StoneMor Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Mar 2021

[Operator:]

Greetings, and welcome to the StoneMor Fourth Quarter and Full Year Call. During the presentation, all participants will be in a listen-only mode. As a reminder, this conference is being recorded, Tuesday, March 23, 2021. And now, I would like to turn the conference over to Keith Trost. 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 fourth quarter and full year 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.

[Joseph Redling:]

Thank you, Keith and thank you everyone for joining us this afternoon for our fourth quarter and full year earnings call. It's now been just over a year since that COVID-19 pandemic disrupted our lives, our businesses, and our communities. Each quarter over this past year has presented new challenges as we navigated through unprecedented times and adapted to an ever-changing world. One year ago, we were just beginning to learn about the threat and the expansive impact the pandemic would have on our lives and the uncertainty quickly gave way for lockdown, business closures, remote working, and a change in everyone's daily behaviors. At StoneMor, as the initial severity of the pandemic became clear, we quickly adapted to the new normal and initiated immediate responses and procedures, as all our locations across the country remained open to serve our families and our communities.

[Jeffrey DiGiovanni:]

Thank you, Joe and thank you all for joining us today. I'm proud of the financial performance StoneMor team delivered in the fourth quarter and full year. In addition to the delivery of solid financial results, I want to thank our team to the significant progress we made against our strategic priorities during the year and for their unwavering commitment to take the steps necessary for us to continue our transformation as a company. I'm proud of what we've accomplished in 2020, and I'm excited for what we can achieve going forward. First, before we dive into the GAAP results, please note that when we've looked at a performance for both the fourth quarter and full year 2020, I want to point out that portions of the presentation in our consolidated financial statements And during this conversation today is based upon a continuing operations basis, that is based through the financial performance of our West Coast operations that have been, or certainly will be divested. In the fourth quarter of 2020, we drove total revenues and continuous operations of $74.9 million, representing a $16.6 million or 29% increase over the $58.3 million in the fourth quarter of 2019. This increase was driven largely by the growth in our Cemetery segment, which comprise 86% of our 4Q revenue and contributed $15.9 million to the increase in revenue. Within the Cemetery segment, we experienced a $4.4 million increase in at-need revenues, driven by incidence death rates. We also experienced a $7.4 million increase of revenue recognized on pre-need driven by increases in pre-need insurance at-need impairment and increased servicing on pre-need merchandise. Additionally, we experienced a $4.1 million increase in our investment income driven largely by strong investment returns on our perpetual care trust. Funeral Homes that comprise the remaining 40% of our fourth quarter revenues improved modestly driven by increased call volume offset by lower average pricing. Looking at the full year 2020, we experienced a $22.3 million or a 9% increase in total revenues to $279.5 million. As of the fourth quarter, much of this performance was driven by the tremendous growth in the Cemetery segment, which drove $21.3 million of the growth. Again, we experienced growth in both at-need revenue and revenue recognized on pre-need contracts. For the year, we experienced a $10.6 million in gross attributed to at-need revenue driven largely by the COVID -- impact of COVID-19. But as Joe mentioned, we're also seeing the evidence of market share and pricing increases. Revenue recognized in our pre-need contracts, that’s up $3.9 million for the year driven by the fourth quarter performance offset by lower servicing rates early in the year, as our field teams adapted to the rising at-need activity. Funeral homes grew $1 million versus . again, but the impact being driven by higher call volume and merchandise sales offset by lower average pricing and servicing, that those were limited through the COVID-19 pandemic. As a reminder, when we talk about GAAP revenues, that is a largely a function of the revenue recognition standards, particularly when talking about the revenue recognition on pre-need that relies heavily on the kind of pre-need