StoneMor Inc.
Q1 2020 Earnings Call Transcript

Published: 15 May 2020

[Joe Redling:]

Thank you, Keith. Thank you for joining us this afternoon. It's been a little over a month and a half since we last spoke with our year-end earnings release.Those were the early stages of the COVID-19 pandemic. And since then, our businesses and our lives have been disrupted like never before. I wish you all well, and hope you and your families remain safe and healthy as we continue to navigate through this pandemic.As I mentioned on our last call, we instituted remote working at our corporate office on March 13. That continued that policy for the past two plus months. While this has been a challenging transition, our team has done an outstanding work and has remained highly productive. We are adapting quickly to the trends we see and remain focused on our key initiatives to continue the positive transformation of our business.While we saw an immediate impact on our business from COVID-19, specifically in both pre-need and our at-need sales trends. We have been successful in deploying new tactics to better serve our customers and support our sales teams that have resulted in a positive reversal of those early trends and improvement in overall sales results.I will dive into more detail in a few minutes on the emerging sales trends. But first, I must acknowledge the sacrifices and dedication of our people. I'm very proud of our employees, and how they have all responded to these unprecedented times and embraced the new tools and protocols that were rapidly put in place to address the pandemic and the business disruption we experienced.I want to acknowledge and thank our employees, particularly those on the frontlines. They are essential workers and have gone above and beyond the call to support the families and communities we serve.Not only the employees of StoneMor, but all the frontline workers in our industry are true heroes and they deserve our thanks and appreciation to their passion and dedication during these challenging times. In particular, our teams at our cemeteries and funeral homes have stepped up during this time and have now managed more than 700 confirmed COVID cases on top of our own COVID activity.They show up for work day in and day out and remain committed to the families we serve. They've embraced the new technologies that we've rolled out to address the changing dynamics caused by COVID-19. And they've been the driving force behind many new initiatives that have been well received in our communities.So just one example, one of our great general managers and his team were featured on the news in Greenwood, Indiana after developing an offering a newly created drive from visitation option at our cemetery for a young Armed Forces member that tragically lost his battle with leukemia during the early stages of the pandemic.This effort was in support of the family's desire to allow the community to take part in the service while still maintaining social distancing mandates. The drive thru visitation was a complete success and after receiving such positive feedback from the family and the community, we took that experience and knowhow and have brought it to all of our locations as an option for families.It's been executed successfully a number of times across our properties with similar success. I also need to recognize the efforts of our corporate and divisional sales and marketing teams that have provided the necessary tools and support to our field teams.Without their leadership and guidance, we couldn't have rolled out the new initiatives that we did during the height of this pandemic that enabled us to rapidly adjust our selling process and establish new protocols that led to a rebound in sales results in a matter of weeks.As the pandemic took hold PPE was quickly identified by our teams as a concern. We quickly assembled the team and tackled the issue, and has been delivering great results. They have placed orders for and received more than 135,000 items into our central office. Over 100,000 of which have already been distributed to the field teams that need them.We continue to ship out these items every day. There are certainly more items that our team needs to do to get their job done. But the efficiency that this team achieved has been remarkable. The safety of our employees and customers remain our number one priority.And these efforts to provide our people with the necessary PPE has been critical. And I applaud our procurement team for answering the call. I also want to again thank our employees for their complete compliance and adhering to the new safety protocols as they have clearly been effective, as we have had very few actual COVID-19 employee infections across our large number of properties.And I want to recognize my executive leadership team. With all corporate executives and field leadership, taking voluntary salary reductions during the second quarter as we manage through this pandemic. Similarly, our Board of Directors has volunteered to take reduction of their next quarterly fees consistent with