StoneMor Inc.
Q3 2017 Earnings Call Transcript

Published: 29 Jan 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the StoneMor Partners, third quarter 2017 earnings conference call. At this time all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to John McNamara, Director of Investor Relations at StoneMor. Sir, you may begin.

[John McNamara:]

Thank you. Good morning everyone and thank you again for joining us to discuss StoneMor Partners 2017 third quarter financial results. Joining us on the call this morning are Bob Hellman, Chairman of StoneMor G.P.; Paul Grady, President and CEO of StoneMor L.P.; and Mark Miller, Chief Financial Officer. Before we begin I would like to remind everyone that this conference call contains certain forward-looking statements within the meaning 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 beliefs and assumptions and not on information currently available to our management. Our management believes that these forward-looking statements are reasonable. However, you should not place undue reliance on any such forward-looking statement, 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, except 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. With that, I would now like to turn the call over to Bob Hellman. Go ahead Bob.

[Bob Hellman:]

Thank you John and good morning everybody. We’re glad you could join us this morning to discuss StoneMor’s third quarter financial results and the turnaround effort that we have had underway at the company. We have a great deal to discuss with you this morning, so let me summarize quickly for you what we hope to cover. Since we last spoke to you, we have a new CEO at StoneMor, Paul Grady, as well as a new CFO, Mark Miller. I’m going to let them introduce themselves in a moment and they’ll be walking you through the partnership’s financial and operating results, as well as the achievements that the team has accomplished over the course of the last nine to 12 months and as importantly, the challenges that lay ahead. I’m here today to provide you with some background and context around four key areas. Number one, how we have had to modify how we report our financial results, specifically with respect to the use of non-GAAP financial measures. Number two and three are related, our distribution policy and our leverage ratios and how we are thinking about the two of them and their interplay at this moment. And finally number four, I’m going to comment on the business’s performance and importantly the pace of change at the company. Now before I get to that, let me say that with the filings of our third quarter financial results, I am delighted that we are now current with our financial filings. This has been a very long and very expensive road and I know that we share the investment community’s frustration with this process. It’s come at a tremendous cost, specifically in one time professional resources, but the effort has not been without its benefits. During the course of this review we effectively scrub the balance sheet; hand checked 1.1 million pre-need contracts to make sure that they were appropriately accounted for. As a result, we now have an even more complete picture of our fiscal accounts and with this matter behind us, we are now able to focus 100% of our energy, laser focus on the turnaround effort of the operating business that we have in front of us. Turning to those four areas of focus and starting with how we report our financial results, GAAP requires that we defer all revenues related to the sale of pre-need cemetery merchandise and services until we deliver these items, which can be years down the road, but at the expense of the costs associated with these sales, be booked on a present basis, on a current basis as they are incurred. So we cannot provide an apples-to-apples comparison between total billings and expenses, which I am sure for you is frustrating as it is for us. The investor as a result can’t really get a complete picture of how StoneMor is doing, because we don’t really have the ability to give you a complete look at the pre-need side of the business where this accounting policy change comes into place. So while we’re going to report our results using GAAP measures or measures that could be reconciled directly to GAAP, we’re going to do our best to also provide you important insights in how the pre-need side of our business is doing using non-financial operating statistics and we think this will hopefully give you a good guide to how the business is performing as we go forward. For now, we are going to be reporting to you just as you see our third quarter financial results, the press release and the filings that we just did and that’s going to the form in which we are filing results going forward. We are going to work very hard over the quarters ahead to supplement that with additional statistics, so that you as I said before can get a sense of how the business is doing. Now with regards to items two and three, distribution and leverage, eliminating the distribution in the second and third quarters of 2017 was as we said initially, a very, very difficult decision, but one that we felt was necessary to preserve liquidity for importantly the longer term health and stability of the business. We are now living within the four corners of our balance sheet. That’s a standard that we’ve been discussing now for over a year. So our working capital or capital expenditures and any cost of acquisitions must come out of operating cash flow. What do we mean by this? Well, we came into 2017 with leverage a little higher and tighter than we would like, and as the year progressed and we encountered a bunch of these non-recurring costs with this financial review that Mark is going to detail later in the call, that leverage continued to increase modestly. So we took the course of action that we took in order to preserve liquidity for the longer goal of the financial health of the business. Looking forward and with that same focus of living within the four corners of the balance sheet and strengthening the company by increasing liquidity, we believe we need to have at least $25 million of availability in our credit facilities available to the company, and that’s going to translate into a leverage ratio of about 3.75. Getting there may require a couple more quarters in which we withhold distribution payments. But we believe the long term benefit of the added liquidity outweigh the benefits of paying a reduced distribution today. We understand very well that the distributions is important to our unit holders, but it needs to get balanced against assuring a strong foundation in the business and we have more work to do to get that latter objective of a strong foundation accomplished. Finally, let me comment on how the business is doing currently and as importantly the pace of change. When we last spoke to you in December of 2016 we outlined a timeframe for restructuring our sales force and we fully believe that that was achievable. What we didn’t know entering 2017 is we re-confronted with all of this accounting review and the subsequent delays in our filing of our financial statements which has really been consuming the resources of the business. This enormous project which entailed as I mentioned, reviewing 1.1 million customer contracts spread across hundreds of properties and dating back in some cases nearly 10 years, consumed a lot of energy. It was important that we do it right, it was important that we only do it once. So we took the time to do it right and we believe that has impacted – will help to build that strong foundation I mentioned a few minutes ago, but has certainly impacted the pace of change of the partnerships. This project certainly distracted from our ability to make material progress on the sales and sales force resuscitation effort. The good news as you can see from our recently filed numbers is we have stabilized the businesses. We have achieved a level of performance that’s actually slightly upward slopping year-over-year on a GAAP basis. But we believe the complete – but as we complete the restatement and the accounting work, we have to make more progress on revenue and we have to do so more quickly. This is not happened fast enough and we are very frustrated about that. So in sum, we made progress in cleaning up our financials, and stabilizing the ship and getting our accounting issues behind us, but there is still more work to be done to bring the company to level that we know it is capable of achieving. With that, I’m going to turn the call over to Paul Grady, who can share with you some of the initiatives we have under way to better drive performance at StoneMor. Paul.

