Smart Employee Benefits Inc.

Thank you for standing by. This is the conference operator. Welcome to the Smart Employee Benefits, Inc. Fiscal Year 2021 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. At this time, I would like to turn the conference over to Tim Beaulieu, Chief Financial Officer. Please go ahead.

Yes, good afternoon and thank you. I want to welcome everyone to the call to discuss SEB's fiscal 2021 results. On behalf of SEB's Board of Directors, the management, and employees, I want to thank you for taking the time to participate in today's call. With me on the call, I have John McKim, SEB President, CEO, and CIO, and Mohamed Elshaya, SEB COO. Before I turn over the call to John, I'd like to remind everyone that during this call, we will be discussing SEB's business outlook and making other forward-looking statements that reflect management's expectations regarding SEB's future growth, financial performance, and business prospects and opportunities. All such statements are made pursuant to the safe harbor provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance as of the conference call and as of the date of the respective statements. Listeners to this call are cautioned that reliance on such information may not be appropriate for other purposes as by their very nature they are forward-looking statements and require management to make assumptions that are subject to inherent risks and uncertainties. A number of factors could cause actual future results, conditions, actions, or events to differ materially from the targets of those expectations, goals, estimates, or intentions expressed in the forward-looking statements. Thank you for your attention, and I'll hand over the call to John McKin.

Thank you, Tim, and thank you, everyone, for joining our call, our year-end fiscal call. I would like to... I'll make a few comments summarizing our results for the year. And then Tim, our CFO, will talk about some of our cost factors. We're an IFRS reporter, not a GAAP reporter, so some of our financial numbers, in particular our interest and a few things, are more difficult to understand. And we will wind up the call with Mohamed Alshea, our Chief Operating Officer and our President CEO of all of our software solutions business, benefits processing business, talking a little bit about our future. And then we'll have a couple of quick comments at the end. So just to sum up, we have seven quarters of consecutive positive adjusted EBITDA. And in the Q4-21 period, Revenue increased 13.7% year over year. Our 2021 fiscal year revenues were approximately 62 million. Our budget for the year was 63, so we're fairly close to that. Our adjusted EBITDA was up 27% over the previous year. We exited 2021 with 160,000 plan members that are in transition. that will come on our platform this year between now and year end. Our future revenue and our EBITDA is expected to be strong. We've won a lot of new business this year, over $205 million of new business in the last 15 months. So just to look at the fiscal year, our revenue, as I say, was up 1.9% over fiscal 2020. We were thinking our budget was 63. We were thinking it could be a bit stronger. But COVID delays and stuff and getting contracts signed and getting people engaged still took a little bit longer than what we had anticipated. Our benefit solutions, software solutions revenue was 17.9 million, had a positive EBITDA of 1.7 million. That revenue grew 18.5% and the adjusted EBITDA number grew over 20% year over year over 2020. Our technology services for the benefit solutions is the second consecutive year of positive results. And we expect substantial growth in those numbers coming in 2022, just on the backlog of business that we've already booked. The technology services revenue for the year was 46.5. It was roughly flat fiscal 2021 over 2020. EBITDA was 3.4 versus 3.5. So, again, the revenue in EBITDA and just EBITDA was roughly flat. Um, we had a lot of new business, uh, that we won in the year, particularly in this area. Uh, it just took longer to deploy and largely because, uh, our clients just took longer to execute contracts and to, uh, and the majority of our business requires security clearance clearances. And that was processes took a little longer than expected, uh, early in the year. We had one contract that we had used up all of the budget in that contract, so that caused us a loss of some parties, contractors. We've replaced that, but it took a number of months to do it. Otherwise, we would have exceeded the budget number that we had for the year. Our gross margin growth remained strong. It was a bit weaker in the fourth quarter. largely because of one project, one one-time project. But that project was profitable, just not quite as profitable as we expected. But overall fiscal year, our consolidated gross margin was 35.6% versus 33.5% in fiscal 20. We're expecting continued growth in that gross margin in 2022. Our EBITDA, as we noted, improved to 2.3 million versus 1.8, adjusted EBITDA, 1.8 in fiscal 2020. So we continue to be positive in that. And as I noted before, we had 205 million of new contract wins over that number, actually, in the last 15 months. So our technology services operations has historically been profitable, very profitable, and our benefits solutions and software solutions has been positive for the last two years. But we've got over $60 million invested in that business, so we're amortizing some of that investment through the year, and Tim will speak to that. The good thing about our budget this year is up substantially from 2021. Or 2021, yes. And about 90% of that is booked business today. So we're pretty confident on the 2022 numbers. And of that 10% that doesn't fall in the category of booked is contracts we already have. We're just not quite sure when they or how quickly we can start them. And we will continue to win new business as we go forth this year. Today, going forward, over 80% of every new gross margin dollar will go to our EBITDA and our cash flow in both revenue streams. We have our services revenue stream, which is a lower gross margin, but it's integral to our software solutions business because you can't really introduce our software solutions into clients without having a strong services component with it. The gross margins in our services business is 15% to 20% range, some a little bit higher than that. Our gross margins in our software solutions have been between 70% and 80%, depending on the particular solution. So today, we've got over $470 million of contract value. Over $130 million of that is in our software solutions business or our benefits processing business. And our existing pipeline of new business remains one of the strongest that we've had since we came into existence. So on this one, we'll turn it over to Tim Belew. And Tim will talk about some of our financial metrics. Tim? TIM BELEW Thanks, John.

