StoneMor Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Greetings, and welcome to the StoneMor Third Quarter Earnings Release Call. As a reminder, this conference is being recorded, Thursday, November 12, 2020. I would now like to turn the conference over to Keith Trost, VP, 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 third quarter financial results. You should all have a copy of press release we issued earlier today. If anyone does not have a copy, you can find the full release on our website at www.stonemor.com. Additionally, a copy of the presentation can also be found on our website.

[Joe Redling:]

Thank you, Keith. Thank you for joining us this afternoon for our third quarter earnings call. I hope that you and your family continue to remain safe and healthy as we all continue to navigate the pandemic. I feel like, I say this every quarter, but the third quarter was once again, very eventful for both StoneMor and our nation as a whole. During the second quarter, we reported strong sales production results with those trends continuing into July. As we closed the third quarter, I am pleased to report that our cemetery sales production reached record levels driven primarily by strong growth in pre-need sales production. A smaller portion of that record level of production was also from at-need activity, driven both by COVID and increased mortality rates in general.

[Jeffrey DiGiovanni:]

Thank you, Joe, and thank you all for joining us today. I'm proud of the financial performance the StoneMor team delivered in the third quarter. I want to thank the team for the tireless efforts in prioritizing the safety of our people and communities and supporting the families we serve. First, before we dive into the GAAP results, please note that the non-GAAP sales production performance that Joe discussed is truly a measure of our current period sales production and is not primarily reflected in these GAAP results. The non-GAAP cemetery production performance was a primary driver in the generation of unlevered operating cash flows of $9.1 million for the third quarter, which excludes cash interest payments of $6.5 million. In addition, between investment returns and contributions from customer collections, we delivered growth in our at trust assets of $15.4 million for the quarter. On Slide 4, you would see a snapshot of our third quarter GAAP financial results. GAAP revenues are more heavily related to the timing of pre-need turning at-need. In a pre-need 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 $76.9 million for the third quarter compared to $73.1 million for the prior year period. In 3Q 2020, we generated operating income of $3.2 million compared to an operating loss of $6.6 million in the third quarter of 2019. In order to provide additional clarity into these results along with comparisons to 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 1, 2019, and September 30, 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 $76.8 million of revenues from comparable locations for the third quarter, which represents a $7.6 million or 10.9% increase on a comparable location basis over the same quarterly period in 2019. Cemetery revenue comprise 83% of our revenues for the third quarter 2020, and was primarily driver of the year-over-year increase in total revenues, accounting for $6.6 million of $7.5 million comparable location increase. Within the cemetery segment, determined revenue, which is largely recognized at the time of sale, drove the increase on the strength of the strong cemetery production performance that we've highlighted. Funeral home revenue, which makes up the remaining 17% of revenues, experienced a $0.9 million year-over-year increase on a comparable location basis, with the bulk of that growth being generated through the recognition of merchandise related revenues. The gains in revenues offset by declined in average contract values for our at-need services, as we experienced an $11.7 million increase in call volume year-over-year, the decline in average contract value was driven by reduced restrictions, a service opportunities related to COVID social distancing. Moving ahead to Slide 5, we had operating income of $3.2 million. This represents approximately $11 million improvement over the third quarter of 2019 when we reported a comparable location loss of $7.8 million excluding other losses. It also represents a sequential improvement compared to the second quarter of 2020, when we reported breakeven operating income on a comparable location basis and excluding a gain on divestitures and other losses. Certainly, the growth in revenue played a major part in driving operating income, but we also benefited from a reduced cost structure and our transformation initiatives that both reduced our variable costs on a percent of revenue basis and reduced our fixed costs. On the expense side, we've made tremendous strides on reducing our overall costs. The total cost expenses of $73.6 million on a GAAP basis during the third quarter 2020, representing a $5.9 million or 7.5% decline from prior year. Cemetery cost of goods sold as a percent of cemetery of revenue decrease from 17.6% for the third quarter 2019 to 15.6% for the third quarter of 2020, the decrease in percentage was largely driven by the decline in merchandise revenue, which typically carries a lower margin than determined and services revenue. Cemetery expense, which includes the cost associated with the maintenance outsourcing machine is declined $1.7 million overall or 9% versus the same period last year, which is primarily related to maintenance and landscaping expense savings. Certainly, much of the savings is being driven by our transition of maintenance and landscaping to move landscaping. We've rolled out the program to most of our locations, but still have some locations that will be transitioned over the coming months. Those savings have been offset with continued investment in locations with repairs and maintenance activity that does not meet the standards for capitalization. In addition, we continue to drive savings in our cemetery selling expenses, with a total savings of $1 million, despite the increase in revenues, the expense as a percentage of total cemetery revenue improved to 21.3% for the third quarter 2020 compared to 24% for the third quarter of 2019. This, as improvement, is driven by increases in sales productivity through enhanced training