StoneMor Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Welcome to the StoneMor partners 2016 third quarter financial results call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time, if you have a question please press be the 1 followed by the 4 on your telephone. If at any time during the conference to reach the operator, please press Star 0. As a reminder the call is being recorded Wednesday November 9, 2016. I’d now like to turn the call over to John McNamara, Director of Investor Relations. Please proceed.

[John McNamara:]

Thank you, James. Good morning everyone and thank you again for joining us to discuss our 2016 third quarter financial results. You should have all 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 on our website where we provide some additional color on the quarter. Joining us on the call this morning are Bob Hellman, Chairman of StoneMor’s general partner, Lawrence Miller, President and Chief Executive Officer and Sean McGrath Chief Financial Officer. Before we begin, we would ask that you all take notes of the cautionary language regarding forward-looking statements contained in this morning's press release. That same language applied to statements made on this conference call. Although forward-looking statements represent our best estimates and expectations, any form of the statements made on this call are not guarantee of the future performance and actual results could differ materially from these estimates and expectations. We disclaim any obligation to update any of the forward-looking statements to reflect future events for developments. In addition, please note that it was otherwise specified, we will refer to non-GAAP metrics in discussing our third quarter financial results on his call. Out press release provides directly comparable. GAAP financial measures. Non-GAAP financial measures that we use should not be considered as alternatives to GAP financial measures, and you should not consider such non-GAAP financial measures in isolation or as a substitute for or superior to our results as reported under GAAP. These non-GAAP financial measures are used internally by the management to measure partnership operating performance. And we believe they are relevant and helpful to investors in understanding our performance. With that on the hour from now turn the call over to Bob Hellman. He’ll take it from here. Go ahead,

[Bob Hellman:]

Thank you, John. And good morning. Thank you everybody for joining us today. I want to acknowledge right up front the concerns that have been stressed by our investors about the drop in unit price as a result of the recent distribution cut. And these concerns include whether the current $.33 per unit quarterly distribution is sustainable, what the chief cause the change in distribution, whether the company's business model fundamentally works, and can distributions be restored over and over what time period. Let me take a minute and outline what we're going to address today. We plan on doing a more in-depth review of all of those topics I just mentioned at an investor day to be held in December. But for the time being, our goals today are to discuss a brief description of the business, what happened operationally and why, what actions we're taking to correct those challenges, the sustainability of the distribution at the current level, how investors - how all of you who are on the phone and in the public markets will know about the progress that we're making, and what the next steps will be in reporting to the market and to the investor community. These are our goals for the call but before we dive into that, I want to ask Sean McGrath our Chief Financial Officer to briefly address both our quarterly earnings as well as the balance sheet restatement work that as a new CFO and as any good new CFO would do, he's been diving into deeply over the last quarter or so. Sean, will you take it from here?

[Sean McGrath:]

