StoneMor Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the StoneMor Partners' 2016 First Quarter Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session [Operator Instructions] As a reminder, this call is being recorded Monday, May 9, 2016. I would now like to turn the conference over to John McNamara, Director of Investor Relations. Please go ahead sir.

[John McNamara:]

Thank you Carlos. Good morning everyone and thank you all for joining us to discuss our 2016 first quarter financial results. You should all have seen a copy of the press release we issued this morning. If anyone has not, the full earnings release can be found on our website at www.stonemor.com. Along with the earnings release, investors can also find an earnings supplement document, where we provide some additional color on the quarter. Joining us on the call this morning are Larry Miller, President and Chief Executive Officer; and Sean McGrath, Chief Financial Officer. Before we begin, our comments on the financial results, we ask that you all take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning's conference call. Any forward-looking statements made on this call are not guarantees of future performance, and we disclaim any obligation to update such factors or to announce publicly the results of revisions to any of the forward-looking statements to reflect future events or developments. In addition, given the provisions of the SEC's Regulation G, which limits our ability to provide non-GAAP financial information, we are only going to discuss that non-GAAP financial information, which is provided in the earnings releases and is therefore reconciled to comparable GAAP financial information. With that, I will now turn the call over to Larry Miller, who will take it from here.

[Lawrence R. Miller:]

Thank you, John. Good morning and thank you for joining us today. As indicated in our release, Q1 was a challenging quarter for us, yet we've manage to generate adjusted EBITDA slightly ahead of Q1 2014. Not only were we impacted by a strong drop in the death rate as previously reported, but our pre-need sales were also impacted by the severe blizzard in the East Coast in Q1. Many of our cemeteries and communities were shutdown for almost a week. March was our first quarter weather month and we were back on plan. We will likely see the death rate normalize over the balance of the year and we would expect to be on plan for the balance of the year. We are confident we will have adjusted EBITDA of at least $26 million for the second quarter and generate adjusted EBITDA for the year between a $106 million and a $115 million. The restructuring of our sales organization is continuing, we have consolidated our 10 regions into seven and are continuing our recruiting campaign to ensure we develop a higher quality and more prominent sales force. While we have not yet filled a 100% of our targeted number of sales positions we continue to see positive results. Productivity per sales percent is up and both presentation rate and closing rate continue to improve. Our focus now is getting the appropriate number of qualified sales people at each property. The transfer of our trust funds to Cambridge Associates is essentially complete and we should begin the benefit for those scale and access to quality investments. While our previous advisor did a good job for us, Cambridge's access to a broader array of opportunities should prove very beneficial for the company. Concerning our newly formed insurance division, we continue to see progress. We have a highly confident national sales director, four skilled Regional Vice Presidents and a relationship with a national insurance underwriter. We are now actively hiring insurance representatives including independent contractors as well as signing up independent funeral homes that we will represent. And these are properties that in addition to the ones we own we actually will be able to sell an insurance funeral product for their benefit. Later in the year, we will provide a more complete update on the insurance division. Finally, the acquisition opportunities continue to be strong, however, given our higher cost to capital we are operating our targeted rate of return and concentrating on deals that are cash accretive from day one. And with that, I'm going to turn over to Sean and then I'll come back on for Q&A.

[Sean P. McGrath:]

