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Ladies and gentlemen, thank you for standing by and welcome to the Park Lawn Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jennifer Hay, General Counsel. Thank you. Please go ahead.
Thank you, Carol. Good morning, everybody. We would like to thank you for joining us today. 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.
Thank you, Jennifer, and good morning, everyone. In addition to Jennifer, with me on the call today is our CFO, Daniel Millett. As you know, Dan joined Park Lawn in September, and he has quickly made his presence felt and become an integral part of our team. Additionally, Joe Leeder is on the call doing what he's done since September, which is keeping a watchful eye on Dan and I, and stepping in when necessary. I'll begin with a discussion of our business highlights in the quarter, and Dan will follow with a more detailed review of our financial results and outlook. I'll then explain the impact of the pandemic on the third quarter as well as what we might expect the impact to be on operations for the remainder of the year. After our prepared remarks, we'll take your questions. We had another strong quarter, even with the pandemic-related challenges in our operating environment. We achieved revenue of $83.8 million with comparable revenue growth at our businesses of approximately 11% for the quarter, and earned adjusted EBITDA of $19.1 million. Having adapted to our environment and demonstrating an ability to act swiftly and make any necessary adjustments, we shifted our focus back to our core operating and growth objectives during the quarter. In addition to our strong operating performance in the quarter, we also managed to strengthen our balance sheet by completing an $86.3 million secure -- sorry, senior unsecured debenture financing. After using the proceeds to pay down our credit facility, our leverage ratio was reduced to approximately 1.48x based on the terms of our credit agreement. This transaction gives us significant liquidity to further pursue internal and external growth opportunities, which is exactly what we did, and we were excited to announce the 2 transactions that closed subsequent to the end of the quarter. On October 1, we announced the acquisition of Bowers Funeral Service, comprising 3 stand-alone funeral homes located in British Columbia. While small in size, we believe this business will fit perfectly with our other BC locations. On November 2, we announced the acquisition of J.F. Floyd, which consists of 4 funeral home locations, 3 of which are on-site, 9 cemeteries and a stand-alone crematory in South Carolina. The addition of these businesses strengthens our footprint in the Carolinas as we continue to expand into the Southeast region of the U.S. Both acquisitions were purchased primarily with cash generated from our operations, leaving us approximately $130 million in liquidity. And with that, I'd now like to turn the call over to Dan to review our financial results in more detail.
Thanks, Brad, and good morning, everyone. You'll find a detailed breakdown of our third quarter operating results and our financial statements and MD&A, which are available on our website and on SEDAR. My comments this morning will focus on the third quarter operating results. As Brad has mentioned, our total revenue for the 3-month period ended September 30, 2020, was $83.8 million compared with $66.6 million for the same 3-month period in 2019. This represents an increase of $17.2 million or 26% over the same period in 2019. Excluding the impact of currency fluctuations, revenue growth from comparable business units in Q3 2020 was 11.1% over Q3 2019. The increase in revenue from comparable business operations during the quarter was primarily the result of increased sales at both our cemetery and funeral businesses in the United States. The company's cemetery businesses experienced strong sales, both in at-need sales that may or may not be directly or indirectly related to COVID-19 as well as pre-need sales where our sales teams were able to utilize various tools to support communications with families in terms of end-of-life planning. On the funeral side of the business, while both at-need and pre-need sales remained strong, many jurisdictional restrictions imposed, as a result of the COVID-19 pandemic, were eased in many areas of Canada and the United States during the quarter. This generally allowed us to return to pre-pandemic service capacity but continued to impact ancillary items and reduced the overall revenue per service relative to the first quarter of 2020. Finally, many of the acquisitions made over the past year have seen increased sales as these businesses are integrated and transitioned into the broader company. Recent acquisitions, such as Baue, Horan and the Journey Group, have experienced sales increases over the comparable quarter and internal expectations. With respect to expenses, the company's operating expenses, including general and administrative, advertising and selling and maintenance expenses for the 3-month period ended September 30, 2020, increased approximately $10.5 million compared to the same period in 2019. The majority of the increase is due to the acquisitions of the Journey Group in Q4 2019 and Harpeth Hills, Family Legacy in Q1 2020. Additionally, approximately $4.3 million of the increase relates to the legacy businesses. The increases are primarily due to increased headcount and reenergized marketing efforts. Along with additional sales counselor incentives, maintenance and overhead costs that were previously being deferred increased, as risks associated with operating during this global pandemic were better understood. You will also see that our interest expense this quarter was higher as we utilized our credit facility to fund the acquisition of new business over the past year, and more recently, we utilized