Morneau Sobeco Income Fund
TSX : MSI.UN

Morneau Sobeco Income Fund

March 10, 2010 09:26 ET

Morneau Sobeco Reports Record 2009 Results and Announces Conversion Plans

TORONTO, ONTARIO--(Marketwire - March 10, 2010) -

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Morneau Sobeco Income Fund (the "Fund" or "Morneau Sobeco") (TSX:MSI.UN) today reported its financial results for the three- and twelve-month periods ended December 31, 2009 (all amounts are in Canadian dollars, unless noted otherwise). As well, it announced its conversion plans from an income fund to a corporate structure.

Highlights:

  • Record revenue increase of 32.8% to $331.7 million from $249.7 million in 2008;
  • Adjusted EBITDA(2) increased 28.6% to a record $64.4 million from $50.1 million in 2008;
  • Conversion to a corporation planned for January 1, 2010, along with an annual dividend of $0.78 – an increase of 10.6% on an after-tax basis for unitholders taxable at the highest marginal tax rate.

Conversion and Distribution Policy

"Today, we are announcing our plans to convert to a corporation at the end of 2010," said Bill Morneau, Executive Chairman of the Fund. "We intend to maintain our current distribution level for 2010 and provide an effective 10.6% after-tax increase in 2011 for unitholders taxable at the highest marginal rate."

The conversion is being undertaken in response to the legislative changes enacted by the federal government that will apply a tax at the income trust level on unitholder distributions commencing January 1, 2011. The current monthly distribution level of $0.07871 per unit (or $0.94 per unit annualized) is expected to remain unchanged for the balance of 2010. Starting in January 2011, the monthly dividend level is expected to be $0.065 per share (or $0.78 per share annualized) with a sustainable payout ratio of 65% to 80% of cash flow. This dividend policy will facilitate the repayment of debt, while providing investors with an attractive yield. Going forward, the Fund's intention is to continue to reward its investors with dividends in line with business performance. A special meeting of unitholders will be held in the second half of 2010 to obtain unitholder approval of the conversion.

2009 Results

"Our 2009 record results demonstrate Morneau Sobeco's resilience during challenging economic times. Our growth in revenue was 7.1% and EBITDA growth was 8.4%, on a pro-forma basis assuming we had a full year's contribution from Shepell.fgi versus the actual seven months in 2008" said Alan Torrie, President and CEO of the Fund. "As the integration of our Shepell.fgi acquisition is now complete, we are gaining momentum in our efforts to expand our service offerings - through substantial investments in business development and technology to support our cross selling and health management initiatives, as well as our continued focus on our core businesses. We intend to capitalize on our future growth opportunities and to augment our growth with accretive tuck-in acquisitions."

Selected Pro-forma Financial Information

The following table presents selected financial information for the Fund on a pro-forma basis, adjusting for the inclusion of twelve months results from Shepell.fgi in 2008 instead of seven months.

  Year ended December 31, 2009 (Unaudited)* Year ended December 31, 2008 (Unaudited)* Year ended December 31, 2008 (Pro-forma)*
Revenue $  331,703 $  249,713 $    309,731
Standardized EBITDA 61,314 50,111 59,436
Adjusted EBITDA 64,427 50,111 59,436
Standardized EBITDA margin 18.5% 20.1% 19.2%
Adjusted EBITDA margin 19.4% 20.1% 19.2%
* In thousands

Twelve Months Ended December 31

For the twelve months ended December 31, 2009 ("F2009"), revenue for the Fund increased 32.8% to $331.7 million from $249.7 million in the prior year. Revenue growth of approximately $82.0 million is largely attributable to:

  • $63.2 million from full-year contribution of Shepell•fgi compared with seven months in 2008, as Shepell•fgi was acquired in June 2008;
  • $2.9 million from full-year contribution of Leong & Associates compared with three months in 2008, as Leong & Associates was acquired in October 2008;
  • $5.6 million from growth in the Employee Assistance Program (EAP) business;
  • $5.1 million from growth in the pension consulting practice; and
  • $4.6 million from growth in the pandemic diseases crisis management.

