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Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Lawn Corporation Third Quarter Results. [Operator Instructions] Mr. Andrew Clark, Chairman and CEO, you may begin your conference.
Thank you, Cheryl. Good morning, everyone, and thank you for joining us today. With me on the call are Joe Leeder, our CFO.Today's call is being recorded, and a replay will be available after the call. Please be aware that certain information discussed today is forward looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please see our public filings for more information regarding forward-looking statements.During the call, we will reference non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see our public filings for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures.I'll begin with an overview of our business highlights for the third quarter of 2018. Joe will follow with a more detailed review of our financial results and our outlook. After our prepared remarks, we will take your questions.Our 2018 third quarter results reflect the continued successful execution of our business plan. During the first 3 months of 2018, we acquired HansonsArbor Funeral Chapels and Crematorium in British Columbia, expanding our operations in the Okanagan Valley. Wayne Bose Funeral Home and Gateway Memorial Park in Texas joined our firm, expanding our portfolio of the properties in the Dallas area. Both of these acquisitions were funded from PLC's credit facilities.Our New Jersey-affiliated cemetery, Restland Memorial Park Association, completed the purchase of 78 acres of land in the Township of Lafayette, New Jersey. The purchase was also funded from PLC's credit facility. The new property has been named Eternal Sunset Memorial Park and Cemetery and is currently undergoing construction with expectations that we will be open for business in the fourth quarter.We also amended our existing syndicated financing arrangement led by National Bank and including the Bank of Montreal and the Toronto-Dominion Bank. The amendment to the financing arrangement increases PLC's borrowing capacity by $25 million to $150 million.Subsequently, in the fourth quarter, we completed the previously announced acquisition of Citadel Management LLC, which adds 29 cemeteries and 8 funeral homes to our portfolio and expands our operations into North and South Carolina.We also announced the purchase of Wells Funeral Homes and Cremation Services, a well-run, 2-location funeral business in Waynesville and Canton, North Carolina.On the Canadian side, we made an investment in Humphreys' Funeral Home alongside new President and owner, Kim Hunter. Humphreys' is based in Toronto, Ontario. The acquisitions of Wells and Humphrey were also funded by our credit facility. We're thrilled to welcome so many new members to the PLC team.Overall, our revenue numbers for Q3 were in line with management expectations. We continue to see softness with at-need sales in some markets in earlier part of the quarter. The softness seems to be consistent across our peer group, according to the publicly available information. The at-need softness was partially offset by strong pre-need sales, particularly on the U.S. side of our business.On the organic growth front, highlights include investing in a number of projects such as the previously mentioned development at Eternal Sunset Memorial Park; the commencement of mausoleum preconstruction sales at 5 of our Kentucky locations; the building of stand-alone funeral home in Taos, New Mexico; and funeral homes on cemetery properties in Toronto and Houston.In addition, we are building or have opened cremation gardens in 2 New Mexico locations and also in the Dallas market.Our plans for integration and margin expansion efforts in the U.S. are also moving well. We have created 6 regional leadership positions, have consolidated many key supplier relationships and are integrating the entire U.S. human resources function, including commission, payroll and health benefits.Lastly, we are investing in technology to enhance our processes and reporting capabilities.The company's revenue increased year-over-year by 92.9% to $43,239,000 in Q3 2018 as compared to $22,419,000 in the same quarter of 2017. After -- for adjusting for the impact of foreign exchange, revenue growth in the company's comparable businesses was 5% in Q3 2018 as compared to Q3 2017.I'd now like to turn over the call to Joe to review our Q3 financial results in more detail as well as our outlook.
