Park Lawn Corporation (OTCPK:PRRWF) Q3 2022 Earnings Conference Call November 10, 2022 9:30 AM ET
Company Participants
Jennifer Hay – General Counsel
Brad Green – Chief Executive Officer
Dan Millett – Chief Financial Officer
Conference Call Participants
George Doumet – Scotiabank
Daryl Young – TD Securities
Zachary Evershed – National Bank Financial
John Zamparo – CIBC
Operator
Good morning, ladies and gentlemen, and welcome to the Park Lawn Corporation Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a lisen-only mode. We will open the floor for your questions and comments after the presentation.
I will now hand the call over to Jennifer Hay, General Counsel of Park Lawn. Ma’am, the floor is yours.
Jennifer Hay
Thank you, Matt, and good morning, everybody. Thank you for joining us on today’s third quarter 2022 earnings call. Before we begin our prepared commentary on the quarter, please note that 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 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.
Brad Green
Thank you, Jennifer, and good morning, everyone. In addition to Jennifer, with me on the call today is our CFO, Dan Millett. Our third quarter operating results exceeded our expectations as it relates to the comparable COVID-19 impacted quarter, especially considering the decline in the death rate. During the quarter, we experienced continued revenue growth with revenue increasing 10.7%, principally as a result of acquired operations, while adjusted EBITDA remained relatively flat.
Our at need sales in both our funeral and cemetery businesses were impacted as a result of the drop in the death rate, although we are pleased that the decline in our same-store call volume decreased significantly less than the national average.
More specifically, recent CDD data suggests that in the United States were approximately 14% lower during Q3 2022 versus Q3 2021. However, in looking at our operations, we only saw a decrease in call volume of approximately 8%, which was not only lower than the national average, but also compares favorably to our peers. We believe this demonstrates our market share growth and strength. And while we expect the death rate to stabilize in the near-term, we also expect year-over-year mortality to continue to decline as compared to the two remaining COVID-impacted quarters.
Looking to our cemetery, our comparable cemetery sales increased approximately $2.7 million year-over-year. This increase was due in part to strong preneed property sales, including a couple of large bulk sales. As we have explained in the past, including at Link last quarter, these sales can vary significantly from quarter-to-quarter. As a result of our strong cemetery sales, our revenue from comparable operations remained relatively flat, exceeding our expectations, especially when taking into account the sharp decline in mortality year-over-year.
In addition, in the quarter, we continue to see positive results from both our organic and M&A initiatives. On the organic front, we announced that the Westminster Funeral Home and Reception Centre in Toronto has opened for business, and it has performed very well in the past month and a half. It is a first-class premier property, which pairs quite nicely with our exceptional on-site cemetery and mausoleum. As a matter of fact, we had our board meeting here yesterday, which concluded with a very nice launch and are fully catered onside event center. On the M&A side, we have previously expressed that the second half of the year was going to be very active.
During the quarter, we acquired nine standalone funeral homes, two standalone cemetery and another two on site, adding approximately 1,935 calls, 376 internals, expanding our presence in the Western Tennessee and entering a new market for Park Lawn Virginia. After the quarter ended, we expanded our presence on the Western Slope of Colorado by adding five standalone funeral homes and one on-site property.
Finally, we have announced an agreement to purchase substantially all the assets of three additional standalone funeral homes in Kansas and Missouri. This transaction is anticipated to close later this month. In total, this adds approximately 4,300 cold and 411 interments, which equates to roughly 8% of Park Lawn annual volume. As we continue to partner with premier independent business operators, we have seen very strong performance from our acquired operations through 2022, exceeding our integration expectations.
As we continue to be a desired partner for suspension planning, our acquisition pipeline remains robust with high quality businesses, which will have a beneficial impact on the strength of our businesses moving forward.
I’d now like to turn the call over to Dan, who will provide some additional detail regarding our Q3 results.
Dan Millett
Thank you, Brad, and Good morning, everyone. Turning to the third quarter results. You’ll find a detailed breakdown of those results in our financial statements and MD&A, which are available on our website and on CR. My comments this morning will focus on the operating results from the third quarter of 2022 relative to Q3 2021. The third quarter saw revenue increase approximately 10.7% as preneed property sales increased year-over-year and acquired operations continue to contribute to Park Lawn’s positive growth.
