quarter was 71 cents up 7.6% from the same period last year and.
In terms of profitability the loss for the period was $2.1 million compared to a profit of $1.3 million last year and this was impacted by a provision of 10.3 million associated with the planned relocation of our three trauma area offices into a single head office location in downtown Toronto at the end of 2021.
The move will deliver cost savings and reduce our overall square footage while at the same time, providing a modern workspace location that will serve our people and business more effectively occur.
Accordingly, the loss per share for the quarter was three cents compared to EPS of two cents in the comparative prior year period.
In the quarter, we generated normalized free cash flow of $21.9 million compared to 24.2 million last year. The decrease was mainly due to higher capex that we are making in our business.
Year to date, we reported $729.5 million in revenue.
An increase of 13.7% over the same period last year, along with adjusted EBITDA of 149 million up 10.9%.
Our year to date adjusted EBITDA margin was 20.4%, which was slightly better than what we anticipated for the year.
The company is maintaining its policy of paying a monthly dividend of 6.5 cents per share.
In closing I'd like to emphasize a few thanks.
At the end of the quarter, our liquidity position remains very strong and in line with our expectations, giving us the capacity to support our growth strategy.
We continue to manage our working capital very closely and have seen no degradation in the quality of our receivables a testament to the quality of our client relationships.
We had significant operational achievements in Q3, we completed the integration of our life works back office systems into one single platform for the business and accordingly, there will be no additional spend here going forward.
And on our Mercer integration, we've completed the majority of the work to extract these functions from their organization, we anticipate another million dollars in Q4, which time this work will be complete.
Therefore, we expect to have the remaining $1 million for Mercer and our ERP project Opex as adjusted items in Q4.
And from Q1 2021, it will be solely the ERP project.
And last year lastly, I want to reiterate how pleased we are with our strong organic growth for the quarter, especially from our us and international operations.
And with that I will turn it back to Steven.
Thanks career in summary during the quarter, we saw good overall revenue growth solid and improving organic growth and a good increase in margins I'd like to thank everyone on the call for your time, so far today and we'd be pleased to now answer any questions. Melanie can you go ahead and open the line. Please.
Certainly thank you.
Please press star one at this time, if you have a question there will be a brief pause for the participants register thank you for your patience.
The first question is from Stephanie price. Please go ahead. Your line is now open.
Good morning, when you Stephanie.
In terms of organic growth is obviously followed in the quarter. Just wondering if you could talk a little bit about the puts and takes here both in Canada, and what you're seeing in the us and internationally.
Yes, its Stephen here, let me start with international and Us.
That expansion over the last number of years has really been from what I would call, our new products and new areas of focus.
So we have very little onetime client facing stuff that would have stopped odd there. So the organic growth. We're seeing there is similar to what we would have expected kind of in the high single digit range.
Canada is a little bit more complicated because we've been here for a long time.
And as you know when we moved into the pandemic, we had some face to face services that stopped you can think about child support you can think about onsite trauma that we do some of the onsite training training.
And some of our consulting activities, we've been able to pivot over the last few months a lot of those to be virtual.
As I mentioned, not 100% back, but we're doing a lot of training now virtually how we're working with our clients from pension consulting standpoint, virtually on and we've got some office is open from.
Children support solution. So we are well back on our way, but that really is a difference in organic growth between Canada and the U.S.
Hi, Thanks for the color and then wondering about team is been more details around the role of telemedicine. Just curious if you see it more as an add on to the well being product are you could you could drive significant growth on a standalone basis.
Yes, we always think about that platform, which is why I keep coming back stepping into the number of people. We have on the platform and why that's such an important measure that you know that platform will be the place that employees will go to every single day. The place it will go in organizations to find.
Everything they need and we've really been working on how do you take that platform and one make a global we've added lives on we've moved to full data residency no matter where people are so we're complying with privacy laws in issues no matter, where people are coming onto it and we've been adding services.
Where we've just launched in the last quarter with a large north American bank, where we put pension and data pension and benefit data on the platform for them going forward, we do see adding other services and I think telemedicine is a really good.
Example of that where people can come onto our platform come into our system and pickup Tele medicine solution as they need we can do that through another provider out there or we can do that through our own solution whatever makes more sense for our clients. So I do think it will generate growth, but I do see it as an add on to the platform.
Okay, Great color and then just finally from me in terms of the accelerating pipeline just wondering how we should kind of think about the translation of that pipeline into revenue as we kind of head into 2021.