Thanks, Andrew. And good morning, everyone. You'll find the detailed breakdown of our third quarter operating results in our financial statements and MD&A, which are available on our website and on SEDAR. And my comments this morning will focus on the 3-month results for Q3 2018.As Andrew just mentioned, our total revenue for the 3 months ended September 30, 2018, was approximately $43.2 million, an increase of 93% over the same period last year. And after adjusting for the impact of foreign exchange, the revenue growth from the company's comparable business units was a healthy 5% in the third quarter and 4.5% for the full 9 months.Our growth in the comparable revenue was largely attributable to our cemetery operations, both in Canada and in the U.S. The revenue growth in the current quarter was positively impacted by the completion of cemetery construction projects on previously sold property, increased pre-need sales and increased investment income on our trust deposits. The revenue growth from comparable funeral home operations was also higher, particularly in the U.S. market.We saw continued improvement in our gross margin this quarter. Our gross profit margin for the third quarter 2018 was 79.5% compared with 77.7% in the same quarter 2017. The 180 basis point increase in our gross margin reflects the higher margins coming from our CMS and Signature businesses as well as various funeral home acquisitions during the year.Our overall operating expenses for 2018 increased to approximately $28.7 million, a $13.5 million increase from last year. This overall increase is, again, primarily related to the inclusion of the acquired businesses.Looking specifically at our general and admin maintenance and selling expenses from comparable business operations and adjusted for foreign currency, there was an increase in operating expenses of approximately $200,000 over 2017. And this increase was largely attributable to higher costs to support our growth initiatives, including public company costs such as legal, audit, listing fees, et cetera.Our maintenance, selling, advertising expenses from comparable business units were largely in line with the prior period, although these costs can be seasonal in nature and vary in future periods.Interest expense in the third quarter was higher this year by $532,000. The increase in interest expense in 2018 relates directly to the utilization of our credit facility to fund recent acquisitions as well as increased amortization of deferred financing costs we incurred to establish the credit facility.Our bank debt at the end of this quarter was approximately $58 million compared to only $3.5 million last year. And during the quarter, we also incurred $1.4 million in acquisition and integration costs compared to $2.2 million last year. And for the 9-month period, these costs were $7.8 million this year compared to $3.3 million in 2017. These expenses are directly related to the increased M&A activity in 2018, including Signature, CMS, Citadel and a number of smaller funeral home acquisitions. And I had mentioned in our Q2 call that we would continue to see larger acquisition and integration costs moving forward in 2018 as we executed on our acquisition strategy, and that is what happened.Our effective income tax rate this quarter was 20%, which is within the range -- the percentage range we indicated on our Q2 earnings call. And so as a result of all of the above, our net earnings attributable to PLC shareholders was $3.3 million in Q3 2018 compared to a loss of $171,000 for the same period last year. And this represents fully diluted earnings per share of $0.14 this year compared to a loss of $0.01 per share in 2017.And as Andrew mentioned, and as you know, we also report 2 non-IFRS earnings measures in our financial statements and MD&A. And the purpose of these non-IFRS measures is to adjust for the after-tax impact of certain nonoperating, nonrecurring or noncash expenses.In the current quarter, these costs included acquisition integration expenses and share-based compensation. After making adjustment for these items, our net -- our adjusted net earnings attributable to PLC shareholders in Q3 was $4.5 million compared to $2.2 million in 2017. On a per share basis, adjusted net earnings this year was $0.194 compared to $0.144 last year, and that is a 35% increase year-over-year.Our adjusted EBITDA to PLC shareholders in 2018 was $9.3 million compared to $4 million in 2017, a year-over-year increase of 131%. And on a share basis, 2018 adjusted EBITDA was $0.40 per share compared with $0.26 per share last year, and that's an increase of 53% year-over-year.The significant double-digit year-over-year growth in per share adjusted earnings and adjusted EBITDA reflects the impact of deploying our capital in 2018. The equity financing we completed in May of this year left us well-capitalized to execute on our acquisition strategy and organic growth strategy. However, it also left us under-levered compared to our targeted leverage ratio of around 2 to 2.5x our adjusted EBITDA. In the third quarter, we are beginning to see the improvement in the per share adjusted earnings as this capital is being deployed.Also, our adjusted EBITDA