StoneMor Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the StoneMor Partner’s 2014 Q3 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, the call is being recorded Friday, November 07, 2014. I’d now like to turn the conference over to John McNamara, Director of Investor Relations. Please go ahead.

[John McNamara:]

Thank you. Good morning, everyone, and thank you all for joining us to discuss our 2014 third quarter financial results. With us on the call this morning are Larry Miller, President and Chief Executive Officer and Tim Yost, Chief Financial Officer. Before we begin, we ask that you all take note of the cautionary language regarding forward-looking statements contained in the press release. 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 or 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 non-GAAP financial information, which is provided in the earnings release, and is therefore reconciled to comparable GAAP financial information. The full earnings release can be found on our website at www.stonemor.com. And lastly, we would like to remind everyone that we will be hosting our Second Annual Investor Day on Wednesday, November 12 at the Hyatt Hotel in New York City. If you would like attend and you have not signed up, feel free to contact me at 215-826-2945. And with that, I’ll turn the call over to Larry, who will take you from here.

[Larry Miller:]

Thank you, John. Good morning and welcome to our Q3 earnings call. If I am a little rusty, I apologize, but I think its allergy season up here. I am happy to report, we had another successful quarter. As a matter of fact, we reported record GAAP revenue and record production based revenue which is referred to as non-GAAP revenue or GAAP. Our major business line showed positive growth and contributed to our double-digit percentage growth in both GAAP and non-GAAP revenue. Obviously this is a little bit more complicated quarter because of the very large acquisitions that we did at the end of the second quarter and the impact that it had on our reported numbers, but Tim will take you through that. So I am just going to touch on a couple of other items. Specifically regarding the new properties that we acquired last quarter, the integration is on schedule. As you might recall, the archdiocese properties had no sales organization whatsoever. I believe we currently have about 60 counselors trained and now generating preneed sales. Of course there is no ramp up in the expenses. So the full cost of the maintenance and administration for those properties are in their numbers, but the sales are just starting to be realized. Also the properties we purchased in the same time period is a result of the SCI Stewart merger are undergoing some minor changes in the sales organization, but we continue to be excited about their addition to StoneMor. As you probably heard us over the years talk about, we're a little bit different in how we manage a preneed sales organization and some of the -- some of the employees, while they were doing a good job, they didn't quite fit our mould. So we decided that we would make some changes early on and get the organization the way we like to operate it. But that's all about finished. So we should start seeing very positive results from both those acquisitions. As you know, we consider ourselves experts in the preneed selling of cemetery products and services. In our previous companies, we also sold a great deal of preneed funeral products and services. Recently we decided that it would be very beneficial for us long term to develop a strong national sales organization focusing on selling preneed funeral products and services and final expense insurance. As a matter of fact, we have a pretty impressive organization put together so far with Vice President of insurance sales in our Philadelphia office. He has already hired three very capable regional Vice Presidents and the training is in place for a number of sales people and I think shortly we'll have about 15 licensed insurance people out on the street starting to sell these products. So still little time to ramp up because we wanted to get the right portfolio of products to sell, but we're now moving forward and kind of locked in with our providers. Obviously we have the expertise and what makes the creation of this new division exciting, is the fact that we can develop it without using expensive capital and I think that's the theme we've talked about a number of times on our calls is yes, we have to grow using acquisitions and therefore using expensive capital, but we will continually look for ways to build out based on other sources of revenue and cash that we can generate through our existing stores and certainly insurance is one of them. We have hundreds and hundreds of thousands of families affiliated with so more and we will be contacting them in the near future to offer them an opportunity to prearrange their funeral. We're building a network of insurance professionals that will be supported with modest increases and overhead. While most of the operating expenses are variable, the financial and cash impact to StoneMor will take several years to be material, but the beauty of these products is the continuing renewals, which will add a growing stream of earnings and cash flow to the company. And when you look at the models, once you get out a couple of years the impact of renewals is very significant. Finally, as promised, we increased our dividend for the second time this year and we continue to expect our ability to continue the increases through 2015. And with that, I'll give it to Tim.