[Paul Grady:]

Thank you, Bob. Good morning. It’s a pleasure to be speaking with you today. As Bob indicated, I’m relatively new in the CEO role at StoneMor. My background in principally in operations, sales and marketing and multistate retailing. This has been helpful in working to become familiar with StoneMor, which is a network of 400 local businesses selling and providing customer service. We service thousands of customers every day who expect a high quality product and service, and we work to develop long term value relationships with our customers. We must instill the discipline of a large multi state company, develop economies of scale and bring strong controls and processes to the delivery of our products and services, without losing the local touch and commitment to individual customers in the communities we serve. Before discussing some of the specific actions that we are taking at StoneMor, lets stat with a broader view of how we see the industry and StoneMor’s unique place in it. We view this industry as absolutely essential. We memorialize our loved ones, whether a traditional burial or a cremation, the bottom line is that cemeteries and funeral homes play central ongoing roles in our lives. Our work is important in our communities, and there are strong demographic forces that will drive growth in this industry for years to come, and StoneMor is a part of that growth. The barriers to entry in the cemetery businesses are extremely high. Our 316 cemetery properties represent irreplaceable assets that are well positioned in our industry. For StoneMor however, 2017 was a turbulent year. It was dominated by the lingering effects of our accounting review and the subsequent delays in issuing our financial statements. This was also a year that was heavily influenced by management changes. We now have new leadership in nearly every key position. Our sales force changes that first came to light in 2016 and continued in 2017 are a work-in-progress. We’ve made progress in first stabilizing and then beginning to rebuild our team. We will talk more about sales later in this call. So while the past year has been a challenge, we think it’s very important that we not lose sight of essential facts that we operate in a profitable and growing industry. We own irreplaceable assets within that industry, which not only include the cemetery properties, but also include more than $840 million of trust fund assets. I would like to give you a brief overview of the steps we are taking to address the current challenges. I will also cover some financial and operating highlights for the quarter. Our CFO, Mark Miller will then take you through the third quarter numbers in more detail and provide additional information on our leverage and liquidity situation. We’ll then entertain your questions. When I joint StoneMor we initiated a new assessment of the business, including a detailed review of our operations, sales and financial performance. From this we identified three critical areas that need focus and attention and we are going to discuss these with you today. They are operations, sales performance and cash flow and liquidity. In operations, we are implementing a number of organizational changes that we believe will help streamline the reporting lines and make us more efficient and accountable. Here are a few examples of work in this area. In August, we began rolling out P&Ls by cemetery and funeral home that roll up to area levels and regional level. We believe this simple field management change will significantly promote ownership and accountability for location performance. In September we de-layered the field organization and integrated five separate business units into three divisions. This step reduced cost and bureaucracy and was our first step in addressing an overly complex field structure. And in October, we began a company-wide rededication to increase our service levels. As a part of that effort we have consolidated customer response to one team that reports to our VP of marketing. We’ve also launched a program in partnership with a social media firm to respond to all digital media customer inquiries within hours versus days. Our objective is to improve, maintain and be recognized for high customer service levels. I want to take a few minutes to discuss StoneMor sales in more detail. As you are well aware, at its core StoneMor is a sales driven company and effective pre-need and at-need sales strategies are vital of our success. We are pleased to have Dina Kelly, National VP of Sales leading the StoneMor sales team. Dina’s career has been in death care and assisted living. She has been with StoneMor for 15 months and is providing fresh leadership and new energy. Dina is focused on ensuring we have the right slate of sales programs and strategies for 2018. A key part of that is to find the right sales candidates, hire and retain them. Early in 2017 we implemented a sales hiring program, using both internal and external recruiters, together with new field and classroom based training. But what caused a slow ramp-up of the sales force is relative high attrition soon after hiring and training. We identified this issue and in October we implemented more robust qualification requirements, as well as behavior based assessment testing to create a higher quality candidate pool. We’ve also revamped our coaching and mentoring of new hires for better retention. We’ve also introduced a new performance management process and manage our accountability for results. Dina has been making appropriate personnel changes for performance reasons and is leading elevated accountability expectations for sales personnel. And we implemented more effective pricing programs in the fall of 2017 to maintain or increase margins, as well as right price inventory that is slow moving. One last item regarding the sales force, as you saw with our announcement last week and with previous announcements, our monthly sales force updates show that the headcount has stabilized and begun to grow. However, we feel this data requires context and qualitative information that is better addressed on quarterly calls. Monthly reports suggest a short term focus, which doesn’t give you the whole story. Going forward, we will provide detail on the sales force in our quarterly financial results and conference calls, but we are no longer going to provide monthly updates. Our efforts to drive increased cash flow include our work to stabilize and improve pre-need sales and we are also focused on making specific expense reductions. On expenses, we are emerging from a period of unprecedented expenses for the partnership. Many of these expenses like those related to our delayed financial fillings and accounting review, as well as costs related to management turnover and certain legal costs will roll off in future periods. In addition, we are actively working to identify additional opportunities for permitting cost savings, including to name a few specific reductions in field operations, legal and selling expenses. So that’s our work to improve operations, sales performance and cash flow, critical areas that need to be strengthened to build a firm foundation. Mark will soon cover our liquidity situation, but before we does, I want to give you some broad view of our third quarter and year-to-date financial performance. For the third quarter, GAAP revenue was $84 million compared to $81million in the prior year period. Year-to-date revenues were $253 million compared to $238 million. The improved revenue performance both for the quarter and year-to-date reflects stable improvements, an increase in opening and closing service revenues and revenues related to the constructive delivery of pre-need merchandise, as well as revenues from properties acquired in August of 2016. Where we saw a softness in the third quarter was in our pre-need cemetery business. A key part of the year-over-year pre-need contract and revenue decline in the third quarter was related to unusual prior year activity. In August of 2016 the company had a major corporate wide promotion that offered both heavy discounts, coupled with interest refinancing. We did not run a material promotion in August 2017. Encouragingly we saw a bounce back in the fourth quarter pre-need contracts and the sale of interment rights increased modestly over the prior year. We believe we can move the needle in 2018 by growing the sales force and making it more productive. We can do better here and we don’t see anything in the industry or consumer trends that tell us we are looking at this the wrong way. So we are going to continue to focus on the areas we’ve highlighted for you today. I will now hand over the call to Mark Miller.

[Mark Miller:]

