StoneMor Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Aug 2020

[Operator:]

Greetings. And welcome to the StoneMor 2Q Earnings Release. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded, Thursday August 13, 2020. I would now like to turn the conference over to Keith Trost, Vice President, Financial Planning and Analysis. Please go ahead.

[Keith Trost:]

Thank you. Good afternoon, everyone. And thank you again for joining us on the StoneMor Inc conference call to discuss our 2020 second quarter financial results. You should all have a copy of the press release we issued earlier today. If anyone does not have a copy, you can find the full release on our website at www.stonemore.com. Additionally, a copy of the presentation can also be found on our website. With us on the call this afternoon, are Joe Redling, President and Chief Executive Officer; and Jeff DiGiovanni, Senior Vice President and Chief Financial Officer. Before we begin, as usual I would like to remind everyone that this conference call will include certain forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. All statements that address operating performance events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management's good faith beliefs and assumptions. Our management believes that these forward-looking statements are reasonable. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of today's date. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise accept as required by law. In addition forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to those described in the reports which we file with the SEC. During the call, we will reference certain non-GAAP financial measures such as comparable location revenues, adjusted operating income; adjusted comparable location, operating income EBITDA and adjusted EBITDA. A reconciliation of these measurements to most directly comparable measures calculated in accordance with GAAP is provided in the press release and presentation. With that I'll now turn the call over to Joe Redling who will take it from here.

[Joe Redling:]