However, offsetting this growth was a decrease in mortality year-over-year, which was expected considering the heavily impacted COVID-19 comparable quarter. To follow up on Brad’s initial comments, while the death rate remains somewhat unpredictable, we do anticipate that it will continue to decline from the previously impacted code quarters. As year-over-year mortality rates decrease, we continue to focus on maintaining margins in a unique inflationary and recessionary environment.
We are pleased with our proven market share strength and continue to manage our operating costs such as overtime, hard time, contract labor and maintenance and supplies and other variable costs relative to demand. Nonetheless, it’s important to remember that fixed costs in our industry are high and have experienced the impact of inflation on items such as labor, utilities and vehicle expenses such as maintenance and gas.
For the three-month period ended September 30, 2022, the company’s operating expenses, including general and administrative, advertising and selling and maintenance expenses increased by approximately $8.1 million over the same period in 2021, primarily due to acquired operations, but also from comparable operations and corporate costs. While we believe we were slower than other industries to experience the effects of this prolonged inflation. We still believe that our businesses have pricing power to help combat those effects. Throughout the year, we have strategically increased pricing, but have been sensitive to macro to the macroeconomic environment and impact on market share. However, more recently, we have made further pricing changes to improve quarter-over-quarter averages and further offset the effect of inflation.
Ultimately, these items resulted in a decrease in net earnings for Q3 2022 relative to Q3 2021. Net earnings attributable to PLC shareholders for the third quarter was $5.3 million or $0.153 per share compared to $7.2 million or $0.229 per share in Q3 2021. Furthermore, the adjusted net earnings attributable to PLC shareholders for the third quarter of this year was approximately $7.8 million or $0.22 per share compared to $9.6 million or $0.305 per share in Q3 2021.
Turning to the balance sheet, our balance sheet continues to be a strength. And at September 30, we had $133 million outstanding on our revolving credit facility. Other debt of approximately $12.7 million, finance leases of approximately $5.6 million and cash on hand of approximately $31 million. Excluding our debentures, our net debt was approximately $120 million at September 30, 2022. We remain conservatively levered – and at the end of September as our leverage ratio was approximately 1.49x based on the terms per credit facility in approximately 2.26x, including our outstanding debentures.
As previously indicated, as we move through the upcoming quarters and continue to expand our business, their acquisition activity and organic growth opportunities, we expect the leverage ratio to gradually increase. After acquisitions that closed and were announced subsequent to quarter end, we estimate our current availability on the company’s credit facility is in excess of $90 million, which is readily available to be deployed into ongoing and future organic and acquisition growth initiatives.
Finally, during the quarter, we utilized our NCIB facility to repurchase approximately 200,000 common shares at an average cost of $24.86, in order to achieve our 2026 goals, we continue to believe the best use of our available liquidity is in high quality acquisitions similar to those businesses we have acquired this year. However, to the extent the public markets continues to significantly undervalue PLC, we do expect to strategically deploy some additional capital to repurchase our stock.
I will now turn the call back to Brad for closing comments.
Brad Green
Thanks, Dan. At our Investor Day in Nashville, we spoke at length about the exponential growth Park Lawn has seen since 2018, growing from a little over 100 locations to almost 300 locations today. Not only is this achievement extraordinary, what is sometimes lost in the short-term quarterly reporting is that this growth largely occurred while we were integrating our legacy businesses into a United platform and during a once every 100-year pandemic. Despite these distractions, we stayed true to who we are as an organization and have maintained our focus on remaining a premier operator of funeral homes and cemeteries.
Looking back since 2018, we’ve achieved a 33% adjusted EBITDA CAGR, a 16% adjusted EPS CAGR and triple the size of the company. Our culture and operating model continue to be the preferred model of high-quality acquisition candidates. And over time, we believe the growth and performance we will achieve will be unique for our industry and position Park Lawn as a staple in the investment landscape. As we look towards the end of 2022, we remain confident that we will meet our previously announced aspirational goals of achieving a pro forma adjusted EBITDA of C$100 million. That concludes our prepared remarks.