Thank you, Paul. Good morning everyone. Thanks for participating in the call. Like Paul, I express my gratitude to the Board of Directors for the opportunity to continue to the future success of StoneMor. I too come from an MLP background, most recently as the CFO of CrossAmerica Partners where I spent 11 years. In a few moments I’m going to expand on some of the comments Bob made regarding our leverage and liquidity, but first let me briefly take you though the high points of third quarter financial results. As Paul noted a moment ago, third quarter GAAP revenue was $84 million compared to $81 million in the prior year period. Year-to-date revenues were $250 million compared to $238 million. The net loss for the third quarter was $9.6 million compared to $9.9 million in prior year period and our year-to-date net loss is $30 million compared to last year’s $25 million. In both the three months and nine months periods the net loss was impacted by non-recurring overhead costs of approximately $3 million and $30 million respectively. These expenses were associated with accounting review, delayed filings, certain legal fees and reorganization expenses. Now let’s look at our second results. Cemetery revenues for the third quarter was $70 million versus $67 million and year-to-date we’re $206 million compared to $193 million in the prior year period. The increase in third quarter revenue versus last year was primarily due to an increase in constructive delivery of premium merchandise and a revenue from an acquisition we made in August 2016. Year-to-date revenue compared to last year increased primarily due to increases in the constructive delivery of merchandise and the opening and closing of services as well as revenue from the August 2016 acquisition. Funeral home revenues from third quarter were $15 million versus $14 million in the prior year and year-to-date they were $47 million compared to $45 million in the prior year period. Both increases versus last year were primarily a result of increased insurance commissions compared to the prior year. Looking at expenses, cemetery expenses for the third quarter were $20 million, nearly the same as last year and we’re $57 million year-to-date compared to $53 million last year. The increase in year-to-date cemetery expenses principally due to cost associated with properties acquired into 2016, vault installation from salaries and wages. G&A for the third quarter was $9.8 million versus $9.5 million last year and year-to-date was $30 million versus $28 million last year. The year-to-date cemetery expense increase was primarily due to expenses associated with the August 2016 acquisition and the increase in insurance expense. Corporate overhead for the third quarter was $12 million versus $10 million last year, and year-to-date was $39 million versus $30 million last year. As I mentioned a moment ago, the increase in third quarter and into the corporate overhead includes $3 million and $13 million respectively of non-recurring expenses relating to our accounting revenue, delayed fillings, certain legal fees and reorganization expenses. I would like to highlight an important aspect of our businesses. As Bob mentioned we face a unique challenge of presenting our financial results to investors. That challenge is rooted in the fact that a business like ours depends on a large degree of the sale of pre-need merchandising services. I consider it our future backlog. Under GAAP, billings from this pre-need activity are not reflected in our GAAP revenue or net income until we deliver the merchandised service. These billions are recorded as deferred revenue and as you can see, we currently have a little over $900 million in deferred revenue in the balance sheet which I will discuss next. The [inaudible] deferred selling and obtaining costs represents almost $780 million in revenue relating to pre-need billings that will flow through our income statement in the future with little selling effort on our part. This compares to $750 million at the end of the 2016. It represents a significant backlog of business and highlights the fact that our balance sheet is often underappreciated aspect our business. The dollar value pre-need contracts reported as deferred revenue for the third quarter was $67 million versus $71 million last year and year-to-date pre-need billings were $192 million compared to $203 million in the prior year period. As Paul mentioned earlier, the decline in three months, nine months period is primarily a result of a large promotion we ran in 2016 which we did not run in 2017. From a balance sheet perspective deferred revenue was $904 million, up $37 million compared to December 2016. The increase was primarily a result of increases in deferred contract revenues and deferred merchandise trust revenue. Deferred merchandise trust income was $22 million, while merchandise trust income revenue recognized was $7.8 million. You’ll note in the cash flow statement that there