Park Lawn Corp

TSX:PLC

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Park Lawn Corporation First Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jennifer Hay, General Counsel at Parkland. Ma'am, the floor is yours.

[Jennifer Hay, executive]

Thank you, Holly and good morning, everybody. Thank you for joining us on today's first quarter 2022 earnings call. 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, 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 filing for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Finally, as a reminder and as we've previously announced, beginning with this first quarter in 2022, we have changed our reporting currency to U.S. dollars. Therefore, all figures referred to in today's call will be in U.S. dollars.

I will now hand the call over to Parkland, CEO, Brad Green, to open our discussion today.

[James Green, executive]

Thank you, Jennifer and good morning, everyone. In addition to Jennifer, with me on the call today is our CFO, Dan Millett. We had another solid quarter that was in line with our expectations shared with you during our last earnings call in March. We are proud to have exhibited a strong operating performance, yielding positive results to begin 2022 in spite of a difficult year-over-year comparison to the first quarter of 2021, where COVID-related death had a more pronounced impact.

For the quarter, we experienced revenue growth of approximately 17.5% to $83.2 million and revenue growth from our comparable businesses was essentially flat relative to Q1 2021. Also for the quarter, Park Lawn achieved an 11% increase year-over-year in adjusted EBITDA to $21.4 million at an approximate 25.7% margin. We continue to believe that we are returning to a more normalized operating environment and saw same-store call volumes decrease by 2% relative to the COVID impacted Q1 2021.

However, unlike the first quarter of 2021, we demonstrated strong revenue averages at same-store average revenue per call increased approximately 7% year-over-year. This increase can likely be attributed to less jurisdictional restrictions, as well as the continued strong desire by our families to celebrate and memorialize the life of their loved ones. Also we implemented some pricing changes during the quarter in some of our businesses to help offset the impact of inflation.

From the cemetery perspective, property sales have continued to grow. However, post sales supply chain delays have begun to impact merchandise and service revenue as items that would have historically taken 6 to 8 weeks to deliver and install are now taking 6 to 8 months to receive and install. As a result, the recognition of the revenue associated with the delivery and installation of this merchandise being delayed, but we expect that this revenue will grow relative to Q1 as the year progresses.

On the acquisition front, subsequent to the quarter's end, we announced the completion of the Chancellor acquisition in Mississippi, which added one stand-alone funeral home and one combination funeral home and cemetery. And just last week, we announced that we have entered into a definitive agreement to purchase the Hudson business, a stand-alone funeral home in Durham, North Carolina, which we expect to close following regulatory approval in early June.

Both of these acquisitions consist of premier businesses in high-growth markets that fit well within our existing operating footprint. As we look towards the rest of 2022, our acquisition pipeline remains robust and we continue to strategically evaluate opportunities to partner with select premier businesses in both Canada and the US.

In addition to our growth through acquisition, we also continue to deploy resources to support our internal growth. For example, in the quarter, we continue to place a heavy emphasis on the improvement of our technology. We have continued the rollout and integration and integrate facts into our cemetery businesses and still expect that by the end of the year, all of our businesses will be operating with the support of facts.

In addition, we partnered with a full-suite digital marketing agency to support our businesses with Bank such as search engine optimization, web design, graphic design and general social media and marketing support. On the inventory side, during the quarter, we completed the construction of and delivery of a mausoleum in one of our Michigan cemetery businesses. And finally, construction of our on-site funeral home in Waco, Texas has begun, and we continue to explore new strategic opportunities for the placement of similar on-sites.

I'd now like to turn the call over to Dan, who will review our Q1 financial results in more detail.

[Daniel Millett, executive]

Thank you, Brad and good morning, everyone. You'll find a detailed breakdown of our first quarter results in our financial statement and MD&A, which are available on our website and on SEDAR. As a reminder, beginning in Q1 2022, we transitioned to a US dollar presentation currency and my remarks will reference US dollars. My comment this morning will focus on the operating results from the first quarter of 2022 relative to Q1 2021.

As Brad mentioned, Q1 of 2021 was anticipated to be and was a tough comparable for Q1 of this year, as the dynamics of the COVID pandemic have changed significantly since early 2021. Despite this, total net revenue growth year-over-year was approximately 17.5%, growing from $70.8 million to $83.2 million. Revenue growth from our comparable businesses grew by 0.6%, which was supported by strong call volumes and averages, as well as the delivery of a modeling in Michigan.