And I will now turn it over to the operator for any questions.
Question-and-Answer Session
Operator
Certainly, ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from George Doumet from Scotiabank. Your line is live.
George Doumet
yes, good morning, guys. I know we got some help from – I know we got some help from the box sales. Can you talk a little bit about what initiatives you’ve done to improve operating volumes internally, I guess, maybe from a sales force perspective? And have they started to pay off at all?
Brad Green
Yes. So we definitely saw the benefit of the bulk sales through the quarter, but the preneed property sales were basically consistent with what we see saw on the at-need side as well, and that was basically in line with the decrease in the sales rate – excuse me, decrease in the death rate. So the steps that we took throughout the quarter, I mean, they were buried at the preneed sales level, especially to cemetery.
We definitely took a much more, I’d say, active or aggressive approach at a ground level, making sure that, that was one of the levers that we knew that we could pull in a down death rate environment, and that’s what you saw the success come in there. I mean I don’t know if you wanted the details of some of the things we did, but it was definitely something that we absolutely focused on in the quarter because while we cannot control the death rate, we can talk to our folks and explain to them the importance of focusing on sales during a period like what’s going on today.
George Doumet
Okay. Great. Thanks. And same-store G&A was up 4%. So we expect the level to continue in the coming quarters? Or there maybe any levers we have there to pull in case I think, get a little bit more challenging.
Dan Millett
Hey, George, it’s Dan here. We kind of look at it historically, we’ve been trending around 7.5% of our revenue is kind of our corporate cost, and that’s been pretty consistent over the last few years since we kind of did a larger restructuring at the end of 2019 or early 2020. Our expectation is that we would see that range kind of between 7% and 8%.
And in the near-term, I would actually see it a little bit higher, closer to the 8% with several of the initiatives, we kind of have planned various integration of our current businesses and planning for future growth as well. I think that’s becoming really important as we discuss our $75 million to $125 million of acquisition growth and various other corporate initiatives, such as our IT infrastructure, training, potential IR roles and things of that nature. So I think we might see a little increase but nothing dramatic like we saw back in 2019, 2020.
George Doumet
Thanks, Dan. And just one point I made it for Brad. Looking at 2023, our U.S. – our large U.S. competitor expects revenues to be kind of flat to down given the dynamics we’re seeing from a mortality basis. Just wondering on a same-store sales basis, just wondering if you kind of share that prognosis?
Brad Green
Yes. So I would look at it more on a quarter-to-quarter comparison, at least that’s what we’re doing right now. And I would expect Q1 to be a little down. We’re talking about 2023 on a comparable basis just because that would be the end of a COVID impacted quarter. I did expect Q2 to be relatively flat.
And then I would see us coming out of this Q3, Q4, I would expect to see an uptick in those two quarters. That’s the way I would look at it. Now how that averages out or what that looks like once the year comes together, it’s going to depend on how far down Q1 is and how much of Q3 and Q4. But that’s how we’re looking at it right now, George, as the management team.
George Doumet
Thanks guys.
Operator
Thank you. Your next question is coming from Daryl Young from TD Securities. Your line is live.
Daryl Young
Hey, good morning, everyone. Just one quick one around the margin target of 26%. What the key variable to getting to that level from where they are today? Is it a function of higher pricing? Or do we really need to drive higher volume to get the operating leverage?
Brad Green
Yes. So again, a good question. The one thing we can’t impact in this equation as everyone knows, is the death rate. So when you start looking at the margins and maintaining those margins, you’re going to have to manage to what you expect that death rate to be. and you’ve got several things that you can do there. We can absolutely manage our operating cost to what that death rate is. And that’s something we focused on very clearly through the last quarter, and we’ll continue to do so as Dan mentioned, specifically on labor, maintenance and things of that nature. It’s made more difficult by the impact of inflation on those numbers, but we’re laser focused on that.
