Telus Corp Q1 FY2022 Earnings Call

Good morning, everyone. Welcome to the First Quarter 2022 Conference Call for LifeWorks Incorporated. 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 could differ materially from these anticipated. I would now like to turn the meeting over to Mr. Stephen Liptrap, President and Chief Executive Officer of LifeWorks Incorporated. Please go ahead, Mr. Liptrap.

Thank you, Paul. Good morning, and thank you for joining us. On the call with me today is Grier Colter, our Chief Financial Officer; and I've invited our new Board Chair, Bob Courteau, to sit in with us since he's in the office for the AGM later today. Welcome Bob. And Bob will be available later in the call if anyone has a question for him. Earlier this morning, we released LifeWorks' financial results for the first quarter of 2022. Later this morning, at 10:30, we will be holding our virtual Annual General Meeting. Today, I'll kick things off by reviewing our results and the highlights in the first quarter and talk about those in the context of lockdowns, followed by a few brief comments on our strategic plan. I'll then turn it over to Grier to cover our Q1 financials in more detail. As we have seen in the earlier quarters of this pandemic, hard lockdowns have an impact on our fee-for-service businesses as most of these are delivered in person at a client site. Good examples are our training business, where clients want us to talk to their employees on-site or our trauma business, where we help employees who may have been part of a robbery or other significant event. The shutdown of these businesses impacted our growth temporarily in the quarter, as it did in Q1 and Q2 of 2020. However, these will come back as we start to open up in Q2 and we expect to be back to normal for Q3 and Q4. On the other side, our core mental health well-being, EFAP, and absence management businesses continued to perform well, and we continued to grow our market share. Our mental health and well-being businesses, traditional EFAP plus grew by over 5% in the quarter, and our absence management business grew over 6%. We also saw some significant wins and win-backs from digital-only providers in the quarter, which I will talk about later. We continue to make progress against our margin target at 19% to 20% by the end of the year. We ended Q1 with 18.7% EBITDA margins, up from 18.5% in Q4 and 18.2% in Q3. Our two key drivers of counselor mix and pricing are making a difference. We increased our staff counselors to 59% from 56% compared to the previous quarter and up from 43% a year ago, a very strong result. We also wrapped up our pricing pilot with excellent results and moved well into full implementation. Grier will talk more about the expectations of pricing, but we see a clear path to significant margin impact as we move into Q3 and Q4. We also saw progress in our Retirement and Financial Solutions business or RFS, where lockdowns resulted in revenues showing actual declines in prior quarters. In Q1, we returned to growth and we expect this trend to ramp up as we move through the year. At this point in the year, our key metrics show us winning market share, getting back to mid to high single-digit growth in revenues for the full year. The biggest drivers were all positive and include a strong pipeline and sales wins, a higher than historical win rate, win-backs, and strong retention rates, which are all tracking well. Regarding the LifeWorks platform, we are pleased with our continuing growth that strengthens our position as a technology leader in our markets. At quarter-end, there were 7.1 million lives on the LifeWorks platform, up 32.7% from 5.4 million lives a year ago. Organizations paying for extra LifeWorks modules increased by 56% year-over-year. Microsoft Teams users accessing LifeWorks' platform grew to 140,000, a 40% increase over just last quarter. Keep in mind there are over 270 million people using Microsoft Teams every month. We offer a fully integrated wellness experience to those users or clients to integrate LifeWorks into Teams, and this is resonating with current clients and in sales presentations. These metrics are critical, as they are the leading indicators of our overall future growth, our platform growth, our ability to add services to our clients' 36 million employees, increased retention, and owning the well-being and mental health spaces globally. Since acquiring the Breaking Free substance use management platform in January, we've won nine very good contracts right out of the gate and have seen tremendous interest from clients about adding a SaaS substance use module to their platform. In our IHS business, we won back six accounts from clients with digital-only competitors who were clearly looking for a richer model for mental health support; one that offered in-person services in real-time, not just digital-only interactions. One of these contracts was with the Quebec Crown Corporation, Société des alcools du Québec or SAQ, which is a main distributor of liquor products in the province. SAQ left us a year ago and tried a digital competitor. Seven months later, they informed us they would be going to tender again, which they did in February. SAQ chose to return to us to provide a full offering of support for their employees, including in-person among other client service attributes that they were missing from their previous experience with us. We are seeing a trend of clients coming back to us overwhelmingly for two main reasons: their employees demanded in-person support for their serious mental health issues and because we are the largest employer of counselors, with the largest network that can get people the help they need much faster than any competitor. We are having these conversations with other clients, as employees emerge from lockdowns and seek a broad range of support from their employers, not to be forced to a single solution that might not work. In Administrative Solutions, we had a major win-back with the State of Nevada's Public Employees' Benefit Program. We won back a significant health and benefits admin contract involving 45,000 members, given their poor experience with a competitor which, as we understand it from their public meetings, wasn't up to the task. As we look at the market and see a growing need for increasingly complex requirements, with a focus on combining human talent and digital support, we believe we are well-positioned to lead the pack against competitors that don't have the depth of our capabilities and our decades of experience in meeting complex client needs. In addition to the win-backs, Q1 saw sizable wins or up-sells in each line of business. In IHS, we secured a significant EFAP RFP up-sell for CAG, Centre d'Acquisitions Gouvernementales, a non-profit government acquisition center for the province of Quebec. We also won an iCBT contract for Canadian employees of a leading global shipping company. Signet Jewelers, the world's largest retailer of diamond jewelry, selected us for a telemedicine health coaching solution in the US and Canada. An existing client, a large home-improvement retailer in North America, selected us for a telemedicine solution. In our Retirement and Financial Solutions business, a longstanding client, a large multinational food manufacturer, selected us for the defined contribution and CAP plan design and implementation. In our Admin business, we secured a multi-million dollar contract with the State of Oregon Health Authority for benefits management, Ariel, and health and welfare. We also won a multi-million dollar benefits SaaS contract with a national state-based benefits provider in the US. Overall, we are pleased with the market reaction to our platform and the fact that we offer a full continuum of care and support. Whether someone needs support in-person or digitally, we take care of them. We believe in that model and it is reinforced by our clients and prospects every day. However, that does not stop us from continuing to invest in our digital capabilities. We have been investing in digital capabilities for more than 15 years, where we launched the first app in this space to today where we offer the first substance use SaaS solution on our well-being platform. We see an amazing opportunity in the mental health space, as one in three individuals are at high risk concerning their mental health, and high-risk drinking in the workforce has increased four-fold. More people are aware of the need to actively invest in their mental health and appreciate employers who also invest in their mental health. We have a product roadmap that is being tested with clients daily, featuring tools that help clients build stronger relationships with their employees and improve retention and productivity. We are the only organization that can combine EFAP, mental health services, depression care, psychological services, and well-being, all in an integrated way. We will continue to evolve our roadmap, with our clients' input to create what we call continuous coordinated care or LifeWorks Total Mental Health, leveraging machine learning and artificial intelligence combined with our unmatched capacity to provide in-person support through our global counselor network, all toward delivering the right service to the right person at the right time—whether in-person, digitally, via chat, or video, on any device and at any time. As we combined IHS and HPS last quarter, we are now building the elements of Continuous Coordinated Care, which will be an integrated solution offering access to personalized therapy, self-guided exercises, check-ins, feedback loops, and having a dedicated therapist to call will be a significant part of our differentiation, making LifeWorks Total Mental Health an exciting evolution of our solution. In closing, we continue to execute against our strategic plan and are excited about the future. Total well-being will remain at the core of our strategic plan, as we differentiate by providing and integrating services across four pillars: well-being, mental, physical, financial, and social. With a robust portfolio of businesses, all with a solid core of recurring revenues, poised for growth and playing a vital role in driving us forward for the next five years.