On the operating costs, as you mentioned, John, so on the operating costs, just quickly, we note the costs were up by approximately $2 million when you look at the salaries and other compensation compared to last year. Really, the majority of that is due to a couple of things. We benefited from some COVID relief in 2020. as well as in 2021, but the relief wasn't as significant. And therefore, that's why we're seeing an increase in those costs this year, as well as some of the costs that we incur for our project implementation allows us to defer those implementation costs, depending on the nature of the contract. And so, we didn't defer as much of that in 2021 as we did in 2020. and therefore those two factors combined contributed to the increase year over year. We don't anticipate that these costs will increase significantly in 2022, and we think that we should have that number pretty stable going into 2022. With regards to the office in general costs, they were up compared to the same quarter I guess last year and again the reason for that is we didn't have the same COVID relief that we had as well as certain costs in terms of our overall lease facilities that just caused the increase however on a year to date basis we were showing some savings of about $800,000 year over year we did benefit from some rent credits there on one of our larger facilities. And so we're looking at, you know, as a result of COVID, we got those credits. We're looking at those costs and going into 2022, we're looking at ways to potentially incur some savings going into 2022, permanent savings, that is. given the change in the dynamics that we've seen with COVID and work from home. So we anticipate being able to see some savings there in 2022. And we're also looking at some savings overall on the office and travel expenses, again, as a result of COVID and the change in dynamics and work from home. which we've always had, but we've increased that flexibility with all of our colleagues in 2021. Moving on into the non-cash expenses. So our non-cash expenses, they include our amortization, depreciation, and our share-based compensation, so options and RSUs. Overall, they decreased by 800,000 in 2021 when compared to 2020. A few things here that are coming into play, the amortization of intangible, the amortization of our intangible assets decreased by about 1.9 million. As John alluded to, that's due to the IFRS accounting of those intangible assets and a significant portion of those assets were We're still being amortized in 2020, whereas they were fully amortized by the end of 2020, and therefore we didn't incur those costs, that amortization cost in 2021. In addition to that, we have about a million-dollar increase in our share-based compensation in 2021 when compared to 2020. The reason for that is largely due to the retention program that we've implemented in the compensation program we implemented in 2021. And these RSUs vest anywhere up to a range of 42 months. This is all new in 2021, and again, a non-cash expense, but we didn't have that in the previous fiscal year of 2020. Outside of that, on our interest and financing costs, interest accretion and transaction costs, we saw these increase by about $1.6 million in fiscal 2021. When we compare those to 2020, the increase is tied to a few things. The largest increase is due to the non-cash interest accretion expense. of about $1 million. And this is really tied to the amortization of the financing costs that we incurred when we did the financing at the end of fiscal 2020. So these costs are essentially capitalized and get recognized over the term of the financing. And therefore, since the financing closed at the end of 2020, we didn't have that expense. And going into 2021, we've recognized about $1 million of that. The other increase to cost is on our interest and bank fees. So, again, as a result of the financing and the different financing that was put into play at the end of fiscal 2020, that increased our overall borrowing cost by about $600,000. Okay. Other than that, we also had a write-down of an asset of about $530,000 in the year. This relates to an ongoing collection issue that we have with one of our large receivables. We took this write-down just given the status and how long it's been in collection and pending, but this is going to arbitration. and we fully expect to recover that at this point. However, we took the provision just in order to satisfy our accounting requirements and to be in line with IFRS, but we do expect that to be recovered by the end of Q3. Outside of that, John, I'll just mention that we also have the right of use assets, which is tied to the amortization of our leases that we recognize the corresponding asset to. And we've recorded that amortization in year for an amount of about, pardon me here, I've lost my line, for about a million dollars as well. And that's also up slightly from last year by about $110,000.