the salary reduction we have taken.We have a fully committed, committed leadership group and Board and I'm very proud to be part of this terrific team. The COVID-19 impact has certainly been challenging. And when we last spoke, we were seeing a material impact on our pre-need and at-need sales.As I stated on our last call, we were having strong sales results in the first quarter. With total commissionable sales year-over-year growth of 16% as of March 15th. However, COVID-19's impact on sales in the final two weeks of March was significant as customer appointments were canceled and sales declined.Clearly that put a strain on Q1s final results. But despite that, we were able to still finish the quarter with 7% growth in same store sales versus prior year. And constraints of COVID-19 on our sales performance carried forward into April, at which point, our new initiatives and sales programs first stabilized and then facilitated that sales recovery.Since that point, we've seen steady increases in sales volume, and are once again trending ahead of prior year's pace on a week in and week out comparable location basis. As we look at our sales performance for the first quarter and into the first half of the second quarter, we've really seen three distinct periods as summarized in Slide three in the investor presentation.The first was the pre-COVID period, which we define as January 1st to March 15th. At that point, our sales were up to 16% versus the same period in 2019. We were trending toward a very strong quarter. As COVID entered the picture, we saw a steep and immediate decline in our sales results, as StoneMor and the whole country had to adjust to a new normal.Ultimately, after being up 16%, with just about two weeks to go, we finished 7% up year-over-year, driven by the fall off from COVID, which impacted both pre-need and at-need activity. That downward trend continued into April. During the four week period from March 16th to April 12th, we were down 34% versus the same four week period in 2019.It was across our entire portfolio and impacted both pre-need and at-need sales. Obviously, we had pockets where unfortunately, we did see spikes in at need activity. But that was more than offset by even steeper declines in pre-need sales for those locations.After April 12th, however we saw two weeks of stabilization where sales production was flat year-over-year and we're once again seeing sales up double digit for the last two weeks, versus the same two weeks of 2019. We've seen this rebound across all of our divisions, and in both pre-need and at-need activity.It's certainly an encouraging sign for our business, as this trend continues to show positive year-over-year growth. As we look at our performance in the first quarter, and Jeff will dive deeper into these numbers. We're seeing the impact of the initiative that we've been rolling out.Most noteworthy is the material improvement in operating income, both sequentially and versus Q1 2019. While revenues remained relatively flat versus prior year, operating income improved by $7.9 million for the first quarter of 2019 and $9.7 million sequentially excluding the impact of other gains and losses.You will see from our financials that corporate overhead declined $4.9 million or 37% as compared to the same quarter in the prior year. While some of that reduction is related to certain onetime charges incurred during the first quarter of 2019, around $1 million the remainder is truly a testament to the reductions and changes that we've been actively working through for the last year.And we continue to address those costs as we move forward. In April, we executed an additional corporate reduction in force of 15%. While it's never easy to take these steps, particularly during these challenging times, it was necessary to right size our corporate overhead staff and expenses as we continue to implement our transformation strategy.As a quick update on some of the initiatives that we talked about, on the last call, I just want to say I'm so impressed with the progress that we've made in such a short period of time, despite the fact that all of our corporate teams continue to work remotely. Our agreement with Moon on the outsourcing of maintenance has now been in full force for approximately 45 days. As with any transition of this size, there were going to be challenges, but the partnership between the Moon team and our field leadership team has been nothing short of remarkable.Issues are being resolved quickly and I remain very optimistic about the future of this relationship. With further enhanced efficiencies and spending materials, we are rolling out new business spend management software [indiscernible] and modernizing our network infrastructure over the next few months.We are currently on target to have our major savings initiatives implemented and fully operational by the third quarter and full savings being realized in the fourth quarter of this year. On that note, I'd like to turn the call over to Jeff to go into more details on the financial results from the first quarter.