is a significant flux in merchandise trust and deferred revenue which arose from the liquidation of assets that were impaired in 2015. So what we see here when we look all the inputs is that our business as Bob and Paul have pointed out has shown signs of stability and that’s an important message we want to communicate. Now let’s spend some time to update you on some of the steps we take to improve our liquidity. As you can see in our financial results at September 30, 2017 we had approximately $8.4 million in cash and $3 million availability under the credit facility with leverage constrained. We are looking to reduce our overall indebtedness and leverage by increasing sales and reducing expenses. Paul walked you through the plan we have for increasing sales and I’d like to walk you through some of the key points about our expenses, which are important to what we have done now in order for you to understand why leverage increased during the year. What’s important to note is that our leverage increased over the past year, not as a result of significant decline in our business or our ability to execute. For example, as Paul highlighted, revenues increased on a quarterly and year-to-date basis. Year-to-date cemetery cost of goods and selling expenses as a percentage of sales, we’re pretty much in line with last year while funeral home merchandising service margins improved. In addition, year-to-date cash provided from operating activities increased approximately $6.5 million compared to last year. Overall profitability declined in the year-to-date period, primarily due to the non-recurring expenses related to our accounting revenue, deferred revenue project, the delayed filings of our financial statements. As we have said, results from operations were heavily impacted on non-accruing expenses; leverage was increased over the past 12 months for a number of reasons. One of the reasons is that we have a stream of pre-need billings that is no longer included in our bank EBITDA calculation which as it was in the past. So let me back up a bit, our leverage ratio is a little bit of a hybrid calculation. It starts with EBITDA like most leverage calculations and has the tradition add backs and deductions. StoneMor’s bank EBITDA is also adjusted to account for pre-need billings deferred revenue and associated cost for pre-need billings such as deferred selling and obtaining cost, both of which are on our balance sheet. This is a key point. Why is this an important point? Late 2016, StoneMor made a strategic decision to fund certain pre-need funeral home sales through insurance contracts instead of funding them with cash depositions to merchandise trusts. When we historically solid our pre-need funeral home contract, it was recorded as deferred revenue. The sale of insurance contracts on the other hand are not recorded on our balance sheet as deferred revenue under GAAP. The result of funding these sales with insurance products instead of trust deposits makes the partnership premium funeral home deferred revenue lower, which equivalence to approximately $5 million in lower bank EBITDA. Also contributing to lower bank EBITDA is non-GAAP merchandise trust income was down about $3 million on a trailing 12 months basis. Lower investment income has an unfavorable impact in deferred revenue, which in turn just drives the lower bank EBITDA. Expenses were higher, particularly cemetery expenses which were up approximately $5.5 million on a trailing 12 month basis due to increased park maintenance. This total is more than $13.6 million loss in the calculation on bank EBITDA for 2017. So we have two main drivers of the leverage; we have a bank EBITDA one side and we have debt outstanding on the other side. On the EBITDA side, we get the benefit of being able to add back certain onetime cost, but not all the expenses get added back, so EBITDA is lower. On the other side we paid more cash expenses that are non-recurring. Absent to these expenses, this cash would have been used to pay down the bank revolver balance. So instead of the bank revolver balance going down during the period with no distributions, bank revolver debt grew by nearly $5.8 million. The cumulative effect of non-recurring expenses impact both EBITDA and debt, reducing expenses, as well as increasing sales will play a large role in our future reference to improve cash flow. We have said the partnership is going to operate within four walls of the balance sheet and income statement to reiterate Bob’s comments at the top of the call. Before the partnership resumes a unit distribution, the general partner and management believe that leverage needs to return to around 3.75, and availability under the revolver needs to be approximately $25 million, not lever constrained. As we have said, that would take some time and effort but we believe we have the pieces in place that help us get there. With that, I’ll turn the call back over to Paul for some final comments. Thank you.