Operating and administrative expenses (including salary, benefit and contractor expenses) increased by 36.1% to $271.7 million in F2009 from $199.6 million, for the fiscal year ended December 31, 2008 (F2008). The increase primarily reflects:

  • $54.8 million increase related to full-year operations of Shepell•fgi in F2009 compared with seven months in F2008;
  • $2.1 million increase related to full-year operations of Leong & Associates compared with three months in F2008;
  • $1.5 million increase related to higher long-term incentive plan expenses, expected as part of the Shepell•fgi acquisition;
  • $2.6 million of general merit increase;
  • $2.2 million of provision for future rental loss associated with the sublease of excess office spaces; and
  • $1.3 million write-down of leasehold improvements related to the sublease locations.

F2009 Standardized EBITDA(1) totaled $61.3 million, an increase of 22.4% from $50.1 million in F2008. Adjusted EBITDA(2) increased 28.6% in F2009 to $64.4 million from $50.1 million in F2008. Normalizing for twelve months' contribution of Shepell•fgi in F2008, Standardized EBITDA(1) and Adjusted EBITDA(2) in F2009 grew by 3.2% and 8.4%, respectively, on a pro-forma basis. Standardized EBITDA(1) margin and Adjusted EBITDA(2) margin in F2009 were 18.5% and 19.4%, respectively, compared with 20.1% for both metrics in F2008. 

The Fund's net income of $10.8 million, or $0.27 per unit (basic), increased 22.7% from $8.8 million in F2008.

Three Months Ended December 31

For the three months ended December 31, 2009 ("Q4 2009"), the Fund reported $83.3 million in revenue, a 1.2% increase from $82.3 million for the three months ended December 31, 2008 ("Q4 2008"). Operating and administrative expenses (including salary, benefit and contractor expenses) totaled $68.4 million in Q4 2009 compared to $65.0 million in Q4 2008. The increase was largely due to a $0.8 million write-down of leasehold improvements and $1.8 million provision for future rental loss associated with the sublease of excess office space. Net income in Q4 2009 was $4.2 million compared to $3.0 million in Q4 2008.

Q4 2009 Adjusted EBITDA(2) increased 6.9% in Q4 2009 to $18.5 million from $17.3 million in Q4 2008, after taking into account the exclusion of a $1.8 million provision for future rental loss and $0.9 million in severance related to integration. Standardized EBITDA(1) of $15.7 million was lower than Q4 2008 of $17.3 million, Standardized EBITDA(1) margin and Adjusted EBITDA(2) margin in Q4 2009 were 18.9% and 22.2%, respectively, compared with 21.0% for both metrics in Q4 2008.

Distributable Cash

For F2009, the Fund generated cash from operating activities of $49.0 million compared with $35.3 million in F2008. Standardized Distributable Cash(3) increased 28.9% to $35.2 million in F2009 from $27.3 million in F2008. Adjusted Consolidated Distributable Cash(4) increased by 2.8% to $44.7 million in F2009 from $43.5 million in F2008. With distributions declared of $43.9 million and $32.7 million in F2009 and F2008 respectively, this implies Adjusted Consolidated Distributable Cash Payout Ratios(6) of 98.3% and 75.2% respectively.

Balance Sheet

As at December 31, 2009, the Fund had working capital of $15.2 million, including cash and cash equivalents of $1.6 million, compared to working capital deficit of $9.6 million, including zero cash and cash equivalent as at December 31, 2008. Long-term debt of the Fund, including the current portion, was $170.4 million compared to $142.4 million as at December 31, 2008. As at December 31, 2009, the Fund had approximately $8.5 million available under the revolving credit facility and its debt to EBITDA ratio under the facility was 2.7.

Notice of Conference Call

Management of Morneau Sobeco will host a conference call today, Wednesday, March 10, 2010, at 2:00 p.m. EDT. The conference call is open to all those wishing to attend, with a Question & Answer period to follow the presentation. In order to participate in the live conference call, please call 416-695-7806 (participant code 8122527) in the Toronto area, or 1-888-789-9572 (participant code 8122527) throughout the rest of Canada. A replay of the call will be available via the Morneau Sobeco Web site at www.morneausobeco.com.

