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Edited Transcript of PEO.V earnings conference call or presentation 28-Jan-19 1:30pm GMT

Q1 2019 People Corp Earnings Call

WINNIPEG Jan 8, 2020 (Thomson StreetEvents) -- Edited Transcript of People Corp earnings conference call or presentation Monday, January 28, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis D. Stewner

People Corporation - CFO & COO

* Laurie Marc Goldberg

People Corporation - Executive Chairman & CEO

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Conference Call Participants

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* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Meny Grauman

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Sanford Lee

Macquarie Research - Analyst

* Jonathan Ross

Loderock Advisors - Principal

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the People Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions) This call is being recorded on Monday, January 28, 2019. And I would now like to turn the conference over to Jonathan Ross. Please go ahead.

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Jonathan Ross, Loderock Advisors - Principal [2]

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Thanks, Joanna. Good morning, everyone, and thanks for joining us today. People Corporation's first quarter 2019 financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as on the People Corporation website at peoplecorporation.com.

Before I pass the call over to management, we would like to remind listeners that portions of today's discussion include forward-looking statements. There can be no assurance that these statements will prove to be accurate or that management's expectations or estimates of future developments, circumstances and results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are made available on SEDAR, and we encourage listeners to read those statements in conjunction with today's call.

Forward-looking statements made during this conference call are made as of the date of this call. People Corporation disclaims any intention or obligation to update or revise such information, except as required by applicable law. And People Corporation does not assume any liability for disclosure related to any company mentioned during this call. People Corporation's financial statements are presented in Canadian dollars and the results discussed during this call are in Canadian dollars.

I'm joined on the call today by Laurie Goldberg, Executive Chairman and Chief Executive Officer of People Corporation; and Dennis Stewner, Chief Financial Officer and Chief Operating officer.

I will now pass the call over to Laurie.

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [3]

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Thanks, John. Good morning, everybody, and thank you for joining our Q1 2019 results conference call. We will keep our prepared remarks relatively brief this morning since we updated you on the business just over 1 month ago. People Corporation continued to make significant strategic and financial progress during the quarter. We generated 27.6% revenue growth compared to the first Q of 2018, which includes organic growth of 7.6%. EBITDA grew faster than revenue with year-over-year EBITDA growing 37%. The growth in revenue and EBITDA relative to Q1 of 2018 reflects the success of our efforts to scale the business, which includes winning new clients, additions to our product suite, optimizing our customer service and sales efforts and the success of our acquisition and integration activities.

As a leading TPA and group benefit consulting firm in the country, we continue to build on our strengths, in particular, proven operating and integration capabilities that demonstrate a track record of organic growth and deep corporate development expertise and experience. These strengths enable us to provide our clients with a superior experience and position us to further expand and drive shareholder returns by leveraging the platform we have assembled.

I'd like to provide a brief update on some strategic initiatives and milestones for the quarter using our 4 key focus areas as the framework; sales and service, products and strategic acquisitions, and Dennis will touch on integration. For sales and service, we continue to gain market share in the enterprise market with the build-out of our business development solutions group, which we mentioned last quarter, we landed some key clients, which will be rolled out beginning the latter half of the year. As we continue to grow our enterprise business that facilitates increased brand recognition and referenceability, thereby enabling our momentum to continue in this channel. We also continue to attract top talents across the country in sales and service functions, including, but not limited to, our group retirement solutions unit and in Québec.

In the product area, we added to the company's market-leading preferred provider network, which offers our clients value-added services and preferred pricing in some of Canada's most recognized national retailers. We also expanded our product development team to support the broadening of our product shelf. In addition, during the quarter, we pilot launched the HR at your service for small group clients to provide HR support to these organizations.

Strategic acquisitions will continue to be a focus for People Corporation as we seek to continue to achieve superior returns and scale in the marketplace. In Q1, we benefited from a full quarter of contribution for acquisition of Silverberg & Associates, and we also closed the acquisition of Benefit Partners Inc. shortly before the end of the quarter. Benefit Partners is a group benefit, group retirement and insurance advisory practice based in Ontario. We also continue to add additional expertise within the corporate development group to provide additional scale to execute on deals.