[Paul Grady:]

Thanks Mark. Before taking questions, let me just take a moment to share our admiration for our team members in Puerto Rico and Florida that were impacted by hurricanes Irma and Harvy. Puerto Rico in particular has faced incredible adversity. We have nine properties and 122 employees in Puerto Rico and we are pleased to report that all of our employees are safe, although many are still struggling with the broader challenges the island faces in getting on its feet again. We can’t say enough about our team on the ground. Our operations in Puerto Rico bounced back in Q4 and are performing well given the local challenges. We are proud of the resilience of our team and business operations. I’ll add in closing, that we have stabilized sales personnel and business operations and we are putting in place a number of organizational changes and operational initiatives that we believe will provide the foundation from which we can begin to grow the business again. There is still much work to be done, but we believe we are taking the right corrective steps. With that, Bob, Mark and I are pleased to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Liam Burke with B. Riley FBR. You may begin.

[Liam Burke:]

Thank you. You talked a lot about the growth of the pre-need sales and obviously outside of the distribution it does affect your free cash flow, both by increasing the merchandize trust with the offset of differed revenue. Discuss the use of insurance to offset some of the growth of the merchandise trust, but do you see that as the biggest driver of the cash flow improvement in the business?

[Paul Grady:]

This is Paul. We can take couple. Maybe I’ll start just talking about the strategy around switching over to insurance for a part of our pre-need funeral business. We found that in a couple of geographic areas, principally in Florida, the use of pre-need insurance as a funding vehicle for sales of pre-need funeral is productive and adds to the mix of products that we sell, but it did have this adverse impact on how we calculate bank EBITDA. So we’re really adjusting our strategies to reflect that and handle it more effectively. In terms of the percentage or kind of the impact overall that plays, Mark you may want to...

[Mark Miller:]

[Indiscernible] Paul is referring to is that the accounting for pre-need funeral homes under insurance contracts for the year versus doing it to a trust of product was about $5 million, $5.5 million effect on EBITDA, bank EBITDA.

[Liam Burke:]

Let me flip this over. If I look at the increase of merchandise trust, that’s a negative effect on your free cash flow, on your GAAP free cash flow, let’s put EBITDA aside for a moment. The increase in your deferred revenue is a positive effective on your GAAP free cash flow. If you use the insurance contracts, there should be some decrease in the – your increase in the merchandise trust should be lower. How does that affect your free cash flow rather than EBITDA or how much do you think that would improve your free cash flow?

[Mark Miller:]

Well, first of all with the insurance contract, there is no deferred revenue that goes on the books. It’s under GAAP you’re not permitted to do that. So in essence the insurance contracts are an all balance sheet type product for this purpose. We do believe though, management does believe that insurance contracts are more profitable and we also would believe it has better cash flow attributes over the life of contracts versus the pre-need contract that’s funded through trusted products.

[Liam Burke:]

Okay, and then just going back to the merchandise trust, is there anything else over and above the insurance contract you can do to shorten the delivery time. Now there was discussion, the previous management where you could actually go and construct the vault prior to actually happening and that would technically mean a delivery. Are there any other – is there anything else you can do to shorten the delivery cycle?