Yes, it's been really interesting because our sales have been above historical levels, which I don't know as I would have predicted when we first got into the pandemic, but that is continued month over month, our quality pipeline, which is what I really look at which is anything thats into pre.
Presenting or finalist presentation stage on is up over last year.
So I would see that both of those in looking at the pipeline in general.
Will lead us to believe that you know over the mid and long term, we will deliver inline with historical growth levels and I always think of that as mid single digit organic growth in Canada. You know don't know, whether that's three and a half four or 5% depending on the year on and then higher levels of ER.
Again at growth when we get outside of the Canadian markets.
Great. Thank you very much.
Thanks, Stephanie.
Thank you.
The next question is from Graham writing of TD Securities. Please go ahead.
Hi, good morning.
Right.
So the virtual health announcement.
I believe you said that you are partnering with a firm there.
Does that mean, you know you can provide coverage right across the country and maybe just some details on what you're providing in this partnership and what they're responsible for.
Yeah, Weve really got two things Graham so we've been providing virtual medicine through our partnerships that we've announced before with some of the larger providers. This.
This one what we announced it and thats been going on for well over a year. This one more particularly was us providing a telemedicine directly through our own system, so not needing to.
Hand off to one of these other relationships that Weve had on so we has.
Through partnerships as we do with it.
He and counselling and all of the other things we do we stood up a full network across Canada and we've now just stood up a full network in the U.S. So no matter where people are high we're able to provide virtual telemedicine support in Canada and in the U.S.
Okay understood and just to be clear.
Is this being offered within your existing contracts or is this an incremental.
Fee and add on.
Yes, it would be 100% incrementals. So we are out talking to our clients right now about if any of them are interested in adding those services on we will add that on as part of.
Our platform and how you come into the system I understood.
And then my last question just on the ice CVT. It sounds like there is pretty good tractions for you in that area yes.
Do you feel like you are at the forefront of this of this space are you seeing any developments in terms of.
Competition or or similar product offerings, yes.
Yes, I see BT has been our fastest growing product this year.
As we moved into the pandemic, we had a tremendous.
Support from two of the largest provinces in Canada that wanted to roll IC Bts to all residents and we've delivered over 100000.
Cases already.
We've been in the past quarter added on a number of other government entities and some private sector and we launched down in the U.S. So no. This is we believe that we are nicely at the forefront hi, there are a couple of competitors in the space, but we're very happy with our growth our pipeline and.
Our technology and what our team has been able to deliver.
That's it for me thank you.
Great. Thanks Grant.
Thank you once again, please press star one at this time, if you have a question.
The next question is from Jamie Lynn of National Bank. Please go ahead.
Yes, thanks, and good morning.
Yes.
First question is just on that life works.
Gration stops they sound like there is advancing.
Pretty well and.
Accelerated can you maybe talk about what's driving that acceleration and then the.
The follow through is.
What's what's the uptake on the enhanced life works platform from these.
From these lives that are now migrating.
Yes really good question James So the first thing I would say you would have heard me talk over while that.
That we've got $10 million direct lives that.
That we have access to through our EAP programs and the first thing I think thats significant as we've taken that $10 million up.
Another $2.7 million to well over $13 million in the last quarter and that really was about adding lives for our current clients as well as new wins and could.
Could be adding lives in different jurisdictions, adding part timers or picking up brand new clients and we gave a couple of examples of those so we're now starting with a base of 30 million versus the 10 million that would have talked about before.
From there.
We really do try and migrate those clients over to our core platform, we don't charge them anything extra to do it it's a better more integrated experience and one that we believe that we can up sell from and again there. We saw a really nice growth, where we've now got 3.7 million lives sitting on our core platform, which is up 63%.
Year to date, so kudos to the team who have moved and we've got really good feedback from those clients. Once we have those clients on the core platform, though we do have the ability to up sell them.
And we can up sell them anywhere from one to $4 per employee per month, depending on how many modules. We want we had seen that up sell running about 10% of the people on the core platform and.
And we saw that increased to 11% in the past quarter, which is great and also the fact that we move from $10 million to $13 million of that 11% is on a much larger base. So I think right across the whole ecosystem of our Lifeworks platform. We're very pleased with what we saw in the last quarter.
Okay. That's that's really interesting just on the.
On that 13 million so your guidance 3 million lives.
Well for us.
When you are adding these lives are they being added directly to the life Fourkscore platform.
Or are there still a segment alive side.
They just want the AD the legacy type product offerings.
Yes, it really is up to the client.