Okay, well, thank you, Tim. We'll have questions at the end, but what I'd like to do is turn it over to Mohamed Elshea. Mohamed is our chief operating officer and also the present CEO of all of our software solutions business. So, Mohamed, do you want to speak to some of our opportunities for the future?

Thanks, John. Thanks for having me. We are taking bold actions around the future of the company. We are making SEB future-ready. Of course, we're looking into various aspects of the company perspective, starting with the company purpose, and we're looking into reinvigorating the identity and making sure we've got our story very clear for our colleagues, for our customers, and for our investors. With that, we've engaged... an investor relation partner and company that will be helping us with this story. We're also looking into sharpening our value and extracting more of the value chain for our customers and shareholders. We're also using our culture as the new secret sauce. in the company. We've built a very strong set of beliefs, behaviors, and performance metrics within the organization that we think will be able to differentiate us in the future. As we look into the operating model, we're looking into prioritizing speed. And with that, we're starting with the structure. We're making it fitter, flatter, and faster. We're enabling more progressive decision-making framework and support. We want to continue to operate as nimble as possible. But also we're looking into our talents. And many of you are aware what's happening in the market and the market dynamics. Talent is becoming scarcer than capital. And we're lucky having so much talent. in our organization, and we're taking a strong position in the future of the company around our talent and managing our talent. Looking at our technology, of course we're expanding the ecosystem capability, but also we're creating a data-rich platform. And with our technology-driven business model, we are able now to get into other markets that we were not able to enter before. And I'll speak about this briefly. Then we're looking into our learning and development. And we're creating various incentive programs within the organization to enable a high-performing organization and the high-performing future of the company. Talking about some of the future activities, as we are entering now into the small market, we call it small-medium enterprises, or emerging market, as we enter into this marketplace, we're planning to launch, sometimes in May, our latest technology and platform. It will be a live streaming event. There will be an in-person We will have select investors as well and shareholders joining the in-person meeting, but it will be a live stream and most of our investment community will be available and they will be able to attend the launch. With this platform, we're gonna capture almost 96, 97% of the small, medium-sized enterprise, and we will have a total addressable market that is close to $30 billion. in premium and and more than 1.1 million employer with almost 11 million employees and we are targeting um in the next 24 to 36 months to capture at least 10 percent of this employees from this market so on average around 1 million to 1.3 million Now, not all of those will be migrated and transitioned. However, we have a line of sight of where we're going to capture these opportunities, and we're executing with this launch. We're hoping that we'll also announce the first, if you wish, set of groups and plans that will be migrated into this platform. So we're super excited about the launch of the FlexPlus Enterprise. I would encourage everyone to tune in and join the live event. We will have more communication going out soon, so watch out for some of this communication. It will also be featured on all social media. It will be live on major streaming websites, but also we will have our own channel that we will be broadcasting the live event. Looking forward into this major, major milestone for the company, but also for the future of SVB. Thanks, John.