The other thing we can do is focus, as I mentioned in my prepared remarks on sales. So those are things that we can do as well as basically continue to make acquisitions that are vastly higher in margin than some of our legacy businesses are – do I think that, that number is achievable without having the death rate increase above what it is now? Yes. Do I think it’s going to be easy to do that?
No. Is it going to be a lot easier to do that if the death rate goes back to where I think most of us believe it will with the different things that we believe are coming in the very near future. Yes, I think so. So to make a long story short, we think that, that margin is attainable in a current death rate environment with the businesses that we have, yes, but we still have some more work to do.
Daryl Young
And then just one other one, where would you stack up relative to your competitors in terms of the price increases you’re putting through today? Would you be sort of on par with them? Or are they much more aggressive?
Brad Green
If you’re talking about – I only really speak to the competitors that are in our market and a particular business, right. I mean I read and hear the same things you do from our publicly traded peers. So I wouldn’t have any additional information than what you have unless I’m going head-to-head with them in a particular market. I’ll answer it this way. We’ve been cautious, but we’re doing it.
And what do I mean by that? We looked at prices towards the beginning through the second quarter, and we made some changes in, and we’ve recently made some changes towards the end of the third quarter and the beginning of the fourth quarter, and that would be different rooftops in our rooftop-by-rooftop basis. And the cautiousness you see there is driven by the fact that we do not want to make a mistake in start losing market share. But we clearly are wanting to play to keep our averages at where they are, are slightly increasing.
And quite frankly, I think we did a good job of that this quarter. Yes, I realized that the average was down a little bit this quarter. But year-to-date, it’s still up over 3%. And if you compare it last quarter, it was up – and it was up in Q1 of 2022. So I think that we’re doing a good job with how we’re approaching the pricing. I think we’re going to continue to look at that. But relative to our peers, I can’t really speak to that relative to our market.
We’re seeing both independent small and large as well as the consolidators move their prices pricing in response to the inflationary environment we’re in. And there’s a lot of talk about it in the different industry and professional publications that are out there. So I would say we’re kind of in the middle of the fairway. We could be more aggressive. But if you start losing market share as a result of increasing prices, it is infinitely more difficult to get that back. So I would rather be on the conservative side of that and as this continues to develop.
Daryl Young
Thanks, I’ll hop back in the queue.
Operator
Thank you. Your next question is coming from Zachary Evershed from National Bank Financial. Your line is live.
Zachary Evershed
Good morning. Thanks for taking my question.
Brad Green
Good morning.
Zachary Evershed
Just a follow-up on the previous question, the magnitude of the pricing increases that you’ve done so far this year. We’ve seen that flow through in the year-to-date numbers. With the end of Q3, beginning of Q4 prices be kind of on the same par as what we saw in the first half of the year?
Brad Green
I think so, maybe slightly higher, but incrementally probably around the same, I would – I think that’s fair, yes.
Zachary Evershed
Good color. Thanks. And then do you foresee the need to continue to adjust pricing in the new year, given what we’re seeing with inflation?
Brad Green
Yes, right. It depends on the second part of that question. We don’t want to be seen by the families we serve and the communities that we’re in of taking advantage of them at any point in time by raising prices unnecessarily. I mean we could have raised price pre-inflationary environment, too, right? So what we’re really trying to do is make sure that our pricing remains competitive.
So as inflation increases, we’re going to increase our prices, I think, like everyone is seeing on everything from milk to cars. – we start seeing that decrease or it starts coming down a little bit, or we start feeling like we’re maybe losing some customers or especially on the low end, then we’ll be much more cautious with that. But yes, I have no problem continuing to raise prices if the overall macroeconomic environment remains like it is today.
Dan Millett
If I can just add something too. It’s something we’re constantly reviewing. It’s not – we don’t just put a pin in it to say we’re going to look at pricing every quarter or every half year or annually. It’s something that’s constantly being done on a rooftop-by-rooftop basis relative to the other players in the market to make sure that we’re appropriately priced.
Zachary Evershed
Great answer, thanks. And then in terms of capital allocation, highest use in your eyes is M&A, but how are you balancing the NCIB against acquisition opportunities and how high are you willing to take the balance sheet if you see good opportunities to do both?
