LifeWorks Inc (LWRK) Q4 2021 Earnings Call Transcript

LifeWorks Inc  (TSE: LWRK) Q4 2021 earnings call dated Mar. 10, 2022

Corporate Participants:

Stephen Liptrap — President and Chief Executive Officer

Grier Colter — Chief Financial Officer and Executive Vice President

Analysts:

Scott Fletcher — CIBC Capital Markets — Analyst

Graham Ryding — TD Securities — Analyst

Etienne Ricard — BMO Capital Markets — Analyst

Jaeme Gloyn — National Bank Financial — Analyst

Presentation:

Operator

Good morning, everyone. Welcome to the Fourth Quarter 2021 Conference Call for LifeWorks Inc. Please note that this conference call will contain forward-looking statements, which reflects management’s current beliefs and expectations regarding the corporation’s future growth and results of operations. Actual results can 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, Inc. Please go ahead, Mr. Liptrap.

Stephen Liptrap — President and Chief Executive Officer

Thank you, Valerie. Good morning and thank you for joining us. On the call with me today is Grier Colter, our Chief Financial Officer. Yesterday after markets closed, we released LifeWorks’s financial results for the fourth quarter and full year 2021. Today I’ll review our business performance and the highlights, Grier will cover the financials, and then, as usual, we’ll open the call to questions.

Overall, a solid fourth quarter that improved on Q3 allowed us to deliver a good 2021. In 2021 we saw record sales, record platform adoption, significant upselling of additional modules on our wellbeing platform, and an unprecedented demand for mental health services. In addition, we saw over 9% growth in our recurring tech-enabled revenues, which is the direction we have been moving our organization in. These results were delivered during a challenging period in our world, including the many rotating lockdowns due to COVID-19. On previous calls, I’ve talked about our monthly Mental Health Index that tracks mental health in the workplace. From our research, we know that COVID-19 has worsened the mental health of employees and their families that will take years for society to fully recover from. If there is a silver lining, COVID-19 is shining a light on employee mental health and wellbeing as a strategic business issue. The growing awareness of that reality is helping with a trend that started before the pandemic, which is reducing stigma associated with getting mental health support. And from that awareness, the demand for mental health support in the workplace we believe will continue to increase for a very long time to come. In addition, as organizations look for ways to retain and attract talent, providing mental health and wellbeing solutions will be critical.

The other impact of COVID-19 relates to how we operate our business. Like many companies, the process of coming in and out of hard lockdowns in the past year has impacted our results. While we started last year very strong the impact of COVID-19 on our operations, particularly in supporting the higher demand for mental health services, caused our own supply chain issue that started in the second quarter and resulted in some cost pressures in our global counselor network. We are addressing those issues, hiring more staff counselors and taking pricing on our highly valued services.

In our Retirement and Financial Solutions business, in the third quarter, we saw a slowdown due to higher vacation usage versus the prior year. In the fourth quarter we saw continued pressure on this business as our clients locked down for the new variant and pension consulting and design was pushed to the backburner. It’s not too simple to say that COVID-19 is negatively impacting our consulting business that works best when people aren’t working remotely. Another contributing factor in the RFS performance in Q4, which we are addressing is that we’re down a few consultants, which means billable hours. That issue is also being fixed. There is more than enough business out there in this space for us to drive billable hours higher and return this business to growth in 2022.

I say all this in the context about our margin performance in the past couple quarters. For 2021, adjusted EBITDA margins were down to 19.1%. That is below where we want to be, but we are now seeing signs of improvement. For specific context, our adjusted EBITDA margins in the third quarter came in at 18.2%, but with a lot of hard work we have done since then resulting in an 18.5% margin in Q4. As we said on our last call, this process is going to take some time, and we’re working through it in a deliberate way. It’s all about using more staff counselors, which we are making progress on quarter by quarter; taking pricing where we have seen early success in our pilot, and we will move to full rollout over the next one to quarters; and returning our higher-margin RFS business to traditional growth rates. Another factor that Grier will address has been the impact of currency on our top line. For the year, we delivered 6.7% constant currency growth, or 6.1% on a constant currency organic basis, which is in line with our expectations.

Turning now to some of the highlights for the year. We saw the continued adoption of our LifeWorks platform with lives on the platform increasing to 6.7 million from 5.1 million a year ago. Also very positive is that organizations paying for extra LifeWorks modules on our platform is up more than 50% from last year. In line with our strategic plan, acquisitions continue to supplement organic growth and position us stronger. In September, we deepened our commitment to the European market with the purchase of Ascender, a leading psychological service provider in employee health and wellbeing headquartered in the Netherlands and operating across the continent.