funds from our debenture financing to reduce our credit facility balance. This provided Park Lawn significant financial flexibility with a slight increase in our cost of financing. As a result of strong sales within the quarter and acquisitions made over the past 18 months, I am pleased to report that our quarterly earnings were up significantly over the same period in 2019. Our net earnings attributable to PLC shareholders in Q3 2020 was $5.4 million or $0.18 per share compared to $1.6 million or $0.05 per share in 2019. Furthermore, the adjusted net earnings attributable to PLC shareholders for the third quarter of this year was $7.7 million or $0.26 per share compared to $6.6 million or $0.22 per share in Q3 of 2019. This represents an increase of 17% in adjusted earnings per share. Our adjusted EBITDA attributable to PLC shareholders for the current quarter was $19.1 million or $0.64 per share compared to $15.1 million or $0.51 per share for the same period in 2019. This represents an increase in the adjusted EBITDA per share of 26% over the same period in 2019. The significant double-digit growth in the per share earnings metrics from 2019 to 2020 reflects the impact of the accretive acquisitions made in recent past, but also reflects the strong sales experienced over recent months. Next, let me say a few words about our balance sheet. We ended the third quarter with approximately $138.8 million of availability utilized from our revolving credit facility, other debt of approximately $12.8 million and cash on hand of $46.1 million. Excluding the recently issued debentures, our net debt was approximately $105.5 million at September 30, 2020. At the end of September, our leverage ratio was approximately 1.48x based on the terms of our credit agreement and approximately 2.69x, including the outstanding debentures. While we have seen our financial position show resilience during this ongoing pandemic, we believe our liquidity of approximately $130 million, after acquisition subsequent to quarter end, provides financial flexibility to support our operations as well as gives us the dry powder to take advantage of any acquisition opportunities that may come our way in the upcoming months. Finally, our trust funds have continued to improve as the broader economy stabilizes. At September 30, our perpetual care trust funds had a net unrealized gain of $5 million, representing a 2.3% increase from book value. Our pre-need merchandise and services trust funds had an unrealized gain of $13.5 million or a 5% increase over book value. Ultimately, it was another successful quarter for Park Lawn. Our operating results were positive. Our balance sheet is well positioned to support our objectives and our strategy, and we believe we will see continued success as we look forward to Q4 2021. I will now turn the call back to Brad for some closing remarks.
Thanks, Dan. In August, we discussed the fact that we were still experiencing strong pre-need property sales, and that continued throughout Q3. Again, in addition to our strong sales culture, we attribute this continued strength in pre-need property sales to the fact that the pandemic is a trigger event. Additionally, we saw an increase in at-need volume in both the funeral and cemetery side of our business. However, unlike the second quarter, these increases were not concentrated or in so-called hotspots, but rather, were spread across all of our markets. So while a portion of the at-need increase may have been related to the COVID-19 virus, it's very difficult to make that determination, given the fact that we did not have any major operations in any these particular hotspots during the quarter. Finally, while we still saw a decrease in the average funeral sale, there was significant improvement going from 7.2% to 3.7% from Q2 to Q3. While this improvement is encouraging, average sales continue to fluctuate as various jurisdictions tighten and relax regulation, and we expect to see further fluctuation in Q4 and into the new year. So in summary, I'll repeat what I effectively said when we spoke in Q2. One would have to assume that the pandemic had an impact on our volume during Q3. However, some of this volume growth is due to our continued focus on our operational objectives, which, by their very nature, are intended to increase our market share. So again, it's my personal opinion that we would have had a strong performance in a COVID-free environment as well. In closing, we made a concerted effort to refocus on operating our business as normally as we possibly could under these challenging circumstances throughout the quarter. Having said that, we continue to closely monitor COVID-19 as the resurgence of cases throughout North America continues to pose a threat to the health and economic well-being of our employees, their families and the families we serve. As the circumstances evolve, our principal focus remains ensuring the safety of each of these individuals to the best of our ability, and we continue to make adjustments as local restrictions remain in what feels like a constant state of flux in some jurisdictions. To add some color, this is what I meant when I said we had a challenging operating environment. We've had about 75 verified positive tests in the U.S., which represents about 4% of our U.S. workforce, with an additional 250 employee outreaches due to things like family exposures and COVID-like symptoms, that were ultimately negative but had to be dealt with in various ways. In spite of all of that, all of our businesses, including our office here in Houston, have remained open to serve our families. Our team members consistently exhibit an unwavering commitment to their job and the families we serve, which is certainly not lost on this executive management team, and I hope it's not lost on our investors either. I will now turn it over to Carol, and I'm happy to take your questions.