Thank you, Keith. Thank you again for joining us this afternoon for our second quarter earnings call. It has certainly been an eventful three months for both StoneMor and for our nation as a whole. I hope that you and your families continue to remain safe and healthy as we all continue to navigate the pandemic. COVID-19 continues to be a driving force in our daily activities both with our corporate team, but even more importantly for our locations as they continue to serve on the front lines of this public health crisis. Dedication of our on-site teams that work with our communities remains a source of great pride for all of us. They have truly risen to the occasion and continue to set a very high bar in serving our families and our communities. All locations continue to work closely with local and state governments, and authorities to ensure that our locations are meeting the standards of care for our guests, particularly as states have eased restrictions on the number of visitors permitted in a gathering. We've ramped up our procurement efforts with regards to Personal Protective Equipment both for our employees and for our guests. While we will always adhere to the required standards in the local community; we have also implemented a mask requirement for all indoor activities, as well as outdoor activities where social distancing is not practical or possible. Like most of the nation after an initial decline in cases, we have once again seen a surge in activity both in terms of the impact on case count, but also with our own employees and their family. We continue to provide additional paid sick leave to our employees above the government mandate. We've increased our cleaning efforts in all our locations. We are an essential business and we will remain open to serve our communities, but we continue to make the safety of our employees and all visitors our number one priority. Again, I am very proud of our team and leadership for adapting early on in the pandemic with the rollout of video and telephonic appointments to better serve our customers. Our teams quickly embraced new technology and protocol; although, many of our markets have reopened to some extent and in-person meetings have increased. We continue to offer and utilize the virtual meetings with customers. This is a trend that I expect will continue permanently in our business as it has proven to be a very effective channel to support our sales efforts. Although, we made quick decisions to respond to the pandemic, we did experience initial declines in both pre-need and at-need sales activities in late March and into April. However, due to our actions and responses we have been successful in reversing those trends, and are now seeing significant comparable location sales production growth in both pre-need and at need categories in our cemeteries. As we talk about our sales production, we're looking at non-GAAP measures that focus on new pre-need contract dollar volume together with at-need contract dollar volume, where no pre-need contract existed. On a comparable location basis, our cemetery sales production for the second quarter increased 6%, compared to the second quarter of 2019 despite declines in April driven by the pandemic. I am very encouraged to see our trends improve month after month as we continue to build sales momentum into the third quarter. To illustrate this reversal, April sales production experienced a decrease of 7% in April versus prior year, driven by the disruption caused by COVID-19. In May this year, we reversed that decline and increased 7% over May of 2019, and in June we doubled that growth by increasing total sales production 15% over June 2019. That momentum continued to build in July, where we experienced a remarkable 38% increase in sales production compared to July 2019. Total sales production for the last three recent months of May, June and July are very impressive, with consistent sequential monthly sales improvement. Our July production represented the highest July on record, and the total sales production for the full three-month period 19% is ahead of the same three-month period from 2019 and the highest three-month total over the last five years. That's quite an accomplishment and an amazing turnaround. I'm very proud of our sales and marketing teams for their outstanding performance; improving sales productivity has been a major focus, and I truly believe we have established a new sales culture at StoneMor that's focused on high performance and overachievement. We have strong sales and marketing leadership and I am confident that we will continue to deliver strong results from their efforts. Again to be clear, this is comparable location sales growth; there is no benefit from any new acquisition, in fact, we achieve this growth despite disruptions from divestiture activity. This upward trajectory of our sales is being driven by strong growth in our pre-need sales production. While we were down nearly 10% in premium sales in April versus April of last year; we've seen steady growth over the May to July period with high single-digit growth in May and June culminating with a 43% year-over-year growth in premium sales production in July. Interestingly, our June 2019 premium sales production was bolstered by $1.5million in bulk sale. Excluding this bulk sales growth in June would have been 26% over 2019. Certainly with the pandemic, the process of completing such large bulk transactions is somewhat limited as it requires a hands-on customer experience, which we have purposefully limited. As the pandemic dissipates, we will ramp up our pursuit of such transactions as they represent a meaningful opportunity for us on the sales front. Similarly as death rates remain above historic norms, our at-need production has outpaced most area mortality rates with a 17% growth in the second quarter and a 27% increase in July. As with most in the industry, Funeral Home activity was not quite as rosy of a picture, but as a reminder it only represents approximately 15% of our total revenue. On a comparable location basis, total funeral home revenues were effectively flat during the quarter. Call volume increased 6% on a comparable basis, but we experienced a corresponding decrease in average value per call. Looking ahead to the remainder of 2020, I am strongly encouraged by the recent trends, while I don't necessarily expect the team to repeat the incredible performance from July; I have high hopes and expectations for the remainder of the year as we continue our goal of driving double-digit sales growth. I am similarly encouraged by the team's rapid response to the changing environment back in March. And I'm confident that we are well positioned should a similar situation arise again with another extended nationwide shutdown. Jeff will do a much deeper dive on our financials, but I also want to provide some additional color regarding our ongoing transformation process, and how we will translate strong sales production into improved profitability. Looking at our financial statements this quarter, we are starting to see the impact of our initiatives on our income statement. As total expenses have declined more than $14 million or 17% for the three-month end of June 30th, 2020 compared to the three months ended of June 30th, 2019. Much of those savings are the result of the transformation initiatives that have been implemented by our team. Specifically, our cemetery expense line item which now includes our maintenance and landscaping agreement with Moon Landscaping has seen a $3.7 million decrease. Now not all of that savings is related directly to the Moon Agreement, some of it is related to our divestiture activity and some of it is related to other cost savings but we are now seeing the direct benefit on the P&L of that transition which has largely been well received. Our corporate overhead is down $4.4 million in the quarter or 33% compared to the second quarter of 2019.This is being driven by a number of our transformation in this initiative, including a corporate risk back in April. Various programs to improve efficiency by doing more with less and overall a commitment by our team to eliminate wasteful and unnecessary spend. In addition this year, we did not incur expensive non-recurring expenditures associated with consulting and legal advisors. And as a reminder, our executive management team took voluntary pay cuts during much of the second quarter as we adapted to the changing COVID t environment. Our Board of Directors is similarly taking a reduction in their compensation during the third quarter. The $14 million in expense reduction is after the impact of several one-time expenditures incurred or accrued during the second quarter, including those related to a ramp up in our Personal Protective Equipment purchasing to the tune of a $0.5 million that did not take place last year. We'll continue to incur costs associated with PPE on a go forward basis, but our execution on savings will more than offset those added costs. Just recently, we launched Coupa, our new procurement software; it was a remarkable example of cross-functional collaboration by our team as many of our systems and processes needed to be significantly re-engineered to accommodate the launch. We're expecting to see significant savings in our procurement process as we consolidate vendors and drive improved procurement and governance practices. Those savings are not yet reflected in our P&L as it will take several months for those benefits to mature. In terms of the bottom line, we are reporting positive operating income for the second consecutive quarter. Our adjusted EBITDA which excludes certain gains and losses associated with the divestiture activity in California, where the quarter ending June 30, 2020 was positive $2.2 million, an improvement of $6.2 million compared to the negative $4 million EBITDA in the second quarter of 2019. This improvement is even more impressive when you consider that our now divested locations contributed approximately $1.6 million of operating income in the second quarter of 2019. Lastly, I want to point out that we generated $6.4 million in cash flow from operations during the quarter. While we had internally set a target to achieve positive cash flow by the end of the third quarter of this year, our sales initiative during the quarter as we responded to the COVID pandemic; coupled with the acceleration of key transformational initiatives enabled us to generate positive cash flow from operations ahead of schedule. Going forward, we remain focused on continuing this momentum across sales, expense management and profitability. We still have more to accomplish, but I am very encouraged by our progress and results so far this year as we navigate through these unprecedented times. I will now turn the call over to Jeff DiGiovanni, who will walk you through more detail on our financial performance during the second quarter.