Subsequent to year-end, we announced the acquisition of Breaking Free, one of the world’s best Software-as-a-Service, or SaaS, platform providers, a digital treatment options for substance use disorders. As the pandemic enters its third calendar year, use of addictive substances has increased tremendously. Just one example is that the percentage of working adults drinking over 15 alcoholic beverages per week has increased from 2% to 8%. Much of this growing issue was hidden during the pandemic as workers worked remotely. Two years later we have significant levels of employees struggling to gain control over substances. Breaking Free is a must-have, self-guided, and fully anonymous substance use treatment program for organizations everywhere. It also furthers our ability to use clinically proven and effective strategies coupled with digital technology to service the ever-growing global demand for mental health solutions. We believe acquisitions like these are a very good use of our capital. Both acquisitions fit with the goal of bringing in early-stage companies and scaling them through our LifeWorks wellbeing platform, our global capabilities, including access to our client base of, approximately, 25,000 organizations in more than 160 countries supporting more than 36 million employees.

Another accomplishment in the mental health space was winning Knox-Keene certification allowing us to provide counseling to people directly in California, one of the largest regional markets for our services that we offer. By year-end, as a result of our Knox-Keene license, we won 24 new client mandates, extending our services by about 17,000 lives in California. One new client, in fact, selected us prior to us receiving certification. They told us they were confident our license would be granted based on our clinical knowledge and professionalism and for that reason we were uniquely capable of supporting their national growth strategy. The new client relationship was launched successfully and continues to show strong growth in revenue month over month.

I should mention that our results for the year included a restructuring charge in the fourth quarter related to several factors but mainly to combining our Health and Productivity Solutions business with our Integrated Health Solutions business, which going forward will be called Integrated Health Solutions. Grier will talk about the restructuring provision which is focused to save money and offset returning expenses such as travel and client promotion, but also to cover investments needed to support the growing demand for mental health services and attracting and retaining the right talent.

Let me talk to the significance of combining these businesses as a main driver of our mental health growth strategy. We were early leaders in introducing digital delivery of our services and combining it with in-person care, creating what we believe is the most comprehensive and personalized continuum of care in the market, providing not only digital but with a wide array of in-person solutions. In our combined business, we are now better able to offer everything our clients want for the care their people need in the way they want it; digital, chat, video, telephonic, and in person, everything within easy reach and within the daily flow of their lives and work. Our approach in the combined business meets the market demand for integrated services across our mental health continuum of care.

Our focus in the simplest terms is really about helping people with the right support, at the right time, in the right delivery form, whether it’s a short-term need for advice on managing stress or something more serious and long-term like clinical depression. Bottom line, our model is unique and differentiated, and as we go forward, we believe it has so much more to offer our clients than our digital-only competitors.

Before I wind things up, here are a few highlights from the fourth quarter. Let’s start with Integrated Health Solutions, which had a very strong year of growth. As you know, we generally don’t press release when we win a new mandate as there would be too many press releases. But let me share that we had a significant win where a digital-only competitor was excluded from bidding as this now client realized the importance of helping their employees in the way they needed help, both digital and in person. In addition, in Canada, we won a significant new mandate to provide mental health support to the agricultural and farming community in Ontario. In Quebec, we picked up a new public sector contract with Societe Quebecoise des Infrastructure that combines our EFAP program with our telemedicine solution.

We’ve also been building our presence in the higher education market providing students and university employees with mental health support and employee assistance programs. In the U.S., we had two new sales of significance to universities, the University of Texas at Austin and Texas A&M University, along with one new mandate for the University of Saskatchewan. Internationally, in the large corporate market, we’re very pleased by two major contract wins. We won a global EFAP program with Siemens Healthineers. We also had a major cross-sell with a leave and absence management solution for one of the world’s largest beverage companies. We won a new mandate for actuarial, strategic consulting, and administrative services for an important new program being launched by Scotiabank, which they announced yesterday. As we reported last quarter, our LifeWorks platform became available in the Microsoft Teams app marketplace. There are now more than 100,000 users on the app. While published metrics are not available, information we have been given indicates that we are the top wellbeing app in Canada and among the top seven overall apps globally.