Thanks, Stephen, and good morning. We made very good progress in Q1 as it relates to our pricing initiative, operational improvements, and performance in our most strategic service lines. We are very pleased with our margin improvement in Q1 to 18.7%, as we continue our path to higher and more traditional margin levels. Our overall earnings quality improved in Q1 due to the completion of our Workday ERP project in Q4 2021, and we saw lower year-over-year CapEx in the quarter, resulting from the completion of our GTA office consolidation project in Q4 of 2021. As we announced last quarter, we combined our HPS and IHS businesses into a single line of business and expanded the service line disclosure within that business to provide better transparency. As Stephen mentioned, we saw solid growth in our core mental health and well-being services, which increased by 5.1%. I consider this to be our core recurring E&P revenue driven by customers on the enhanced well-being platform. We have separately disclosed fee-for-service revenue, representing non-recurring service lines impacted by lockdowns, such as training and trauma, which declined by 29% year-over-year. We expect our fee-for-service revenue to improve as economies continue to open and return to normal growth rates in the mid to high single digits. Coming off a year of strong growth in our Administrative Solutions business, which grew over 6% on a constant currency organic basis in 2021, this business slowed in the first quarter to 0.2%. Recall that this business is concentrated on the mid-to-large end of the market, and it is not unusual for it to exhibit somewhat lumpy revenue patterns, which we are seeing in Q1. However, we fully expect this business to generate mid-single-digit growth rates over the longer run. In our consulting business, Retirement and Financial Solutions, we are pleased to see revenue building again in the quarter. Although our revenue was relatively flat for the quarter year-over-year at 0.7%, we see good momentum building across all business lines coming out of Q1. On revenue, before I move on to a brief update on our pricing initiatives, we have communicated about $10 million in run-rate pricing uplift to our IHS clients. These increases were not made across the board but targeted based on service utilization assessed on a client-by-client basis, and we are encouraged by the positive response from our clients as we invest in this business to provide best-in-class mental health support. By year-end, we expect to approach a $15 million run-rate increase in pricing with $7 million to $8 million of this being realized this year. To simplify, we are targeting approximately 150 basis points of improvement by Q4 of this year, which will contribute to revenue growth and margin improvement. Adjusted EBITDA was $48.4 million for the quarter, down 8.2% year-over-year. Recall that in Q1 2021, we had not yet experienced significant returns to in-person counseling, which we are continuing to see today. This is promising for our long-term business, as this is a key point of differentiation compared to our competitors. We continue to make progress on costs as we shift our counseling network to in-house salary and clinical staff, which increased to 59% of the mix in the first quarter. Adjusted EBITDA margin came in at 18.7%, following 18.5% last quarter and 18.2% in Q3 2021. Overall, profit was up 38.1% year-over-year to $14.1 million or $0.20 per share, primarily driven by the reduction in expenses from our completed Workday ERP project and improved earnings quality. We generated normalized free cash flow of $26.2 million in Q1, which is similar to 2021. In conclusion, we have made very good progress on several initiatives this quarter and are beginning to see the results reflected in our operational and financial metrics, positioning us well with respect to traditional revenue growth and EBITDA margins by the end of 2022.