[Jeff DiGiovanni:]

Thanks, Joe. Good afternoon everyone. I'm pleased to have the opportunity to speak with you this afternoon and I hope that you and your families are healthy. Before reviewing our results, I wanted to give you my perspective on the quarter.As Joe gave you some great insights into the last four months of our sales activity, given the unique nature of the environment today, we thought it was important to provide a level of detail on sales that we haven't historically provided. After the additional late March, early April, we were back on track and working towards the state of goal of sales growth in 2020.The last few months have been a bit of a roller coaster and it is impossible to predict where the next few months will take us. But we're all encouraged by our recent path. While sales have seemingly stabilized and we're once again exceeding prior year sales performance, we're cognizant that the impact of COVID-19 may fluctuate over the upcoming months and potentially into 2021 and beyond.We have worked on and continue to work on contingency plans for downside scenarios and are prepared to execute on further measures should they be necessary. During the first quarter, we made significant progress on our divestiture plans, as we closed on the divestiture of Oakmont and completed the sale eventually after our previous earnings call.Proceeds from the divestitures have enabled us to delever our balance sheet by approximately $51.8 million, saving us more than $3.8 million annually in cash interest expense. As previously discussed, we are also subject to a definitive purchase agreement to sale our remaining assets in California for a total purchase price of $7.1 million in cash, which we expect will yield approximately over $6 million in additional debt paid out.With this transaction, we would exceed the $65 million pay down threshold. So any additional proceeds, StoneMor will be able to retain 20% of those proceeds to be invested back into our properties for capital improvements.In terms of improving efficiencies and reducing costs, we continue to make strides in those efforts. We're executing on the initiatives that were already underway and contemplated. We have also redoubled our analysis and efforts as we consider the immediate and long-term impacts from COVID-19 and identify additional saving opportunities.We've taken compensation reductions at both the corporate and executives and board levels. We've worked with our advisors with consultants to secure reduced rates on their services and we have eliminated all non-essential travel.In addition, we're preparing - we're partnering with our suppliers such as Amazon to ensure that the essential PPE is secured for all our employees. Our financial performance in the first quarter is reflective of the efforts put forth by the team over the last year.While we have not realized the benefit of management responses to COVID-19 we have made tremendous strides over the last few quarters and I'd like to highlight that financial performance now.I would like to direct your attention to slide 4 of the presentation which begins our financial overview. Total revenues for the first quarter of 2020 were $71.2 million which represents a $200,000 or 0.3% decrease versus first quarter of 2019. Total revenues for the quarter grew $4.8 million compared to the fourth quarter 2019, a 7.2% increase.Our cemetery segment revenue which represented 82% of our revenues in the first quarter 2020 was flat compared to the first quarter of 2019 at $58 million. The 1Q '20 performance was positively impacted by an increase in our investment and the other income of $1.9 million driven by improved returns on our trust investments.Those gains were offset by lower revenue for merchandise and services, primarily as a result of the COVID-19 impact. Our funeral home segment, which represented at 18% of our revenues in the first quarter of 2020 declined by $400,000 or 2.8% to $30.2 million. This decrease is primarily services related as families chose to defer or reduce services during the latter parts of March.Please turn to slide 5 for an overview or operating results for the quarter. During the first quarter of 2020, we had an operating income of $22.6 million, which included a $24.1 million gain related to the sale of Oakmont in California. After interest and income tax expense, we had net income of about $9 million.Excluding the gain, we incurred an operating loss of $1.6 million, which represents a significant improvement over the $9.4 million operating loss in 1Q to '19 and the $11.2 million operating loss in 4Q '19. This improvement is driven by improvements in operating results at both our cemetery and funeral home segments as well as material reductions in our corporate overhead expenditures.Now turn to slide 6 for a deeper dive into what drove those results. Our cemetery segment produced operating income of $5.2 million for the first quarter 2020, a $2.4 million improvement over last year, driven largely by reduced selling costs and general and admin expenses.Cemetery selling expenses as a percentage of total cemetery revenues decreased to 22% for the first quarter 2020 or 25% in 1Q to '19. A necessary component of our strategic initiatives has been focused on review of our commission structure to ensure that commissions are appropriately aligned with margin considerations, while also ensuring that our sales force is appropriately sized and compensated.We have not yet seen the benefit of the Moon contract which was signed in early April on our cemetery segment income. The rollout of the contract will continue over the remainder of the second quarter. The funeral home segment produced an operating income of $2 million for the first quarter 2020 and a $500,000 increase over last year.Additionally, our continued focus on reducing corporate overhead expenditures resulted in a $4.9 million reduction in expenditures over the first quarter of 2019. Our payroll and related costs component that that was down $1.5 million, thanks to previously discussed executive team consolidation and general workforce reductions.That reduction does not include the incremental savings associated with the reduction in force executed in early April at our corporate office. Moreover, we saw a significant decline in professional fees largely associated with one time expenditures incurred in the first quarter of 2019, as well as savings generated through the change in all the firm's to better management of third party consultants and legal fees.Finally, in addition to the strides that we've made in our income statement, we've made some similar strides in terms of our cash flows. You can see some key metrics of our liquidity on slide 7. We are pleased with our operating cash flow for the quarter of 2020.We used $5.3 million of cash in operating activities as compared to the use of cash of $13.1 for Q1 2019. Excluding $7 million of cash interest, StoneMor generated approximately $1.9 million of cash from operating activities as compared to use of cash of $4.4 million for Q1 2019.Also in this quarter, we had a reduction in our accounts payable and accrued liabilities of $6.1 million. All in all a substantial improvement to prior periods. Cash flow from investing or financing activities resulted in a net use of cash of $4 million.This was largely driven by the sale of Oakmont for a cash deposit of $5 million had previously been received in 4Q 19 and was held in escrow as cash until we utilize funds to pay down the debt in early January after the transaction closed. As always additional information that we found in our quarterly report on form 10-Q.While we see this quarter as positive and significant progress in the execution of our turnaround strategy, we understand that there are many challenges in front of us. Our strategic initiatives are making a difference and they've given us many tools that we needed to quickly and efficiently respond to the COVID-19 pandemic and the new paradigm.Now, before we turn it over to Q&A, I'd like to hand it back to Joe for some concluding comments. Joe?