Brad Green
So again, a good question and a lengthy topic of discussion bought yesterday during our board meeting because those two topics – those two areas are competing for the same capital. And so I think I can’t answer it with any specifics, but I will say that we’re still focused on our M&A. I think that we’ve made it very clear that we plan on hitting that $75 million to $125 million target annually, and we’re going to do it again this year. We have a lot of opportunities in the Park Lawn.
So it’s not like there isn’t a use of our capital, and we believe that will return – we’ll have a higher return. Having said that, it is quite frustrating to it in this chair – and see what’s happened to our stock price as a late. I think we were – I think we should have seen a pullback based on our second quarter results. I think that was overly harsh. And if the market continues to give us an opportunity to buy our company back at eight or nine times, then we’re probably going to do that.
Zachary Evershed
Appreciate that. Thanks. And just one last one on messaging. What’s the best way to manage the Street’s expectations around organic growth, given the possibility of big swings in pre property sales from large bulk sales.
Brad Green
That’s interesting. What I would say is if there was a silver lining that came out of us for Q2, and I think it’s probably evident in Q3, is it really made us go back and focus on what I think we’re good at, which is running these businesses rooftop by rooftop. We’re going in right now and really making sure that we understand our own organic growth opportunities in this type of environment because this wasn’t the environment we were in 9 months ago in this type of environment so that when we go into 2023, we’re able to have both a better understanding internally of what we can expect for our organic growth, but able to kind of share that with our investors and analysts and going forward as well. If I’m sitting in this chair right now, I can tell you that I’m expecting Q4 to be in somewhere in the world of Q3.
Whether or not it’s based on bulk sales, whether it’s not, it’s based on an increase in what I would call normal 3D sales or whether it’s based on we’re just executing better. We’re going to put all of those pieces together, and we are going to manage these businesses to that EBITDA expectation. So that’s just basically a long way of saying, I can’t tell you where it’s going to come from, but I can tell you we’re focused on it.
So if there’s any possible way to get there, we’re going to be able to do it. 2023 is going to be a different story because right now, on a rooftop-by-rooftop basis we’re putting together our expectations of what can happen in 2023, assuming need to be the death rate stays where it is. I know that’s a long answer, and I hope it got there. I just can’t give you a number because we don’t know it ourselves, if that makes sense.
Zachary Evershed
That does, you definitely got there. Just one follow-up on the statement around Q4. You expect it to be kind of in the same area as Q3. Is that despite the tougher COVID comp in Q3 a year ago or kind of a similar year-over-year comparison in Q4, if you understand what I’m saying.
Brad Green
Zach, I think what that probably considers is we saw mortality decreased 14% in the U.S. year-over-year. And if we see that exact same detain Q4 being a significant COVID impacted quarter and potentially even a little bit more, although it’s the winter months, and we should expect to see some of the people who took vacations in July and August and didn’t want to think about preneed come back. I think that’s kind of where we make that expectation around Q4.
Zachary Evershed
That’s great, guys. Thanks for taking my questions, I’ll turn it over.
Operator
Thank you. [Operator Instructions] Your next question is coming from John Zamparo from CIBC. Your line is live.
John Zamparo
Thanks. Good morning. I wonder how you think about your business is positioning for recession, especially given what we’re seeing in consumer confidence. So can you talk about how preneed sales trended through the quarter and subsequent to it.
Brad Green
In relation to – I’m sorry, I thought I’m confused by the question. You were asking if we were – how we view it, the business is recessionary proof for what happened in the quarter based on the preneed sales.
John Zamparo
Well, both. I mean at-need is not particularly impacted by consumer confidence. So just focusing on the preneed sales and how your business be position of consumer confidence versus materially?
Brad Green
Okay. I understand. On the pre-need side, in this past quarter, as I mentioned in my prepared remarks, it’s one of the things that we can actually control to some extent. So we can put certain programs in place. We can offer certain discounts. We look at that market by market. We can put certain incentives in place. And we do things like that when we need to both encourage our customers to step forward and plan for their preneed as well as encourage our salespeople to maybe follow up only with a little bit more Zest than they would otherwise. That’s what we did this past quarter.