Thanks, Grier, for your comments. Paul, do you want to go ahead and open the lines for questions?

Thank you. So the first question is from Etienne Ricard from BMO Capital Markets. Please go ahead. Your line is open.

On pricing, if I heard you correctly, you expect to realize $7 to $8 million in higher pricing for your mental health and well-being business this year, and by the end of the year, a run rate of $15 million. In other words, what percentage of your contracts do you expect to have renewed at higher pricing by the end of this year?

Stephen here; I'll start and then Grier can add some comments. At a really high level, what we wanted to do was take a very surgical approach to that. We looked at each client, considering utilization, ROI, returns, and contract pricing. We reached out to those clients on a pilot basis and are in the implementation stage now. We received phenomenal feedback with many positive comments from clients. This supports our confidence on 100 basis points improvement in Q3 and 150 basis points in Q4. We have gone through all of our contracts, and some clients were increasing larger amounts and some smaller, and some were already at a reasonable rate. So, it really is a mix.

Understood. Is there an opportunity for you, given the average life of the contract is three to five years, to renew all contracts before then?

Yes, what we did—Grier's team and business leaders did a really nice job—was go through contract by contract, which fell into three different buckets. The first were contracts that already had built-in increases and we enacted those. The second were contracts with significant usage but were in the middle of term, and this was a conversation with clients. Many of those clients agreed to our request to invest a little bit more in our counselor network and call center. A very small number said no, but most understand that providing fast mental health support and well-being support is a competitive edge.

On margin, in Q1 salary costs were the lowest in the past five quarters. Was there a notable drop in the number of cases this past quarter given some lockdown measures? Or do you see this as a good run rate considering the shift in the mix of in-house counselors?

This is due to a couple of factors. It's the changing mix toward more salaried providers, as well as efficiency from combining the IHS and HPS businesses. Those are the two largest contributors.