Thanks, Larry and thanks to everyone for participating on the call this morning. I'll start with a quick review of our first quarter financial results. Overall, we generated adjusted EBITDA of almost $22 million, which is slightly above the prior year period. The improvement was the result of three items a $1.2 million increase in cemetery margin and $300,000 decrease in corporate overhead cost, which combine the offset of $1.4 million decrease in trust investment income. The details of which I'll discuss in a moment. Bottom line. this translated into a cash distribution coverage ratio for the period of 1.4 times based upon distributable available cash. To provide some additional color on these results. Regarding Cemetery margin we generated $12.3 million for the first quarter, which represents a $1.2 million or a 1% increase compared with the prior year quarter. This is very solid performance concerning that we were impacted by heavy winter storm that costs us $3.5 million pre-need sales for the period. In addition the death rate was down between 4% to 6% in all our region, which impacted our at-need sales by $1.5 million for the period not including a residual impact of pre-need sales. Despite all of this, our same-store cemetery margin for the first quarter was $1.9 million representing a 7% increase from the first quarter of 2015 for the 303 properties included. In our funeral home division, we generated a margin of $4.9 million for the first quarter. This positioning includes the results of our start up insurance division. In which we would sell and our commission on pre-need funeral home insurance sold through our third-party in areas where we do not have an existing operation. Excluding start-up cost for the insurance, funeral home margin was $5.3 million for the first quarter and 8% increase compared with the prior year first quarter. On a same-store sales basis funeral home margins for the first quarter was $3.9 million representing a 20% decrease from the $4.9 million for the first quarter of 2015 for the 97 properties included. Same-store revenues were down 7% at period-over-period, which is the direct impact from decrease in the death rate. Notwithstanding flooding through the weather and death rate we are generally pleased with the results of this division [indiscernible] insurance initiative in the quarters and years ahead. To elaborate more on our investment trust returns. Overall income was $10.5 million for the first quarter a decrease of approximately $1.5 million period-over-period. This decrease between periods was entirely related to a $4.4 million decrease in realized merchandize trust gains, which were $1.3 million for the first quarter of 2016 compared with $5.7 million for the prior year first quarter. Excluding these realized gains, our overall portfolio performed quite well with investment trust income improving to $9.3 million for the first quarter of 2016 or annualized return of 4.8% compared with $6.3 million or an annualized return of 3% for the prior year. As I mentioned on last quarter's call, for the full year 2016 we've budgeted returns in our trust investments for the year to be between $36 million and $38 million or an annualized return of approximately 5%. Those are our full results of operation. Let me touch on four more items quickly. Regarding corporate overhead cost were $8.2 million for the first quarter, a decrease of $300,000 from the prior year quarter with the lower labor cost due to our continued focus on maintaining a lower and more efficient cost structure. In maintenance CapEx we invested $3 million compared with $1.3 million in the prior year. This entire difference was a one-time investment we made moving to a more efficient corporate office as our existing space wasn’t adequate for our needs and at least with any shortly. Regarding our balance sheet we continue to have significant strength as we have approximately $660 million of assets within our merchandise trust, accounts receivable and cash as on March 31. With only approximately $172 million of liabilities from merchandize contracts. Leading us with approximately $490 million of free cash flow to our account. More than enough to pay down our entire debt balance and fund multiple years of acquisitions and be able to services those contracts in the current period. And finally with regard to our liquidity positional leverage, at the end of March and pro forma for our recently cost related equity offering, we had approximately $83 million of total capacity under our $180 million credit facility borrowing base. Along with $30 million of cash on hand giving us total liquidity of close to $96 million with a pro forma leverage ratio of 2.7 times compared with a maximum leverage ratio of four times. I also want to remind everyone that we have a $45 million equity commitment from our general partner to fund certain piece of acquisitions. With that, I thanks for your time and I'll return the call over to Larry for closing comments or questions.

[Lawrence R. Miller:]

Operator we are ready to take questions.

[Operator:]

Thank you sir [Operator Instructions] Our first question comes from the line of John Ransom [Raymond James]. Please go ahead.

[John Ransom:]

Hi good morning. Could you talk a bit about the Archdiocese deal in terms of how that's tracking, how much capital you had to invest after closing to grow the pre-need, I know they had no pre-need and what the outlook is for cash flow cash out flows for that deal in the future periods? Thanks.