[Operator Instructions] Your first question comes from the line of George Doumet with Scotiabank.
Congrats on that double-digit organic growth in the quarter. I know there were some mixed headwinds there. But at same time, we were hopeful we can see some more of that drop to the bottom line. So any thoughts there? I know you guys called out investing in expansion of corporate infrastructure, but I just want to get your thoughts.
Yes, George, it's Dan here. I'd tell you, I think our margins -- we're pretty proud of our margins in the quarter considering the pandemic and everything that's going on. This stability we've seen between Q1, Q2 and Q3, I think, is very positive. We've discussed it a little bit in the past that our headcount and overhead expenses in our corporate operations were growing throughout 2019 in order to build out our infrastructure and support the significant increase to our business over the years. But I think what we're seeing in the second and third quarters is some more stability in those corporate expenses, which I think will allow us the ability to start taking some more of those overhead expenses that are out in the field off the table. Obviously, the margins are something we're very dedicated to improving and something we're focused on. But I think the double-digit growth in adjusted earnings per share and adjusted EBITDA per share is also a result of that. So that's kind of what I'll say about our margin.
Okay. Last quarter, you guys called out quite a bit of market share gains. Maybe I'm reading too much into this, but I know there's less commentary this quarter. Can you comment on that at all? Has the momentum continued there?
George, this is Brad. Here's what I would say about that. When the first -- or in the second quarter, we definitely could point to specific areas, and we did, Michigan, Denver and New Jersey, where we saw some significant -- saw increasing cases or increase in call volume. Whether or not that was all market share-driven or not, I wouldn't pontificate on because I don't think anybody can answer that question. But we certainly knew a big part of what was driving that was those were hotspots. As I mentioned in my opening remarks, we're seeing kind of an increase in our market share across all of our markets, and it's pretty steady. While we're not a small company, we have -- we don't have a large percentage of the overall death market in the United States. So when you take that percentage and apply it to the unfortunate increase in COVID deaths, that would not explain our market share increase. But I still can't put a finger on that and tell you exactly what it is. So I can tell you that it's increasing. I can tell you that we think it's because of what we're doing in our company, what was happening pre-pandemic and what we'll continue doing post pandemic. But to be able to point to whether it's COVID or just what we're doing in these circumstances, I really can't do that. But we do think that it's related to our operating and our market share.
Okay. I appreciate that, Brad. And just one last one, if I may. We've obviously been putting up some really strong organic growth here in the last few quarters. But as we look to next year and anniversary that COVID trigger event, do you think we'll be able to come back to the more normal cadence of mid-single-digit organic growth? Or you think the headwinds are pretty strong there and that might be a little bit lower?
No. I actually think -- again, everyone's going to face headwinds with comparing our results in 2021 versus 2020 when, hopefully, the COVID pandemic is behind all of us. And I would much rather have results that looked -- that are lower than have the pandemic around. No one wants to deal with that. So as we get into a normalized environment, I would expect our organic growth to be single digits, but it will still be there because what we're doing, we were doing pre pandemic. And we can point to specific examples where we are very methodically taking our legacy businesses and improving them and integrating them into an overall structure. And then when we buy these acquisitions, we can internally, very specifically, point to improvements in those acquisitions and improvements in those margins. And all of that eventually makes its way into that organic growth. So I'm certainly not going to promise double-digit organic growth, but I'm also not going to say that all of that is due to the COVID pandemic.