As mentioned in the past, our corporate development efforts continue in group benefits and group retirement space, and we'll continue to expand our activities seeking adjacent business lines to a national platform. More specifically, as we continue to scale, our focus will be to provide integrated HR solutions to our clients to enable them to attract and retain a productive and engaged workforce. We'll continue to march forward on our strategy, and I look forward to sharing more of our progress in the coming quarters.

I'll now pass the call to Dennis.

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Dennis D. Stewner, People Corporation - CFO & COO [4]

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Well, thanks, Laurie, and good morning, everyone. We are very pleased to be sharing our Q1 2019 results this morning. Revenue grew 27.6% this quarter to $36.3 million compared to $28.5 million in the first quarter of 2018. And adjusted EBITDA grew 37.7% to $7.4 million from $5.4 million in 2018. Adjusted EBITDA margin for the quarter was 24.4% compared to 19% in 2017.

In Q1, profitability improved as a result of our efforts to scale the business and integrate our operations as well as due to natural inflationary factors. As we continue to grow, we anticipate that EBITDA margins will continue to fluctuate within a reasonable range quarter-to-quarter. Certain targeted markets will require an investment in some step-wise fixed costs over the next several years, just as our growth in the sales and service and product sides will come with some additional variable compensation costs. We remain committed to the disciplined management of operating costs and to leveraging our fixed cost base over time as we scale.

Our net loss was $1.5 million for Q1 2019 compared to $0.5 million in the comparable period in 2018. This metric is impacted by a variety of noncash items and costs that are long term, nonrecurring. In particular, the variance in net income is attributable to an increase in the amortization of intangible assets, an increase in the valuation of our noncontrolling interest put options and higher acquisition, integration and restructuring costs. These put options are a liability to the retained economic interest holders and relate to future dividend payments and put features. The increase in the valuation of these put options relates primarily to changes in assumptions as a result of very strong underlying financial performance of these businesses.

We introduced adjusted earnings per share this quarter to give investors more clarity on bottom line per share profitability once nonrecurring items are eliminated. We still feel that adjusted EBITDA is the best metric to use when evaluating our financial performance on an annual basis.

We do anticipate that during 2019 we will begin to consolidate select retained economic interests where the timing makes sense, both for People Corporation and for our retained interest partners. These purchases will be very accretive to the company and can be funded with existing capital resources. The valuations are prenegotiated and they add meaningfully to EBITDA.

Our balance sheet continues to have available capacity and remains in a sound position. At quarter end, we had $16.5 million in cash and $62 million in available credit under our operating revolver and acquisition revolver.

Regarding our strategic priorities, I'd like to share some updates on our integration efforts from the first quarter. We introduced our shared services to Lane Quinn and the Silverberg Group, including business development resources, group retirement specialists, health and wellness programs, preferred provider networks and marketing and communications. These steps are part of the onboarding all our partners have received in the past and are immediate value-add to an acquired platform.

We also executed the first phase of our integration for Lane Quinn and the Silverberg Group encompassing finance, accounting, banking, legal and information technology. Our office consolidations are also progressing in both Alberta and Québec. The new office in Laval will facilitate the integration of our Québec-based businesses, and both initiatives allow for centralization of shared services of regional offices, which we think makes it easier to grow the business.

At this point, I'd like to ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Meny Grauman from Cormark Securities.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [2]

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First question on organic growth. Definitely within guidance but slower than the recent pace and where you've been very vocal in talking about your guidance and how that growth rate can be lumpy. But I'm just wondering if there's anything notable there this quarter. And then a related question, is there any weakness in any economic -- in any region of the country? And is that part of what's going on here?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [3]

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No. I think I've always provided probably for a less number of quarters and years consistently organic growth between 5% and 10% on an annualized basis. I've also included in the past that practically speaking it will vary quarter-by-quarter. We -- if you take a look at our historical track record, while we've usually on an annualized basis achieved the higher end of that range, even within that historical review from quarter to quarter, we've had quarters where we've had 3% to 4%. We've had quarters of 12%. And so there's nothing, in particular, to highlight.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [4]

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And if you could just talk about what you're seeing on a regional basis across the country. What's weaker and what's stronger? Anything interesting that you're seeing in your business, specifically in Western Canada?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [5]