turning at-need and servicing on pre-need merchandise. The non-GAAP sales production metrics that Joe addressing is the measure of a current period sales adoption and does not reflect our GAAP revenue results. We recorded operating income of $3.3 million for the fourth quarter of 2020, represented a $16.3 million improvement over the $13 million operating loss we recorded in the fourth quarter of 2019. For the full year, we recorded operating income of $3.2 million, and that represents a $43.1 million improvement over the prior period. The remarkable turnaround is driven by the increase in sales, but also better reduction on our cost structure at StoneMor successful turnaround initiatives. Looking at our total expenses, we have a flat versus the fourth quarter 2019, despite the $16.6 million increase revenues. For the full year, we saw a $20.9 million decrease in our total expenses and that's with the $22.3 million increase in revenues. We saw enough taking cemetery cost of goods sold driven by the increased sales. For the full year, our cost of goods sold as a percent of cemetery revenue was flat. Cemetery expense, which includes expenses related to maintenance and landscaping as well as certain facility charges, including non-capitalize repairs and maintenance increased by $2.3 million during the fourth quarter of 2021 when compared to the fourth quarter of 2019. That increase was largely driven by additional expense related to the internal volume increases that we experienced late in the fourth quarter. The fourth quarter of 2019, which was positively impacted by $0.6 million public coverage from insurance. For the full year we experienced at $1.2 million reduction in cemetery expenses. Looking at selling expenses, we actually saw a $1 million decrease in expenses for the fourth quarter, even with the $15.9 million increase in cemetery revenues. As a percent of cemetery revenue, we saw that rate decrease to 19.1% for the fourth quarter 2020 versus 27.5% for the fourth quarter of 2019. For the full year, we saw a $4 million reduction in selling expenditures, with the percent of cemetery revenue decreasing to 20.9% for 2020 compared to 24.8% for 2019. This saving was largely driven by decrease in marketing and advertising spent. As we improved the efficiency of that spend for our digital marketing channels, we also have been able to address in additional savings on our fixed payrolls by improving our retention rates on new hires and investing more heavily in our strongest sales performance. The last cemetery expense category is our G&A spent, which is largely focused on our regional support administration functions. During the fourth quarter, we drove savings of $0.5 million and that created a $2.9 million savings for the fourth year. Keep in mind that these savings are net of approximately $600,000 in increased spending for PPE as our vacations dealt with the ongoing COVID pandemic. Funeral home expenses showed slight increases year-over-year for both the quarter and the full year, largely driven by uptick in revenue. And finally, we've reduced our corporate overhead by $4 million for the fourth quarter of 2020 compared to the fourth quarter 2019. For the full year, we reduced these expenses by $15.1 million or 29.6%. This savings is driven by a number of our transformation initiatives, notably the decrease reliance upon third-party consultants. So, we reduced that associative cost by $2.6 million for the fourth quarter and $8.4 million for the full year. We also reduced our payroll related expenditures to planned corporate reductions enforced by $1.4 million for the fourth quarter and $3.2 million for the full year. Collectively, that's $4 million for the quarter and $11.6 million for the year. That our team has accomplished that the successful turnaround while reducing these costs is truly a testament to the team that we've built. As we looked at our current structure, we believe there are many opportunities and efficiencies that we would reduce further expenses, so variable and fix, but at this point we have exceeded our best case scenario, internal targets for cost savings. I do want to note that the exception of payroll deduction taken by a corporate leadership team during the early days of COVID-19, there haven't been any one-time cost savings directly attributable to COVID. As an essential operation, we remain open at all of our locations. We did not furlough any employees or have any temporary layoffs. The structure that we establish the larger would be the cost structure going forward. The positive strides the reasoning with our income statement had been equaled by the strides we've made with our