[Mark Miller:]

No, I mean I think historically I think there was concern whether the partnership was caught up in its being able to construct the delivery of vaults. At this point we do believe we are caught up and from where we are historically at this point and so we’re and will continue to do – construct a delivery of vaults on a go-forward basis and on a timely basis, and as much as we possibly can do at any one point.

[Liam Burke:]

Great. Thank you.

[Paul Grady:]

Thank you.

[Operator:]

Thank you. Our next question comes from John Ransom with Raymond James. You may begin. John, your line is open. Please check your mute button.

[John Ransom:]

Alright, sorry. Yep, I had it on mute. Can you hear me?

[Paul Grady:]

Yeah, we can hear you John.

[John Ransom:]

Okay, thank you. Look, just recognizing the heavy lift that you’ve had and the limited amount of time I guess I’m a little surprised and maybe I’ll ask for a deadline or a commitment. I would think at some point you know kind of management one-on-one would be to do a cost review and then set a goal for the amount of costs that can come out of the organization. If we calculated it right, we’re estimating that you’re running you know somewhere around a $25 million EBITDA deficit at the property level and once you strip out your interest income from the trust, so it looks like the properties are running in the red and the first logical question would be well, how much cost can come out of the properties, number one. And then number two, I would also think a logical thing to do would be to do an asset review to see, you know do you have you know 20% of your properties that are losing a ton of money. Could you find some strategic buyers for some of these properties, because just looking at the sheer amount of assets on your balance sheet, it just is odd to me that you know other of your peers can run 15%, 20% margins on their cemetery business and it looks like you guys are running in the red and it’s just not clear (a) what it is and (b) if you guys have a process to either identify underperforming assets and identify costs that can come out and assuming that’s what you’re doing, when do you think you can kind of get through that process and come back to investors and say you know, here’s our report card and here’s how much costs we think we can take out.

[Bob Hellman:]

Sure. I’ll let Paul address the cost. I’ll address the best use of our assets. As you probably can see in our financial statements we do have on the balance sheet a line item called assets held for sale. We have historically been looking at our assets and I think it’s an ongoing process that we will continue to do moving forward to ascertain that we are – you know we have locations and they are being used for their best use or I’ll say their best alternative use from that standpoint. So that is a constant ongoing review that we do.

[Paul Grady:]

And John, your questions are very good ones. When we came in we looked at operating margins and our margins are low compared to our competitors and as we got to know the business we tackled one creating really and now working with a brand new management team. As I mentioned earlier on the call, we’ve got new leaders in nearly every aspect of the business. Nine new leaders overall and they are with us basically about a year or less or have been newly promoted into this position. We’ve started the cost tackling; the cost and margin issue that you’re raising. One is we look at the field organization as being too complex, too bureaucratic. We already took five separate business units, combined them into three, but we think in 2018 there is specific cost reduction opportunity. Maybe not quite so much at the very ground level, the folks that touch our customers, but we’ve got a lot of management and so we think there is the opportunity to create a more streamlined platform and so new management team, no sacred cows and really working to drive change through the organization and in term is operating the…

[John Ransom:]

So, I mean I appreciate the answer, but is it reasonable to think by the time you do the next call, which will be sometime in March or April that you could at least say we think we can take our $10 million or we can – you know we think over three years our properties can be at X margin. Are you going to give yourself any kind of target to shoot at or because you know the answers that you guys just gave me didn’t include a single number. So I’m just wondering how long it’s going to take you to develop some kind of target to hit? Whether it’s free cash flow or margin or cost or something you know, I’m just – I don’t – I frankly understand the audit and all the stuff you had to go through, but I guess I don’t understand why we’re still at the phase of not having these targets, at least made public. I mean you’ve had a lot of time to do that. So that’s what I don’t quite understand and so given that we all agree that should be the case, is it reasonable to expect that maybe another three months you can or couple of months you could come back to the street and say we think we can take out X dollars of cost?

[Paul Grady:]

Yeah, I think as tougher as your questions are, I think our Board of Directors ask equally tough questions of us, so we are addressing qualitatively the issues that you’re raising, but I am frankly not going to commit on this call without really having that downtime review with our Board and no excuses. It’s just I think process wise that’s the better way to go, but your questions are a very good John.

[John Ransom:]

So when is your next Board meeting?

[Paul Grady:]

We have a Board meeting right here in Eastern PA in March.

[John Ransom:]

So that would be the absolute earliest then. It would be after the March Board meeting, assuming that’s what gets discussed.

[Paul Grady:]

I got to tell you, we spend a lot of time with the executive committee of our Board, so it’s not like we fly blind between meetings. We’re in close touch.

[John Ransom:]

Okay.

[Paul Grady:]

And again, I don’t want to put a timetable in this call other than to give the folks on this call comfort that we’ve got a Board of Directors and the process where we expect the business to perform.