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Yes. I mean, overall, generally reasonably strong. Our largest market is Ontario. There's no doubt about that. In terms of Western Canada, our biggest presence, of course, would be in Alberta. That -- there's no doubt that certificate counts get impacted as a result of employment levels. But that said, we have, over last really a handful of years, been a market share gainer. And I think I've mentioned in the past that Alberta in the last 3 years has grown year-over-year. With the addition of Silverberg Group and Lane Quinn in the last year, while we would have a -- one of the leading firms in that economy, we still have a relatively small percentage of the overall market, and that scale gives us opportunity to continue to march forward and grow, gain market share.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [6]

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Then just a question about capital deployment and how you think about the trade-offs. If you had $1 to spend and to choose between a new acquisition and redeeming retained interest, is there one choice that is more obvious than the other? And on a related question, do you feel, as you head into 2019, that you have to sort of compromise? You have to scale back a little bit on acquisitions in order to make redemptions? Or can you go full force on both?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [7]

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Yes. We can go full force on them. We don't really look at that as a trade-off. We do take a look at capital allocation very closely on a continuous basis. I don't think that on the one hand, when it comes to our retained economic interest, those ones are easier to execute. And so far as, obviously, we own the business, there's no real due diligence to do. It's a financial transaction that has been prenegotiated. And you'll begin to see some of those being taken in. Acquisitions are -- we look at those, and that's more of a strategic decision based on either that particular target completing and rounding out our value proposition to clients as well as what kind of scale and/or synergy does it bring to People Corporation. So we really look at them distinctively from that perspective.

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Operator [8]

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Your next question is from Jaeme Gloyn from National Bank.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [9]

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My first question is on the EBITDA margins and, I guess, more specifically around the operating expenses. We saw personnel costs tick up as a percentage of revenues, much higher than historic norms as well as G&A tick up as well and again, higher than historic norms. I was just wondering if you can just give us a little bit more color around either the permanents or temporary nature of those 2 line items.

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Dennis D. Stewner, People Corporation - CFO & COO [10]

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Okay. Yes. So overall EBITDA margins for the quarter were very good. If you look and drill down on personnel and compensation, total personnel and compensation were 64.2% of revenue in the quarter compared to 60.9% last quarter or the comparative quarter in 2018. If you strip out personnel and comp within our integration bucket, integration and acquisition bucket, they become 61.1% of revenue. So we've got about 3.1% of personnel and compensation costs in our acquisition, integration and reorg costs, and I'll come back to that. And within the 61.1% number, there's about almost 2% of noncash stock-based compensation costs in the quarter. And that really relates a good part of that. 2/3 of that relates to the stock options that were granted to executives in August of 2018. And if you go further, general and administration costs were 14% of revenue compared to 12.2% in the prior year. Again, that number becomes 11.2%, which is actually down from 12% last year when you break out the G&A included in our acquisition, integration and reorg costs. And if you're looking on our P&L, you'll see acquisition -- we call it AIR, acquisition, integration and reorg costs, were $2.1 million -- $2.17 million in the quarter, and that really reflects the total nonrecurring-type costs and efforts we have directed both at acquisition activities and integration of the businesses that we've acquired and all -- we've acquired 4 businesses in the last fiscal. We have a significant effort around integration of both businesses into the People Corporation platform.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [11]

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Okay. So just briefly, just a follow-up quickly on the stock options or stock grants. Sorry, that was how many points on the personnel? I just missed that number.

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Dennis D. Stewner, People Corporation - CFO & COO [12]

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So the total stock-based comp was up about 2 points compared to prior year. So it was $1 million compared to, I believe, it was just over $200,000 last year.