Your next question comes from the line of Scott Fromson with CIBC.
Just a couple of quick questions. Now can you talk about average revenue per call trends? Is it -- has it changed since Q2? And do you think there are permanent changes resulting from COVID?
So in Q2, we saw a decrease of precisely around 7.19% -- or approximately, I guess, I should say, 7.19%. During Q3, that improved to about 3.66%, and that's off of a comparable of the first quarter. So we saw a dip in the second quarter. That was, again, 7%. We saw an improvement of that, about 3.5% in this quarter. And in our discussions internally as well as listening to what other people are saying throughout the industry, it certainly feels like that those things were related to there being lockdowns and limited amounts of people that we can have in services. And when that was -- when those restrictions were removed, we almost immediately saw an increase in the average funeral sales. In our experience in the past, whether it be -- with what happened with the economic downturn in 2008 or other things that happened kind of in a macroeconomic sense, the funeral industry is very resilient, and people do what they want to do. So I think what's limiting or what's putting pressure on those averages right now are limited to 2 things, and that is the inability to have the larger funeral services and the inability to add ancillary items that would be connected with those funeral services. And I'll give you a real-world example. As of last week, New Mexico, where we have some significant operations, has limited their capacity size and funeral services, again, to 5 people. That's going to impact your average. And there's not a whole lot we can do about that except for -- we've seen it before. We saw it this summer. We know what to do and we get lean where we can and we sell where we can. And that's why the funeral averages would be down, in my opinion.
So we can expect maybe a similar situation in Q4 as we've seen in Q3? Maybe not as much, maybe down 4.13%?
Well, I would have no idea which direction it would go -- it's actually. I know you're messing with me, aren't you, Scott?
I'm messing with you. But I'm just wondering if it might be somewhere in between the 2 quarters.
Yes. I mean so I would think -- look, we're all reading the same news and watching the same television, right? So as we're going into this and things begin to start look like there might be a more significant lockdown, the answer depends on where are they, which state? Is it the states we're in, right? And I mean does it come all the way into the Southeast? Or is it just limited in the Northeast this time? How much is Canada lockdown? You get -- we're all seeing the same thing. And I would expect that as that occurs and as this continue to occur, we've seen this increase in pre-need cemetery sales, and we've also seen an increase in our at-need sales when there is a death. So while yes, the average is down, it seems that as if it's being more than offset by these increases. So one would think, as things go back to normal and normalize, as the average goes up, then probably some of those pre-need volumes will go down. But right now, it's been a net benefit which is, again, difficult to talk about in a pandemic because I would rather be in precedented times instead of unprecedented times.
Your next question comes from the line of Maggie MacDougall with Stifel.
I was wondering if we could just jump into a bit of discussion on some of the initiatives you have in place around the margin growth. I think I read in the MD&A about some investments that's happening behind the scenes at the corporate level to support sort of that platform development. I'm wondering where you're at with regard to finalizing completion of sort of your "U.S. platform". And then is this a situation where, as we see sort of revenue per call normalize, we may actually start to see a bit more margin growth? I'm wondering if that's been a headwind so far this year.