profit margin for the current quarter was 21.1% compared to 19.5% last year. We have seen improvement in the EBITDA profit margins in recent quarters as a result of the acquisition of higher-margin businesses spreading our corporate expenses across a broader earnings space and general improvement in our margins from comparable business units. That is a trend we expect to continue over the next few years as we integrate the acquired businesses and execute our growth strategy.And now a few words on our balance sheet. We ended the current quarter with approximately $58 million in debt compared with $4.5 million last year. This level of debt, combined with our $150 million credit facility, provides the company with significant growth capital to fund our acquisition or organic growth opportunities going forward. We had cash on hand of $13.5 million, similar to that at the year-end. Our net working capital was $35.8 million compared to $25 million at year-end.Also, our pipeline of future revenue currently sits on our balance sheet in the form of deferred revenue, cash and pre-need trust and pre-need insurance contracts. This backlog of future revenue currently sits at approximately $385 million, representing a significant source of future revenue for the company.During our Q2 earnings call, we indicated that we were targeting approximately $25 million in organic growth spending over the next 18 to 24 months and $40 million over the next 3 to 4 years. This capital will be deployed on growth initiatives such as cemetery expansion, on-site and stand-alone funeral homes and visitation centers and new mausoleum construction.As Andrew mentioned, in the current quarter, we announced we have spent $3 million -- U.S. dollars to acquire 78 acres of cemetery land. We also spent $1.7 million on newly constructed mausoleum inventory in connection with the Citadel acquisition, and that inventory is now available for sale. We hope to be able to announce further the commencement of certain other organic growth initiatives in the coming months.Our maintenance capital expenditures continue to be in line or below the annual depreciation expense.I will now turn the call back over to Andrew for some closing remarks.
Thank you, Joe, very much. Looking ahead, we remain optimistic of our -- about our pipeline of opportunities, both acquisitive and organic in nature. We are also very pleased with the opportunities that we see for margin expansion throughout our business. And we believe that all of the above leaves us well positioned to continue creating value for our shareholders in the remainder of 2018 and beyond.Joe and I are now ready to open the line for questions. Operator, please go ahead.
[Operator Instructions] Our first question comes from Leon Aghazarian, National Bank Finance (sic) [ National Bank Financial ]. .
Just on the organic growth on the 5%. Can you give us a bit more color as to maybe on the geography? And whether it was mostly Canadian, mostly U.S.? And if there were pockets of stronger areas, I guess.
Yes. Most of the organic growth, Leon, was on the U.S. side there. It wasn't heavily skewed one way or the other, like meaningfully one way, but it was more weighted towards the U.S. and particularly from CMS and Saber.
Okay, that's helpful. What was the FX impact on the overall quarter? I don't think I saw that anywhere in the release.
You mean, Leon, what would have been without adjusting for...
Yes, correct.
I believe in the quarter, Leon, it would have been in the range of 7.5%.
Excluding FX?
Excluding the impact of FX, yes.
Okay, that's helpful. And just a question on some of these kind of tuck-ins that you had made during the quarter as well. How long do you think the integration process on those would last? And what kind of uplift do you see in terms of margin? You did mention a few times that you see some margin expansion opportunities as the integration gets done. I'm just trying to maybe see if you can quantify the potential lift from those and what the time line on that would be.
The -- so that's a good question. The tuck-ins, as I think most of the audience would be aware, are relatively easier on the integration front, particularly because they are, for lack of a better way to describe it, bolted onto existing clusters of assets in various markets. So I think we are fairly comfortable that all of the most recently announced tuck-ins will be integrated by -- later in the first -- fully integrated by later in the first or early in the second quarter of 2019. We would expect -- again, it depends on the nature of the business and the nature of the market as to what that expansion -- margin expansion could look like. But it wouldn't be unreasonable to assume half a turns worth of improvement in over, say, a 24-month period.
Okay. That's fair. And one last one from me. You did mention that there was some softness at the at-need side of the sales, but that was offset by pre-need sales. Can you talk to us a little bit about what are some of the steps that you're taking to kind of increase some of these pre-need sales? I'm assuming that there are some obviously work behind the scenes that needs to be done in terms of getting some of these pre-need sales up.