and more efficient marketing spend, as we've more closely manage and target our digital leads. Lastly, on a cemetery side, we drove G&A savings of $0.5 million overall, with the elimination of certain administrative expenses and tighter expense management. It's important to note that our 3Q 2020 costs also include $0.3 million in COVID related purchases, as we've managed through the pandemic and ensure that our locations have the necessary safety equipment. This line is certainly a place for where we love to see additional savings generated with the launch of Coupa. Funeral home expenses were flat year-over-year, despite the increase in funeral home revenue. On a percent of revenue basis, we saw a slight decline cost as our locations focused on offsetting a decline of service revenue with higher margin merchandise. And finally, we reduced corporate overhead by $1.8 million, a 15.8% decrease over the third quarter of 2019 included in the savings with a decrease of $2 million related to professional consulting fees and 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 at corporate, both during the second 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 riff are now materializing after previously being offset by associated severance costs. We've also reduced our other expenses across the board, although they have been offset by increased insurance and additional investment in our corporate marketing efforts to drive more higher quality leads moving forward. In addition to the strides that we’ve made in our income statement, we've 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 6 for some key metrics. I'm happy to report that we have once again, achieved positive cash flows from operations for the second consecutive quarter. For the nine months ended, 9/30/2020, we had $3.8 million in cash flows from operation, which includes $20 million of cash interest payments. We were able to execute this by also reducing our payables balanced by $3.8 million. Specifically for the third quarter that equates to $2.6 million in cash flows from operation and again, that's after a $6.5 million cash interest payment, we've now generated $9 million unlevered operating cash flow over the last two quarters. We've done this without seeing a material increase in our payables. So it's a truly representative of operating cash flow generation. Looking back at 2019, you may recall that during the third quarter, we actually generated $4.8 million in operating cash flow, but that was really a function of timing as we had negative $18.5 million in operating cash flow in the second quarter and negative $11.2 million in operating cash flow in the fourth quarter of 2019. As we look at our current results, we believe that two sequential quarters of positive operating cash flow are indicative of the progress that we've made with our transformation and represent the current state of our business. Over the last nine months, we spent $4.8 million on capital expenditures with $1 million of that taking place in the third quarter. We slowed down that CapEx spend starting the second quarter of response to the COVID-19 pandemic. During the latter stages of the third quarter, we started increasing our CapEx spend, but that has yet to show up on our cash flows due to the natural cycles of payables. On the debt side, and as Joe mentioned, with the closing the sale of remaining locations in California, we exceeded our $55 million in debt reductions. We're targeting the completion of the Oregon divestitures in the fourth quarter, which will provide additional reductions toward debt as well as provide additional capital to further accelerate our CapEx reinvestment initiatives. As a reminder, as it relates to our debt, we have the option until January 30, 2022, of paying 7.5% cash interest and 4% paid in kind interest or paying 9.875% cash interest with no paid in kind. After January, 2022, we are obligated to pay cash interest of 9.875% until maturity. Our intention for the fourth quarter 2020 will be to pay full cash interest. Although that decision will be finalized in December and market conditions, including COVID related issues may impact that ultimate decision. We've also been carefully monitoring and tracking our Trust performance, but more than $800 million in Trust assets, including $19 million that is classified as held for sale, we know that an uptick in performance can have a material impact on our results. There has been a considerable amount of market volatility recently, especially with the unknowns from the pandemic in the election. During the third quarter, we drove net returns of $15 million. You can see on Page 7, how we calculated these amounts. We also added $17.4 million during the quarter in terms of net contributions, primarily from cost of receipts. The increases in Trust balances were partially offset by $16.9 million in distributions representing net asset creation during the third quarter of $15.4 million. We will continue to closely monitor and track our portfolio with the help of our asset advisors and Trust committee to maximize the values from these Trusts. As Joe noted between our unlevered cash flow from operations and the growth in Trust assets, we created nearly $25 million in asset value during the third quarter. Lastly, Joe mentioned our corporate office. We've been working remotely since early March and our team has not missed a beat, even prior to remote working environment, we had listed a portion of our office for potential sublease. With the previously executed risks, we were leasing more space than we necessarily need and represent an opportunity to drive further savings. As such, we identified an opportunity to sublease the entire footprint to a single tenant. As part of that process, we negotiated a one-time termination fee with our current landlord and the sublease fee negotiated directly with the landlord. Moreover, we signed a new lease in Bensalem for new corporate office, which is approximately one-third of our existing space, which we rent utilities and CAM charges. We expect to save nearly $1 million annually on a cash basis from this transition. In summary, we've made great progress on our initiatives with steady sales productions, 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 execution and driving operational and financial improvements in the business. With that, I will turn the call back over to Joe for his final thought. Thank you.