Let’s turn to our Administration business that turned in another solid year. Its fourth quarter highlights had a strong U.S. focus we won a major defined benefits upsell to a global healthcare company. We also won a significant upsell for one of the largest grocery companies in North America. And finally, we sold a large multi-year integrated defined benefits and health and welfare system solution or SaaS [Phonetic] to the Board of Pension of the Presbyterian Church. In our Retirement Solutions business, which is a consulting business driven by billable hours, the hard lockdowns and other COVID-19 issues resulted in a year that was essentially flat compared to the previous year. We expect a better year in 2022, particularly as we exit lockdowns. And in that regard, in the fourth quarter, the highlights included three sizable contracts in Canada, all for large brand name companies. We won a cross-sell with a Canadian operations of L’Oreal to provide retirement consulting and administration services. And for the Canadian operations of a global brand in luxury cars, we upsold a contract to evaluate and execute a shift from a defined benefit pension plan to a defined contribution pension plan for its employees.

In closing, we continue to execute against our strategic plan and are very excited by the future. Our goal now is to build on our global reputation for trusted leadership for mental health and wellbeing solutions. We have some amazing strengths to build on. We’re the leading mental health and wellbeing provider trusted by some 25,000 organizations and their 36 million people. We offer the most comprehensive range of mental health and wellbeing services available to our clients and their people. We make a substantial positive impact on our clients and their people every day. In previous quarters, I’ve talked about the four levers for growth that gives us confidence in our business model: one is a solid core recurring revenues across our businesses and those are increasingly tech enabled; the second is our accelerating global expansion from a strong North American base; third is our proven ability to grow by innovating with new digital technologies to create market-leading solutions; and fourth is a much stronger growth opportunities we expect in the global mental health market.

On that note, Grier will review the financials.

Grier Colter — Chief Financial Officer and Executive Vice President

Thanks, Stephen, and good morning. Like Stephen, I will lead with our results for the year, and as we go along, I will weave in comments on the quarter. In terms of revenue for the year, we were pleased with 6.1% constant currency organic growth and 4.1% reported revenue growth taking us over CAD1 billion for the first time. If we look at total growth, not just organic, including acquisitions, from a constant currency perspective, 6.1% turns into 6.7%, which isn’t a metric in our MD&A, but it shows the currency headwinds over the previous year which were quite meaningful.

In Q4, we delivered 3.5% in constant currency organic revenue growth and 3.5% reported revenue growth. It’s not fully where we expect to be and as Stephen mentioned, there were factors that negatively impacted our revenue that relate to COVID-19 and a year of coming in and out of lockdowns. Tech-enabled revenue grew 9.2% for the year and 9.0% in the quarter, and we continue to be happy with that. Adjusted EBITDA was CAD194.8 million for the year and CAD47.8 million in the quarter, both down compared to same periods in 2020. Adjusted EBITDA margin for the year was 19.1%, down from 20.4% in 2020. As discussed on previous calls, we’ve seen cost pressure in our counselor network as demand for in-person services for mental health increased.

In fourth quarter we saw adjusted EBITDA margin at 18.5%, which was consistent with our expectation. As we’ve said, we have a plan to return margins to historical levels through operational and pricing-related initiatives. We are on the right track, but this will take several quarters to achieve. We continue to believe that the positive trends in mental health remain, and this bodes well for our business over the longer term. And we experienced strong growth in 2021, aside from our Retirement and Financial Solutions business which was essentially flat on the year, underperforming relative to our expectation and clearly so in Q4.

In Q4, we incurred an CAD11.6 million restructuring charge, primarily comprised of employee severance and attributable to the restructuring and combining of two businesses into a unified Integrated Health Solutions business. The HPS and IHS businesses had many commonalities and this combination will help us make the product set more seamless to our clients from a continuum of care standpoint, while also making the operation more efficient. In terms of profit for the year, we showed a loss of CAD24.1 million, or CAD0.34 per share, which was driven primarily by the accelerated amortization of the Shepell trade name as we rebranded the company to LifeWorks.

During the year, the company generated normalized free cash flow of CAD107.9 million compared to CAD101.2 million in 2020, and normalized free cash flow increased by CAD7.0 million during the fourth quarter compared to Q4 2020, primarily due to lower capex in the current period. Although working capital was negatively impacted by an increase in accounts receivable, which was temporarily impacted by the name change which caused a small delay in collections and which we discussed at Q3, this will reverse, and we are pleased with our management of working capital overall. And lastly, the company will continue its policy of paying a monthly dividend of CAD0.065 per share.

And with that, I’ll turn it back to you, Stephen.

Stephen Liptrap — President and Chief Executive Officer

Thanks, Grier. Appreciate your comments. Valerie, please go ahead and open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Scott Fletcher with CIBC. Please go ahead.

Scott Fletcher — CIBC Capital Markets — Analyst

Hi, good morning.

Stephen Liptrap — President and Chief Executive Officer

Good morning, Scott.