During the quarter, the company's operating expenses including general and administrative, advertising and selling and maintenance expenses increased by approximately $8.3 million for the 3 months period ended March 31, 2022, over the same period in 2021. This increase is primarily the result of acquired operations with other cost increases resulting from corporate costs. These cost increases were offset due to decreases in advertising and selling costs, typically at our cemetery businesses where sales incentives were restructured during the second half of 2021 and where recognized revenue and associated commissions from comparable operations was down year-over-year due in part to the recognition challenges mentioned by Brad.

As a result of another quarter of exceptional sales and a commitment to operations, our net earnings attributable to PLC shareholders for Q1 2022 was approximately $8.79 million or $0.25 per share, compared to $7.7 million or $0.256 per share for Q1 2021. Furthermore, adjusted net earnings attributable to PLC shareholders for the first quarter of this year was approximately $11.2 million or $0.321 per share compared to $9.5 million or $0.316 per share in Q1 2021. The net earnings and adjusted net earnings on a per share basis were impacted by the equity raise completed in September of 2021, as approximately 4.7 million more shares were outstanding on a diluted basis year-over-year.

Park Lawn continues to deploy liquidity into accretive acquisitions, we expect to see further growth in our per share metrics. Turning to the balance sheet. We ended the quarter with approximately $87 million drawn on our revolving credit facility, other debt of approximately $11.7 million, finance leases of approximately $5.7 million, with cash on hand of approximately $30.7 million. Excluding our debentures, our net debt was approximately $73.7 million at March 31, 2022.

At the end of March, our leverage ratio was approximately 0.87x based on the terms of our credit facility and approximately 1.69x including our outstanding debentures. As previously indicated, as we move through the upcoming quarters and continue to expand our businesses through acquisition activity and organic growth opportunities, we expect the leverage ratio to gradually increase. We estimate our current liquidity is in excess of $160 million after taking into account the acquisitions announced subsequent to the quarter's end, which is readily available to be deployed in ongoing future organic and acquisition growth initiatives.

I will now turn the call back to Brad for some closing comments.

[James Green, executive]

Thanks, Dan. As we continue to move towards a more normalized environment, it is important to recognize the value and performance of our teams who not only exhibited exceptional performance under volatile circumstances over the last 2 years, but we also continue to excel in their performance and service to our communities and client families. This dedication has yielded extraordinary results for our shareholders over time and it's the same positive momentum that has already allowed us to announce that we anticipate exceeding our 2022 aspirations for the Park.

Irrespective of the expected decline in call volume and impact from COVID over the near term, we have strengthened the core of our organization from within and our expertise in operating businesses as opposed to simply consolidating businesses will allow us to remain resilient and focused on translating our operations to shareholder value and achieving our new aspirational goals by the end of 2026.

That concludes our prepared remarks and I will now turn it over to Holly for any questions.

[Operator]

[Operator Instructions] Your first question for today is coming from George Doumet.

[George Doumet, analyst]

Yes, Scotiabank. Your prior commentary have been and you expected organic growth to be flattish in '22, Q1 is the toughest comp of the year and were flat. So just wondering maybe how much conservatism you have in that goalpost.

[James Green, executive]

We're going to stick with that same -- the same thing we've been saying now for I can guess something that we are seeing that would make us change that recommendation this time. I think we've been more right than others. I mean, obviously, we would have had a much bigger quarter and people would be saying that we had exceeded expectations had we said that we were expecting a 15% decrease in same-store volume like was mentioned by one of our larger competitors, but we stuck with the back that we thought that it would be consistent throughout the year. And there's nothing we're seeing, George, right now that would make us think that's not the case.

[George Doumet, analyst]

Okay. And can we talk a little bit more about the decrease in merchandise and service sale pretty pronounced. Just wondering what gives you confidence that, that could be probably the worst of it and that situation should resolve itself in the next couple of quarters?

[James Green, executive]

Yes, it's not a decrease in sales and that's an important thing to remember here. It's a decrease in recognition of sales that have already occurred, which is actually a very positive thing. So we can't recognize the revenue on certain merchandise and services in the cemetery segment of our business until we actually deliver those. And so now take it down in the weeds a little bit, we're talking receiving a monument and going and placing that monument in the cemetery and charging for putting the monument there and the service that charges that are related to that.

So what we're effectively doing is we've already sold it, but we can't recognize that revenue until the monument shows up. We'll do the supply chain issues that are going on, where we used to sell that monument and recognize that revenue within 6 to 8 weeks of the sale. Now we're looking at 6 months before the monuments are showing up. So the sales are there. It's just the recognition problem. And to me, that would be a big distinction that I would want to make to you guys.