cash flows and balance sheet. Starting up the cash flow, we generated operating cash flow for the 12 months ended December 31, 2020 of $3.2 million, that is compared to use of capital $30.7 million for the 12 months ended December 31, 2019. And this improvement is generated while reducing our AP and other liabilities by $7.1 million. That turnaround was driven by sales performance, coupled with the intense focus on cost savings and transformation initiatives. Our unlevered free cash flows for 2020 were $26.0 million. We defined unlevered free cash flows as cash flow from operations plus interest payments, which were $29.2 million for 2020 less capital expenditures, which were $6.4 million for 2020. This compares with an unlevered free cash flow of $14.9 million in 2019. This improvement is largely driven by our shear performance, coupled with strong trust performance and cost saving initiatives that have been implemented as well as the cost of implementing the cost savings coming down significantly. During the fourth quarter, we've had unlevered free cash flow of $6.7 million, which included $1.6 million of capital expenditures and $8.9 million of cash interest savings. Note that the company did not elect the interest option on the notes in the fourth quarter, which reduced the total interest expense, but added approximately $2 million in additional cash interest during the quarter. Asking about increased cash interest, StoneMor would have achieved another quarter of positive operating cash flow. As we look ahead to 2021, we expect to see continued improvements in our unlevered free cash flow. Specifically, we're targeting positive $40 million, which represents a more than 50% improvement over our 2020 unlevered free cash. That target includes a committed effort to increase our capital expenditures, to support our locations that need a great inventory and capitalize the serving agents. There's a tremendous number of high return capital improvement opportunities across the portfolio. But we will continue to be very disciplined in the projects that we select. Additionally, and while it doesn't impact the target, we do intend to continue not selecting to put the option on our interest for the remainder of the loan. Again, that sets the interest rate at 9.875% payable fully in cash, instead of having a 7.5% cash interest rate, that is 4% interest rate. Lastly, we focused on driving our trust performance and our growth -- and that growth is part of deleveraging our balance sheet and building the future success of the company. Our trust assets represent future revenue and cash flow streams for the company. As of December 31, 2020, we have $497.7 million in merchandise trust assets and $312.2 million in perpetual care trust assets. That's excluding the trust associated with the upcoming divestitures in Oregon and Washington. But the merchandise trust that value is increased with new trust contributions from previous customer contracts, on both cemetery and funeral home sells. We received distributions on the principal as services occurs. Depending on the state, investment income to view the distress to operating cash as its current or is retained in the trust and for servings occurs creating a compound of opportunity on that return. For the perpetual care trust, new contributions are made with each impairment at various percentages, depending upon the requirements of each state, where we operate. The principle rule we made in the trust and perpetuity while disbursements have made that investment income cover expenses incurred to the carrier cemetery. During 2020, we increased the value of these trusts through contributions and the current investment returns by $22 million, net of permitted pass distributions of both principal and income. Keep in mind that this growth has been measured based upon death reporting methodology, which includes mark-to-market adjustments and underling losses, which were particularly impacted during the first half of 2020. With a proven comprehensive investment strategy bolstered by continued growth in pre-need , we expect that we will drive growth in the range of $15 million in our trust during 2020, net of pass distributions that support our operating cost and free cash flow. Collectively between our targeted free cash flow and the growth in the trust assets that represented combined $90 million increase in our asset base. It's been a remarkable year and I'm excited about what the future holds for StoneMor. Our performance and successful implementation of the transformation strategy has put us in a position to thrive going forward. With that, we will open the floor to any questions.