Yes. Good question. So let me -- I'll use a specific example to talk about the -- building the corporate infrastructure, and how that has basically stabilized for us. So definitely, that's put some pressure on what our margins have looked like quarter -- and comparing Q3 '20 to Q3 of '19. However, we made a large acquisition, as everyone knows, in Nashville in January, and we've made a pretty good-sized acquisition here in South Carolina. With the exception of hiring a VP of Operations to run basically both of those markets, we didn't add any infrastructure in Park Lawn to handle those 2 acquisitions, and that probably increased our headcount by, I don't know, I'm guessing here, 15% approximately. Maybe 10% to 15% additional employees. So that is a good indication that what we have in place is sufficient to continue to add acquisitions without seeing those costs come up. And so if that's what you were talking about by the initiatives that you read in the MD&A, I'm not sure exactly what you were talking about. The other thing that helps our margin, another specific example, and this just takes time, but we have some of our legacy businesses that we have said many times on the -- well, in the last 3 quarters, I've said that we're constantly working on the margins. And I'll give you a specific example. MMG's margin in the company in 2018 was about 1.7%.In 2019, when we got involved in that business and got Mat Forastiere starting to work on it, it was about -- we got it up to about 10.7%. And year-to-date in 2020, it's at 22%, right? So over time, that's just an example of how we're taking some of these legacy businesses and moving their margins up. And as we do that, you'll see the margins improve as opposed to a business like Baue and Horan that we purchased last year. The year-to-date, it's running an average north of 30% margin. So we're taking the legacies up. We're buying businesses that are higher margins now. And as that continues to occur, you will see that margin move towards that number that we've talked about. But we're not going to make a decision during the quarter, Maggie, to make that margin look better that quarter. These are all very stable businesses, very methodical approach, very -- but we'll get there, right? So -- and we still feel very strongly about hitting the 26% that we've been talking to you guys about for a while.
Okay. The other question I had was with regards to your growth. Maybe I -- I'm not sure if I'm reading it correctly, but I take from your commentary that we are still in a bit of an uncertain environment with COVID, but you're quite pleased with how you've been able to manage through it and you're comfortable with the practices you have in place currently, which gives you a bit of an opportunity to sort of refocus on your growth strategy. And so if that is an appropriate read of the situation, could you please comment on your M&A pipeline and your ability to push ahead with acquisition-related growth kind of no matter what might come with COVID? Obviously, we could get into an extreme situation, depending on how the winter goes. But absent an outlier, how are you thinking about both your pipeline and your activity as we push into 2021?
The short answer to that is during this quarter, we are at -- maybe at the beginning of this past quarter, we started approaching our business as -- specifically the acquisitions in the pipeline as we did in the pre-COVID environment. So now taking a step back, I will say, we kind of looked at the business and said, "Okay, we now know what it looks like during the major lockdown. We now know what it looks like." We're basically talking about June, July and August when things were rough in both countries. We now know what that feels like. So if it happens again, we know what to do. But minimally, across the company, we can't continue and don't want to continue operating in an oh-no or what can't we do environment. So we know what it is, so let's go back and focus on what our operating objectives are and what our acquisition objectives are in the situation we're in. Because it may be this way for 3 months, 6 months, 9 months or 12 months, none of us know. So we're just going to go back to as normal as we can. So we fired up the acquisition pipeline again. It takes longer. It's a little more complicated. It just takes -- it takes more money, bluntly, because it's harder to get people out to do certain things that you have to get done. But to show you how normal it is, every senior executive that exists at Park Lawn, with the exception of Dan, because we couldn't get him back and forth across the border, were physically at the Floyd location the week before or the week after we bought them during the integration, which we always do. So we're back on the road again, the 4, 5 of us went to multiple locations over the last 3 months -- sorry, over the last 3 weeks. So that is a long way of saying we're doing our best to get back to a normalized environment in the acquisition setting. And I -- well, since I'm doing it, I can tell you for a fact that we're active in that, and I would expect to continue doing acquisitions in the next couple of quarters.
[Operator Instructions] Your next question comes from the line of Zachary Evershed with National Bank.
Congrats on the quarter.
Thanks, Zach.
So just wanted to dig a little bit deeper on the trigger effect. And just looking at kind of past events, what kind of duration should we expect once the vaccine is being rolled out? Will people still be susceptible to the trigger effect? Or will it dissipate fairly quickly?