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [13]

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So Jaeme, it's Laurie. If you actually take a look at our EBITDA, our adjusted EBITDA before REI, as a percentage of revenue is 24.9% versus 24% quarter-over-quarter, like 2017 to '18. And after -- adjusted EBITDA as a percentage of revenue after the REI is 20.4% this quarter versus 18.9% last quarter. So these are actually improvements on both.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [14]

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Yes. No, I would agree that the margins are expanding year-over-year. I just want to get a sense then as to, I guess, the stock grants. Is this something that we should expect at these levels if -- assuming that performance sort of continues as it has historically, should we expect more of a chunk of personnel compensation in stock grants? And then secondly, is that sort of 61% ex-acquisitions? And I guess, this is still in the same kind of theme of questioning. Is that 61% -- is that the -- is that sort of your target or expected run rate for personnel and comp?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [15]

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It's Laurie. I'll answer the first question. The answer on those stock-based, the answer is no. We hadn't done those historically. Those were really awarded to senior management as a kind of a onetime grant for -- that will be there for the foreseeable future in the next number of years to really align with shareholder creation opportunities. And so from that perspective, the answer is no. That will not be a continuing item. As it relates to your second item, I'll throw that over to Dennis.

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Dennis D. Stewner, People Corporation - CFO & COO [16]

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Yes. So just if I go back, there's -- again, there's 2 components in the personnel and comp, the AIR component and then the regular component. And again, our personnel and compensation was 61.1% of revenue if I just look at the business -- the general business operations, but included in that is roughly 2 points on higher stock-based compensation. So I think we've been trending, like last year, we were 59.9%, so say, 60% of revenue were personnel and compensation costs. And that is essentially where we're running, if I strip out the stock-based compensation.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [17]

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Right. And the stock-based comp is a onetime for Q1 '19? We shouldn't see it Q1 2020 is what I understand.

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Dennis D. Stewner, People Corporation - CFO & COO [18]

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Well, you'll see that cost but you won't see any additional incremental to it but you will see that. So we've -- stock-based comparables, we are amortizing that over essentially a 36-month period. So you'll continue to see that on that line. So that -- of the $1.06 million of costs in the quarter, about roughly $625,000 of that was the stock-based comp related to these options, and that will continue.

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [19]

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As a onetime option, yes.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [20]

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Okay. Great. And then in terms of the organic growth, one of the bullets that you highlighted as a milestone was continued gain in market share of the enterprise market. Can you just sort of discuss as to what type of game we're talking about either in magnitude or number of enterprise clients? I'm assuming that's kind of in the 5,000 to 15,000 employee -- number of employees segment. And can you just talk about the economics of an enterprise client versus your traditional small-to-mid client in terms of EBITDA margins potential growth?

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Dennis D. Stewner, People Corporation - CFO & COO [21]

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Yes, I mean, I'll address that on a high-level basis. Generally, we define enterprise is roughly 1,000 and up. What we're referring to in terms of the -- some of the mandates that we were on, they were at that level or significantly much higher than that. Those will be fairly large accounts that will hit our platform in the latter half of the accounts that we were on, but they will take a number of months to onboard onto our platform. And of course, they will continue to build our book. As it relates to economics, generally speaking, margins on larger accounts are smaller. But the dollar profit contribution is much more significant. When we look at and define small group, generally kind of the 1 to 50 life group, and then enterprise is 1,000 and up and, of course, mid-market is in between, you'll generally achieve a higher margin on a small group client, of course, a much smaller dollar contribution. And so small group is more around volume and activity and enterprise is, of course, not the same, not to mention, of course, is way more small group accounts in Canada as opposed to enterprise accounts. So that's why we're in both markets. Strategically, it's hard to kind of build scale in Canada unless you're really focused on kind of all 3 market segments. And you're going to get that kind of profile of profitability by account as a result.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [22]

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Okay. And just one follow-up and then I'll turn it over. In the -- in terms of the business mix as it stands today of small to mid versus enterprise, what market -- what share of your revenues would enterprise be driving today -- or maybe share of EBITDA today? And where do you see that share going to, let's say, over the next 3 years?

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Dennis D. Stewner, People Corporation - CFO & COO [23]

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Yes. I mean, it's, for sure, less than half of our market today. Having said that, we would serve hundreds of enterprise-style accounts and see that continuing to grow. That said, we're -- we've got very good momentum in the small group market as well. But I think on a proportionate basis, probably enterprise accounts will start to creep up and -- as a relative percentage of total EBITDA growth.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [24]

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And is there enough of a growth trajectory there that there's a sort of a cap on EBITDA margin, given the profitability of those businesses? And where would you see that cap sort of hit?