[Sean P. McGrath:]

Yes, I think the Archdiocese to deal has been performed better than we model originally, we expect as Larry said I think we targeted 20% to 25% IRR so far over the last - almost two years at this point we performed better than that model. I wouldn’t significantly but significantly not giving the size of the deal. Contribution of the trust fund and given that it was a property that had no pre-need sales and so we took the property and probably I would say we're at the range of 50% to 55% pre-need at this point. So with that comes in investment into the merchandize trust as we put in this trust for those sales. I would say that's probably in terms of those investments we're probably getting towards the maturity range meaning that the increase in the investments in our trust funds which I think over the last few years would probably average around $50 million I would say a significant portion of that was associated with Archdiocese. So that's probably getting to its level of maturity. As Larry said, we are going focus on deals that are cash flow accretive meaning that in most cases on cemetery side these properties already have a pre-need program. And so that’s requiring them required the same level of investment as a Greenfield project like the Archdiocese where we're starting from scratch and making significant investment into the trust as we build pre-need sales. Any more to add Larry?

[Lawrence R. Miller:]

No, I think that's fair. John we should be getting pretty close to the turn, I don't know exactly where it is, because we continue to generate more sales than we had anticipated, but that's a good thing.

[John Ransom:]

So, I'm sorry did you say - I know you said $50 million a year is what you put into your trust, did you say the majority of that was from the Archdiocese, so over $25 million a year for last two years?

[Sean P. McGrath:]

Yes John. Yes, over the last few years we've been around $50 million net total for each year and I would say a significant portion of that relates to the Archdiocese, just because as I said just starting from a Greenfield. And so you have to make a lot of investment for most of our other acquisitions that we’re on target or other acquisitions we acquired over the last two years that was pretty much the primary one where we had to start from scratch.

[John Ransom:]

So all things being equal, should your net trust fund investments slow by the Archdiocese's, I mean should this slow by half or is that too optimistic? If you no longer have to pre-fund Archdiocese, why wouldn’t your trust fund outflow slowdown?

[Sean P. McGrath:]

No, you're right, I mean it should get down significantly. I think the first quarter when you look at the queue you will see that disclosure on the net contributions. So net contribution plus the distribution came out, and we're probably around $5 million to $6 million range, you know $5 million to $7 million, which obviously is well below ours. So hopefully we'll continue to see that trend. Other initiatives that we're trying to do, in order to [indiscernible] trust contributions as much as we can, but one of the biggest things is we are focusing on acquisitions that are cash flow accretive day-one. We're not starting from scratch, there are other ways we can do those type of deals, but within the MLP, maybe even in the GP, but within the MLP we're focused on [indiscernible] reduce that cash burn rate.

[John Ransom:]

Okay.

[Lawrence R. Miller:]

And John that is part of our plan as that if we have an opportunities like Archdiocese which obviously is a fabulous transaction, we'll try to do it at the GP level and just we'll get a line of credit to maximize the $45 million it's still available there and hold in the GP until we're sure and then we'll drop it down into the LP.

[John Ransom:]

Okay that makes sense. The other couple of questions I had, what is the outlook for the year in terms of what we should expect for total acquisitions spend and what impact that will have on accrual EBITDA and cash. What you are going to spend, what kind of accrual EBITDA contribution we should think about and then just what effect it will have on the kind of cash inflows and outflows you know working capital?

[Sean P. McGrath:]

Sure, yes I mean I would say our acquisition pipeline at this point is probably - I would say its $75 million to $100 million in terms of what we're working on. Some of the deals in peculiar are not things where it's all cash up front, some of these that we're looking at related to certain cemetery property that we can acquire over a period of time. So the amount of cash outflow this year it's probably $5 million or less. Other deals that are going to be more down and fairway acquisition, I would say right now we probably have $30 million to $40 million of deals that we could probably close within hopefully the next six months. From there it will just be the [indiscernible] as we look at the capital market I think as we've stated publicly, we've looked to add on to bonds, I think we've already kind of looked at the equity side, obviously the deals that we've completed in April. But we would like to add to bonds and I think from there that will kind of shed some light on in terms of how many deals we're going to do this year.