Scott Fletcher — CIBC Capital Markets — Analyst

My first question is on something Stephen touched on in his comments. But I want to ask about the competitive environment for the Integrated Health business, both in U.S. and in Canada. You obviously had a competitor announce a decent-sized EAP win in Canada. So I’m interested to hear what you’re seeing in terms of renewal and new business situations.

Stephen Liptrap — President and Chief Executive Officer

Yeah, great question, Scott. Nothing overly different than what we would have seen over the years. I think we’ve always had competitors come in and go out of that space. We’ve had U.S. competitors come into Canada with some new offerings. We’ve had, as you know, digital competitors show up here and there. But what we tend to see is our pipeline continues at historic levels. Our sales hit a record level last year. And as I mentioned, we don’t press release when we win things, but shortly after that press release came out, we had a win that was actually larger than that, as I mentioned. A digital competitor was actually banned from bidding on that because they didn’t provide in-person services.

So I think at the end of the day we’re very confident in our offerings. We believe that having a broad spectrum and a full continuum of care delivers better services to our clients. It’s not to say that the odd time somebody won’t try and buy business and get a logo up or something like that. We’ve always faced that in history. But at the end of the day we see many of those clients end up coming back to us to make sure that they get the right level of quality of service to their employees.

Scott Fletcher — CIBC Capital Markets — Analyst

Okay. Thanks for that. And then maybe sort of a related follow-up to the last comment you had there. You mentioned taking price in your comments. Can you give us some more detail on that pilot project you mentioned and how that’s getting rolled out more broadly?

Stephen Liptrap — President and Chief Executive Officer

Yeah. No problem. I’ll start and Grier might have a couple comments. As we mentioned, as we were moving into from Q2 to Q3 last year, we saw a significant increased demand for our mental health services, which obviously had an impact in margins, because our revenues are per employee per month, so essentially flat. And as we provide more services or help more people, our costs go up. So that gives us an ability to go back to our clients and have a conversation about us helping more of their people. Rather than just going out with an across-the-board increase or something, we wanted to take a very thoughtful and deliberate approach. So we actually brought in some outside help on this. We did a full analysis of our total book of business. We compared average rates to utilization. We then launched a pilot which we are just coming out of now, and we picked up some learnings from that pilot around messaging, what is most important to clients, best ways to implement, and we’re moving that from pilot phase into the broader book of business, and that’ll occur over the next couple quarters.

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah. Maybe I’ll just say a couple things. Stephen said most of it. But kind of three ways that we get our pricing in this — primarily in the IHS business. These are clauses we have in contract to get inflation, but you need to experience long periods of — like you can’t just experience one month of inflation and adjust the contract. So we are seeing inflation. We’ll get it, but you do need to see an appropriate period for you to make that adjustment. But we’ll get these things.

Second thing is as contracts roll over and in this IHS business it’s between two and three years probably average contract, and we’ll see these roll over, and obviously have these conversations with our clients about the cost environment and embedding that in contracts. And I guess this pricing initiative, as Stephen said, it’s not something where we’re just going out and applying a blanket-type approach. We’re literally going customer by customer looking at the margins, how large they are, historic conversations. So it’s pretty in-depth, and as you said we’ve done pilots and we’ll apply that as we go through the year.

So our view is to do this right and not just try to accelerate it by a couple months but to do it right and that’s what we’re doing. So I think we’ll see the impact of this realistically a little bit in Q2 but more — it’ll be really Q3, Q4, before we see anything really out of that. At the end of the day, we actually in Q4 saw really good growth, I think, in the business, we would expect overall. So, forget getting into our adjustments but on an aggregate basis for the Company, we would expect us to grow kind of mid-single digits 5%, 6% and if you look at the two things that impacted that to kind of take us from 5% to 3.5%, the way I would look at it is two main things. The first is that the RFS business did not perform on expectation, that was about 100 basis points. If you look at the impact of them was below expectation. And the second is the iCBT line [Technical issues] the business is actually performing very close to where we expect and certainly did so in Q4.

Scott Fletcher — CIBC Capital Markets — Analyst

Okay, thanks, I’ll pass the line.

Stephen Liptrap — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question is from Graham Ryding with TD Securities. Please go ahead.

Graham Ryding — TD Securities — Analyst

I’m not sure if it is me or not, but I missed your comment on the iCBT piece, would you mind repeating that, I couldn’t hear you, that piece of your answer.