The next question is from Graham Ryding from TD Securities. Please go ahead. Your line is open.

Grier, you touched on it there but this question is for either Stephen or Grier. With the incorporation of iCBT, is there an opportunity to use that product more regularly to drive margins higher through more efficient use of in-house therapists?

Yes, you're absolutely right. The reason we wanted to combine those businesses was because we knew we had a compelling set of mental health services. By integrating EAP, iCBT, and depression care, we aim to create a seamless experience for every user, solving client issues surrounding one-off solutions that are hard to navigate. This will allow us to assist individuals through various means, be it in-person, video, or through modules. We see numerous opportunities by pulling these components together.

Is the deployment fluid as you work towards right balances in pricing versus utilization?

Yes, it’s a natural evolution as we integrate our products. Integrating iCBT is a great success, allowing multiple ways to assist individuals. We will continue to evolve this strategy to better aid our clients and maintain our ROI.

Regarding win-backs versus digital competitors, are you referring to renewing a contract that’s put up for RFP or winning back a contract previously lost?

Yes, this is winning a contract that we previously lost. We continue to achieve phenomenal retention rates, between 95% and 98%. The new win-backs involve clients who had tried a digital competitor but were not satisfied with the service they received; they chose to return to us.

I think you mentioned target revenue growth this year as mid to high single digits. Does that target reflect a run rate as you exit the year or the overall target for 2022?

Yes, that's our target for the entire year, Graham. Our metrics, including wins, sales pipeline, win rates, and everything else, indicate that we should be able to achieve mid-single-digit growth by the end of 2022.

Thank you. The next question is from Scott Fletcher, CIBC. Please go ahead. Your line is open.

Can you give us an idea of whether those win-backs are coming back at similar margins to before, or is there an opportunity to raise prices as they return?

Yes, for the most part, they're returning at similar margins or enhanced margins. It depends on the clients and their previous rates. We review everything at the time of bidding as they come back to market. We're pricing at a level that enables our clients to access rapid support, be it in-person or digital, resulting in either similar or improved margins.

It looks like the tech-enabled recurring revenue was down sequentially. Could you delve into that?

We experienced a slower quarter, as Grier mentioned, in our Admin business. We continue to grow and win new contracts, but this business tends to be a bit lumpy given the size of contracts we win.

The next question is from Jaeme Gloyn from National Bank Financial. Please go ahead. Your line is open.

Can you clarify if the organic revenue growth you mentioned is for the full-year 2022 or a run rate by the end of the year?

Yes, we are targeting mid-single digits for the full year, Jaeme. If we look at all the metrics we track about our sales and growth, they suggest we should achieve this by the year's end.

On the pricing pilot, is the $15 million run rate the maximum you expect, or is there a scenario that could yield more?

Yes, while we expect the $15 million run rate, the demand for our services is substantial. As we demonstrate ROI and improve service speed, we have the capacity to continue increasing pricing over time.

Could you refresh my memory regarding the counselor mix? We’re at 59% now, and the target is in the low 60s, correct?

Correct. A year ago, we were at about 43%. Last quarter we moved to 56%, and now we’re at 59%. Our target is in the low to mid-60s, and we’re on track to reach that by Q3 and Q4.

What specific impacts from Omicron and related lockdowns affected fee-for-service items? Are these mostly in-person childcare and services?

Yes, exactly. That's why we wanted to call that out for clarity. While our core businesses and recurring revenue are on the rise, the fee-for-service revenue takes a hit during lockdowns, as we saw in Q1 with Omicron. This includes training, trauma services, and childcare, all of which involve in-person elements that declined due to restrictions.

So, that Omicron impact on fee-for-service is something that should recover as workplaces open up?

Absolutely. Those services should recover as teams return to the workplace and in-person interactions increase.

I completely agree. Q1 2021 represented a more normal type number for us. Q1 2022, we believe, was impacted and not reflective of our typical performance.

Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Liptrap.

Thanks very much, Paul. We continue to execute against our strategic plan and are excited about the future. We welcome you to join us at our virtual shareholder meeting at 10:30 today. Login details are available on our website. I’d also like to end by expressing my gratitude to everyone on the call. We appreciate your interest in our company, and we look forward to keeping you informed regarding our growth and success. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.