Yes. No, absolutely. I would say on -- just on the at-need side of it, the at-need side of the business, there are signs that it was really slow in the first part of the quarter, and I think that was consistent with our commentary around the back half of the second quarter, it starting to slow. But in terms of the pre-need side, and I think we've mentioned this before, one of the integration initiatives that is top of mind is to sort of building a best practices sales platform across the organization and using specific sales techniques that have been successful across a wide range of markets and building sort of a best practices handbook. We've got a very senior, very successful sales leader in the business, in Houston, who has taken over the sales leadership for the organization in the U.S. And that leadership is charged with sort of integrating those sales best practices across the business. So I think really driving uniformity and consistency in the message and consistency in the application of those sales techniques is really what we're focusing on to drive the pre-need business.
Our next question comes from Paul Bilenki, TD Securities.
So on MMG, last quarter you highlighted some of the cost challenges and then -- but noted that the pre-need sales were starting to improve a little bit. And then this quarter, you noted that revenue was down year-over-year. So I'm guessing -- or if you could just update us on the progress there, kind of steps that you're taking? And maybe how long you expect it to take before you get it to a level that you want it to be at?
Yes. Thanks, Paul. We're making a considerable -- there's a considerable effort going into restructuring the MMG business. It's under new leadership now, [ Matt Forestiere ], who was running the Kansas City market and for the Signature business has moved over to MMG and is now running that business. Matt has a history of turning and helping businesses turn around, and so we feel very, very confident in him and his abilities to get that turned around. We have restructured the sales organization and the operation of the organization there at MMG in terms of dividing up the markets. As you may be aware, the portfolio at MMG is relatively large and geographically spread out. And so we have restructured those, the operating businesses into separate smaller clusters, each with their own sales and operations leadership and with accountability driven further down the food chain, for a lack of a better description, than it had been previously. So we're really focusing on a full restructure of the way the business is organized and operated. We're doing -- we're evaluating our approach to paying commission in that market. It's paid differently there than any other market that we've operated in. And again, as part of the sales best practices, we're looking to uniformity across the business units there. We're looking at -- we've made some selective redundancies in certain roles at MMG. And obviously, those are now being managed by folks -- those roles are now being managed in Houston and other areas for us. So there's a whole bunch of factors that play into it, but it really starts at the top and the reorganization of how the whole business is run and is operated.
Okay. And just to follow up on that. I think Q4 last year was down pretty materially year-over-year. Do you expect it to be down again this Q4 versus last year? Or do you expect to kind of return to growth in that business unit?
It's tough for me to say at this particular point in time. I wouldn't want to -- we're sort of part way through the quarter, and there's a whole bunch of factors at play. So I wouldn't want to comment one way or the other on forward-looking information that we don't have as complete.
Yes, okay. Fair enough. And then, I guess, going back to the softness in the at-need sales. I guess, is there -- are there any steps you can take or anything you can do to kind of stimulate those so that you aren't as dependent on the death rate in a given period? Or is it just kind of a function of however many people die in a given period, it impacts that revenue, and that's all there is to it.
Yes. I mean, look, you can make and do things on -- to try and build and grow market share. The -- which is admittedly more challenging to do in a cemetery-focused business or a cemetery-heavy business than it is on a funeral business, which is -- softness in at-need provides challenges on both sides. On the cemetery business with so much of the business being so pre-need, it's very difficult to gain market share. The flip side of that is that it's very difficult to gain market share, and so that's good and very difficult to lose it. On the funeral side, it's really just being well positioned to gain share when you can. Although if the death rate is low and is off, modest gains and market share won't have a meaningful impact one way or the other. So we try and be ready and try and grow our market share. And if the macro factor of the death rate is off, then our growth and market share can still result in softer at-need sales. So it's a bit of a challenging factor to influence. We do know and we've always said that our business, while it's highly predictable, is not necessarily predictable on the quarters, right? It's nonlinear in its predictability. And so the death rate over time is going to revert to the mean. But we don't have any real visibility on when and how that's going to happen.