[George Doumet, analyst]

That's understood, but I guess are you seeing maybe reach that supply chain is probably getting a little bit better at all?

[James Green, executive]

Yes, I can't really say that I've seen it. But if you think about when this started to occur for us at least, it started to occur about 6 to 8 months ago. So we're still ahead and that's important because we started seeing the delivery slow down. Well, now the ones that would normally take 6 to 8 weeks, went out 6 to 8 months. So we actually think in this quarter, we're going to start seeing the recognition of that again. So it's not that we're seeing improvements in the supply chain, but merely because of time we're going to start seeing the recognition of those that have been 6 to 8 months out now and we think that's going to certainly help how that looks for the next couple of quarters.

[George Doumet, analyst]

Okay. Great. And one last one, if I may, Brad. I know we've always been a very acquisitive company. But is there a point where it's probably more accretive to buy back our own stock?

[James Green, executive]

That is an interesting question and you know that we are very transparent. One of our Board members that actually, I would say, probably instrumental in my development as a CEO and that is a full-time job, trust me, is Steve Scott and he has mentioned that in the past up to and including yesterday's Board meeting. So it's something that we discussed, but I'm not saying it's anything that we're going to do right now. Our acquisition pipeline is quite robust.

We still have people that are knocking on our door. Many of the acquisitions we make are still not brokered or if they are, they're just coming to us. And I just -- while I don't believe our stock price is anywhere near where it should be and it kind of boggles the mind as a reason it is where it is right now. I still believe the best use of our capital is acquisitions, but that's not my decision to make alone. And so I guess I would shorten the answer by saying, there are lot of smart people that are talking about just that.

[Operator]

Your next question for today is coming from Irene Nattel.

[Irene Nattel, analyst]

RBC Capital Markets. Just continuing on the subject of M&A, I suppose it is a slow start to the year. Are you still confident that you can come that you'll sort of come out at that $75 million to $125 million range you articulated?

[James Green, executive]

Absolutely, there's no reason to believe that, that won't be the case, Irene. And I know it probably looks like it's been a slow start to the year just because we haven't -- we've only announced 2 deals up at this point in time. I would only point back and say to you that our fourth quarter was very active and we actually closed 2 deals that we probably would have put into the first quarter, but for reasons that were seller-based, we did it in the fourth quarter.

And as you know, we pride ourselves around here about being focused on our operations, so making sure that we can integrate those businesses before we move on to the next is very important. And I'd also point out that those other companies that are publicly traded in our sector, I don't think any of those folks made any acquisitions in the first quarter and I think at least one of them pointed to the same reasoning.

So be a little bit patient with me, you'll see the acquisitions hopefully, speed up through the end of the year. But as the only other caveat I would add to that is last quarter I said, you see some years that at $50 million and the next one could be $200 million. So that $75 million to $125 million -- I mean those are bumpers, right? But we're very comfortable that at least what I'm seeing through the end of this year that, that is not going to be a problem.

[Irene Nattel, analyst]

That's great. Just coming back to this issue, is it mostly monuments or are you also seeing slowing in other merchandise categories?

[James Green, executive]

Almost exclusively monuments because of where those -- a lot of those come from, they're not -- all of them are not domestic. But most of the other things we're getting our hands on pretty easily.

[Irene Nattel, analyst]

Okay. And then just a final one, you would be very disappointed if I didn't ask it on fact. As you're rolling it out through the cemeteries sort of how is that rollout -- I'm sorry, to the funeral home, how is that rollout going? How is -- what's the early data collection looking like and kind of thing?

[James Green, executive]

I would say that the rollout as far as the data collection is exceeding our expectations, in that we're starting to see information that we thought we would see that will help us operate this company more efficiently and more effectively. So I'm pretty tough greater and that team knows it and I would give them a solid A right now for where we are in that process. And that's not the only thing that IT team does, I mean there's plenty of things that go on in a company of this size.

I mean we had a pretty significant attempt to ransomware attack in us the middle of the quarter and our IT team did exactly what they're supposed to do and stop that in to tracks along with other things that they do all the time. But the fact is exactly where I want to be. I knew you would ask the question, thanks for doing that. And as we get closer towards the end of the year, I think we're going to start being able to share with everyone what we actually want -- expect to see out of that and then start pointing to numbers that we can disclose that as a result of having the facts in place, if not by the end of this year, certainly through next year.

[Operator]

Your next question for today is coming from Scott Fromson.

