Park Lawn Corp

TSX:PLC

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Lawn Corporation First Quarter Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Chairman and CEO, Andrew Clark. You may begin your conference.

[Andrew Clark, Chairman of the Board & CEO]

Thank you, operator. Good morning, everyone, and thank you for joining us today. With me on the call are Joe Leeder, CFO; and Suzanne Cowan, VP, Business Development & Corporate Affairs.Today's call is being recorded, and a replay will be available after the call. Please be aware that certain information discussed today is forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please see our public filings for more information regarding forward-looking statements.During the call, we will reference non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see information regarding our non-IFRS financial measures including for reconciliations to the nearest IFRS measures.I'll begin with an overview of our business highlights for the first quarter of 2018. Joe will follow with a more detailed review of our financial results.Our 2018 first quarter results reflect the continued successful execution of our business plan. During the first 3 months of 2018, we acquired CMS Mid-Atlantic, Inc. and Billingsley Funeral Home. CMS Mid-Atlantic operates, manages and provides financial services for 7 cemeteries: 6 in New Jersey and 1 in New York; and Billingsley operates a funeral home in Huntsville, Ontario. In addition to our Q1 acquisitions, we acquired Opatovsky Funeral Home in early Q2 of 2018. Subsequently, we launched and closed a $190 million subscription receipt offering in connection with our acquisition of Signature Funeral and Cemetery Investments, LLC, which closed on May 7, 2018. The Signature acquisition added 9 cemeteries, 21 funeral homes, including 7 located on cemetery sites, and 5 crematoria in 4 new states: Kansas, Missouri, New Mexico and Mississippi, and expanded our operations in Texas. At the same time that we announced the Signature acquisition, we also announced that we had entered into a purchase agreement to acquire Citadel Management LLC. Citadel currently owns and operates 29 cemeteries and 8 funeral homes, including 1 on site through North and South Carolina. The Citadel acquisition is expected to close before the end of the third quarter. These acquisitions collectively demonstrate the company's ability to source and acquire larger, more transformative businesses while also continuing to strategically expand our existing operations through selective smaller acquisitions.In the first quarter of 2018, the company continued to show strong operating results, which were in line with management's expectations. The company's revenue increased year-over-year by 44.7% to approximately $27 million as compared to approximately $19 million in the first quarter of 2017. After adjusting for the[Audio Gap] exchange, revenue growth from the company's comparable businesses was 3.1% in the first quarter of 2018 compared to the first quarter of 2017.I'd now like to turn the call over to Joe to review our first quarter financial results in more detail.

[James Joseph Leeder, CFO & Director]

Thanks, Andrew, and good morning, everyone. You'll find the detailed breakdown of our first quarter financial results in our press release, our MD&A and financial statements, which are available on our website and on SEDAR.As Andrew mentioned, total revenue for the 3-month period ended [Audio Gap] $27.2 million, an increase of 44.7% over the same period last year. And after adjusting for the impact of foreign exchange, revenue growth from the company's comparable businesses was 3.1% in Q1 2018 compared to last year. The growth in comparable revenue was largely attributable to our cemetery operations in both Canada and in the U.S. Revenue from comparable funeral home operations was marginally positive year-over-year.Gross profit margin for the period ended March 31, 2018, was 78% compared to 75.8% for the same period in 2017. The inclusion of Saber for a full 3 months and CMS for 1 month in our 2018 results was a contributing factor to the overall improvement in our gross margin. However, we also saw overall improvement in gross margins from other comparable cemetery businesses and from funeral home operations.Our aggregate operating expenses for [Audio Gap] [ $2,008 million ] from $12.4 million in 2017, and this increase resulted from the inclusion of Saber, CMS and other funeral home acquisitions.Looking specifically at our G&A, maintenance and selling expenses from comparable business operation, there was no increase year-over-year. Higher selling and advertising expenses relating to increased sales activity were higher but offset by lower maintenance expenses at our cemetery operations.Share-based compensation, which represents the noncash expense associated with our RSU and DSU programs. This increase in 2018 is directly related to the issuance of additional units year-over-year. The increase in interest expense in 2018 relates primarily to expenses associated with our expanded credit facility, including amortizing, deferred financing fees incurred to establish the facility and increased standby fees on undrawn amounts.During the current quarter, we also incurred $1.2 million in acquisition and integration costs compared with $179,000 last year. These expenses are directly related to the increased M&A activity in 2018. And based on recent acquisition announcements, we will continue to see increased acquisition and integration costs moving forward in 2018 as we execute on our acquisition and integration strategy.Our effective income tax rate in 2018 was 22.8% compared with 9.7% in 2017. We would expect that our effective income tax rate moving forward in 2018 would be in the range of 20% to 23% of our pretax income.So as a result of the above, the company's net earnings to PLC shareholders for Q1 2018 totaled $1.7 million compared to $1.3 million for the same period in 2017.Our fully diluted earnings per common share attributable to shareholders of PLC for 2018 was 10.8% -- or $0.108 compared to $0.117 for 2017. The weighted average common shares outstanding during the period ended March 31, 2018, increased to approximately $15.3 million compared to approximately $11 million for the same period in 2017. And this increase occurred largely as a result of the company's June 2017 prospectus offering as well as smaller share issuance for the equity incentive plan and our DRIP plan. We also report 2 non-IFRS measures in our financial statements and MD&A. The purpose of the non-IFRS measures is to adjust the after-tax impact of certain nonoperating, nonrecurring or noncash expenses. In the current quarter, these include acquisition and integration expenses and share-based compensation expenses. After making adjustments for these items, our adjusted net earnings attributable to PLC shareholders for Q1 2018 increased by 65.5% to $2.8 million from $1.7 million in Q1 2017, which on a fully diluted per share basis is a 19% increase year-over-year.Adjusted EBITDA to PLC shareholders for Q1 2018 was $5.8 million compared to $3.3 million in Q1 2017, representing a year-over-year increase of 74.3%. Now on a fully diluted per share basis, adjusted EBITDA was $0.375 this year compared to $0.299 last year, which represents an increase of 25.4% year-over-year. The double-digit year-over-year growth in the per share adjusted earnings and adjusted EBITDA reflects the impact of putting the capital we raised last year to work in 2018.Our adjusted EBITDA profit margin for the current quarter was 21.7% compared to 18.7% last year. This improvement relates to the acquisition of higher-margin businesses, spreading our corporate expenses over a broader earnings base and general improvement in margins from comparable businesses.And just a few words now about our balance sheet. We ended the quarter with approximately $61.7 million in debt compared with $4.4 million in debt in March -- at March 31, 2017. This level of debt, combined with the excess cash we raised, recent share offering, our $125 million credit facility, provides the company with significant capital to fund acquisition and organic growth opportunities going forward.Cash on hand this year was $6.7 million compared to $12.7 million last year. And our net working capital was $25.7 million compared to $25 million last year.In closing, I would like to mention a recent change in one of our accounting policies. Effective January 1, 2018, we implemented IFRS 15 dealing with revenue recognition on long-term contracts. We elected to use the modified retrospective method of implementing the new standard, which records the transitional adjustments through opening retained earnings without a restatement of prior period operating results. I would point out that our comparative peer group in the U.S. also chose to use this retrospective method of applying the new standard.For Park Lawn, the major impact of IFRS 15 is to capitalize sales commissions associated with preneed sales contracts where the associated revenue from these contracts has also been deferred to future reporting periods. The capitalized commissions are then amortized as an expense at the time the contract turns at need and the merchandising services are delivered and the revenue is recognized. This accounting treatment is intended to better match the commission expense with the revenue recognition.So the impact of implementing IFRS 15 in Q1 this year is that we have an increase of approximately $13.3 million to retained earnings, which is comprised of a $17.7 million increase in deferred commission asset, offset by a deferred tax liability of approximately $2.6 million. And this is explained further in Note 2, Sub F in our financial statements.So I will turn the call over to Andrew for some closing remarks.

[Andrew Clark, Chairman of the Board & CEO]

Thank you, Joe. We're pleased to have delivered another successful quarter and look forward very much to reporting our second quarter results in August.Looking ahead, we remain optimistic about our pipeline of opportunities, both organic and acquisitive in nature. We believe we are well positioned to continue creating value for our shareholders in the remainder of 2018 and beyond.Joe and I are now ready to open the line for questions. So operator, please go ahead and do so.

[Operator]

[Operator Instructions] Your first question comes from Leon Aghazarian with National Bank Finance.

[Leon Aghazarian, Former Special Situation Analyst]

I just want to drill down a little bit on the -- on your year-over-year growth. I know you mentioned that excluding FX and acquisitions, the organic growth was 3.1%. So I guess my first question would be what was the FX impact in the quarter. I'm just trying to break down what the FX and acquisition contributions were respectively in the quarter.

[James Joseph Leeder, CFO & Director]

Leon, it's Joe. The impact was 2.5% of the organic growth. So 0.5% without adjusting for FX and then basically 2.5% if you adjust for the FX.

[Leon Aghazarian, Former Special Situation Analyst]

Which would therefore mean that the acquisitions were about, what, 44%, if I understand correctly?

[James Joseph Leeder, CFO & Director]

44% of the total?

[Leon Aghazarian, Former Special Situation Analyst]

No, I meant of the year-over-year growth. I'm just trying to figure out -- okay, so it's 0.5% of the FX. Fine. Okay.

[James Joseph Leeder, CFO & Director]

Right. Yes.

[Leon Aghazarian, Former Special Situation Analyst]

Okay. Within the organic growth, I mean, can you talk a little bit about the geographic split on that? Maybe how was Canada versus the U.S.? And where was the -- predominantly, the organic growth coming from?

[Andrew Clark, Chairman of the Board & CEO]

So Canada -- it was more -- Leon, it would be more, call it, asset-related than it was geographically related. A lot of the organic growth in Canada came from -- if not all of the organic growth in Canada or the vast majority of it, came from the Park Lawn cemetery assets, the original 6 assets in the Toronto market. As Joe indicated earlier through his comments, funeral revenues in Canada were, by and large, flat or marginally up year-over-year, so not a significant organic contribution there. And the cemetery assets were the primary driver rather than geographic split per se.

[Leon Aghazarian, Former Special Situation Analyst]

Okay. Aside from the higher-margin, Saber in now was 1 month of CMS in your margin profile now. I mean, what were some of the improvements that you did see in the legacy business? That's something that you mentioned in your prepared remarks. I'm just curious to see what were some of the improvements that you saw at the legacy business.

[Andrew Clark, Chairman of the Board & CEO]

We continued to see enhanced cost reduction initiatives from the MMG business in Michigan. We had -- we were modestly pleased by the improvements in -- and the execution on some of the new sales initiatives led by the Saber Group on the MMG assets. So we saw a -- sort of a general positive improvement out of the MMG business in this quarter versus not only the prior year but the prior quarter. In the Toronto market, we just -- quite typically, there's solid demand in the first quarter, and we had good mausoleum sales from our Westminster property and our Park Lawn property in the first quarter of 2017 in Toronto.

[Leon Aghazarian, Former Special Situation Analyst]

Okay. One final one for me before I jump back in the queue. I realized CMS only closed on March 7, and you had slightly less than a month worth of contribution there. Can you give us some color on the progress of integration or anything that's actually gone on at the moment there?

[Andrew Clark, Chairman of the Board & CEO]

There -- we're happy with the progress of integration to the extent that there has been any. Given the Signature acquisition, we have not -- which we knew was coming, we have not made considerable acquisition -- integration, I beg your pardon, efforts as it relates to CMS. And I think as we have explained in the past on the CMS transaction, those assets on a stand-alone basis justified the purchase without significant integration exercise. So we're pleased with how CMS has performed. We've got a great team there. And we're looking forward to plugging them into our other business units in the U.S. on a more broader integration exercise.

[Operator]

Your next question comes from Maggie MacDougall with Cormark.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

So you just commented and you did also in the MD&A -- I'm sorry, the press release that Michigan tracked slightly ahead of expectations, and I was just curious if this is due to better preneed sales, which I think was kind of the focus of the changes made to the marketing and sales strategy in January.

[Andrew Clark, Chairman of the Board & CEO]

Yes. We had -- I think that's fair. There were -- the Saber-led initiatives in the Michigan market, we're focused on only a small number of properties. So I think their relative impact was significant on those properties, obviously, less so on the portfolio as a whole. But we are seeing sort of more positive revenue trends developing there.As you may recall, there is some considerable seasonality to the business. The cemetery business in Michigan and Saber, for that matter, they would tend to be stronger Q2, Q3 than they would be Q1, Q4. And so I think our pleasant surprise with Michigan was -- had to do with performance relative to the prior quarter and relative to what we would have expected given the season. We were also -- I think the team there was better at containing costs than they had been in prior quarters. So that was the needle mover. It was more on the cost side, but we do -- we are seeing some significant headway on the revenue side as well.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. Great. In the past, you've commented on the fact that you have a number of opportunities listed in your portfolio to enhance organic growth going forward. And I'm wondering if you could just update us in terms of what's ongoing now, what your expected capital spend might be on initiative for this year and then what kind of projects are currently under consideration perhaps for 2019 or 2020 even?

[Andrew Clark, Chairman of the Board & CEO]

It's a good question. We have a number of capital projects under development, including on-site funeral home opportunities in a couple of our markets. We have a number of, not necessarily capital items, but inventory-related items, particularly in the Saber portfolio, for the development of mausoleum projects in several of those markets. We would expect that -- particularly as it relates to the on-site funeral operations, that those projects will be capital projects for the latter half of 2018 and through to 2019. We haven't fully spec-ed out the costing on those, so I would be reluctant to commit to a number. But they are, as you can imagine, significant capital expenditures to develop those on-site funeral homes.So I will be able to provide more color in the coming quarter or 2 as we go through the approvals process in those markets. But those are significant projects for us in addition to the inventory builds that are going on in selected markets within Saber. We're also starting now to look at what other organic opportunities and the timing of those organic opportunities within not only the Signature but also the Citadel portfolio.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. And then just one final question for me, and this is fairly broad question. In a number of industries, there's been a lot of discussion of inflation and labor costs, input costs and transportation and freight costs, and recognizing that you guys don't have a ton of exposure perhaps through that type of inflation, I'm still curious if you've seen anything in your business in this regard that we should keep in mind from a margin perspective? Or is that's really not so much of concern for you at this point?

[Andrew Clark, Chairman of the Board & CEO]

It's something we think about, Maggie, but in the realm of materiality, it's not something that -- we monitor it, obviously, but it's not something that gives us considerable consternation.

[Operator]

Your next question comes from Stephen Harris with GMP Securities.

[Stephen C.A. Harris, Head of Research]

Just had -- I want to follow up a little more on your integration plans. And I think we've talked about this before, but give a sense in terms of time lines. You've got 5 U.S. businesses now that you plan to bring together and understand that Mr. Dodds and Mr. Green are going to take a big role in all of that. But how -- where do you plan to be, say, by the end of the year? What do you think you can accomplish in terms of common operating practices, common sales practices, that sort of stuff? Is this a 1, 2, 3-year proposition to integrate these businesses? Where do you think you're going to be, say, by the end of this year?

[Andrew Clark, Chairman of the Board & CEO]

It's probably -- well, by the end of this year -- I mean, sort of on a 12-month basis, we would expect to have sort of 2/3 of the integration exercise well underway, if not complete. And then we would expect that the remaining integration work would be done over the following 12 to 18 months. So we're looking at a 24- to 30-month window when you -- not just for synergies, but also for all those other sort of common sales practices, alignment on best practices, so on, over all those businesses. So obviously, there will be some synergy opportunities in the shorter term, and those will play out over 12 to 24 months. But the integration, broadly speaking, of those were to 30 months.

[Stephen C.A. Harris, Head of Research]

And what are the top priorities there? Where's the easiest low-hanging fruit, if you like, in terms of integration benefits?

[Andrew Clark, Chairman of the Board & CEO]

A lot of it is in sort of supplier-level relationships. Obviously, we have some duplicating relationships in a number of different areas, not only sort of trade suppliers like monument, granite, bronze businesses, that type of thing, but also health care suppliers in the U.S., insurance providers, the integration of insurance policies over a number of different businesses, the standardization of payroll practices, the back-office and accounting, administration-level functions, consolidating those under a single roof. Those would be the priority items in the near term.

[Stephen C.A. Harris, Head of Research]

Okay. Great. And I had sort of more of a maintenance question, but it did stand out to me that your care and maintenance contribution was actually down year-over-year despite the fact that you have Saber and 1 month of CMS in there. And the fund assets were up substantially. But could you give me a little background as to why that expense would decline and where we could expect to see that going forward as you integrate the other assets? And I know the regulations are different in Canada versus the U.S., and I think that's probably part of it, but maybe just a little more color there would be helpful.

[Andrew Clark, Chairman of the Board & CEO]

I think that's the significant part of it, Steve, on the relative contribution is those not only [Audio Gap] contribution levels now within the portfolio can vary quite widely from as little as 10% to as much as 40% of the gross revenue contributed to the care and main -- mix issue more than it is anything else that's based on the regulatory requirements in the markets. There's nothing more to it than that.

[Stephen C.A. Harris, Head of Research]

Okay. And why would it be down year-over-year given the business basis?

[Andrew Clark, Chairman of the Board & CEO]

Down in real terms or down in percentage terms?

[Stephen C.A. Harris, Head of Research]

It's down in dollar terms, I think.

[James Joseph Leeder, CFO & Director]

Well, it could be. Even in the.[Audio Gap]Steve, if we have a mix of -- a different mix of business from land sales to crypt sales, the percentage that we would contribute on land sale is much higher. As Andrew said, the product mix state-by-state adds to it, but even within a certain market, it can vary based on the product mix as well.

[Operator]

[Operator Instructions] Your next question comes from Sanford Lee with Canaccord Genuity.

[Sanford Lee]

You mentioned that MMG is performing better on the cost side as well as on the sales side. I think in the Q4 '17, if we backed out all the numbers, it looks like the revenue was down 17% or so. Can you give us an idea of the revenue decline at MMG for the quarter?

[James Joseph Leeder, CFO & Director]

I don't believe we break that out specifically, but revenue on a currency-adjusted basis at MMG year-over-year would have been, by and large, down single-digit percentage points. Low single digits.

[Sanford Lee]

Great. That's -- it sounds like a vast improvement. And then you are really expanding your margins nicely. It seems the majority of it has come through the revenue mix profile, and now you're starting to see more and more coming from cost synergy stuff as well as your organic savings. Just trying to get a sense of what your new normal base margins are. In the past, like -- sorry. In the past, you've guided to low 20% adjusted EBITDA margins. So I'm taking that as 21%, 22%, but you're already hitting that right now. So are you able to give updated EBITDA margin guidance?

[Andrew Clark, Chairman of the Board & CEO]

Sorry, I couldn't hear a bunch of that question. Could you -- are you...

[Sanford Lee]

I'm looking for -- yes. Just looking for…

[Andrew Clark, Chairman of the Board & CEO]

Are you looking for guidance on EBITDA?

[Sanford Lee]

That's right. Because you had said in the past, it's going to be in the low 20%, at least that's for 2018, but you're already at that and you haven't even incorporated all the savings that you achieved.

[Andrew Clark, Chairman of the Board & CEO]

Yes. I think given sort of the business mix that we expect going forward, we would be reluctant through the balance of the year to guide much higher than that. I think we're obviously going to strive to improve margins. We think that over the longer term, we can get into the mid-20s. But I wouldn't, given the lumpiness of our business or how it can be quarter over[Audio Gap] to anyone who will listen that our business is highly predictable, but it's not linear. We wouldn't want to make pronouncements on margin over the next quarter or 2. We prefer to point to where we think we can get over 18 to 24 months, which would be creeping into sort of more the mid-20 type of range.

[Sanford Lee]

Right. And I asked that question on the last conference call about whether you'd be willing to set another multiyear EBITDA target, and at that time, you did say that you would do so in the not-too-distant future. [indiscernible] not-too-distant future?

[Andrew Clark, Chairman of the Board & CEO]

Yes. And we are -- given the most -- the recent Signature acquisition and the enhancements to our management team, we want those individuals in conjunct with our existing team and our existing businesses to really get into it with us. And so yes, it's -- we plan on future, but we don't think it's prudent to do so specifically at this time, given the new management team has largely only been in place for 6 days.

[Sanford Lee]

That's fair enough. And lastly then, Service Corp referenced on its Q1 '18 call that it benefited from a very strong boost. Just wondering from Park Lawn's perspective, would you say your top line benefited this quarter as well with what you are seeing?

[Andrew Clark, Chairman of the Board & CEO]

Not materially so. Their business would be -- given that it's more funeral-weighted than cemetery-weighted, would be more of an at-need business, which would benefit more from a robust flu season than Park Lawn's business, which would be, obviously, Cemetery and, therefore, more preneed in nature and less susceptible to benefits or downdrafts from the flu or other things like that.

[Operator]

Your next question comes from Maggie MacDougall with Cormark.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Just wanted to see if you could comment on your M&A pipeline. You just announced 2 pretty good-sized acquisitions, and you've been really busy the last 18 months. Wondering what kind of opportunities you may have going forward.

[Andrew Clark, Chairman of the Board & CEO]

There are a number of opportunities out there, Maggie. I would say that it would be inaccurate to classify the pipeline as robust in the context of past acquisitions. But there are a number of opportunities out there that we're exploring. I would say that our focus on the -- in the coming months is on integration. We don't see any -- candidly, any big swings at the moment, although we would -- we're never afraid to be opportunistic. But there are a number of things percolating in the pipeline, but I wouldn't classify any of them as immediate or transformative in nature.

[Operator]

There are no further questions at this time. I will now turn the call back over to the presenters.

[Andrew Clark, Chairman of the Board & CEO]

Thank you very much. We appreciate you joining us all for the call today, and we look forward to speaking with you soon, and appreciate very much your support of the company over the past year and beyond. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.