We saw a result of that. Same when it comes to bulk sales, we’re responsible for talking to the people who do those large group sales, and we’re responsible for pricing of those. So we can also, when necessary, make those move a little faster or a little slower when we need to. We did that in the past quarter. So as far as I’m concerned in the current economic environment we’re in, we’re doing exactly what we needed to in Q3 from a pre-detailed perspective, and we’ll continue to do that in Q4.
Regarding the recessionary environment, we’ve kind of seen this movie before. And just this group was at a different company, we saw an initial in the last, I would call it, great recession. We saw an initial pullback on pre-need, especially at the lower income levels. And they were also the first people that bounced back very quickly in large part because they had concern about whether their own family members could take care of them.
And we learn from that. We have programs in place that are ready, if that occurs. We have plans in place that already is occurred. We haven’t implemented any of that yet because we’re not necessarily in that type of environment, certainly like what we saw in 2009. But when it comes, we’ll be ready for it.
John Zamparo
Okay. That’s a good color. Thank you. I wanted to follow up on the comments about inflation, and in particular, inflation hitting the business later than some others. Specifically, can you say what level of cost inflation you’re seeing in the business year-over-year and how that might compare to a quarter ago?
Brad Green
Yes, John. Unfortunately, it’s very difficult for us to break out what cost increases are related to inflation versus what related to managing the business and just natural growth – there’s no question we’ve seen inflation in our labor costs, probably most specifically in the corporate office. I think everybody is experiencing it, I’m not sure if people can give you a number, but you can go ask anybody with a corporate office and have a quick session and figure out that’s a very tough environment to be in right now, utilities, gas, some of the noninflationary things that we’ve been seeing and potentially some of it is just coming out of a very focused COVID environment as some of our maintenance costs on the noninflationary side have continued to increase, again, with our operations being so head down during the COVID environment focusing on families and the significant number of families that they have to serve some of those maintenance items kind of got pushed off.
And then, again, managing the businesses from a contract labor position as labor becomes a little bit tighter, we’ve had to use a little bit of contract – additional contract labor that we normally would. And again, not just the increase in contract labor, but the inflationary impact on that contract labor has seen costs go up. So I can’t give you a specific number, unfortunately, but we’re definitely seeing the impact of it. We think that has kind of come in, especially on the labor side, a little bit later than some of our peers. And for now, unfortunately, expect it to continue.
John Zamparo
That’s helpful. Thanks. And then one last one for me. I wonder how you characterize the level of competition when it comes to M&A. And it seems your other competitors are also eager to grow aggressively in this way. So I wonder if you’re seeing more or less competition for targets relative to the cost?
Brad Green
Yes. Good question, and I didn’t get an M&A question this time. So thanks for that. The – we saw some elevated competition, let’s call it, midyear 2022 from two particular private equity-backed players. Those of us who’ve been around a long time, whether publicly traded or even the larger regional ones, were acting consistent with what we’ve done in the past but we saw a couple of the private equity players really get aggressive, let’s call it before.
I think the results of the last couple of quarters started coming in. I would guess that now some of them probably have buyers remarks, at least on a couple of the deals that I saw. We never did that in large part because the deals that we have announced as well as the deals that we haven’t yet announced that will be 2022.
Hopefully, those deals by and large, are self-sourced. And frequently, there’s not another that are involved. So we haven’t seen that type of pressure or competition. We did on one large deal. It was purchased by one of the private equity players. And based on what they did and based on what I see now, I find it quite comical, and I’m glad they had it. So as a general rule, we’re not seeing competition and we believe that we can hit that $75 million to $125 million target this year and the years going forward without having to worry about too many distractions from other consolidators.
John Zamparo
Okay, appreciate the color. Thank you very much.
Operator
Thank you. That concludes our Q&A session. I will now hand the conference back to Brad Green, CEO of Park Lawn for closing remarks. Please go ahead.
Brad Green
As always, I appreciate everyone who joined us today and taking the time to listen to us and for those of you north of the border and enjoy your holiday. Thanks a lot.
Operator
Thank you. Ladies and gentlemen, this concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Be the first to comment