[Scott Fromson, analyst]

CIBC. Just a question, I don't mean to be more of it, but are you seeing any pull forward or any increased mortalities from kind of ancillary effects of the pandemic and I'm talking things like drug abuse, substance abuse, suicides, disease. I'm just trying to get a sense of the longer-term death rate.

[James Green, executive]

Yes, so there are 2 things that I would say that you would see that we've been talking about, I think, maybe earlier than most, and I'll attribute both of these to Jay Dodds. The first thing we talked about was that [ pre-need ] would be a triggering event. And the other thing that we talked about early on was that these -- the deaths that we were seeing, we started referring to them as COVID-related deaths. And that's because we didn't know what else to call them and this may add up to go back and look, but we're talking -- we started seeing this like 3 and 4 quarters ago.

So when you talk about the elevated death rate in the US, I think most people starting this quarter in the last few months have started to recognize that it's some combination of events that we can't put our fingers on, right? It's not -- I mean people aren't necessarily dying of COVID anymore, but it's not healthy for people to not go to the doctor for a year. It's not healthy for humans to be secluded from other humans and their family members. It's not healthy for people to be sitting in their apartment, going through whiskey every 3 days or whatever it is that people are doing.

And I think that's what you're seeing. That along with some combination of the baby boomers and just demographics and things of that nature. I can't tell you what it is, but what we try to do and I'm literally beginning to wonder whether or not it's a benefit or not. What we try to do is tell you exactly what we're seeing and what we think we're going to see. And I think we're going to see kind of this leveling off of the death rate, but it's still going to be elevated. It's why we're not pointing to our same-store sales necessarily going up or down.

But we're also not going to forecast some major pull forward and pull that number down. I mean we just kind of see it staying where it is. Now we could be completely wrong because no one knows the answer to this question. So I don't think it's more of it, but I would just summarize by saying we're seeing what we think are COVID-related deaths and there's no way to know how long that's going to continue to occur.

[Scott Fromson, analyst]

You operate in some -- you call traditional markets, basically rural southeastern, South Texas where I would think that you've seen a lot of substance issues even before the pandemic. Are you able to track kind of on a regional basis, what you're tracking versus national or state averages? Or is that even a relevant question?

[James Green, executive]

Yes, that's not something that we track. I will say that drug-related deaths are definitely starting to come on to our radar, but that's not a percentage that you're going to see that would probably move the needle, we don't own enough of the market, but you're starting to see that and you're starting to hear anecdotal stories of that and some of the -- I don't think it has anything to do with Texas, if it could be as much as anywhere in the US. But you read the newspapers just like I do, there's a lot of fit and all that's coming over the southern border and that's not going to help us at all.

So we're starting to see anecdotal evidence of that in some of our markets, no doubt. But it's not something we track and God forbid, it becomes something that's that big of a deal. But no, I don't think that will move the needle for us.

[Scott Fromson, analyst]

Brad, I didn't mean to mess with Texas. I'll turn it over.

[James Green, executive]

Did you get that settlement there, I'm proud to be Canadian, but I'm still a border Texas, so be careful there.

[Operator]

Your next question for today is coming from Zachary Evershed.

[Zachary Evershed, analyst]

National Bank Financial. Congrats on the quarter.

[James Green, executive]

Thanks, Zach.

[Zachary Evershed, analyst]

Are there any markets that you're seeing performing much better or much worse than you anticipated?

[James Green, executive]

No, I would -- knock on wood, I would say this is the most in line quarter with what we expected to see going into it, since I've been the CEO, but I've started out in the CEO role at the beginning of the pandemic. So when I say it's normal or normalized or we saw exactly what we expected to see and what is meaning our internal projections that we discussed at the Board level at the end of last year. So I think our markets are performing as they should be.

I mean we haven't had a bad quarter yet, Zach, where I get on the phone and tell you guys, it's the funeral industry and we don't look at it quarter-to-quarter, you have to look at it over a year. But as far as this particular quarter is concerned, I haven't seen any market perform better or worse than another one.

[Zachary Evershed, analyst]

Got you. And the new digital marketing push, do you consider that more of a defensive maneuver to protect market share? Or do you expect it to translate to new wins with a good ROI?

[James Green, executive]

I'd say it's more of the latter and let me tell you why. So we've got our -- I mean we've got a very strong internal IT team. I mean our Chief Technical Officer has worked with this executive team for a couple of decades and we pulled him over for a reason. He's really good at what he does and he brought his people with him. So we've got a strong team. We've really had been focusing on facts and other things that are necessary, I mentioned the security and things like that.