Stephen Liptrap — President and Chief Executive Officer

Yeah, let — yeah, thanks, Graham. It’s Stephen here. Let me start and then Grier might have a couple of comments as well. I think a couple of things on iCBT, as you know, this is very small, but has been growing very quickly for us and a year ago, we provided a tremendous amount of support with everything that people were going through, and this year was a little bit less and as you know those contracts are on a per-case basis.

So that would be the first. The second thing is Manitoba had put in place iCBT on an emergency funding basis and that emergency funding ended, which we were expecting as well. What I would say is three things as we look at that — at this business going forward. The first is we have some significant Canadian RFPs in front of us. Second, we have a very strong pipeline in the US. Again, as government is going to be slow. But they are significant and very large. And the third, as we pull these this business together, which is one of the reasons that we really wanted to do it, was we can really integrate and provide that full continuum of care and we’re going to weave iCBT into the broader mental health solution. so that we’re able to provide that full continuum of care and frankly, also has a positive impact on costs as well.

Grier Colter — Chief Financial Officer and Executive Vice President

And Graham, sorry, it sounds like, I might have cut out there for a little bit. So what I was saying at the end is, in Q4, like over the longer run, we kind of expect us to be in the 5% to 6% for all the businesses combined. Obviously, we are in the 3.5% zone in Q4 and what I was saying is the delta on that really is made up of two things, in my mind.

The first is the underperformance of the RFS business relative to what we would have expected, which was close to 100 basis points of that delta. And then, iCBT performing lower than our expectation was, it represented around 50 basis points. So if you, if those businesses had performed — had performed close to our expectation, we would have been in the 5% zone, which would have been closer to how we expected the business to perform. That was the comment I made, I’m sorry that I got cut out there.

Graham Ryding — TD Securities — Analyst

That’s fine. Okay, so taking the sort of the color that you provided around new mandates that you’ve brought on, offsetting some larger mandates that you’ve lost. So if you think about that in your pipeline, what’s your near term expectation for organic growth, are you still thinking you can hit the 5% to 6% range or is it going to be lower over the near term here?

Stephen Liptrap — President and Chief Executive Officer

Yeah, Graham. It’s Stephen here and again, I think quarters can be up and down as you know, and they’ve been far harder to predict with the pandemic and lockdowns and we have some businesses, every time there is a lockdown that slow down and then you open, and those businesses come back again.

So it’s been harder to predict on a quarter-over-quarter business. But I’m very confident that over a regular period of time, call it years, we’re going to be into our normal range of mid to higher — higher single digit growth. There is nothing in our plans, our strat plan or anything that would lead me to feel differently. So in fact, we are very positive going forward. But again, my only caution is quarters will be a little bit up and will be a little bit down as a result of — it’ll be easier when we get out of this pandemic fully for sure.

Graham Ryding — TD Securities — Analyst

Sure. That’s fair. Understood. Jumping just to your margins and the labor mix piece that you’re working hard to adjust by hiring more full-time staff, maybe an update on where you’re at with that process? And are you still targeting to complete that by Q2 of 2022?

Grier Colter — Chief Financial Officer and Executive Vice President

Graham. So, as you’ll recall, and just to kind of give the rest of the group some of the background, we kind of, our old kind of legacy mix was that our salary providers would represent kind of 50% of how we would deliver cases and our preferred provider group 35% and then the affiliates we used for around 15%. And what happened was when we saw the preferred provider, which was very — is, continues to be, a very efficient and effective group. We saw the increase in demand kind of reduce our ability to get access, and so that went kind of almost overnight in Q2 from 35 to — down to 20.

And we immediately increased our affiliate to compensate for that, and they went up to 30% and that’s what’s caused the cost pressure. As you’ll recall, in Q2, our salary providers were 46%, we increased that to 54% in Q3, in Q4 that 56%. So we made some headway, not as much headway as we made in Q2. And as we said, I think there will be quarters where we’ll make more progress and some where we’ll make less. But ultimately, our target is to get the new mix assuming that preferred provider availability is going to keep us at 20% of the mix, then we’re going to refill that 15% gap to get the affiliates back down to 15 and then a salaried would make up the other 65%. So we’ve got a little ways to go. I would say that, are we still targeting to have that done by Q2? Absolutely. We do have a ways to go though, but that’s the update.

Stephen Liptrap — President and Chief Executive Officer

And we did make progress over the last quarter, adding another couple of percent to that number. So it’s going in the right direction for sure.