[Jeff DiGiovanni:]

Thank you, Joe and thank you all for joining us today. It has been a truly remarkable quarter as the company continues to adapt to the new environment brought on with the COVID pandemic. Like Joe, I'm proud of what our entire StoneMor team delivered in the second quarter. I want to thank the team for their tireless efforts in prioritizing the safety of our people, and communities and supporting the families we serve. I'm also very pleased to discuss our second quarter financial performance. First, before we dive into the GAAP results, please note that the non-GAAP sales performance that Joe discussed is truly a measure of our current period sales production and is not primarily reflected in these GAAP results as the sales production builds our pre-need backlog for future recognition. On slide 4, you will see a snapshot of our second quarter GAAP financial results. GAAP revenues are more heavily related to the timing of pre-need turning to at-need. And in a premium contract those components will be recognized sometime in the future as merchandise is delivered and services are performed. On a GAAP basis, we generated revenues of $70.7 million for the second quarter compared to $78.5 million for the prior year period. In 2Q, 2020, we generated operating income of $4.7 million compared to an operating loss of $10.2 million in the second quarter 2019. In order to provide additional clarity into these results along with comparisons the prior year, I will refer to certain results on a comparable location basis. That is excluding the locations that we have divested between January 1st, 2019 and June 30th, 2020. We believe that this comparison provides a better picture of our current performance. Reconciliations of these adjusted measures to the GAAP financials are included as an appendix to the presentation, which can be found on our website. Having said that we generated $70.7 million in total revenues for the second quarter, which represents a $3.2 million or 4.3% decrease on a comparable location basis over the same quarterly period in 2019. As we look at the segment revenues in a few minutes, I will provide additional color on the nature of the decliner revenue, however, I do not -- I do want to note now that the year-over-year decline was primarily driven by COVID-19 pandemic impact on the company's April's performance. The revenue performance in May and June rebounded and was ahead of prior year, but was not enough to offset the April decline where early signs showing these positive trends are continuing into the third quarter. Moving ahead to slide 5, we had operating income of $4.7 million which included the gain on divestures of $7 million and other losses of $2.2 million. Excluding those one-time gains and losses, we had an operating loss of less than $200,000 and on a comparable location basis we were actually breakeven. This represents an improvement over the second quarter 2019 when we reported an operating loss of $6.8 million excluding other losses. It also represented sequential improvement over the first quarter 2020 when we reported an operating loss of $1.5 million excluding the gain on divestitures. On the expense side, we made tremendous strides on reducing our overall costs with total expenses of $70.9 million during the second quarter representing a $14 million or 17% decline from prior year. Now turn to slide 7 for a deeper dive into what drove those results. Looking specifically at our Cemetery Segment, we had revenues of $58.9 million for the second quarter 2020, a decrease of $2.7 million or 4% on a comparable location basis versus the second quarter 2019. The difference is largely attributable to the revenues associated with large sales. These larger sales are highly typical private stage or bulk lot sales that require more personal hands-on customer experience, which was not a focus during the early stages of COVID-19 pandemic, as we shifted our efforts through virtual and telephonic meetings. Specifically, we saw revenue associated with large sales declines by $1.7 million on a comparable location basis during the second quarter. The remaining decrease of a $1 million was driven largely by decreases in average revenue per case on a comparable location basis. Our internment performed actually increased by 182 burials year-over-year. Specifically, our cemetery cost of goods as a percentage of total cemetery revenues decreased 16.5% to the second quarter 2019 through 16.2% for the second quarter 2020. With the launch of Coupa this quarter, we will continue to see savings generated on this line item. Cemetery expense declined $3.7 million in the period or 17.3% versus the same period in 2019, which is primarily related to maintenance and landscaping expense savings. Certainly much of the savings is being driven by transition of maintenance and landscaping to Moon, we've rolled out the program to most of our locations but still have some locations that will be transitioned over the coming months. In addition, we continue to drive savings in our cemetery selling expense. Cemetery selling expense declined $2.9 million with the expense as a percentage of total cemetery revenue decreasing to 21.4% for the second quarter 2020 compared to 23.6% for the second quarter 2019. These savings is reflected of reductions in our advertising expense as we've moved closely managed and targeted our digital lead spend. Additionally, during the second quarter we continued our focus on optimizing our sales force productivity through the elimination of our lowest level performers, driving base payroll savings and increasing total commission opportunities for our top sale performers. Lastly on the cemetery slide, we drove G&A savings of $1.2 million with the elimination of certain administrative expense and tighter expense controls. This is another place where we expect to see additional savings generated with the launch of Coupa. It is important to note that our 2Q, 2020 span also included $0.5 million in PPE purchases as we managed through the COVID pandemic and ensured that our locations had the necessary safety equipment. Profits for the cemetery segment were $7.4 million for the second quarter 2020 compared to $4.8 million for the second quarter 2019, a 56% improvement. The growth in the cemetery segments profitability was