[Operator:]

Thank you. And we do have a question from the line of Jack Kelly with Group One Limited . Please go ahead. Your line is open.

[Unidentified Analyst:]

Hi, Joe. Nice quarter and a good explanation of it all. I just had a question, maybe just kind of some assumptions. If we started with the field EBITDA, I think it was $4.6 million in 2020. You and Jeff outlined a number of initiatives whether it's more additional cost savings, et cetera. But in broad strokes and where you can throw in numbers to be great. If we started with $4.6 million at the field level, what should we be thinking about as incremental to that? And I'm kind of putting aside volume because that can change, but just in terms of cost savings whether this is landscaping, et cetera. And then secondly, once we could get those factors time on that table, what below the line savings might we see? Jeff was talking about interest expense and whether you toggle back and forth between cash or stock, but what would be the potential savings if you refinanced in today's market? I don't know if you're going to do it today or six months from now, but what can we look for possibly in interest savings on refinancing?

[Joseph Redling:]

Sure. Jack, good question. So, on the field EBITDA remember, field EBITDA does not include any investment income at all from the trust, so anything positive is really strong. As long as our investment income is greater than our corporate overhead, we're going to flow through a lot of margin and a lot of profitability. Our focus on the field EBITDA is really around EBITDA margins. We've really focused this year on our larger locations where we were, I would say, behind our peers in terms of EBITDA margins for our larger properties. In 2020, we did a very good job of improving that. I would say our tier one properties now are equal to any of our peers in the same range of EBITDA margins. What's remaining for us now, as you go down to that second tier of properties and focus there, I think there's an opportunity to expand margin there as well. And I also believe as I mentioned in the prepared remarks, getting our hands around pricing and margin and discounting is something that I think has pretty huge implications and positive results for us going forward. We have a big project underway right now to automate pricing margin discounts, so we have real controls on a market-by-market basis. Company never had that before. I think that's going to have a big impact on our ability to drive margins higher in those properties, and really get into specifics about what those numbers will be at this point, it's been pretty early. On the refinancing side, obviously, the market is pretty hot right now. Obviously, as Jeff mentioned, we’re close to 10%. I mean, we would expect, a 300-, 400-basis-point improvement. That would be a compelling change in our interest rates. We have to see what the market says to us if we go out there and floor, but we think there's a huge opportunity to have a material reduction in our interest expense. Again, we're in no hurry right now. The market will decide that for us as we go out and talk to potential lenders, but we think that's a pretty significant opportunity.

[Unidentified Analyst:]

And that would be on all of your debt or you say a significant portion of it, Joe, and potential reduction?

[Joseph Redling:]

That's all on the debt.

[Unidentified Analyst:]

On all debt. Good. Just coming back to the tier two and I guess tier one. So, when you're talking about pricing, and you're doing it more on a localized basis, that means prices could go up or down depending on the market, right? So -- or are you implying that this pricing tool gives you better realizations on pricing or, does it give you better -- if you drop the price, you get more volume. So, net-net, more absolute profit, not necessarily high profit margin, but maybe could you explain kind of what the -- without giving us numbers what the strategy is?

[Joseph Redling:]

Yeah. I think, there's three components to it. I think when you set, let's call it retail pricing. There’s also a lot of discounting that goes on from a sale go-to-market strategy. If you're not controlling the margins of the discounts, you could raise prices all day long and not net any improved margin. So, what we're trying to kind of create is a model where we can task discount levels with pricing to garner the best result in terms of the bottom line. So, it's really setting the right price for the market whether that's up or down, controlling discounts and driving improved margins, it's really those three components. So, that'll be a little bit different depending on the markets we're competing in. But the first thing that's a real -- very thorough competitive review of the market and then set the right pricing and control the type of discount we're doing. So, we're not giving that pricing away. I think in the past, the company would set us a certain retail price or have a price sheet, but to any price increases would be discounted away in the market through the sales process. So, we're getting a much better control over that whole process. I know it'll take us a couple of quarters to get it figured out. But I think as we get to the end of this year and especially in 2022, that's going to be a big opportunity for us.

[Unidentified Analyst:]

Okay. And just last question on your selling expense. For the quarter, it was down. For the year was I guess, kind of flattish, even though, volumes were up substantially, whatever adjustment you made in terms of headcount or compensating, your top guys more, et cetera. Is that pretty much through the system, or do you still see that kind of leverage, meaning, flattish kind of selling expense for another couple of quarters in the face of higher volumes?

[Joseph Redling:]

Yeah. We're actually down for the year about $4 million in selling expense with that pretty significant increase in revenue. So, our efficiency -- I think as Jeff pointed out, our selling expense went down from 25% of revenue to under 20%. I mean, that's a remarkable level of efficiency. We expect that it'll continue. If it goes up, because we're making investments that we think have better returns on the marketing side and on the comp side, but right now it's kind of exactly where we had planned it to be. We're a little bit ahead of our plan right now in terms of the efficiency. We look at net sales income, which is really gross sales, less cost, less selling expense, and we're kind of hitting all times high on that net sales income margin line. So, we'd like that to continue. And if we did spend more, we would measure that and make sure that getting a good return for us.

[Unidentified Analyst:]

Okay. Good. Thank you.

[Joseph Redling:]

Thank you.

[Operator:]

That’s all the time we have questions. I'll turn the call back to Joe Redling for closing remarks.

[Joseph Redling:]

So, I'd like to thank everyone again for joining us today. We've clearly established positive momentum throughout 2020, and now into the first quarter and are well on our way to building another successful year here in 2021. This performance is the result of the hard work and dedication of the entire StoneMor team. And I greatly appreciate and must recognize their continued support and their commitment to our mission of reestablishing StoneMor as a true industry leader. We look forward to sharing additional updates on our progress on our Q1 earning call in May. And thank you again and have a great evening.

[Operator:]

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