Graham Ryding — TD Securities — Analyst

Okay. Okay, that’s helpful. And then one last if I could just on your outlook for capex in 2022. And in particular, you’ll be also spending on technology. What are you thinking here? Are you in a phase of sort of maintenance spending or are there specific initiatives that you want to invest in and if so, then what’s the end goal with those investments?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, maybe I’ll start and Stephen can jump in. But I’d say. Firstly, and I look at kind of projects that we’re working on last year and I think at Workday, so workday went live in November and there’s always some small kind of rats and mice things as I would say that need to get fixed. But the system is live and running, and all is in order. So that was a huge initiative that is now substantially complete.

Second is our office build that we did and we’re sitting in our new office right now and we’ve moved in. So that work is done and behind us, and then, of course, we’ve spent some money to integrate the IHS and HPS businesses. So as we look into 2022. There is, whether it’s capex or some of these opex items that were kind of one-time or unusual, there is certainly more cash flow. It’s a question now of whether we go back to a maintenance capex or whether we advance our product roadmap.

So that’s really what we’re going through right now. I think there’ll be more to comment in future quarters on that, but that’s really what we’re discussing right now is whether we advance the product road map and use some of the excess cash flow that’s come from these initiatives winding down and so yeah, as I said, we’re back on that.

Graham Ryding — TD Securities — Analyst

Okay, that’s it from me. Thank you.

Grier Colter — Chief Financial Officer and Executive Vice President

Thanks, Graham.

Operator

Thank you. Our next question is from Etienne Ricard with BMO Capital Markets. Please go ahead.

Etienne Ricard — BMO Capital Markets — Analyst

Thank you and good morning. In well-being, we have previously discussed about LifeWorks’ ability to offer both the in-person and digital resources. Do you have a sense as to what percentage of employees prefer in-person counseling solutions and how would that compare to pre-pandemic levels?

Stephen Liptrap — President and Chief Executive Officer

Yeah, great question Etienne and you’ll recall, when we came out of one of the lockdowns previously, we saw a 30% increase in cases we are delivering. And I always call that the pent-up demand of people that wanted in-person support and we’re not able to get it through the pandemic because of lockdown. So we did see that bulge hit and kind of move through.

The easiest way to think about it is pre-pandemic, we would have been somewhere around 60%, 65% in-person, depending on the year and depending on the issues, we just did a study, which we released, which would say that 35% of people for the foreseeable future will want in-person services and other 15% to 20% will want to blend.

So if you think again about in-person, if I’m at home and I’m in a relationship where I’m being abused, the last thing I want to do is get on the phone, get on Zoom or get on our proprietary video chat system and have a conversation that I may be overheard. And again, a number of people just prefer that relationship with in-person. The next set that we talked about and we did a study on it was really around people that want to meet that counselor, establish the bond to start with and then maybe have future calls on the phone or on video, whatever it is. And don’t forget we’ve been delivering digitally for over 20 years.

And then maybe, they have a fallback and they want to get in front of the counselor again, but I think for the foreseeable future it’s probably going to be somewhere around that 50% number. It’s hard to imagine it won’t, but frankly, it doesn’t really matter to us. And as I said, we’ve been delivering digitally for over 20 years, we have a state-of-the-art solution there and we have in-person and at the end of the day, it’s really about what’s the right solution and what’s your right care to provide to the person coming in for support.

Etienne Ricard — BMO Capital Markets — Analyst

Understood. You also announced last month some enhancements to your telemedicine offering, could you share some details as it relates to the new features and how should we think about the incremental revenue and cost impact of that initiatives?

Stephen Liptrap — President and Chief Executive Officer

Yeah. So we continue to look at all of the services that are attached to our well-being solutions. So generally, our strategy is, we have a well-being solution that is out there that people are going on, they’re using every day, every week, every month and when they’re on that because they’re getting a personalized news feed about things that they care about or they’re on there to recognize a colleague or they’re on there to watch a video around maybe, dealing with kids at home or educating kids or whatever the case might be, they’re going to our platform every single day.

And we look month after month on our road map, what are the other things that we want to put on that platform and we’re informed on that by industry trends, we’re informed in that from our client groups, client councils and what people are looking for and what people are asking for as well, and we will continue to add services to that platform if that makes sense for our clients to do it.

Our telemedicine was one of those, particularly, at the beginning of the pandemic, we added it very quickly to meet the needs of our clients. And what we’ve been doing over the last year is continue to integrate it more, have it feel more like a totally seamless experience for anyone that’s going on using it, just make it easier and continue to increase the speed and make sure that we have one of the very best telemedicine solutions in the market.

So that’s, as Grier talked about, capital to make sure that we continue to lead other organizations, we spend CAD150 million on technology every year, we have a significant capital outlay and that really is about creating phenomenal experiences for our clients and their employees. Going forward, telemedicine’s a very small piece of what we do. But it is an add-on, we see wins on a regular basis from that business, but it’s pretty immaterial to the overall growth of the organization.