[Joe Redling:]

Thanks, Jeff. I was seeing our team's hard work and the successful implementation of our plan via financial results has been rewarding, as we are executing at a very high level. That said, now is not the time to rest. We have more to do and we really embracing the opportunity to continue to build on this momentum. We have already laid out our plans for 2021 and our beginning cost down on key initiatives to start the year off strong and continue to drive EBITDA growth in 2021. Importantly, we're closely monitoring COVID-19 and its impact. We'll be prepared to act if, and when it's required. I continue to commend the resolve of our employees. They are the backbone of our success. And with this team leading the way, I'm very confident that our future remains bright. With that, I thank everyone for their time today, and we'll now open the floor for questions.

[Operator:]

Our first question comes from the line of Craig Carlozzi with Longfellow Investment. Please go ahead.

[Craig Carlozzi:]

Yes. Thanks for the opportunity to ask a question. So, I'm new to the story and my question actually has two, but the first one is regarding your Trust assets on Page 7. So, it's like you grew the value of the Trust, but under what scenario would there be excess value in the Trust that could be used to help the holding company best. I'm just not familiar with the matched liabilities and the mechanics of all that.

[Joe Redling:]

Jeff, do you want to take that?

[Jeffrey DiGiovanni:]

Yes, I'm going to take that. So that's a great question. So, what are Trusts? Every time we do a pre-need contract, a portion of that sale price goes into Trust as the customer pays. It makes their monthly payments. Having said that, the liability is substantially less. So, when we service the – when we service those merchandise assets, money comes down to the Trust. Each state has different laws. So, if there's excess funds, depending on the state laws, you can distribute – you could do a distribution. But the state law, sometimes, there's distributions get hang-up in Trust, which get hung up in deferred revenue. So, it's state-by-state case.

[Joe Redling:]

I think, that's simple, Craig – Craig, this is Joe. I think a simple way to think about it is, as we generate pre-need sales, we make contributions to the Trust. Each state has different regulatory requirements for Trust deposits on a pre-need contract. So, we make – this quarter we make significant investments in Trust. We benefit from the yields of those investments, certain percentage, certain states allow us to distribute that income. Other states don't. About 60% of our Trust income – 60% of our Trust returns are distributable. And so that’s a big piece of income for the company. And at the same time, as we’re adding more value to the trust, we’re increasing the total number of assets that we’re managing. And to Jeff’s point, the full face value of those contracts go into the Trust, which includes quite a bit of margin. So, when we’re able to withdraw money from the Trust, there’s quite a bit of margin that comes with that. So, it obviously has multiple components of it. It’s complicated, but it’s a tremendous long-term asset for the company.

[Craig Carlozzi:]

Okay. So, have you disclosed what the net asset would be at Q3, assuming, let’s say the Trust wanting to run off, and the contracts were serviced in a manner that you expect them to be? What is the asset to the company?

[Jeffrey DiGiovanni:]

So, you’re saying they’ll be disclosing the merchandise liability associated with those trust assets.

[Craig Carlozzi:]

Yes. Yes, the excess of the assets over the mandatory liability.

[Jeffrey DiGiovanni:]

We don’t disclose that at this point in the – but it’s something we’re considering for the future.

[Craig Carlozzi:]

Okay. And my second question is now that it looks like you’ve sold some assets and you’re in the middle of a transformation. Can you give us a little bit or give me a little bit of high-level thought on what your field EBITDA potential would be? I don’t really care about next quarter or the next six months, but thinking on a normalized level, maybe 18 months or 24 months from now, how do you view the earnings power of the business pro forma, all the actions that you’re looking to do. Thank you.

[Joe Redling:]

Yes, it’s a great question. So, again, not getting into guidance, but we think we have pretty good margin expansion opportunities in the business. StoneMor, we have a pretty diverse group of assets, they’re all different sizes around the country. So, we believe the profitability of these locations are still an opportunity. We’ve had some really good growth in margin expansion this year. We believe there’s still opportunities in many markets to continue that expansion. So, without getting into specific forecast, I think we kind of just began to scratch the surface here. Our first step was to take out what we thought were unnecessary cost and structure the business the right way, get the top line moving. And as you can see from our performance in Q3, when you’re moving that top line quite a bit it flows through to the bottom line. We are looking at four walls EBITDA on a regional basis since what we manage every week. And we do have plans in place to really focus on maintaining that top line growth, staying focused on expenses and expanding margins as we go forward. So, we still think we have opportunities there.

[Jeffrey DiGiovanni:]

Yes. And just to add, even with the launch of Coupa, that’s something that can significantly benefit that.

[Craig Carlozzi:]

Got it. Thanks for the time.

[Operator:]

All right. Thank you very much. And we have no further questions from the phones at this time. I’ll turn the call back to your hosts.

[Keith Trost:]

Thank you again for your time this afternoon. We look forward to talking with you again for the fourth quarter and full year update. In the meantime, if you have any questions that were not answered, discussed on today’s call, please feel free to reach out to investor relations at [phone]. Thank you. Have a great evening.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.