Thank you, Mohamed. So to sum up, just to reiterate a few things that Mohamed said and so forth, we have engaged Sofit Capital as our IR partner going forward. And it's been a while since we've had dedicated investor relations. So we think that will be positive. It will help us present our, you know, our story a bit more effectively and more efficiently. So we're looking forward to that. We also will have research out in the next 30 days. We think in the next, you know, let's say three to four weeks. I think that will help clarify a few things as well. Um, now I know our share prices suffered recently since we've, uh, uh, particularly in the last week, uh, which is somewhat disappointing, uh, given that we, we did have, we do think we had a strong 2021 overall in terms of, uh, where the business has been. And, uh, and, uh, just to sum up, um, our big opportunity is this emerging marketplace as Mohammed says, uh, that is 65% of the premium. in the employer-funded benefits in Canada. It's about 95% plus of the employers in Canada, and it represents two-thirds or more or 70% of the employees in Canada. This particular market has been the domain of the insurers up until this point. Third-party administrators like us were primarily focused on the large market, which we have a very large presence. You know, if you look at our client base and you pick a name of a large corporate client or a government client in Canada, there's a one in three chance that we have our foot in the door with that client. But the emerging market is the growth area. And our white label platform that you've heard us talk about several times, That is somewhat unique in this marketplace, and we've added additional unique characteristics with the business model. By going after channel partners who already have the clients in that emerging market, we are giving them the opportunity to be their own administrator. Today, in that marketplace, the insurers do virtually all of the administration work. You know, we have with our enterprise platform, which we're launching, with what we've got, we've taken all of the capabilities that we supply our largest clients, our largest corporate and government clients, and we have put that into a cost-effective platform that gives emerging clients a whole level of functionality and capability and flexibility in designing their benefit plan that's not available with any other party in the country. So this is a big advantage for us. And when we partner with brokers and consultants and organizations that already have those clients, we give them new revenue models. We have demonstrated that we can double their earnings with those new revenue models. We create more stickiness for their client base. And so the value proposition for our channel partners is a very, very positive one. We take what were formerly cost centers for our channel partners and we turn them to profit centers. We've signed over 100,000 plan members in Quebec. We have about 6 million premium and a couple million plan members that are in our pipeline. And we think in 2022, you know, as Mohammed says, we should be able to lock down over 1.2 million of those plan members. And the interesting thing about this pipeline is we do business already with every one of those channel partners. It's a different level of business, but with our white label partners, model we are targeting taking the business that we already do to a whole new level so it's not cold calls it's not knocking on doors it's working with existing clients and introducing to them a whole new strategic dimension to their business which has never been available to them before so we're excited by this we do have a large cost structure to cover we've got good control over our costs Our rent costs, we don't need the space we've got right now, so we're looking at ways. COVID has changed the way business is done in Canada today, or globally, really. So virtual work-from-home environments seems to be the dominating factor. So we're looking at ways to take our real estate costs down. As Tim says, we've got some challenges there, but I think we can accomplish some additional savings this year, so... We're excited by our future. This is our 11th year of operation. And I like to think that we can be an overnight success in 11 years. So we're open to questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue.

The first question comes from Mike Cloud, a private investor.

Please go ahead.

Good afternoon. In your opening comments, you talked about the new business ones over the last 15 months in the pipeline. Can you talk about that more? Help me better understand what the timeline might look like for a large new client in the benefits business and when that would start to translate into revenue and EBITDA.