Sure. Thanks, Bob. And thanks everyone for being on the call this morning. Before I started in on the results for the period, I want discuss the restatements that we mention in the form 8- K we filed this morning. To recap, in early September we filed a form 8-K noting that we expect to file restatements for the financial statements contained in our 2015 form 10-K and our forms 10-Q for June 30, 2016 and March 31, 2016 for adjustments to the allocation of income between the general partner and [indiscernible] partners. In the form 8-K we filed this morning, we noted that the restatement for these periods will also include adjustments based upon additional review procedures we performed during an ordinary course review by the staff at the SEC. While disclosure within the form 8-K summarizes each of the additional adjustments we expect to recognize, I would probably characterize these entries as consisting of balance sheet reclassifications, cleanup of prior period entries that were previously determined to be immaterial to the financial statements, and other historical entries that relate to the GAAP recognition, customer contracts, and the related obligations rather than the generation of customer billings and related non-GAAP cost. We expect to file the amended versions of these filings once the SEC’s review is complete, which we expect to be soon. While these amendments are unfortunate, I believe we exit this process with stronger financial statement control than at any time over my first year with the organization. In addition to the amendments, I’d also like to take a moment to mention that the format of our earnings release has change from the previous quarters due principally to our adoption of the SEC’s new guidance on non-GAAP measures. As I mentioned previously, we've been working with the staff at the SEC regarding its ordinary course review of our filings including our press release format. So this draft incorporates comments received from them to date. These changes include, among other items, that we will no longer be able to provide adjusted EBITDA as a performance metric in the same manner as calculated in our historic earnings releases or as utilized in our leverage covenant calculation under our revolving credit facility. However, our release will contain all the components necessary to calculate adjusted EBITDA for interested readers. Moving onto our financial results, we generated distributable cash flow of $11 million for the third quarter of 2016 compared with $14 million for the prior year third quarter. The decrease was a result of a $6 million decrease in cemetery margin and $2 million decrease in funeral margin partially offset by $2 million increase in trust investment income and $3 million legal settlement charge during the prior year. In the end this translated into a cash distribution coverage ratio for the period a one-time space upon DCF. To provide some additional color on operating activities regarding cemetery margin, we generated over 9 million for the third quarter which represent the $6 million decrease compared with the prior-year quarter. As Bob alluded to, our premium billings were the primary driver for [indiscernible] performance for our cemetery operations compared with our guidance, coming in at 8-1/2 million below our internal projections for the period and almost $2 million below the prior-year third quarter due to lower sales force complement. Moving on to cost, cemetery expenses of almost 20 million were 1.7 million higher than the prior year, but consistent with our internal budget, as we incurred 900,000 of non-recurring repairs and maintenance on our properties during the period to repair storm damage and a $900,000 hired landscaping cost due to timing of services incurred offsetting the year over year favorable bearings for the second quarter of 600,000. Selling expenses of 19.5 million were 1.4 million higher than the prior year, as training costs were around 700,000higher due to hiring and training sales force additions. And advertising costs were a half million higher due to temporary strategic initiatives to increase sales leads. In our funeral and division, we generated a margin of 3.5 million for the third quarter compared with 5.5 million for the prior year third quarter. Our year-over-year revenues for the third quarter were slightly favorable. Expenses were over 2 million [undiscernible] due to a $1 million-rebate received in the prior year and $800,000 of higher wages and commissions due acquisitions we consummated during the latter part of the prior year third quarter. This is all due to principally low, usually low, expense levels in the prior year third. As third quarter of 2016 funeral home expenses of 13,8 million were relatively consistent with the second quarter of 2016 and $600,000 hours lower than the first quarter of the new year. Investment trust returns of 10.5 million for the third quarter sixteen. There was then an increase of almost 2 million compared with the prior-year third quarter. The increase between periods was almost entirely related to an increase and realized trust gains, which were 1-1/2 million during the third quarter of this year compared with a realized loss of 300,000 for the prior-year third quarter. In addition to improvements and realized gains and interest in dividends, overall portfolio continued increase with an improvement of over $50 million in unrealized value for year-to-date 2016. For maintenance CapEx, our investments were a little over 1 million for the third quarter of 2016 compared with 1-1/2 million for the prior year due to timing of prior-year information technology improvement purchases. Regarding our liquidity position and leverage, at the end of September we had approximately 50 million of total capacity under our barring base along with approximately $15 million of cash on hand, giving us total equality a close to 65 million with a leverage ratio of 3.6 times compared with a maximum covenant of 4 times. With that, and thank you for your time, I’ll return the call to Bob to provide an overview of the actions we are taking.

[Bob Hellman:]

Thank you, Sean. I appreciate that. Just to step back and give people context for this call, and I know many of the people who are on this called they already understand this about the business, but to put today’s further discussion in context. The company has three main sources of operating profitability; trust fund earnings, at-need sales in other words providing products and services to the families at the time of death, and pre-need sales, which has a very active sales force selling products and services in-advance of need to consumers. The trust fund business is very stable and improving over time especially as a result of our hiring last year of Cambridge Associates to lead the oversight of the deployment of that capital. The at-need business is relatively stable. And frankly, there's very little that we can and do to influence the top line of that business. It is business whose operating results are largely based upon good cost control and has service quality and of course the death rate. It's the pre-need side of our business that requires very active management; management of sales force and management of the cash cycle -- how we manage the amount of revenue that must be deposited particularly into our merchandise trust funds when our sales force sells merchandise products. It is in these two areas that we have made errors. Lovely put. And what we're going to outline here are the errors that we made, and what we're doing to correct them. And to take you through some detail of that, I'd like to turn the call over to Lawrence Miller our CEO to describe what we're doing in each of these two areas. Larry.