Etienne Ricard — BMO Capital Markets — Analyst

Okay. And on margins, in Q4,the year-over-year increase to salary costs was broadly comparable to revenue growth. And if you compare that to the prior two quarters, that’s quite an improvement. So looking into 2022, should we expect salary costs to increase more in line with revenue growth?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, so Etienne, there is no doubt that we saw this line item increase a lot faster than certainly what we would have expected, and the business can’t tolerate that over the longer run. The pressure as we’ve talked about at a reasonable length is mix of how we deliver and that’s really what’s driving the majority of it. Certainly, we’re seeing inflation similar to other businesses, but our expectation is that the topline growth needs to be something well in excess of that line item, particularly when you look at the quantum of expense that we have that comes from people. It’s a significant line item and obviously needs to be less. So for sure, that is what we expect is that the growth in the topline would be higher than the growth in the people line.

Etienne Ricard — BMO Capital Markets — Analyst

Thank you very much.

Stephen Liptrap — President and Chief Executive Officer

Thanks. Thanks Etienne.

Operator

Thank you. [Operator Instructions] Our next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.

Jaeme Gloyn — National Bank Financial — Analyst

Good morning.

Stephen Liptrap — President and Chief Executive Officer

Good morning, Jaeme.

Jaeme Gloyn — National Bank Financial — Analyst

Just want to — I’ll follow up on that last question to start, and I wanted to just dig into the salary components. So in Q4, can you — can you break out some of the moving parts around compensation and variable compensation for — for example, was variable comp perhaps lower this year than maybe expected or in other years that could have helped that number in Q4? Or walk me through some of the moving parts around variable comp and how we should think about that in ’22 off of this year?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah. So I’m not going to go into all the granular details of the comps, Jaeme. But I think directionally, yes, there would have been on the variable side, it would have been slightly lower, but it’s relatively immaterial. I think what you’re seeing here is that the margin in the IHS business was better during Q4. And we made, we made some progress on the mix of how we deliver the cases and the pressure on the number of cases was off a touch as well. So I think it’s less about the mix, certainly the performance of the business in some respects wasn’t where we had expected, so yeah, the variable would have been off a touch, but again it’s not a key driver.

Jaeme Gloyn — National Bank Financial — Analyst

Okay. Good to know. And following up on another question around the capex. So, not ready to provide some guidance today around the specific numbers, but if I’m thinking about the last couple of years running in the mid to high 70s range, should we expect a material step back to like maybe 2018, 2019 levels or is it more likely that we’re going to still run fairly close to where we are today, maybe not higher, but not a material step back. Is that a fair rough characterization?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, let me, say it like this, Jaeme, I think the, certainly, where capex has been running the last two years, if we just go back to kind of a base run rate capex, given that these kind of one-time projects have come off, then it will go back into the 55 to 60 type range. I think, what I was alluding to when Graham asked a question, is we’ve got some excess cash flow here and we have a decision to make. And obviously, we can go through the various capital allocation alternatives, look at that and acquisitions and share repurchase, these are the things that any other Company would look at.

I think that we have some opportunities to advance the product pipeline. So that’s what we’ll be back on, and I think that’s, I think we look at that as a very good alternatives in terms of where we put our excess capital. So, that’s kind of the discussion we’re going through right now. What would that number be? Would it be all of that excess? So if you look at where we were before and if I said, we could bring it down to 55 or 60, and we were running last year at 75. Is it taking that back up to 75? I don’t know that I’m necessarily saying that, but we’ll be back on kind of what that advancement would look like, but I don’t think necessarily it’s to use all. I mean we may even want to advance it a little bit from that.

So, as I said, we’ll be back to provide more color on what we do. But there is this excess cash flow which we have said there would be, as these initiatives kind of came to a close and we just are going through the various alternatives, just making sure that we use the capital in the wisest way.

Jaeme Gloyn — National Bank Financial — Analyst

Okay.

Grier Colter — Chief Financial Officer and Executive Vice President

So, I’m sorry, I can’t be more specific but that’s kind of where we’re at.