Our next question comes from Johann Rodrigues from Raymond James.
Real quick. I just wanted to make sure I heard something earlier on the call correctly. Andrew, did you say you guys expect a 50% basis point improvement in EBITDA margin over the next 24 months?
On tuck-ins.
Oh, on tuck-ins. Okay.
Yes.
And so overall, over the next 24 months or 36 months, how do you guys see -- or I guess, excluding acquisitions from this point onwards with the current portfolio, where do you think the EBITDA margin gets to?
Well, I think our -- in our aspirational growth target out to 2022, we talked about 400 to 500 basis point margin expansion. And I think the history over the past few quarters is probably fairly predictive of what would happen over the next few, and that is sort of 50 to 60 to 70 basis point margin expansion per quarter. That would be -- again, to my previous comment about it being predictable but nonlinear, there may be some bumping around on that. But generally speaking, we would see a march to that over a few years to that 400 to 500 basis point margin expansion. I don't know, Joe, whether you want to further comment on that.
So that would put you kind of, give or take, roughly 100 basis points below, like, a Service Corp? You guys think you can kind of get to that margin?
To Service Corp's margin?
Yes.
That's probably more of a mix issue, to be frank. I mean, their business is more weighted towards funeral homes than ours, which would inherently have a better margin -- modestly better margin profile. So I think if we're going to be realistic about things going forward, I think that would be challenging for us with our current asset mix being weighted more towards cemeteries than funeral homes.
Okay. And just kind of off the same note, there's been some softness, definitely, this quarter from your peers, various things, labor costs, elevated health care costs, marketing costs. But you guys didn't seem to have a soft quarter in the U.S. And so would you attribute to that different mix? Or is there anything you guys kind of are doing? You're just in markets where there isn't as much softness. Like, how would you explain the difference between how the portfolios are, I guess, working?
Again, I would attribute, as much as I would like to take credit for it across our group, which -- and I think we can by being strong on the pre-need sales side. I think the mix is as important a factor as any other. I mean, cemetery sales being largely pre-need in nature and our business being more focused on that is less susceptible to moves in the death rate one way or the other, quite frankly. And so I think that has benefited us relative to our peers in this quarter.
And our next question comes from Anthony Prost, GMP Securities.
After having made 4 acquisitions in about a year, you must now be getting more familiar with these new businesses. With 6 months of reflection, can you highlight areas where you see greater potential than when you made the acquisition as well as some areas that could prove maybe even more challenging than you had previously expected?
It's a good question. I mean, I think the areas that we have seen sort of more opportunity than we would have previously expected would probably be in the profile of the industry that the combined businesses have created. We have become very active inbound recipient for potential sellers of their businesses, and so that has created a whole host of opportunities for us on the M&A side, both on tuck-ins and potentially new markets. So I would say our pipeline at the moment on that front is refilling and reasonably robust. Although, obviously -- so that has been the biggest, I would say, impact. I think the opportunities that scale has provided us, particularly with building out a considerable infrastructure in Houston and the ability to centralize a lot of the functions there has really happened more quickly, and in many respects the ramp-up has been more effective than we might have thought it was or going to be in as quickly as it happened. So I think those would be the areas that we've been most pleasantly surprised by. I think on the challenges side, the continuing challenge that we have is our market in Michigan. And I think that's an older acquisition. I think it's taken us a while to wrap our head around it, longer than we ever anticipated, quite frankly, but I truly believe we're making progress and have been over the past couple of quarters to turn that business around. But it still poses -- out of all the businesses that we operate in, it still poses the greatest challenge.
Okay. Sort of tacking onto that a little bit. You mentioned the pipeline refilling. I mean, over the past year, you were one of the most active participants in the deathcare market or deathcare M&A market. Now that you've slowed your activity to focus on integration, have you seen any change in pricing over the last 6 months or so?
It's really asset-specific. But I would say, sort of, writ large across the industry, we haven't seen any material appreciation in pricing though.