Rather than internally build more into that IT infrastructure, we got -- we found a good business partner that's a full-suite digital marketing agency inside of the death care profession and we like them. And we just made the decision that it would be less expensive and more effective just to use their expertise. So it's not a defensive measure, it's -- we're just improving on the business why our folks continue on getting facts out the door. And if you were sitting in my chair, you would have made the same decision.

[Zachary Evershed, analyst]

Great. And one last one, what's the latest on labor availability and wage pressure?

[James Green, executive]

So both of those -- I know this is contrary to what you're probably hearing and reading, both of those are beginning to relax for us everywhere except for where the corporate offices are. So I think our folks at the field location and business location level are doing a very good job with both of those issues. I think we're starting to see even more candidates come across in what's normally a very competitive funeral director world.

I mean we're sitting in Houston with the majority of our corporate employees are right in the middle of oil and gas land. And so with price of oil at $120 a barrel, we have a lot of people wanting our accountants and HR people and IT people. And most of them are going to stay here, but we're going to lose some. So we see some pressure there when people are making ridiculous offers, but most folks know that, that's short term and they've got a family here.

So I would say less pressure than we've seen in the past, I know that's not what you're probably hearing in other companies, but that's what we're seeing on the ground and if it changes next quarter and you ask me, I'll change the answer, but right now, I'm feeling pretty good about it.

[Operator]

Your next question for today is coming from Daryl Young.

[Daryl Young, analyst]

TD Securities. Just 2 quick ones for me. On the -- and apologies if I missed it at the opening, but on the 7% average revenue per call growth, could you maybe just highlight how much in there is expanded service offering? Or is it effectively entirely priced?

[James Green, executive]

No, it is definitely not entirely price, that would be a significant price increase. It's interesting, Jay and I were debating that yesterday afternoon and again this morning because it's kind of a soft touch answer. And what we basically, I think, come to is people were told they couldn't do something or they couldn't actually memorialize their loved ones what they wanted to during COVID and they couldn't necessarily get together as groups as they have in the past. That's part of it. The other part of it is death and dying has become forefront of people's minds through this pandemic, and it's less of a taboo topic now. And so we're seeing that even in our -- the contracts. Our pre-need contract averages are even higher than we've seen in the past.

So I think it's 2 things, both of which are being just driven by our consumer. And that is parts of the country were told they couldn't do something and they don't like that. And then parts of our countries, they put a different value on it now and value on life. And that's what we come out on that. Other people may have a different opinion. They'd be wrong, we're right. So that's where I would end that answer.

[Daryl Young, analyst]

Okay. Sure. And then when we think about the acquisitions you're doing and the portfolio you're amassing, is there a significant opportunity to, I'll call it, upsell the offering those acquired targets are providing? Or are they relatively full service today?

[James Green, executive]

We have the ability and so far have been able to improve all of the businesses that have joined Park Lawn since we've been here. We already buy good and outstanding businesses, right? So we're really taking a good business and over time taking a little bit of time and tweaking them and making them better. I lasted John [ Haran ], we were on a -- we were doing a trip the other day and he was helping me out in acquisition and he actually told the acquisition candidate that it frustrated him because he run -- he knows he runs one of the best businesses in the country and he said it frustrated him that we made it a little bit better.

And I feel that as literally as a badge of honor. So we can take these really good businesses and make them a little bit better, but that is directly accretive and drops to the bottom line. So that makes a big difference if we can make them a little bit better. We're really not in a business of buying where we run businesses and trying to turn them around. It takes too long and there are plenty of other companies who that's what they like to swim around in and we think we can increase even the good businesses a little bit, but if they're already good, it just helps -- it's immediately accretive and the 2 acquisitions we did this quarter so far this year so far, those are perfect examples of that.

[Daryl Young, analyst]

Got it. And then one last one, just around the cemetery sales. Did you disclose what the sales would be year-over-year excluding the monument and supply chain issue?

[Daniel Millett, executive]

Hey, Daryl, it's Dan. As we kind of referenced, the merchandising services income is down to 13% that translates year-over-year, I think that answers your question.

[Operator]

[Operator Instructions] There are no further questions in queue, I would like to turn the floor over to the management team for any closing remarks.

[James Green, executive]

I really appreciate everyone for joining us today, I hope you have a great weekend, I'm going to have a better one because I'm about to go in a plane and go see my daughter with her MBA, which is my first kid out to graduate college. So while you cannot have as a good weekend as I'm going to, I hope you have an awesome one. Thank you very much.

[Operator]

Thank you ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.