driven by margin improvements, and our continued cost reduction strategies and was executed in spite of the divestiture locations that added $1.3 million to the profits during the second quarter of 2019. We also know that we still have additional opportunities to continue driving the cemetery segment margins. While Funeral Home Segment revenues were $11.8 million for the second quarter of 2020, a decrease of $1.1 million or 8% versus the second quarter of 2019. The decrease was driven by the divestitures of strong funeral home locations, as well as a decline in the average contract values as our call volume increased by 220 or 6.1%. This decline in average contract value was driven by reduced service opportunities related to the COVID social distancing restrictions. General home expenses declined $700,000 or 6% offsetting much of the revenue loss represented at a slight uptick in expense as a percent of funeral home revenues. Profits for the funeral home segment declined slightly from $1.8 million in the second quarter of 2019 to $1.4 million in the second quarter of 2020, driven primarily decreases in average contract values which do not generate similar savings on our expenses. And finally, we experienced a significant decline in corporate overhead of $4.4 million, a 33% decrease over the second quarter of 2019; included in savings was a decrease of $1.7 million related to professional consulting fees that were previously disclosed as one-time transaction costs; including those associated with our C Corp Conversion. Our ability to execute many of these transformation initiatives with our own team and relying less on third party professionals is a true testament to the leadership and dedication from everyone. On that note we're also doing more with less as we significantly reduced our payroll corporate both during the second quarter, half of 2019 but also during the second quarter of 2020 when we executed an additional reduction in force in April. The savings from the most recent rift are only starting to materialize as they were offset by associated severance costs. In addition to the strides we've made in our income statement, we made similar strides in terms of our cash flows and are pleased with the overall results. I would like to turn your attention to slide 7 for some key metrics. Internally, we've been targeting positive cash flow performance sometime during the third quarter of this year. I'm please report that with the timely executioner transformation initiatives, as well as adapting to the ever-changing environment; we were able to generate cash flows from operations earlier than expected. For the six months ended -- 2020, we generated $1.2 million in cash flow from operations, which includes $13 million of cash interest payments. We were able to execute this by also reducing our payables balanced by $6.2 million, specifically for the second quarter that equates to $6.4 million in cash flow from operation. Again that's after a $6.5 million cash interest payment. This was also generated without seeing an increase in our payables or payable agent, so this is truly representative of operating cash generation. Our cash flows from financing and investing activities were impacted by our divestiture activities in California with sale proceeds offset by debt reductions; additionally, we generated $70 million in cash flow related to -- sale offset by a $3.5 million amendment today. Over the last six months we spent $3.8 million on capital expenditures with $1.7 million of that taking place in the second quarter. We've slowed down the CapEx spend during the second quarter in response to COVID pandemic but we expect that CapEx to increase over the coming quarters as we reinvest in our properties. As we look ahead with our debt, we expect an additional pay down with the closing of our remaining locations in California during the third quarter. At that point, we'll have exceeded the $55 million in debt reduction with the lower debt balance and the positive operating cash flows as we approach the end of the third quarter, we'll be evaluating whether or not we continue to pick a portion of the interest on our notes. As a reminder, we have the option until January 30, 2022 of paying 7.5% cash interest and 4% fixed interest for paying 9.875% cash interest with PIK After January 2022, we are obligated to pay cash interest of 9.875% until maturity. While we currently do not have any further divestiture activity to discuss, we continue to work with Johnson consulting to identify additional opportunities that align with our strategic plan of reducing our geographic footprint. There has been considerable interest in our properties across the country but we are being highly selective in what we decide to sell. In addition, as you may recall in late May, we announced that our Board of Directors had received an unsolicited proposal letter from Axar Capital Management to acquire all the outlanding shares of common stock it does not own for $0.67 per share in cash. At that time, the Board of Directors established a special committee of the board comprised of three independent board members to evaluate and respond to the proposal. Special committee gates legal counsel and financial advisors to assist in their evaluation. On June 16th, we announced that the original offer was rejected by the special committee. On July 31st, we announced that the special committee had received a revised proposal from Axar in the amount of $0.80 per share. The special committee and its advisor remained engaged on matters pertaining to the proposed transaction. Finally on July 29th, we announced that the 2020 annual meeting of stockholders will be held on Thursday, November 5th. The record day for stockholders entitled to notice and to vote at that annual meeting will be the close of business on Monday, September14, 2020. In summary, it's been a challenging quarter but financially we've made great progress on our initiatives for steady sales production, coupled with significant expense reductions and positive operating cash flow. We're enthused and remain encouraged about the prospects as we continue to focus on our execution and drive operational and financial improvements in the business. With that I would turn the call back over to Joe for his final thoughts. Thank you.