[Bob Hellman:]

So John at that one point we will be closer to having a finalized budget and an operating plan for next year. So we should be in a closer position to be able to give you some big picture numbers as to what we think we can come up with in cost savings for the year.

[John Ransom:]

Okay, my second question is if we look at the 2017 numbers and assume some things in 4Q, what are the – you mentioned $14 million in non-recurring costs. So that’s – (a) is that all cash costs, number one. And then secondly, what is the offset in terms of one-time recoveries? So we’re just trying to get a – we took a guess at our note Friday in that kind of a run rate for free cash flow, but could you just help us with those two numbers?

[Mark Miller:]

Yeah, the $14 million is all cash and that sure wasn’t the things like recoveries, I apologize.

[John Ransom:]

Part of your cash flow from what I had understood is that you were collecting cash from prior period sales because of a break down in process. So the legacy management team said it was something like $10 million this year of one-time recoveries from you know – in other words you sold something in 2014, but you forgot to go get the money. So then you figured that out and you’re getting some of that money this year.

[Mark Miller:]

More specifically I think what you’re referring to is the DRP project and the net recovery was probably about $14 million when everything was said and done, that’s taking into consideration some of the expenses we incurred. The actual dollar, the gross dollar amount was probably more in the range of about $18 million.

[John Ransom:]

So okay, so that won’t recur next year?

[Mark Miller:]

No, we will not have a…

[John Ransom:]

So basically what you’re telling me is that your free cash flow was about right. The one-time recoveries are about the same as the one-time costs.

[Mark Miller:]

That would be correct, yes.

[John Ransom:]

Okay. So yeah, I mean just to state the obvious, when I think about some number for maintenance CapEx and some of your other CapEx, your basically free cash flow breakeven at this point?

[Mark Miller:]

Yeah, I would say that’s probably a fair assessment, yes.

[John Ransom:]

Okay, and then I guess my last question is, some of the comments about the sales force in terms of too much turnover and we need better people and we shot ourselves in the foot, I mean these were the same comments that I heard a year and a half ago. So why are we at 2.0 and trying to solve for the same problem? What was different? What did we learn in the last year that we didn’t know a year ago? It’s just it’s not clear that’s out there. Thanks.

[Paul Grady:]

Alright, so specifically I think it’s more than focusing on you know the history; I was trying to present kind of where we are now and where we are going on sales. And so on sales really the strategy is rebuild the sales force and as you saw from the last two or three reports, sales counselors were up. I think the latest one was up 33 or about 6%. It’s been stable over the last three months and that’s really due to the activity we’re doing around the qualitative nature of training and mentoring. And in addition, the objective though also is better productivity. So as I talked about performance management with the sales managers and also something I didn’t mention, but which is an important part of the process and that is really a better process around sales inventory. So it’s really the products that our sales people sell and so we’ve got, we implemented a new process around evaluating and approving growth capital basically, the features that go in the parks, columbariums, mausoleums you know new property and making sure it’s got an ROI, making sure it’s tracked and that was in place early beginning of last quarter. So hopefully you know a lot of things going forward here and any other item that’s rebate pricing. In both the inventory and the pricing, really we took a lot of input from the sales folks. So its collaborative in terms of you know the process around identifying what we need and where the prices need to be.

[John Ransom:]

Okay, thanks. That’s all from me.

[Mark Miller:]

Thank you.

[Paul Grady:]

Thanks John.

[Operator:]

Thank you. Our next question comes from Steve Seline with Walnut Private Partners. You may begin.

[Steve Seline:]

Hi there guys. I think I got a simple question for you. Are we back on track on the reporting on the financial side? Are we set in looking for a fourth quarter report that will be timely?

[Paul Grady:]

Yes we are, we are back on track. We no longer are an accelerated filer. We are just a large filer and we have a reporting deadline of March 16 for the 10-K.

[Steve Seline:]

And can I take you on one other question. Are there any other metrics besides the leverage metric that you’ve identified that relate to the distributions? Are there operating results that are going to effect that distribution decision?

[Paul Grady:]

No, it won’t. We do have a fixed charge, not fixed charge. Yeah a fixed charge ratio which we still need to work within those parameters. But no, there are – right now management has not put anything else in place in that standpoint. We do at this point – I’m sorry.

[Steve Seline:]

Is there a free cash flow metric that you – that I assume since you want to live within the fourth corners of the balance sheet that you want to have free cash flow available in order to make the any kind of distribution. So is that a metric that we should be looking at?

[Paul Grady:]

No, right now we are not willing to give any guidance on the free cash flow. But in looking at the four walls of the balance sheet and the income statement, free cash flow is obviously you know a key component of the process.