Okay. And for my last question, it's sort of a multipart one. Just wondering if you could help us understand the acquisition and integration cost line. I mean, quoted $1.4 million of expenses during the quarter, but there were no major acquisitions. So I mean, we understand that these are mostly integration costs. So then what are the nature of these expenses? Are these just things like severances or IT development, harmonization of sales and operating policies? And how long do you expect these to last? And what would be sort of -- like, is this a run rate that we can expect over the next few quarters?
It's Joe answering, and those are some of the items that are in the integration costs exactly, but we also had acquisition-cost related, for example, in closing Citadel. That took a little bit longer than we thought. So the acquisition costs as they rolled into the quarter related to those acquisitions and a number of smaller acquisitions. But there was also the integration costs. We had mentioned a figure of up to $750,000 as a cost of integrating businesses going forward. We probably have about half of that incurred during the quarter as well. We think that those costs will go on, but they won't go on indefinitely. And so going forward, it will revert back to more of a case-by-case, deal-by-deal acquisition costs.
[Operator Instructions] Our next question comes from Raveel Afzaal from Canaccord.
Just one follow-up question from me. When we are thinking about your current EBITDA margin run rate close to 21% and your target of 25%, how much of this gap is expected to be filled by MMG versus all these other organic growth and new acquisitions that you guys will be undertaking?
Yes, that's a good question. I would -- our EBITDA margin in that business would be high single digits right now in MMG. We would expect it mid- to high single digits right now. We would expect on -- our plan for that business is to get it to mid-teens. It represents roughly 1/4 to 1/3 of our revenue base, so maybe a little less than that.
On an actual -- today, it wouldn't be, but on a sort of a go-forward basis, it would be significantly -- MMG would be significantly less once we integrate and roll in all these businesses in over the next 12 months. It would be sort of in the 15% range.
Right. So if we're moving EBITDA margin from sort of mid- to high single digits to mid-teens from a target perspective off 15% of the revenue base, so I'll let you do the math to calculate that, what that income would be.
And our next question comes from Abe [ Murali ] from CIBC.
I think this was alluded to earlier, I know there are some uncertainties, but I was wondering if you can give us just a little bit more color on the timing of the MMG sales improvements and when we can...
Sorry. Can you repeat the question? We couldn't hear you.
Yes. Just regarding the timing of MMG sale improvements, I was wondering if you could give a bit more color on that. And when we can start to model some of those improvements, whether it would be early 2019, mid-2019 or maybe even later on?
I -- tough for us to be a predictor on sales improvements. It's an -- there's an at-need factor to the business. And again, it's very difficult for us to be a predictor of -- certainly we hope to see overall business improvement, an improvement to the margins as addressed in the previous question, through the mid- to back end of 2019. But that's not a factor of sales on its own. And again, sales, as I said, our business is highly predictable, but it's nonlinear. So I wouldn't want to give a firm, "It's going to happen this quarter" type of response because that's very, very difficult for us to deliver upon.
Okay, makes sense. And then last question. After recent acquisition of Humphreys' Funeral Homes in Toronto, do you guys expect any more deals in Toronto funeral homes in the future?
Sorry, I'll just clarify it. That was an investment in the business. We didn't acquire the business. Apologies if that came across, but I think the press release is pretty clear, we made an investment in the business. We are market agnostic. We would anticipate that if we can make acquisitions that we analyze from a bottom-up perspective, great businesses and then sort of build out the market analysis from there, then we would absolutely look at Toronto and other markets. We're really looking for quality businesses, and we're sort of agnostic on the market, at least at the outset.
Okay, that makes sense. Thank you very much. That was my fault on the unseen acquisition there. Sorry, only an investment.
And this concludes the questions in the Q&A queue at this time. I'll turn the call back over to the presenters.
Great. Well, thank you very much, everybody, for your interest. And we appreciate your support over the last while, and look forward to speaking to you again next quarter.
Thank you very much for your participation today, ladies and gentlemen. This concludes the call. You may now disconnect.