Okay, I'll give you an overview, and then I'll ask Mohamed to comment on that as well. So there's two types of... let's say there's two types of clients that we would look at. If we're talking a large enterprise client, like last year we won the RCMP. That was 44,000 members. We had to transition that from another supplier or another third-party administrator. So the planning exercise, once we won that client, there was a planning exercise and business analysis that took several months. because up until that point, until we won it, we didn't have the right to actually go in and to plan the transition of that client. And that was a somewhat unique client. So the other factor of that was security clearance. We have security clearance at the highest levels now in the majority of our business, but the RCMP is a whole other level of security clearance. And we had to identify... somewhere more than 20 people in our organization that would be dealing with that particular client. So that security clearance took about another six or seven months to accomplish. Now, during that interim period, when we started to transition that client, we effectively transitioned that client in about six months. So we actually – we had given that client a particular – time frame and we beat that time frame by several weeks in terms of going live without any problems. So a client like that from the time that we won to where we got fully deployed took almost a year for those various factors. Now if you take another enterprise style client, typically let's say 5,000, 10,000, 15,000, 20,000 plan members Typically, a client like that from the day that we announce to the day that we transition would take us three to six months. But when we win clients, sometimes we win. If we win a client, let's say in August, for example, we wouldn't necessarily start that transition until like January because the other factor that affects the going live of a particular client is the anniversary date of that client. So with that other, with the underwriter. So there's a number of factors that prevail in terms of the enterprise market. So in any given time on that marketplace, it would take us anywhere from three or four months to 12 months. And not because we couldn't transition them faster, but more because of the dynamics of that particular client. Now, when you look at the channel partner marketplace, and again, Muhammad will speak to this in a moment, but when you look to the channel partner marketplace, let's take a 200,000 plan member client in channel. What that basically means is that we've done a deal with the broker or the consultant who already has those clients. And so the objective now is to deploy an administration environment under the brand of that broker or or that consultant. And where with our enterprise market, we deploy our solutions under the brand of that client. Like if that client is RCMP, then that whole site will be RCMP. But with the emerging marketplace and the channel partner, if that client, if our direct client is the broker, so that broker is ABC Brokerage Services, then that's our direct client. And then all of their clients, their employer clients, are secondary clients. So the first thing we would do is stand up the technology environment or the administration environment for our broker client and white label that. And then we would have a plan to transition that broker's clients onto that third-party administrator environment. So that would take a little bit longer. And typically, we try to transition those clients around their anniversary dates of when their underwriter anniversary dates. So, you know, if you've got 200,000 plan members, a situation like that could take, we would start generating revenue immediately on setting up the administration environment. But transitioning the clients would probably occur over 24 or 30 months. And so we have built in organic growth. And so once the plan members are fully transitioned, then there's another level of organic growth can occur. And that level of growth is really what we call our voluntary products or our products that go beyond the basic administration that is usually the initial foothold in those clients. So at a high level, that's what it is. But maybe Mohamed can explain it a little bit better than I can as well.

Actually, you did a fantastic job, John. But as it relates to revenue and EBITDA, and I think, Mike, if I understood your question, there is what's called in-year revenue, and that's mainly everything around the initial implementation. Sometimes we amortize it within the per member per month fee, and sometimes the client pays it up front, and then we recognize it in the year. So usually our implementation goes anywhere between three to six months. We've been pushing our team very hard on bringing more productivity and accelerate the configuration, implementation, and migration of data. And we've been making progress with every new implementation. But it's safe to assume a large employer population will take anywhere between three to six months to implement. Then we migrate the data and the revenue stream will start generating revenue from this account. Most of those deals are three, five, seven years. You can assume average of four to five years because they're managed services, so it's really long term. As John mentioned, there will be an upsell, a cross-sell, whether it's voluntary product or other modules within our ecosystem that we can offer to the client. If the client pays upfront, the whole revenue will be recognized in the year. If the client opts to amortize it over the contract term, then the per-member, per-month fees will be adjusted accordingly. When you talk to the emerging market, the beauty about this is that you sign the deal and then you start migrating immediately. So the provisioning gets faster. We don't have to provision every time an environment, specifically for one employer. We've already provisioned an environment for the channel partner. And in this case, it could be a brokerage firm, an MGA, a large advisory firm, a large union, a large affiliation, or the likes. So the environment is already provisioned. The environment is already configured. All you have to do now is really to migrate the groups and put them under the administration. Most of the time it happens at the renewal date because that's the most efficient, effective way to migrate those groups from one environment to another without any disruption. And then you pull those groups and you migrate them at their renewal date. And that's why John mentioned 24, 36 months So by all means, you would be able to migrate much, much larger volume of those groups within that time frame. I hope this answers the question, Mike.

Mike?

I think Mike is not on the line anymore.

Okay.

Once again, if you have a question, please press star, then one.

This concludes the question and answer session.

I would like to turn the conference back over to Mr. McKim for any closing remarks.

I'd like to thank everybody for joining the call. And if there are any questions, I encourage you to reach out to Sofit Capital, which is our new IR firm. I think everyone has the coordinates there. And if there's any questions of management, we can address those as well. So thank you very much for joining the call, and stay safe, and hope everyone is well. Take care.

This concludes today's conference call. You may disconnect the lines. Thank you for participating, and have a pleasant day.