[Lawrence Miller:]

Thank you, Bob, and good morning everyone. As many of you are aware last year. We had we initiated a program after extensive analysis from a national consulting firm focused on improving productivity and quality. Unfortunately, most of these initiatives failed and resulted in our losing over one hundred producing salespeople. To put this in context, the impact of all this on our results could be seen in the value to us of an entry-level sales person. One incremental entry-level sales person results in revenue of $260,000 and an EBITDA of $165,000. Year over year we're down 70 salespeople. Relative to our target, we are actually down 100 salespeople. This equates to$ 18 million of loss revenue year over year and $11.5 million of EBITDA, and relative to our target $26 million of loss revenue, $16.5 million of EBITDA. And what are we doing about this? We hired a national sales manager, Dina Kelly. She started in July and just getting her arms around the business. We hired a national sales force recruiting firm, a firm by the name of Accelerate, which is located outside of Philadelphia. And we increased the number of recruiters in the home office. We also amended programs installed a year ago to be more user friendly. For example, making it easier for new salespeople to be trained. While not an easy fix, we are confident we will rebuild our sales force. The only question is time. And we hope to be back on track within 6 to 9 months. How will you know we’re making progress? We will begin reporting today and each month the total number of sales people including those in training and total number of sales people we have as of the end of a period who wrote a contract in the prior month. We will be publicly reporting the same two numbers monthly in the second week of each month for the prior period. You should expect to see that as we add sales people our revenue and EBITDA will grow accordingly. Let's talk a little bit about the cash impact. The simultaneous acquisition and integration of acquisitions in 2014 at over five times our normal rate along with new hires in key positions put a tremendous strain on the organization and caused the company to take its eye off the ball in its regular focus of pre-ordering and pre-installing merchandise in order to maximize revenue recognition. The cash flow impact of this has been substantial. Year-to-date, we failed to install 10,000 vaults that were sold pre-need and also failed to order a substantial number of memorial. The consequences of just the vault non-installation is over $15 million being stranded on our balance sheet earning 5% and our cost of capital is over 10%. More importantly, this also resulted in a reduction in annual cash flow of $10 million. What are we doing? We're going back installing the backlog we have on un-installed vaults. We are automating our interaction between ourselves and key suppliers so that for memorials completed contracts are automatically manufactured and stored in inventory by the manufacturer. We're changing our contracting and compensation system so that a higher portion of revenue will result in only modest trust fund deposits. This initiative should take about six months to complete. This will allow us to recapture over $20 million of stranded capital over the next 6 to 9 months and improve our cash flow efficiency materially. In the interim, as part of moving from an acquisition oriented business model that accumulated assets to one that realizes the synergies, we were able to achieve real cash savings of over $6 million. We have also identified an additional $4 million to achieve by the end of this year, meaning that by year-end we will have implemented over ten million of cost savings that will directly affect our 2017 seventeen earnings and cash flow. And with that, I'm going to give back to Bob for a summary and then we'll take questions and answers.

[Bob Hellman:]

Thank you very much, Larry. I hope that outline of our actions of the causes of what happened and the actions we're taking to correct this are clear. The Sales Force and Trust Fund Initiatives which is what we have labeled them as here, will not be able to be achieved instantaneously. We've got a lot of confidence that these will be achieved for, however, over the next six to nine months. More importantly, between the cost cuts and even in a modest improvement in the trust fund cash efficiency, we have more than covered our current level of cash distribution, which we are already recovering nearly on a one-to-one basis based upon our third quarter results as Sean just outlined them. But the real goal we have for you is to be reporting regularly to you as to the progress we're making particularly on the sales force initiative hence the initiation starting today of monthly reporting of these two key sales force headcount statistics so that you can track the progress that we are achieving in that initiative. This has been a very painful exercise. Let me just say that specifically as chairman of the general partner. But it is one that we believe will have long-term benefits for the company. We will outline in far greater detail that the investor day to be held in New York before year-end, the details, the time table, and how each of these initiatives will translate into growth of distributions. And we'll look forward to presenting all of that to you here in the next few weeks. And with that, John, I will turn it all back to you organize our Q&A session please.

[John McNamara:]

James, we’ll take some questions now.

[Operator:]

Thank you ladies and gentlemen. [Operator’s instructions] And our first question is from the line of John Ransom. Please proceed.

[John Ransom:]

And I’m sorry. I missed a little bit of the call. So, I apologize if we’re replowing some old ground. But the main thing that we are trying to figure out is if not withstanding the restatement of the financials which is making our job a little more difficult this morning. If I just look at the cash flows in the third quarter and understanding your comments that you are, you know, close to, you know, being able to sustain the current distribution with cash flows, can you provide a bridge from what you just reported to how you get to cash flow sustainability and just put the numbers in some easy buckets for people to understand? So again, the way we look at this is you have 46 million for the distribution 20 million for interests. So that’s $66 million you have to generate just to cover those two buckets. So added a little bit for CapEx and working capital. So how do we how do we get to understand, you know, looking at, you know, a relatively simple bridge how the company can sustain say an $80 million cash outflow need before you get into working capital stuff? Thanks.

[Sean McGrath:]

John, just very simplistically, if you look at the press release which includes our updated financial statements for each of the periods that are in there, but if you look at year-to-date September and the GAAP cash flow statement, we generated approximately $18.5 million for that nine-month period. So, we're just using that on a normal recurring cash flow run rate where at least like a $24 million, $25 million cash flow generation pace. That includes interest expense. We just as I think Larry mentioned, we just made cost reductions and cost improvement of approximately about $10 million annually that aren’t reflected in those numbers yet. A lot of these have occurred in the most recent quarter, and we're going to get the benefit in the fourth quarter and go forward period. So, another $10 million on top of because that’s $35 million. As Larry all to mention going through our trust that we have approximately have identified at least $10 million on a recurring basis that we have not been able to mine from the trust just by doing the things we need to everyday. So, that's another $10 million. So, you're talking $45 million of cash flow right there and that doesn't take into account any improvement from the additional sales force, you know, which obviously, you know, as we talk I mean we have to put money in the trust, but by continuing to execute our strategy of selling products but then delivering them on a timely basis we’ll generate a significant amount of cash upfront on a recurring basis. So, I think…

[John Ransom:]

So, your number is 45 million plus the 20 million or so run rate interest expenses. Is that right?

[Sean McGrath:]

Yes. That’s net. The interest expense is net in there.

[John Ransom:]

Yes. And there’s nothing in that let's call it 25 million of run rate cash flow from operations. There’s nothing in that number that’s one time in nature, good or bad?

[Bob Hellman:]

No.

[Sean McGrath:]

No.

[John Ransom:]

Okay. My second question is -- I hear you on the sales force productivity. So, let's just say we wave a wand and we have 75 to 100 producing salespeople that Larry talked about. How much of that is cash versus accrued EBITDA of production? So, as we think of every incremental – is that a cash flow number or is that your accrued EBITDA number?

[Sean McGrath.:]

Let's walk through the math real quick. As we said, let's say it’s 100 people just for around math, that should generate approximately $25 million to $30 million of additional revenue just at the -- not even expecting them to be superstar high-end producer, just the normal average run rate. With our margin that’s at least, you know, I would say $17 million of EBITDA. I’m just searching for the schedule in front of me. So, what that translates into in terms of cash in terms of deliveries because what we – as you know, -- we have products that don't necessarily translate into cash day one, but then we deliver the vaults, we have initial opening and closing. Those amounts turn into cash. So you're looking at it at least on a recurring basis that’s going to be, you know, 5%0 to 60% of that is ongoing run rate cash that we can convert that into on it on a quick basis. So, you know, there will be a, you know, a very decent significant cash uplift on a recurring basis based upon that EBITDA that we’re going to get if not more…

[John Ransom:]

So, a rule of thumb will be 50% conversion of EBITDA into cash – incremental EBITDA into cash. Is that it

[Bob Hellman:]

John, this is Bob Hellman. One of the things that we intend to outline at our investor day is not just what we've outlined here today in terms of the revenue and EBITDA contribution of a single sales person but the cash contribution not only in the current period but it's important to see how that one-year that revenue that $260,000 of revenue how all of that lays out over time because there's a bunch of recurring revenue that results -- or recurring in cash flow, sorry, that results from that as well. And that'll all be detailed out in a fair degree of granularity at the investor day.

[John Ransom:]

All right. My third question is this $10 million of -- call it stranded, you know, installations for lack of a better word --That's an ongoing number is not zero. So we think about it as a one-time recovery, or is that an ongoing contribution number?

[Lawrence Miller:]

It's $20 million of onetime of coverage and $10 million of recurring cash flow improvement.

[John Ransom:]

And Bob you and I've talked some offline and again I'm just trying to clarify this any of that include maybe doing a better job of monetizing opening and closings or is that part of that 10 million that you talked about?

[Bob Hellman:]

It doesn't include monetize opening and closing. When we install [indiscernible] which we think about doing laid out, every time we install vault it not only takes the cash out of trust from the vault we take the cash out that we have to put it with the trust with the opening and closing.

[John Ransom:]

Now just to be clear is that a change in policy, is it just doing a better job of making sure you are doing the opening and closing or were you straining that cash in the trust, you were doing the opening and closing and straining the cash in the trust. I'm just not clear on that.

[Bob Hellman:]

It is actually not a change in policy we were doing quite a good job of this up until a year or so ago and as Larry outlined we took our eye off the ball so it's actually just returning to past practices.

[John Ransom:]

This $20 million that is a onetime should we think about that going to debt reduction?

[Bob Hellman:]

In the near term, yes.

[John Ransom:]

Okay. So that would -- so in addition so again let me just kind of sit back and try to frame this as simple as I can. Without any improvement in sales force productivity you think you can generate around 45 of recurring cash flow, you've got a 50% conversion of EBITDA to cash on the numbers you gave if you are able to restore salespeople, producing sales people you've got 20 million you can pull out one time and you've got 10 million that you can get from an ongoing standpoint just from getting back to some a legacy practices around installations.

[Bob Hellman:]

Correct.

[John Ransom:]

Okay. And I guess my other question is, talk about the banks a little bit I know you mentioned your covenant levels but just qualitatively I mean there's been a dramatic equity market reduction, Moody's cut your rating on your bonds what -- tell us about the conversations with the banks and if you could characterize their level of concern if any?

[Bob Hellman:]

Sure. We have been in constant communication with our banks. I think they understand the situation. They know that obviously our unit price is coming down, its always concerned them but I think they understand we're making a prudent decision long term for the business, making sure that we’re cognizant about liquidity and we talk to them in terms of our forecast, our projections same as that you’re just going through and letting them know that we believe we are setting distribution at a level where we can live within that cash flow. So I think in that frame of mind that we're doing the right things that we're not just trying to continue at a level that we didn’t say sustainable generation right now. Talked to rating agencies, as Moody obviously saw the downgrade I think their model is different than S&P's and I think they look at where our equity price was trading at and they communicated to me that when we get through this process and then we reset the distribution at the appropriate level that the units speed up that would be a reason for an upgrade. So I think from our perspective we need to execute and we execute from a Moody's perspective, we should see the benefit ones that gets to a sustainable level.

[John Ransom:]

And just help us think about like salespeople, I know you'll have a onetime cost which probably the best investment you can make in terms of getting back to equilibrium but how should we think about the ongoing funnel if you will of having how much you have to -- how many people do you have to hire and how many dollars you have to spend on training to put and produce sales person into the service and what's the turnover? I mean I'm assuming what you're going to have at this constant where you have to hire 50 people to get to 10 and half those 10 turnover every year because of the scope of influence type sale but just talk about your version 2.0 or 3.0 philosophy in terms of the bottom say 50% of your sales force which you tried to fix with the not so great help of your consultant.

[Lawrence Miller:]

I mean initially obviously we're involved in a little bit extra cost because we've hired this national recruiting firm. We've added people in the home office and those costs once we get to that magic number of approximately 100 producing sales people a big chunk of those cost will drift away. Currently we are paying $15 an hour for eight weeks of training or support for eight weeks and that's when the revised rate, our new Vice President of Sales. She thinks that may be a little bit too liberal and we need to get people selling as opposed to collecting a base salary. So you're right and I wish I had better data, you said 50%, it's certainly somewhere between 50 and 100 to end up with 10 to 15 good people and once we get to that level if history is any predictor of the future and I would hope we can improve on this but if for every person that we hire on an ongoing basis we will lose one person but they tend to be the people at the bottom of the food chain. They're not our top producers.

[John Ransom:]

So do you turn over say 30 sales force every year is that a way to think about it, that you just got to replace 200 sales people every year and you've got to go hire a thousand people to get to 200? Yes I mean I think I mean not that you’ve every answer today but I think it would be helpful to quantify the funnel and what kind of upfront costs is to just get back to square one and then sort of how we should think about the ongoing costs and what the ROI is on that cost.

[Bob Hellman:]

One of the nice thing about hiring this company Accelerate [ph] I mean they're experts at this. They have a lot of stabilized data and they have a lot of analytics that they will give us and help. I think maybe by the time we get to Investor Day will we might have a much better feel for it and I will be able to lay it out for you.

[John Ransom:]

And lastly any asset sales that would just take some of the pressure off that you're -- I know you have something you looked at, you were looking at a year ago but any headway on asset sales?

[Lawrence Miller:]

Not in a material fashion, it's a drip, drip, drip process John and we have a few that we have in the pipeline right now but nothing that we didn't announce that would be in the $10 million plus range in the near term. But I think what's good about it. John is because of our engagement with the Cushman & Wakefield folks we have a much more active -- we always said we would sell off real estate but it was kind of hit or miss. Now we're actually in this weekly calls, we are identifying, we're looking at properties that aren't returning sufficient margin. As you know FCI years ago. You don't have to sell the business of a funeral home bit you can sell the real estate. So we're looking out at ways I think the good way to see again as Bob said we're not talking about major transactions but it should be an ongoing flow every year that we can count on and actually budget for.

[Operator:]

Our next question is from the line of Liam Burke. Please proceed.

[Liam Burke:]

Larry you've got 400 or so remaining salespeople. How has the productivity been affected by the churn that you've had? I mean are they working consistently the way they have prior to this change of composition?

[Lawrence Miller:]

Actually Liam our Top 100, I don’t have it here but their -- I think Sean might have it or their productivity is up pretty substantially year over year which is good because some of the things we did last year they didn't all fail. Some of the quality issues have helped and our top people are producing at a higher rate the next group which is about 500 people that we tabulate is about equal to what -- I think they're up a little bit year-over-year and that's kind of what you would expect. We're going to have our superstars -- we're going to have the people in the middle of the road and then we're going to have that third at the bottom that's going to constantly churn and turnover.

[Liam Burke:]

Well if I looked at give me some sense as to how the quarter went for traditional burials versus how productivity has stepped up on your top performers?

[Lawrence Miller:]

Well I think the annual [indiscernible] was down a little bit in the quarter so our at-need sales which we don't control were down a little bit so that affects all the categories of sales that affects the opening and closing on an at-need basis and a few other items that fall into that, but the productivity for the top people was not only year to date but better quarter-over-quarter but it was because we're short those hundred sales people that actually wrote the sale I think it's 70 for quarter-to-quarter that's where the fall of the production was.

[Sean McGrath:]

Liam, just to need to put numbers to what Larry said, our Top 400 were up 4% quarter over quarter and year-to-date they're up 9% so once again when we look at where that is and are our sales team that’s held that there is no significant shift in the industry that’s telling us that Hey, we just not be able to sell what you sell before top producers are producing at a very high quality. It's more complement at the middle tier level.

[Operator:]

[Operator Instructions]. Our next question is from the line of [indiscernible]. Please proceed.

[Unidentified Analyst:]

Yes, can you guys talk a little bit I think Sean you touched on the liquidity kind of where you are today and I guess sort of how you view sort of liquidity working through the let's say the transition process to tackle these issues that you're talking about. Do you feel like you're going to have adequate liquidity on the debt side? Are you going to go out and raise money at some point or how long do you think you can sort of go with sort of where you're at in liquidity side things?

[Sean McGrath:]

Yes I think that was a good question, when we looked at setting the distribution at this level temporarily as we work through these problems. I could credit the entire team because our focus was really making sure that we set the distribution level that we could live within cash flow without having to go out to the capital markets or out that having to go do any other kind of extreme measures that generate liquidity that we need to fund our business. So we've got pretty comfortable that we have adequate liquidity right now which is -- I think we mentioned we had about 45 million available on the revolver at the end of September and it's probably maybe a slight amount higher there just because the timing of cash flows as of today. So we feel pretty comparable where we're at, we communicated that to our banks I mean that we have a $100 million quoting [ph] on that credit facility. If we needed to plus we have the equity commitment from our general partner of $50 million. We feel pretty good that we're going to live within the cash flow that we’re going to generate but we also know that we have other resources that would have it if we needed to.

[Unidentified Analyst:]

Okay. And then maybe on a strategic question I guess as you look at sort of the problems that you had on the pre-need side of the business and I guess the impacts on the working capital. Just give any thoughts was this really sort of the right strategy to sort of continue down this path trying to grow the pre-need business or did you think about maybe expanding in the funeral side of business or I guess what you're kind of thinking there long term? I sounds like you've looked at it and you're comfortable with the strategy to continue down that path but maybe some more color on that?

[Lawrence Miller:]

Yes, Mike when we talked a couple years ago when we started to increase our focus on the funeral home side of the business and that was obviously because of the positive optics and the positive cash flow characteristics. We will continue to do that but we're also going to continue to look more cemeteries that are cash accretive and that will substantially mitigate the issues that we have with the need for capital and again our focus is now really intensely focused on cash flow. I think when we get to the Investor Day we'll be able to lay out some other programs that we think will have an annual recurring positive cash flow basis so that our goal is really to get to where we sustain our growth and distributions by generating internal cash flow.

[Operator:]

And we’ve a follow up question from the line of John Ransom. Please proceed.

[John Ransom:]

Going back to this cash flow, what's the target for achieving this run rate? I assume it will on there for Q4 but it's first quarter when we should expect? Again assuming unproven in the sales just the installs plus the cost cuts should we be running at this cash flow run rate by 1Q working capital variations aside?

[Lawrence Miller:]

Working capital variations aside John, as Sean outlined in his discussion of the Q3 numbers we're actually darn close to a sustainable level of distribution today. So the incremental flow through of the cost reduction activity that Larry outlined coupled with a modest improvement in the trust fund management and without any improvement in the sales force head count should take us to a level of overall cash generation that exceeds our current level of distribution. The goal in the distribution cut was to take it down to a level but where we were completely self-sustaining, not having to access capital markets or excessive access of debt facilities other than the usual intra-period fluctuations and to be able to then grow from there off of that base given these changes or these operational challenges that we've had here over the last quarter or two.

[John Ransom:]

So again just to be clear the cost cuts are done or they will be done by 4Q?

[Lawrence Miller:]

They're virtually all implemented at this point, 6 million are already done and in the bank and behind us including any associated severance costs and the other 4 million are nearly fully implemented and have very little in the way of incremental severance cost to implement.

[John Ransom:]

So again March quarter should be these changes should be visible even without the sales force improvement?

[Lawrence Miller:]

Yes.

[John Ransom:]

And another kind of way of coming at this is as we think about the business today assuming no acquisitions what's the annual working capital load? You know if you get back to your normal levels of pre-need production, what's that the cost if you will in terms of receivable and trusts in terms of working capital load net of anything you can do on the right side of the balance sheet?

[Sean McGrath:]

Yes I mean John it depends upon level of sales, I mean when we look at AR and the associated cost because not only are we when we generate additional pre-need sales and we’re not getting the cash for those sales but we're also not extending the cost. So there's probably certain level of cash outflow there and say it's depending upon the sales level which will vary let's say on an annual basis somewhere in the I think it's recurring over the last couple of years I would say about $7 million somewhere in the nine in that range and then the trust it's more of a matter of as Larry and Bob had mentioned in terms of just doing a better job of executing on delivering those products and taking the cash out throughout and so. I think as you beginning to see or think we’re positive on the year from the trust scenario. I think we’re positive about $4 million year-to-date and that’s a lot because these activities strongly involve I have already -- occurred to certain extent plus our revenue being down so I think that’s a scenario where that should be I would say as low as they are, not if we're executing the way we expect to.

[Lawrence Miller:]

John, we're also coming to the tailend of the cash crunch with the AOP. Remember that was huge source of capital.

[John Ransom:]

So forgive me I'm confused. Again let's call it $45 million to $50 million goal that includes or does not include pre-need working capital? I assume that's net of pre-need working capital but should we say we can generate 45 million but then we were also going to have some borrowings to offset that against our AR.

[Sean McGrath:]

Yes, so John I was just taking the operating cash flow which include the working capital movement and--

[John Ransom:]

So my point is you’ve less of a pre-need load this year because your production is down. So once you ramp that production I'm assuming you'll take a temporary step back in your cash flows as you as you ramp those sales and should we not think about netting that 45 against some growth in receivables?

[Sean McGrath:]

Well that’s the [indiscernible] average AR was probably in the $7 million range I would say $5 million to $7 million range it could be $8 million somewhere in that tight range. So that’s a minimal amount at that high growth rate that we've had over the last couple of years. So that is up then we will also get additional cash and can increase the rep. I was trying not to dilute it with final revenue.

[John Ransom:]

So again this is my one unsolicited suggestion. I mean we're in a new world obviously with the SEC and I think adding back the deferred revenue is not something that the market is going to look you know is particularly informative, my I think in addition to having goals which I think are very smart around producing salespeople and revenue and EBITDA, I think the company much like your larger competitor in Houston, I think in annual guidance and goal around cash flow from operations would be incredibly helpful.

[Lawrence Miller:]

Thank you, John.

[Operator:]

Our next question is from the line of Robert Carlson [ph]. Please proceed.

[Unidentified Analyst:]

I'm just showing my ignorance here, what a standard installation is or stranded installation?

[Lawrence Miller:]

It means both, it mean when we are talking about that stranded capital we sell both and the related initially opening and closing. Yes but once we receive the cash we have to put the money in trust. So the extent that we have from the not delivered that ball we cannot take the money out of trust which is generally is approximately 70% of the sales price of both the opening and closing as well as the ball and so those amounts are stuck in that trust until we can deliver the ball in pre-install we have the right to pre-install those balls and so as Larry mentioned we haven't executed as well as we should have -- I would say last year that where we put those -- installed those balls and taking the cash out. So we thought stranded capital there's a total amount of stranded capital that we had in there and that we just need to install the ball and we can take the money out and then there's the annual piece of that on an recurring annual basis that we should be able to improve our cash flow a lot.

[Unidentified Analyst:]

Just to understand, so if I buy a contract and I give you X amount of dollars you can install the vault even though I'm walking the earth for the next 20 years is that right?

[Bob Hellman:]

The best demonstrated practice in the industry actually is confirmed by the national cemeteries including our own is that that is exactly what happens. For two operational reasons that are very important to understand, number one it smooth's out the workflow on the property so that installation of vaults are not all clumped in a one time period and number two by pre-installed actually allows for the grass around the site to grow or be restored such that when it comes time for actual internment you merely have to remove the top 12 or 18 inches of dirt depending upon the frost line in the area, lift the lid of the vault and the family in the memorialization process, in the internment process can have a very nice looking site rather than one that’s been all ripped up by backpost [ph] just prior to the internment. The language is clear. We’re talking about stranded capital versus installed vaults. We might have mixed our language up there a little bit.

[Operator:]

There are no further questions from the phone line at this time.

[Bob Hellman:]

Well thank you very much everybody for joining us today. I know that Sean and John and Larry will continue to be available for phone calls or inquires of additional information requests throughout the day and for the next days ahead. but we appreciate everybody's continued interest in StoneMor Partners and we will be back communicating with you on a very regular basis particularly as we get the sales force headcount programming instituted and moving forward aggressively. Thanks again.

[Operator:]

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