[John Ransom:]

Alright and just lastly, you have revamped your sales force, what do you expect kind of for the balance of the year in terms of pre-need sales growth? It's the weather in comps and whatnot gets easier. I mean really the fourth quarter comp, with underperformance last year and hopefully no are more blizzard so what should we be looking for pre-need sales growth?

[Lawrence R. Miller:]

John, I would certainly expect every quarter-over-quarter to be improved. We're seeing it in the micro numbers when we look at productivity per employee, presentation rate, closing rate they are a statistics that really measure the quality of the force. Right now, the challenge jus is getting the appropriate number of sales people at each location. Every property has a target number of people based on a minimum performance and they are working to fill that out. And every month, we should see steady improvement in that as we - we still have a lot more rigor than we use to in who we hire, but more importantly provide a training at the time of hire and then obviously continuing. So I would hope that every quarter where same-store quarter-over-quarter is improved?

[John Ransom:]

And any progress on your real estate, I know this is a longer term initiatives, but should we expect any closings on the real estate sales this year?

[Lawrence R. Miller:]

There may be some modest sales, but nothing that - these are the kind of things that we generally have every year where we get a few million dollars every year of some type of real estate, but the larger [indiscernible] Cushman & Wakefield we are still in process with those.

[John Ransom:]

Okay. That's all I have. Thank you.

[Lawrence R. Miller:]

Thanks John.

[Sean P. McGrath:]

Thanks John.

[Operator:]

[Operator Instructions] The first one coming from the line of Liam Burke [Wunderlich Securities]. Please go ahead.

[Liam Burke:]

Yes, thank you. In terms of traditional burials, the results are very consistent where we are seeing from the casket providers. As we move into the second quarter, is there any sense of the reversal of that trend?

[Lawrence R. Miller:]

Well Liam, we certainly hope so and typically the first quarter normally [indiscernible] extreme cold weather which has an impact. Extreme cold, extreme heat and the flu season and certainly in most of our properties, most of our areas the flu season was very modest and mild and the temperature was mild. But that doesn’t - normally all that happens is people that are likely to pass away in any 12-months period it kind of accelerates into the first quarter, because of the weather and the flu season. Generally, I would think that I don’t know if we will hit the exact targeted number for the year, but in my experience it typically recovers and we should see quarter-over-quarter probably some modest increases.

[Liam Burke:]

Okay and on the cremation side of the business, are you being able to gain any attraction on the and shifting some of your assets over to the cremation which is rather than the traditional burial plus?

[Lawrence R. Miller:]

Yes absolutely, I mean that's a big part of our development plans for all of our cemeteries that are in the cremation markets to develop these specific gardens and we are working with the national provider of bronze and granite to develop these gardens. So yes we think will be really benefit from that in the future.

[Liam Burke:]

Great, thank you. And I just need a clarification here. You are looking for a full-year number of about $36 million to $38 million in investment income or our investment revenue and you completed the quarter at call it $14.5 million. So we’re expecting a fairly significant sequential decline here?

[Sean P. McGrath:]

$14.5 million no we had $10.5 million in the results.

[Liam Burke:]

Okay.

[Sean P. McGrath:]

Yes with $10.5 million, I mean yes that's if you take about $750 million arch [indiscernible] 5% you are going to get to about $37 million. When you strip out the gains that we have was about $1.3 million or $1.2 million. You get the so about a little bit over $9 million which you are probably trending towards the full-year $37 million.

[Liam Burke:]

Got it. Thank you very much.

[Lawrence R. Miller:]

Thank you.

[Operator:]

That concludes the Q&A session. I will turn it over to you, sir.

[John McNamara:]

Alright, everyone. Thank you very much. Look forward to talking to you in the second quarter. And I think we are looking forward to having a great quarter. Thank you.

[Operator:]

Ladies and gentlemen, that conclude today's call. We thank you for your participation and ask you to please disconnect your lines.