And a couple different things can happen. So some some of them just one legacy phone number and access I think about really small employers.
Where it's just easier to do and we can turn that on overnight others are interested in jumping on the core platform right away and making a big splash and many others say, let's start with the high quality EAP program that we know you folks deliver and let's look at moving to the core platform over a period of time.
So we've got clients in all three phases of those.
Okay.
And the breakdown would you be able to offer any color around that.
A breakdown of legacy versus.
I guess core like works.
Yes, easiest way to think of that as Jane would be the.
The increase that we saw in the quarter part of that would have come from converting current clients who were on a trajectory and the others would have been putting some new folks on it I don't have the exact breakdown between those two things, but it's probably somewhere around 40, 60 or 60 40 in that mix.
Okay great.
Next question is from that some of the other wellness products that we've talked about in the past.
Wow like sleeping fitness and things like that.
Obviously tele medicine is a larger I guess space or at least more prevalent today, you talked about some of those other wellness.
Initiatives and the success of those yes.
Yes, obviously the IPO.
Tend to look at putting things on the platform not just for the sake of putting them on but putting things on that our clients value and to be Frank are willing to pay for so that kind of is the test as we look at it on as we looked at all the things that we were looking to put on the platform and there is some constraints around how much we can do from our.
Resources and technology within a quarter.
Largest opportunity that we saw was really around tele medicine. So our focus in this quarter was standing up the Canadian Tele medicine offering and then also getting at launch within the U.S., we have build through the pandemic because we know a lot of people are not able to get out to jims and different things like that we have put physical.
Yes on the platform. So you can actually come onto it and how that program customize for yourself and get a little bit of a personal trainer to help you out a little bit on that side, we've not gone down the road of sleep or anything else. Those are still on the radar we will look at in the future.
The other thing that I think is significant for the quarter, though we were able to stand up we had talked for a while about a large north American bank and working with them to get pension and benefit data on their system and from a backend standpoint were largely able to stand up that in this quarter and they will be rolling it out to the.
Our employees in the next little while.
That's that's great couple.
A couple of more just.
In terms of the.
Health and productivity solutions segment.
No doubt again this quarter, I guess flat sort of quarter over quarter can you just refresh me on that what was the driver of the year over year decline there in that in that segment.
Yes, the first thing I would say James is that's our highest growth on group I know it doesn't show up on those numbers and the decline is only because that's where the health and benefits consulting business used to reside that we sold.
If you strip that out and looked at organic growth within that business that is our highest growth business that is where I CVT is and we're very very pleased.
What that group has contributed.
Okay. That's that's going to look forward to future quarters, and then the last one.
Not sure if you're in a position at this point to start thinking about 2021 margins, but.
If you are should.
Should we think about that as flat to 2020, our their.
Integration initiatives that are starting to flow through or higher revenue higher margin revenues 0.3 that we should see an uptick in that 2021 margins yes.
Yes, Jamie let me start and then I'll get Greer to add some color at it I think at a really high level standpoint, we're quite pleased with where our margins are year to date.
You know in that shed panned out for the balance of this year looking at where we are year to date as we look at next year and we're very very early in our budgeting process, but as we look at next year, we know that we're going to make some investments.
Back into our clients. When you think about traveling you think about getting in front of those clients as we've not been able to do except on a virtual basis. So there are some investments we will make however, as an organization. We also look at continual improvement and we will continue to do things like leveraging technology deliver.
Delivering more through our India operations and things like that.
So we've got both of those things that were working through right now as we set up the budget for next year, but I know girl add some color to that yeah look I would maybe just be repeating in most areas I think Steven said, it very well so yes.
As I said in my script this.
This year, it's slightly higher than what we expected but.
And we expect that to continue for the rest of the year.
Justin.
Maybe continued.
The situation kind of rolls on but I'd like Steven said, there as we can kind of get back to normal.
Some of those costs will come back as we invest in this business and.
Yes, other than that and obviously, we're focused on on efficiency and improvement in.
Overtime.
Our goal is to get the margin higher and Stephens said before it's probably tens of basis points not now.
Tens of percentage points, but.
Yes, I I really just adding to what he said so I completely agree.
Okay. Thank you thats it from me.
Thanks James.
Thank you.
And there are no further questions registered at this time I'll turn the meeting back over to Mr. the cap.
Great. Thank you Melanie I'd like to end by expressing my thanks to everybody 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, we thank you for your participation.
This conference is no longer being recorded.
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Your next question with funding.
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Hi, Steve.
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