[Joe Redling:]

Thank you, Jeff. I've known that we were headed down the right path with our transformation process, but it's great to see those plans materialize into the improvements that we realized during the quarter. Now the onus is on our team to continue driving those improvements and initiatives and continuing on the positive track. We still have much work to do. We started our process of planning for 2021 and we have a whole new series of initiatives that we're undertaking to continue driving EBITDA growth. We will continue to monitor the impact of COVID-19 and are prepared to act when called upon to do so. I continue to applaud and encourage all of our employees; they are the backbone of the successes that I know are in store for StoneMor as we move forward. With that I'd like to thank everyone for their time and open up the line for questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Rick Elkin with Opco. Please go ahead. Your line is open.

[RickElkin:]

Hi, Joe. Very good quarter; a couple of questions, what - how much in savings do you think you'll get per quarter from the Coupa software once it's fully implemented and has had the time whatever two, three months to sort of get to a place where it can start affecting your cost of things you buy.

[JoeRedling:]

Sure, Rick. So it's a little difficult to project mainly because that whole procurement system will impact multiple expense lines from cost of goods to materials to G&A, so we have the main thing for us right now is the focus on compliance because it's a brand new software system. We're pretty happy with the compliance and what we're seeing so far. Our people in the field are actually embracing it pretty aggressively. We think the savings will be sizable; we're not ready to size those yet but we should start seeing those savings probably start occurring in kind of fourth quarter. So we'll have a better view of that once this gets more stabilized in terms of the usage.

[RickElkin:]

Yes. I mean you have any like range where it could fall within anything like that.

[JoeRedling:]

We know it'll be in seven figures, but it's too early for us to kind of put a number out there.

[RickElkin:]

Okay, that's very helpful; just one other thing, is there any further update on the potential buyout by your largest shareholder.

[JoeRedling:]

I think Jeff commented on it. I'll just for myself and the entire management team, we're laser focused on operating the business and continuing to focus on these initiatives, particularly in this challenging environment we're in now with COVID-19. The Board of Directors granted the full authority to the special committee which is comprised as Jeff said with three independent directors to evaluate the proposal. At this point, the special committee is continuing to discuss the proposal with Axar, and if and when there's an update we'll make an announcement, but we have nothing to report at the time as those discussions continue.

[RickElkin:]

Okay. I mean the only thing I would say is that it would be a shame after being a patient shareholder for all these years at this point to have the company bought because it looks like to me your performance is markedly improving every quarter, which means that the value of the company is increasing every quarter. So I don't know if there's a way to pass this one to the Board of Directors, but I think there's probably a lot of long time shareholders that would feel that way.

[JoeRedling:]

We will absolutely pass that on and we have passed on comments from shareholders directly to the committee.

[Operator:]

Thank you. No further question on the phone line.

[Keith Trost:]

All right. Thank you again for your time this afternoon. We look forward to talking with you again for the third quarter update. In the meantime, if you have any questions that were not answered or discussed on today's call, please feel free to reach out to our investor relations team at 215-826 - 4438. Thank you.

[Operator:]

Thank you, ladies and gentlemen. That just concludes today's call. We thank you for your participation. And ask that you please disconnect your line.