[Joe Redling:]

Thanks, Jeff. It's been quite a change in our financial story from even a quarter ago. As a result of our transformation strategy, we are seeing the business turn the corner to profitability even with the advent of COVID-19. I'm confident that we'll continue on this path and expect to see even stronger results from the efforts that the team is putting forth.While I'm encouraged by our progress, we know we still have much work left to do. It's difficult to forecast the prolonged impact of COVID-19, but I do believe that the actions we have taken through this pandemic as well as the initiatives that we've been implementing will continue to position StoneMor for a healthy profitable future.I'd like to once again recognize and thank all of our employees for the continued focus and support and very proud of the work they're doing each and every day.With that, I'd like to open the call to questions.

[Operator:]

All right, thank you. [Operator Instructions] Our first question comes from a line of Rick Elkin with OppCo. Please go ahead.

[Rick Elkin:]

Hi Joe and Jeff, just a few questions. The Moon Landscaping deal, when you say it's in full force, is it rolled out to all your properties now?

[Joe Redling:]

Rick, we will be fully rolled out and operational by the end of this quarter, by the end of June.

[Rick Elkin:]

Okay. And do you have any estimate of how much money that'll save you?

[Joe Redling:]

We haven't publicly disclosed the specific amount. But it's material to our cost saving initiatives. It is part of that $35 million category of savings we've publicly talked about, but it is material.

[Rick Elkin:]

Okay. And see here. Yes, the - so on the rights offering, can you say where that is?

[Joe Redling:]

Yes. Jeff, do you want to take that?

[Jeff DiGiovanni:]

Yes. So with regards to the rights offering, where continuing the process and working through all the documentation to be within the next few weeks. There should be some more information about the rights offering.

[Rick Elkin:]

In the next few weeks?

[Jeff DiGiovanni:]

Yes, we're still working with the process with everything, but will be the next few weeks.

[Rick Elkin:]

Okay. And how confident do you guys feel that the huge improvements, you've made to overcome the impact of the coronavirus and then actually go beyond that to improve? I mean, just how confident do you feel that those things will continue and why do you feel that way?

[Jeff DiGiovanni:]

Thanks for those questions, Rick. Joe, I'll take that. So look, we need to be very cautious about that, right? We're very encouraged by how fast we bounced back and the initiatives we put in place. We did a lot of virtual meeting. We used a lot of technology to get our appointment counts back up.Clearly at this point, we're cautiously optimistic with those declines that you see in that slide 3. Right now we believe we are recapturing some of those lost sales. But we're also seeing quite a bit of demand in our lead generation. So there's clearly an increased demand in the marketplace. So, we're being cautiously optimistic. We're taking this one week at a time to manage it and respond to the trends. But we like what we've seen so far.

[Operator:]

Thank you. [Operator Instructions] All right, and we have no further questions from the phone lines at this time. I'll turn the call back to Keith.

[Unidentified Company Representative:]

Okay. Thank everybody for their participation today. Obviously, you'll be able to find all this information and a recording posted on our website, www.stonemor.com. We look forward to talking with you again next quarter. Thank you.

[Operator:]

And that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your line.