Jaeme Gloyn — National Bank Financial — Analyst

No, that’s clear from the 55 -60 plus organic growth initiatives perspective like that helps frame it. In terms of those one-time items, ERP implementation, restructuring, I believe the previous guidance was that we’d be done ERP in 2021, so I just want to confirm that, is that the case, should we see — should we not expect any adjusting items in 2022 from the best of your visibility today?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, I think that’s fair, I mean we so Workday, as I said is, it’s live, it’s running, but there is always going to be a few small costs. If I look at what first quarter will be, might be CAD1 million or CAD2 million or something like. There’s no, the question would be like, is it worth putting adjusted line item, which Stephen and myself and the rest of the team and the Board will have to have a discussion about whether that’s what we do, it might be small enough to say [Phonetic], whatever and not have an adjusted line item, but it’s, very small. On the office, there is zero. So that’s completely done and then this combination of IHS and HPS is done, those costs were in Q4. So yeah, I think that would be our expectation. And I think there is, unless the is a transaction or something that, like you say, we can’t foresee at this point, then, that’s kind of our view, is that we anticipate Q1 to be clean, safe for transactions, that kind of thing.

Jaeme Gloyn — National Bank Financial — Analyst

Yeah. Great. Good to hear. The contingency reserves in Q4 around normal course legal matters, called out in the MD&A as if they were, I guess, higher this year than in 2020. Do you, can you maybe offer up some color as to why that is, is that somewhat temporary or are there some more permanent factors driving that? Just a little more details around contingency legal reserves?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, I mean it’s — from time to time, we have matters with our clients. And just to be one of those, so we provided for it, we’ve probably been maybe, arguably a little bit conservative, but that’s really what’s driving it, I’m not obviously going to get into details, but yes, these things tend to come up from time to time and that’s what that is.

Jaeme Gloyn — National Bank Financial — Analyst

Okay. Okay. Okay, got it. And then last one for me, just and I apologize if I missed this, around the client departures that have been announced from Scotia and Sun Life. Did you quantify or can you quantify revenue and margin impact from those client departures? And then, in terms of forward-looking commentary, are there any other large clients such as those that would be in RFP process today that might be at risk. I guess, let’s say? if you could walk us on that?

Stephen Liptrap — President and Chief Executive Officer

Yeah, Jaeme it’s Stephen, as I mentioned before, we will, we’re in a competitive business. We have clients who RFP stuff, we have over the years, we always have competitors who frankly will try and buy some business so that they can get a logo. We have seen over the year many, many of those come back to us, because at the end of the day, they need to provide the very best quality care that they can for their people and that really makes a difference and we invest in doing that.

I would say you know nothing abnormal. So when we take a look at our retention rate, which as you would know is always been 95% to 98%, we are easily in that range. So there is nothing that has happened, which takes us outside of that range. I think the only thing different here is normally, we’ll have a bunch of wins and again, we’ll talk about them on quarterly calls, we’re not going press release them when they happen. And we’ll have the odd loss here and there, but we just never had competitors in the past press release losses.

So I don’t think they’re overly different. I think it’s just maybe a different process happening within the marketplace. But everything from a pipeline, a growth and a retention is in line with what we have seen historically.

Jaeme Gloyn — National Bank Financial — Analyst

Okay, great. Thank you. That’s it from me.

Grier Colter — Chief Financial Officer and Executive Vice President

Thanks, Jaeme.

Operator

Thank you. We have a follow-up question from Graham Ryding with TD Securities. Please go ahead.

Graham Ryding — TD Securities — Analyst

I just wanted to follow up on the seasonality of your margins. I think historically, they’re been stronger in the first half of the year and then lower in the second half, is that still something that you would expect in your business? Just trying to connect that back to sort of the improvements in the initiatives that you’ve got. It sounds like there are going to be more back-end weighted in terms of margin improvement?

Grier Colter — Chief Financial Officer and Executive Vice President

Yeah, I think all of the things equal. Yeah, you’re right. Graham, certainly there is a of seasonality there is other stuff, obviously going on that’s probably more impactful. But just as we look at the operational improvements, and as we get our pricing, a little bit, I think those are probably larger.

But if you took those out, the traditional seasonality still applies for sure.

Graham Ryding — TD Securities — Analyst

Understood. Okay, that’s it from me. Thank you.

Operator

Thank you. There are no further questions registered at this time, I would like to turn the meeting back over to you, Mr. Liptrap.

Stephen Liptrap — President and Chief Executive Officer

Thank you, Valerie. In summary, we had a solid year in 2021. Not fully where we want to be, but trending in the right direction as we make investments in high-potential areas in line with our strategic plan. And our commitment to driving profitable long-term growth. I’d like to end by expressing my thanks to everyone on the call. We continue to appreciate your interest in our Company and we look forward to other opportunities in the future, including these calls to keep you up to date on what we’re doing to drive our growth and success as a business. Thank you.

Operator

[Operator Closing Remarks]