Financial Statements and Management Discussion & Analysis

The Fund's financial statements for F2009, together with management's discussion and analysis can be found at the Morneau Sobeco website www.morneausobeco.com.

About Morneau Sobeco Income Fund

Morneau Sobeco Income Fund is Canada's largest human resource consulting and outsourcing firm focused on pensions, benefits, employee assistance program and workplace health management and productivity solutions. We offer business solutions that help our clients reduce costs, increase employee productivity and improve their competitive positions by supporting their employees' financial security, health and well-being.

Non-GAAP Financial Measures

To assist investors in assessing the Fund's financial performance, this news release also makes reference to certain non-GAAP measures such as Standardized EBITDA, Adjusted EBITDA, Standardized Distributable Cash and Adjusted Consolidated Distributable Cash. The Fund also believes that Standardized Distributable Cash and Adjusted Consolidated Distributable Cash and their respective payout ratios are useful supplemental measures of performance as they are generally used by Canadian open-ended business income funds as indicators of financial performance. See the footnotes to the "Results of Operations" chart in the firm's MD&A for more details. Non-GAAP measures do not have any standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers

  1.  "Standardized EBITDA" is defined as income before interest, depreciation, income taxes (recovery) amortization, impairment changes and non-controlling interest. The Fund believes that Standardized EBITDA is a useful measure in evaluating performance of the Fund. It is used to monitor compliance with debt covenants and to make decisions related to distributions to Unitholders rather than net income due to the significant amount of amortization expense related to the firm's intangible assets.
  2. "Adjusted EBITDA" is defined as Standardized EBITDA adjusted for sublease loss provision and severance related to integration.
  3. "Standardized Distributable Cash" is defined as cash from operating activities, including the effects of changes in non-cash operating working capital, less capital expenditures and Consolidated Distributable Cash available to non-controlling interest.
  4.  "Adjusted Consolidated Distributable Cash" is defined as cash from operating activities adjusted for capital expenditures excluding changes in non-cash operating working capital.
  5.  "Standardized Distributable Cash Payout Ratio" is defined as declared distributions divided by Standardized Distributable Cash.
  6.  "Adjusted Consolidated Distributable Cash Payout Ratio" is defined as declared distributions divided by Adjusted Consolidated Distributable Cash.

Forward-Looking Statements

This news release contains "forward-looking statements" within the meaning of applicable securities laws, such as statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Use of words such as "may", "will", "expect", "believe", or other words of similar effect may indicate a "forward-looking" statement. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including those described in the Fund's publicly filed documents (available on SEDAR at www.sedar.com) and in the firm's MD&A under the heading "Risks and Uncertainties". Those risks and uncertainties include current economic conditions, income tax matters, ability to maintain profitability and manage growth, reliance on information systems and technology, reputational risk, dependence on key clients, and reliance on key professionals. Additional risks and uncertainties will also arise in connection with the acquisition and Shepell•fgi's business, including without limitation: increased leverage and restrictive covenants; potential undisclosed liabilities associated with the acquisition and the Fund's limited indemnification from the vendor of Shepell•fgi; the integration of the combined business; Shepell•fgi's agreements with its customers; relationships with channel partners; competition; dependence on key customers; relationships with service providers; reliance on key personnel; regulatory risks; timing of revenue collection; fixed price contracts; currency fluctuations; confidentiality of client information; risks of future legal proceedings; and certain tax risks associated with the acquisition. Many of these risks and uncertainties can affect the firm's actual results and could cause the Fund's actual results to differ materially from those expressed or implied in any forward-looking statement made by the Fund or on the firm's behalf. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements in this news release are qualified by these cautionary statements. These statements are made as of the date of this news release and, except as required by applicable law, the Fund undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, the Fund undertakes no obligation to comment on analyses, expectations or statements made by third parties in respect of the Fund, its financial or operating results or its securities.

Contact Information

  • Morneau Sobeco Income Fund
    Investor Relations
    (416) 445-2700