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Dennis D. Stewner, People Corporation - CFO & COO [25]

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No. I can't comment on the capital to see it as a cap given that. I mean, we still have relatively low penetration in that market. And keep in mind, while the EBITDA margin on a large account is going to be smaller than a small group account, it's also about growing our operating EBITDA margin and leveraging that over all of our corporate overheads. And so it will be accretive, if you will, on a consolidated EBITDA basis to both scale.

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Operator [26]

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(Operator Instructions) And your next question is from Sanford Lee from Macquarie.

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Sanford Lee, Macquarie Research - Analyst [27]

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My question, I guess, relates to a similar line of question on the margins, obviously, showing some really good margin accretion to date. Can you sort of say how much you think that is coming from business revenue mix versus improvement in your operating efficiencies and restructuring efforts? I'm trying to just gauge some magnitude and the pace of further margin accretion, excluding further M&A.

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [28]

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Yes. It's just operating performance. It's not as much about business revenue mix.

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Sanford Lee, Macquarie Research - Analyst [29]

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Okay. Because I mean, as far as I understand it, the more recent acquisitions have been more so in the benefits consulting area, which tend to carry stronger margins, correct? As you ramp revenues in those areas, should [there be] further lift in the margins?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [30]

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Yes. Well, a couple of things. First of all, I mean, that retained economic interest-only you need to actually own it for a while so you start to [get] the growth in the economic value of that business. So the more recent acquisitions would be a very small part of it. Also, some of the more traditional purchases, whereby we purchased 100% with a vendor take back. And so almost all of those REIs are from our more historical deals and similar business mix though.

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Sanford Lee, Macquarie Research - Analyst [31]

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Second one relates to customer trends. Trends that you're seeing, it's been quite good with expectations, like a surprising share in enterprise, I would assume the enterprise churn is even lower. So can you comment just sort of what you're seeing on your churn trends and future trends?

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [32]

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Well, our retention rates are amongst industry leading. I think we've had very, very well above the industry in the last couple of years. I think it is a function of our value proposition to our clients and so it's not just of our TPA platform, but even just when we have a consulting-only client and the value proposition we bring to the table. And so from that perspective, we are seeing very high retention rates are -- there is no doubt in terms of you take a look at consumer trends, expectations are higher. Like many industries, clients are more knowledgeable, which, from our perspective, is a good thing in terms of us addressing what their needs are. And so there's no doubt that we're seeing a market that's more where the expectations are rising. And at the same time, the genesis of People Corporation is really to address those changing trends in our shared services and shared supports platform to be built over time.

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Sanford Lee, Macquarie Research - Analyst [33]

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And one last one, if I could. I noticed that you haven't, I guess, retrospectively applied IFRS 16, which is expected to have, obviously, impact on EBITDA and maybe a larger impact on the balance sheet. Can you give us your general thoughts on, like, how does that play into, I guess, your leverage? Because you're bringing -- how I understand is you're bringing in liabilities of operating leases onto the balance sheet. If I calculate your net debt to LTM EBITDA, you're below 1x. So what does your leverage become sort of on a pro forma kind of basis, given the...?

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Dennis D. Stewner, People Corporation - CFO & COO [34]

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Yes. We're still early stages on that. So we've been just in the process of sort of gathering up all of our lease documentation. And so it obviously will have an impact, just like every other company out there, as we move those costs from an operating expense to amortization. But we're still early stages of doing that work. So we'll bring that forward as we have a little more visibility on that.

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Sanford Lee, Macquarie Research - Analyst [35]

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It's too early to tell whether that changes, I think, you've said sort of in the past that your upper comfort level on the leverage is 2.5x. So does that change theoretically, anyway? Does that change your...?

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Dennis D. Stewner, People Corporation - CFO & COO [36]

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I don't think, high level. No, high level, that doesn't change our view there.

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Laurie Marc Goldberg, People Corporation - Executive Chairman & CEO [37]

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Yes. And we've historically said that we're comfortable in the 3:1 range, even though historically we've been quite a bit lower, just for clarity on that.

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Operator [38]

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We have no further questions at this time. This does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines.