Park Lawn Corp

TSX:PLC

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Park Lawn Corporation First Quarter 2021 Earnings call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jennifer Hay, General Counsel. Please go ahead.

[Jennifer Wiers Hay, General Counsel]

Thank you, Cheryl, and good morning, everybody. Thank you for joining us on today's call. Today's call is being recorded, and a replay will be available after it is completed. 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 are not recognized measures and do not have standardized meanings under IFRS. Please see our public filings for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures.I will now hand the call over to Park Lawn's CEO, Brad Green, to open our discussion today.

[James Bradley Green, CEO & Director]

Thank you, Jennifer, and good morning, everyone. In addition to Jennifer, with me on the call today is our CFO, Dan Millett. I'll begin with a discussion of our business highlights in the quarter, and Dan will follow with a more detailed review of our financial results. Next, I will provide a brief outlook of what we expect from our businesses going forward, and then we will take your questions.Similar to what we saw in the fourth quarter of 2020, Park Lawn again experienced significant revenue growth in the first quarter of 2021, achieving revenue of $89.6 million for the 3-month period ended March 31, 2021. Revenue grew approximately 20% over Q1 2020 with revenue growth from comparable businesses of approximately 21%, excluding any foreign exchange impact.Park Lawn earned adjusted EBITDA of $24.2 million and achieved an adjusted EBITDA margin of 27.2%; an increase of 300 basis points as a result of our continued focus on improving operations. The results for the first quarter 2021 exhibited several similarities to what we saw towards the end of Q4. First, at-need volumes were elevated, both in Canada and the U.S., in part due to COVID mortality. Second, average revenue per contract continued to increase in those jurisdictions where restrictions have been relaxed. And as a result, we achieved growth over our Q1 2020 comparison. And third, we continue to see increased pre-need sales activity. We will continue to focus on improving contract averages and supporting our pre-need sales as we move through Q2 and Q3 in order to maintain our strong sales and operating results.In addition to focusing on operating results, our M&A activity remains dynamic, closing the 3 previously announced acquisitions in North Carolina, Tennessee and Wisconsin by May 1. Although we are first and foremost operators and believe highly in our ability to execute the day-to-day operations of funeral homes and cemeteries, we expect M&A to continue to be an extremely relevant and additive component to the growth profile of Park Lawn for the foreseeable future. We also continue to use our resources to support various organic growth initiatives and have, for example, begun the process to construct a new on-site funeral home in Waco, Texas.I'd now like to turn the call over to Dan to review our financial results in more detail.

[Daniel Millett, Chief Financial Officer]

Thanks, Brad, and good morning, everyone. You'll find a detailed breakdown of our first quarter results and our financial statements and MD&A, which are available on our website and on SEDAR. My comments this morning will focus on the first quarter operating results.During the first quarter, we saw increases in call volumes, both in Canada and the U.S. and correspondingly, our total revenue was $89.6 million compared to $71.2 million for the same 3-month period in 2020. This represents an increase of $18.3 million or approximately 26% over the same period in 2020.Excluding foreign exchange headwind experienced in Q1, revenue growth from comparable businesses was 21.4% over the Q1 2020 comparable. Acquisitions made after January 1, 2020, were also a strong contributor to revenue in Q1, contributing approximately $7.8 million in revenue growth. Moving into Q2, we expect to achieve some additional operating leverage in those businesses acquired during the 2020 calendar year.The company's operating expenses, including general and administrative, advertising and selling and maintenance expenses increased approximately $7.8 million for the 3-month period ended March 31, 2021, over the same period in 2020. The increase in expenses is primarily due to increases from acquired businesses and increased labor and sales expenses to address elevated Q1 sales demand. Relative to Q1 2020, corporate overhead experienced only slight increases that resulted from increased headcount in the corporate office that occurred during Q1 2020.As a result of another quarter of exceptional sales and a commitment to operations, our net earnings attributable to PLC shareholders for Q1 2021 was $9.8 million or $0.324 per share compared to $0.7 million or $0.025 per share for Q1 2020. Furthermore, adjusted net earnings attributable to PLC shareholders for the first quarter of this year was $12 million or $0.40 per share compared to $7.6 million or $0.26 per share in Q1 2020. This represents an increase of approximately 57% in adjusted earnings per share.Our adjusted EBITDA attributable to PLC shareholders for the current quarter was $24.2 million or $0.81 per share compared to $17.1 million or $0.58 per share for the same period in 2020. This represents an increase in adjusted EBITDA per share of approximately 40% over the same period in 2020.Turning to the balance sheet. We ended the first quarter with approximately $139 million drawn on our revolving credit facility, other debt of approximately $11 million and cash on hand of $41.3 million. Excluding the recently issued debentures, our net debt was approximately $108 million. At the end of March, our leverage ratio was approximately 1.23X based on the terms of our credit facility and approximately 2.22X, including our outstanding debentures.We believe we are currently well positioned for and expect future growth through M&A. Our current liquidity is approximately $120 million after considering the recently completed acquisitions. We continue to see support from the broader debt and equity capital markets, and our operations continue to generate free cash flow available for strategic initiatives.I will now turn the call back to Brad for some comments regarding what you can expect as we move forward in 2021 and closing remarks.

[James Bradley Green, CEO & Director]

Thanks, Dan. The first quarter of 2021 continued to be trying for our team members, client families and their loved ones. Our businesses remained extremely busy with both at-need and pre-need sales and services. And although the outlook for the COVID-19 pandemic remains uncertain, there is reason to be optimistic that a return to normalcy for our industry is in the foreseeable future.While it would be irresponsible to expect that at-need volumes recently experienced in Q4 and Q1 will be maintained in perpetuity, we continue to expect financial growth over our 2020 results, driven primarily through acquisitions, pre-need sales and continued improvements in our operating performance.As we've begun to integrate the West, Wichmann and Williams acquisitions, all which closed early in the second quarter, our business development team continues to actively discuss additional opportunities within our pipeline. We are reviewing opportunities of all different sizes, both in Canada and the United States to drive growth.Additionally, our pre-need business has also been a positive driver of top-line growth during the first quarter. The trigger event caused by the pandemic has focused many people's attention on end-of-life planning. As COVID restrictions relax in the various jurisdictions, we find we can more effectively engage with families and discuss their preferences for pre-need property services and merchandise supporting our pre-need sales efforts.Finally, while we do expect to see headwinds from call volumes in the near term, our operating performance, as we've mentioned, is the primary focus for our company. We are constantly reviewing the operating structure of our business, looking for improvements and efficiencies as well as how best to support the needs of our client families with relevant, innovative and customized merchandise and services.During the quarter, we've experienced an increase in our average revenues over the comparable Q1 2020 and foresee a persistent desire of client families to remember loved ones with a service and permanent placement, supporting the likelihood for strong average revenues into the remainder of the year. That concludes our prepared remarks. And I will now turn it over to the operator for any questions.

[Operator]

[Operator Instructions] Our first question comes from George Doumet from Scotiabank.

[George Doumet, Analyst]

Congratulations on a strong quarter. A 2-part question for you, Brad. Last quarter, you guys called out the positive impact on margins from the pandemic to be 150 basis points. Do you have that number for this quarter? Is it similar? And we're obviously running well above our 26% margin goal. I think also Dan alluded to earlier in his prepared remarks to more gains from acquisitions. So should we think of this more as a floor this year with potentially some upside next year?

[James Bradley Green, CEO & Director]

So both good questions. I'm going to take them in reverse, although I think the answer for both remains -- are very similar. We're still trying to get a solid understanding of exactly how the COVID pandemic has impacted the margins. We've definitely seen the increase in at-need activity. We talked about that. We've definitely seen an increase in the pre-need sales. But we also believe very firmly that the changes that we've made in how we operate this business over the past couple of years and how we've integrated our legacy acquisitions as well as our new acquisitions are having the intended impact of getting to that sustainable 26% plus margin.So when you ask me where the floor is, I would say, we haven't moved our goal line from the 26% margin at the end of 2022, but it is very possible that we got there quicker than we anticipated, which doesn't surprise me at all. When you ask me to put a number on how COVID has actually impacted that, it's very hard to do. I think when you take the -- I think you said 150 basis points is something that was mentioned last quarter, it's probably more of us just saying a portion of it is definitely attributed to what happened with COVID. And a portion of it is definitely attributed to the fact that we're running this business more efficiently. But to put an actual number on that, George, I just can't do it.Now it is my expectation going forward that you guys are going to start seeing the margins in the range that we hope to be at the end of 2022, the 26%. It would not surprise me if we're able to maintain margins in that range going forward. But it also wouldn't surprise me if we slip back a little bit, if the at-need volume drops significantly as a result of COVID stopping completely in the summer. But I think we're there. And that's a long-winded answer, but I think it probably got you where you needed.

[George Doumet, Analyst]

Okay. That's helpful. And just one more, if I may. On labor, it's obviously affecting a lot of industries. Just wondering if it's specifically affecting yours? I guess, sourcing the right labor from a capacity standpoint. And would you expect to maybe pass-through some price? If the answer is yes to that, would you expect to pass-through some price to the customer maybe later this year?

[James Bradley Green, CEO & Director]

Good question. We have not experienced the labor problems that you read about every day and actually driving up to the office this morning, listing to CNBC, that was the main thing that was being covered, when I was driving up to the office this morning. We just haven't experienced that. And George, the only thing -- the only reason I can give you for that is a lot of people come in this industry because they want to work in the industry and people find a place working here, and we have a very -- as a general, a very happy work force. So we just haven't run into those problems. But it's something that we've talked about. And if we start running into pressure on our salaries, then we would obviously have to look at price increases, but that's just not an issue that we have right now.

[Operator]

And our next question comes from Irene Nattel from RBC Capital Markets.

[Irene Ora Nattel]

Just sticking with the Q1 results, and I was very intrigued by your comment around the rise in average revenue per call. Where would you say we are compared to pre-pandemic? And how do you see that evolving as we go through the year?

[James Bradley Green, CEO & Director]

Okay. So I'll give you some specific numbers on that. We used Q1. So throughout 2020, we used Q1 as a basis for the average sale. And the reason for that is that was the first full quarter before things really got going with COVID. And we noted that the second quarter fell about 8% from Q1, and then it bounced back to only about 3.5% off in Q3 and then only about 4% down in Q4.If you take Q1 of 2021, this last quarter, and compare it to Q1 of 2020, we're actually up 7%. So not only did we see it come back, we saw it improve and improve, by my opinion, a healthy percentage.Where do I see that going for the remainder of the year? What we have seen is that the burial families have definitely come back with and focus on services. There's still some improvements to be made on the cremation side with cremation families focused on services. But if you remember, as we were being asked this question throughout COVID, when no one really knew where we were going to end up, we consistently said that people make choices on how to bury their mother, their father, their -- a sibling, a child or something along that line. They make these decisions based on what they've done in the past and what they wanted to do, and we didn't think that COVID was going to alter what people -- the choices that people wanted to make.So as a result of that, I think the moment these restrictions were lifted, people bounced back to what their norm was and what they wanted to do. And so that doesn't surprise us at all. And I think you'll see that in the jurisdictions that still don't have restrictions. I think you'll see people bounce back and do what they want to do because it's about burying their loved one. And the COVID pandemic is not going to change their perception of how they want to celebrate that life.

[Irene Ora Nattel]

That's really helpful. Can you tell us what percentage of the market were sort of open in that way?

[James Bradley Green, CEO & Director]

So most of our markets are completely open with the exception of Canada. Now understand, we don't have a big presence in some of the places, I'll use California, for example, that the other 2 publicly traded companies do. So there's a lot of impact that goes along with that. But most of the markets that we are in now are open to the point that the restrictions that exist do not impact our business operations. I'm not saying that they're completely open, but giving us the ability to have 100 or 150 people at a funeral service versus 0, 100, 150 people we can work with that. Zero is very hard. So with the exception of Canada, we're pretty much open. And then some of our markets are completely open, no restrictions, no masks, etc.

[Irene Ora Nattel]

I wonder what that feels like. Yes. Yes, we still have a curfew here. And just another question, if I might. On the last call, you said that you were beta testing the FaCTS software in certain markets in Q1. Wondering where you stand with that?And then secondarily, as we go through 2021 and 2022, how, from the outside, we're going to see the impact of that sort of in the results or rolling through elements of the results.

[James Bradley Green, CEO & Director]

Good question. So we ran FaCTS in one of our large markets side-by-side with the legacy systems for getting the Q1 results, and they matched, which is, as you know, when rolling out software, that's an important last step. So now we're taking that, and we're starting to roll out basically our first version of this software to our other markets, which I plan to have in place by the end of 2021.What you -- what you would see, not necessarily what the benefit in our own organization is going to be. But what you would see and our analyst -- or excuse me, our investors would see, is broadly more detailed reporting; both in the financials and during these calls because we've got 6 or 7 legacy systems that are all giving us umbers that we're then consolidating. And in order to have these phone calls and do what we need to do. When we have a single system I think we'll be more comfortable breaking down some of these consolidated numbers into more specific cemetery and funeral home segments and same-store and things of that nature. I mean, we do that now, but I think you guys will see even more of that because transparency is something we all believe in around here and the more I can give you, the happier we'll be.

[Operator]

Our next question comes from Scott Fromson from CIBC.

[Scott Douglas Fromson]

Well done on the quarter. I'd like to dig in a bit on the accelerated pre-need sales. Do you have an idea of the breakdown of the acceleration between Cemetery and Funeral Home? I guess what I'm looking at is, what is the -- does the business mix with higher percentage of cemetery, have kind of a multiplier effect on growth versus the industry average?

[James Bradley Green, CEO & Director]

I -- it depends on what you're talking about. So our pre-need funeral was up about 22%, but a lot of that is insurance. And so you're basically recognizing commission at the time. Our pre-need cemetery sales as a whole -- I'm sorry, yes, pre-need cemetery as a whole is up about 40%, but you have to remember, in that number, it's not necessarily what was being sold, but what was being recognized in the quarter.So what you really probably want to look at when it comes to the cemeteries is the pre-need property sales because that's what's actually happening in the quarter, and that's what's making it into the number. And that was up about 47%. So if you kind of took all that together, that's where you see some significant pre-need sales. But remember, in this industry, there's a distinction between what is being sold and what is being recognized, and that trips people up at times. But anyway, I think that answers your question.

[Scott Douglas Fromson]

It does. Maybe just to dig a little bit deeper. Are you seeing changes in the demographic groups buying pre-need cemetery? In other words, are you seeing -- is the average age of a purchaser going down?

[James Bradley Green, CEO & Director]

Not really. I think we're seeing more of what we saw pre pandemic. So in other words, the demographics of the individual coming in and talking about this hasn't changed. There are just more of them, which gets back to quoting what Jay Dodds said at the very beginning of this. And just to let you see behind the curtain a little bit, this was him telling me this at the very beginning. And when it was just and I talking, he said, this is going to be a trigger event. And those are words that you all heard us use multiple times through the pandemic, and it's turned out to be true. Pre-planning is in the forefront of a lot of people's minds because you never know what's going to happen, and we've just got reminded of that.So the demographics are not changing, but the sheer volume of people coming in are. Does that make sense?

[Scott Douglas Fromson]

It does and final probe. Do you have a sense of if you're gaining market share versus competitors on that pre-need sales portion, particularly cemetery?

[James Bradley Green, CEO & Director]

The short answer to that question is yes. And that has nothing to do with COVID and everything to do with -- that was our focus pre-COVID. It's been our focus after COVID. I mean we have a very robust sales organization, and that's always been a focus of this company's operating -- the executive operating team, who's been together for 13 years in different spots.So yes, we're gaining market share, Scott, but we're doing that because we expected to do that no matter what.

[Scott Douglas Fromson]

That's great. That's very helpful, Brad. Just one quick further question on U.S. dollar-denominated revenues. Do you have a strategy for dealing with the translation risk? I would calculate your U.S. revenues at about 90%, but the CAD continues to strengthen.

[Daniel Millett, Chief Financial Officer]

Scott, it's Dan here. Yes, that's something that's definitely on our mind. And we started looking at that earlier this year. Obviously, it's really presentation risk as much less of our actual cash needs need to be exchanged. But looking at some ways to manage that. I think one thing you'll start to see going forward is utilizing a little bit more U.S. debt; we have that ability on our credit facility to kind of manage some of that FX risk as well as U.S. dollar presentation currency. We're investigating that as well.And so those are things we're thinking about. And when we have something more to discuss, we'll talk about it.

[Operator]

And our next question comes from Maggie MacDougall from Stifel.

[Margaret Anne MacDougall, Head of Research]

Can you guys just get into a little bit of the twelve month, 24-month expansion plan on the organic side? You announced that the Waco project, and I'm kind of curious what kind of expansion opportunities you have in the portfolio that you might be looking at? And how we should think about sort of that latent opportunity to capture growth through just expansion of assets and building out on what you already have?

[James Bradley Green, CEO & Director]

Yes. So if you back up, it's really a question about the utilization of our capital and how we go out to the market, whether we're buying acquisitions or whether we're taking current properties that we have and improving on them. And the answer is those are constantly happening, Maggie. So if you're asking me to look out 12 to 24 months, there's literally, a spreadsheet of organic, both build projects, whether it be cemetery, mausoleums, doing -- developing cemetery property, developing cremation gardens, things of that nature. But our ongoing projects right now, we've got things going on at Eternal Sunset, Forest lawn here in Houston, the Westminster Funeral Home is still going on. We're building a new funeral home in Waco. Just last night, we were looking at a new build cemetery on a property that we have. Those things are constant and ongoing. And it just depends on what's going on at the time with acquisitions on where we're going to deploy that capital.So we never, I guess, another way to kind of add a little bit more detail of that is we never run out of these organic projects that we could work on, but we just try to decide which ones that we can work on while doing the acquisitions and while running operations. So it's just kind of a constant measured drumbeat of improving or doing organic projects as we go through because we can't be in the construction business. If I have 4 funeral homes being constructed at the same time, it's going to take away from somebody else doing something else in the company, if that makes sense.

[Margaret Anne MacDougall, Head of Research]

Yes. For sure. Allocation is internal, human and financial resources, obviously, what you're discussing. The other question I had is just around the margin and coming at it from a slightly different angel than what we've already discussed on the call. And that's just around looking at the strong gross margin you reported, how do I separate the lift in that, from sort of the change in business mix because you guys have added a lot of funeral assets. It used to be, that Park Lawn was very overly cemetery, now it's a bit more balanced, reflective of the industry versus pricing changes. Because as, Irene's questioning unveiled, we did see a pretty good recovery in that average price per service. So can you just unpack that gross margin once again for me?

[James Bradley Green, CEO & Director]

So yes, you're going to see an improvement in the market with what we've done through an acquisition because the funeral segment has a higher-margin than the cemetery segment does. So to that extent, that's going to have a positive impact on the margins anyway. That was -- bluntly though, that's all part of the plan. We knew even probably before Jay and I joined, Park Lawn knew that it couldn't and would not, if it was going to grow, continue to buy cemeteries at the rate that it had in the past because there just aren't the number of large cemeteries properties out there to consolidate in various funeral homes.So -- and what you're also seeing in the margin improvement is we are buying infinitely better businesses now than what was occurring with some of our legacy transactions. Not that they were bad, but if you're buying a business that's got a single-digit margin and you're working hard to take it to a 20% margin, it's a lot easier to buy a business that's operating at a 28% margin and taking it to a 35% margin.So I think the addition of the funeral homes to the cemetery mix that we have at Park Lawn, yes you're seeing it, but that was always part of a larger plan anyway, just by the nature of how the business looks. But we are also extremely balanced right now. I think our EBITDA is 50-50, almost exactly 50-50 in, Q1 between cemeteries and funeral homes.And the last thing I'll say about that, Maggie, is we're agnostic when it comes to buying cemeteries or funeral homes because we can operate both. They're very different. But in my mind, it's what's the next acquisition up that we can best deploy our capital on? So it wouldn't bother me one bit if we -- if it got to where we got heavy cemetery again because of a couple of transactions or went the other direction. It just doesn't matter for us as operators. But it could have an impact on the margins if we go back in and start buying some larger cemeteries that have lower margins, but we'll still have to see what happens there.

[Margaret Anne MacDougall, Head of Research]

Okay. And just one last one for me. If I look at your same-store sales growth being in the 20% range, that's really high. Are you able to bifurcate that by volume versus price?

[James Bradley Green, CEO & Director]

Let me see. I've got something in front of me that should help me with that. Long pause. Let me see this. I don't have that actually in front of me, Maggie. I'll let Dan get back to you on that because if I start -- I may actually be wrong, and I don't want to tell you the wrong thing because that would be very embarrassing to me. But Dan, can get back to you on breaking that apart.

[Daniel Millett, Chief Financial Officer]

Yes. Maggie, I do have a couple of those things in front of me. Looking at relative to 2020, Q1, our calls are kind of up in total about 25% with our averages up about 7%. So that kind of gives you a bit of the idea of how that flows into the numbers.

[Operator]

And our next question comes from Zachary Evershed from National Bank Financial.

[Zachary Evershed, Analyst]

Congrats on the quarter. So with FEMA funeral funding being retroactive, are you seeing any families come back to spend that money a few months down the line?

[James Bradley Green, CEO & Director]

No. That's actually had no impact on us that we have seen. It's a reimbursement program anyway as opposed to a forward-looking program. And when it was announced, there was a discussion internally as to whether or not to help facilitate those payments. And since it was a government-run program, we decided it was best for us not to get in the middle of that, and I'm glad we did because it's been bumpy. But we have seen no impact or discussion about that whatsoever in large part of that because I think it's a reimbursement program, not a submit the bill to the government program.

[Zachary Evershed, Analyst]

Understood. And then labor, obviously, you're not seeing any issues there. How about any upward pressure on the products that use caskets, urns, that kind of stuff?

[James Bradley Green, CEO & Director]

We haven't seen any of that yet. Obviously, with our largest vendors that they're publicly traded, I listen to their phone calls myself, and they're starting to talk about pricing pressure. But on -- for example, with the casket vendors, which are 2 large vendors of ours, they kind of have an annual price increase that's baked into their product anyway. And I think because it has been for decades, and so they can still get away with that. But I don't see any -- we haven't seen anything coming at us yet.But again, we read and listen to the same things you are, and one would anticipate that that could happen, and we'll deal with it when it hits. It's kind of similar to the same conversations we're having now from an operational standpoint. And that is, if you know or anticipate that the at-need volume is going to drop and have an impact on revenue, where are the costs going to align with that?So if we get a question like that, or if we start seeing cost increase in our product lines or through our vendors, we're going to have to deal with it in one of 2 ways, but we'll be ready for it when it comes.

[Operator]

And that concludes the questions in our Q&A session. I'll turn the call over to Brad Green for closing remarks.

[James Bradley Green, CEO & Director]

I really appreciate those of you all who dialed in today for doing that and continuing to support Park Lawn and look forward to talking to you all next quarter. Thank you very much.

[Operator]

Thank you for joining us today. Ladies and gentlemen, this concludes our call. You may now disconnect.