[Steve Seline:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Louis Peterson [Ph] a Private Investor. You may begin.

[Louis Peterson:]

Hi, thanks for talking my call. Just a couple of quick questions. I know we probably carry all of our fixed assets on the balance sheet at depreciated value. Has anyone done an appraisal to find out what these things are really worth?

[Paul Grady:]

To the best of my knowledge, all the assets have not been apprised and so therefore I can’t answer that question.

[Louis Peterson:]

Okay, do we have any ideas what they are worth? I mean some guesses, that kind of things.

[Paul Grady:]

So long as I’ve been here, as the CFO we have not done any type of formal valuation work or retaining the appraisers to do any formal appraisal work, but on the whole portfolio, both cemeteries and funeral homes.

[Louis Peterson:]

That might be useful to do. Okay, so that’s item number one. Item number two, someone mentioned that there are going to be two more quarters without a dividend. That would be the last quarter on last year and the quarter we’re in this year. Would it be more than two quarters or is it – are we putting fixed on two quarters?

[Paul Grady:]

You know at this point I think until we get our leverage down to 375 and you know approximately $25 million of availability, that’s the goal we set, that’s the water mark. So therefore till we get there, whatever quarters it takes – I assume it’s going to take at least a couple quarters until we get to that point.

[Louis Peterson:]

Okay, well the only other thing I would have to say is you guys obviously inherited a very difficult situation. Thank you for working so hard to get through it. It sounds like it’s a lot. Thanks again.

[Paul Grady:]

Thanks Louis.

[Louis Peterson:]

Okay. Buy.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Steve Percoco with Lark Research. You may begin.

[Steve Percoco:]

Thank you. Just looking at your cash flow statements, if I define free cash flow is cash flow from operating and investing activities, and if I separate out growth capital expenditures it shows that you have generated free cash flow of $20.4 million in the nine month period. My question is do you have full access to all of that cash flow? In other words, are you restricted in any ways through the mechanisms of the trust or whatever from utilizing all of that cash flow in the businesses as you see fit?

[Paul Grady:]

I apologies. Can you just – I’m not quite sure of your question, I apologies. Can you just repeat it?

[Steve Percoco:]

Okay, well as I said, you know I see that you show $20 million of free cash flow and are you restricted at all from utilizing that cash flow in the business?

[Paul Grady:]

I’m going to say since you are kind of picking it off the statement of cash flow, I would say not for the simple reason, the change in the merchandise trust would be unrestricted cash flow, besides that cash would have aligned to the partnerships bank account per say, so yeah, none of it would be unrestricted.

[Steve Percoco:]

Alright, none of it would be restructured or unrestricted?

[Paul Grady:]

None of it – I apologize. None of it would be restricted, excuse me.

[Steve Percoco:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Barry Blank with Divine Capital. You may begin.

[Barry Blank:]

Yes, I had couple of question. The first is how is your sales force compensated. Are they on salary and commission, commission or can you give me a little background, because what you come out or would you say how many people made a sale and so many people haven’t made a sale. How are they compensated?

[Paul Grady:]

Sure Barry, its Paul. They are compensated on commission. So the sales counselors basically have a very low base that is only paid if they are not selling and so it in effect is pretty much a commission plan and so it really varies, you know according to performance.

[Barry Blank:]

Well on this very low base, is that I draw or is that a salary. In other words, if they get it this month and they haven’t made any sales and next month they make a couple of sales. Do they have to repay that very low base back off the commissions in the future months?

[Paul Grady:]

Right, they do not.

[Barry Blank:]

And the number of sales people is quite large. Where do you get them from and what’s the criteria for a sales person?

[Paul Grady:]

So, they really come from generally sales backgrounds. So it can be former insurance sales people, a lot of people from the industry, from the death care business. So people that either know the business or they are coming in typically from another self starting commission driven sales background. And we have what I think is a pretty effective training program. So when we hire them, they go through a week of training in the park and they do a week of training in the class room. Then they come back and they are really mentored at that point by a sales manager and another sales counselor to really get them going, get them started.

[Barry Blank:]

Are they all stationed in the different parts, or some of them telephone solicitors?

[Paul Grady:]

No, they are all stationed in parks. I think a piece of the selling process Barry is being there, doing family follow-up. Our business is really referral oriented and so being part of that process both pre-need and at-need we get a lot of our customer leads from families at the park.

[Barry Blank:]

Thank you very much.

[Paul Grady:]

Sure.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Paul Grady for closing remarks.

[Paul Grady:]

Great. Thank you very much everybody for attending our call today and we are pleased to present and respond to your questions and best regards from the StoneMor team. Thank you.

[Operator:]

Ladies and gentlemen that conclude today’s conference. Thank you for your participation and have a wonderful day.