So here's what I would say about that. This has been a very interesting time and a trigger effect. The hardest thing for a pre-need salesperson to do is to get people to even start talking about the subject matter. If you can get them to start talking about the subject matter, and that is end-of-life planning, then you can get some traction because it makes a lot of sense. And as the CEO of a company that does this, I think everyone should do it because it makes life a lot easier when the time comes. So just having the ability to open that conversation up has been very impactful, and I think that's consistent throughout the industry based on what I've heard and what I've read. Given the significance of this event, I would say you're going to feel this for the next 18 months after it's over, and it could be longer. Because people now understand what this could mean, and knowing what you're going to do and how it's going to happen. It's had an impact. We see it on the ground now. So I don't think -- you're human, I'm human. I don't think we're going to forget about COVID for a while, whether or not there's a vaccine or not. So -- yet, if you want me to put a number on it, which is nothing more than Brad Green's personal guess, I'd say 18 months to 3 years.
That's great color. And then on cremation rates, they've been pretty steady. But are you seeing any evolution in the context of the pandemic?
We have looked at that, and there -- we have seen 0 impact on our cremation rate across August. I mean it's just not there. And to be blunt, we expected to see it. We've heard other people have seen it, but we don't. And we're looking for it every week, and we can't seem to find it yet. So that's good news for us.
Our next question comes from the line of Ace Mirali with CIBC.
A quick one from me. I was just wondering, has the Houston ops centralization been completed? Or how is the progress coming along?
Can you repeat that? You broke up just a little bit on me.
Yes. No problem. Just wondering if the Houston ops centralization, has that been completed? Or how is that progressing along?
So the centralization, let's talk about that in 2 ways. We're -- we have the Houston office and we have the Toronto office, and that's going -- that will remain the same. Most of our operations are -- obviously are out of the U.S. as far as revenue and number of employees. But we also have an HR function and certainly a financial function that's sitting in Toronto, and our CFO is there and will remain there. So -- but most everything else has been moved -- from an operational perspective has already been moved into the Houston office with the exception of one region, and we're kind of working through that. But again, that's a methodical process. We don't -- we're not rushing it, but we're getting close, which is why you're seeing that stabilization that Dan mentioned, and then I mentioned in another question. It's starting to look like it should look, subject to us making larger acquisitions, and you, of course, have to add along as you do things like that, but nothing like you saw in 2019.
[Operator Instructions] You have a question from the line of [ Jean Kontanick ] from Parkline Corporation.
So my question is you were talking about bigger acquisition on the long term, once the question of the pandemic will be dealt with or tamed. Any plans on doing acquisitions on the European territory as to diversify the market and access to the euro currency?
At this point in time, we have no plans, desires or intentions to move out of Canada or the United States, at this time. There's not even been a discussion at the executive or the Board level.
Okay. So the moving from Canada to Houston base was -- it has no reason whatsoever about doing acquisition outside of U.S. and Canada? Like maybe South America or Central America?
Absolutely not.
You have a follow-up question from the line of George Doumet with Scotiabank.
Just a quick one for me. Can we maybe double-click a little bit on that organic growth number, the 11%? So maybe you can give us something qualitatively or directionally comparing pre-need to at-need or maybe cemetery to funeral, just any more granularity in that number.
George, it's Dan here. Truthfully, what we are seeing is a lot of it across the board. I would say maybe a slight larger increase in the cemetery side of things, I think, driving from some of that pre-need. But it was pretty steady across the board that we are seeing good growth from all sides of our business.
And there seems to be no further questions at this time. And I'll turn the call back over to management for any closing remarks.
Thank you, Carol. Before we conclude today, as you guys know, this will be Joe's last earnings call with Park Lawn. In our September press release announcing his retirement, I express gratitude that Joe agreed to stay with us through the end of the year to ensure a smooth transition to Dan, and a smooth transition it has been. I'd like to again thank him personally for helping not only Dan transition into his role, but it was only a few short months ago, that he also helped me transition into my new role. And trust me, that was not easy, but he stuck with me. So while he will be missed as he heads into retirement, he certainly earned it. And by the way, for those of you who are familiar with my first earnings call and the infamous mute button incident, he's taken that secret, whether it was intentional or accidental with him into retirement. And with that, thank you, everyone, for joining us today, and have a great weekend.
Ladies and gentlemen, that concludes today's teleconference. Thank you for participating. You may now disconnect.