[Timothy Yost:]

Thank you, Larry. As you mentioned, as always times of rapid growth provide results that look a little different than usual. In our case, we're seeing dramatic increases in revenues based primarily on our latest acquisitions. That being said, the fixed cost components of those businesses went up as well. While this is consistent with our expectation and is certainly the beginning sign of the future success, the impact on the bottom line of the business appears minimal for now and during the quarter. In addition as Larry mentioned, the start-up cost of our preneed funeral sales and final expense insurance division requires us to incur cost related to salaries and travel and start-up marketing materials, which are in advance of revenue generation. We're pleased with the progress of these initiatives and we look forward to their incremental contribution in the future. Now for the results. Our GAAP revenues, as we've mentioned many times in the past are a reflection of the amount of products and services that we delivered during the quarter. Those increased by 27% when compared to the same quarter last year. Primarily due to the archdiocese of Philadelphia properties and the properties that we acquired from SCI, our production based revenues increased by 13.7%. We're just in the beginning to ramp up phase for the archdiocese properties, which includes the hiring of an entire sales force. As Larry also mentioned we've already hired and trained new sales people who achieved results that are slightly ahead of our projection. Because we had significant growth or GAAP revenues, we also saw significant growth in our GAAP operating profits. In fact our GAAP operating profits were over 200% higher from the same quarter of last year. As I mentioned previously, the start-up cost of our new initiatives are generally recognized immediately while the benefit of the additional revenue will be achieved in future periods. In addition, we agree to settle a legal dispute during the quarter, which created a one-time charge for the quarter of approximately $1 million. we did not have a similar expense in the same quarter of last year. With that being said, our adjusted operating profit declined for the quarter by approximately $1 million or about 7%. When we initiated a new premium sales program, as we have for the archdiocese properties, we have to invest in the working capital necessary to fund the trust and bridge the timing gap associated with the build and accounts receivable. During the quarter our net trust activity was the use of cash in excess of $9 million greater than it was last year. A portion of that is related to the transition period after the acquisition of the SCI assets. The trust fund is related to this cemetery to not change hands on day one of the acquisition. In fact the individual funds were received throughout the quarter. As such, we delivered some of the merchandize and provided some of the services related to the pre acquisition contracts and we were unable to receive the benefit of the trusted funds by the end of the quarter. As of today, we have received the vast majority of the funds and we will be able to withdraw this money during the fourth quarter. In essence it's just a short timing difference. But this affected both our operating cash flow and distributable cash flow for the quarter. Both were down but we expect that trend to reverse very shortly. On a more positive note, our backlog increased by $12.8 million to $572.2 million during the quarter at the end of the quarter. One other item of note, our GAAP net loss for the quarter increased, but this is solely due to the fact that we recorded a $2.5 million gain on acquisition during the third quarter last year. Absent this, our net loss would have narrowed for the quarter. We are seeing exactly what we expected from our acquisitions and our new insurance programs and while some of the results for the quarter were negatively impacted by these growth plans we're confident that they are the building blocks for continued growth and success. Operator, I would now like to turn it over for any questions.

[Operator:]

(Operator Instructions) Our first question comes from the line of John Ransom. Please go ahead.

[John Ransom:]

Hi. Good morning. our model needed some help on the funeral side, I think we look to model that pretty materially, can you help with a visibility 4Q 2015 in terms of both GAAP and accrual, funeral revenues and EBITDA? And again that may just have been our fault, but I'm just trying to get a little more visibility there? Thanks.

[Timothy Yost:]

Sure John, I mean, you know historically we haven’t provided guidance for future operating results. I'm not entirely positive what it is that you're looking for.

[John Ransom:]

Well, I'm saying that the revenues this quarter came in short of our model on the funeral side. So is this the run rate and we just missed it or is there some ramp in the funeral revenue in the next quarter that wasn’t there but could that come in?

[Lawrence Miller:]

Oh I will tell you that's the run rate and you guys has something different than what we had anticipated.

[Timothy Yost:]

Yeah George probably, they are performing you know where they are supposed to be performing. There is no surprise it's positively or negatively on the numbers there. Their contribution is right where it is. As we've discussed before, one of the, our strengths is the preneed sales program and then adding that to a cemetery when we buy funeral homes from operators we operate them [indiscernible] before us.

[John Ransom:]

Okay, well yeah, it's like that I could have just been mis-modeling them anything from use of that’s helpful. The second question, could you and I'm sorry if I missed this, I got on just a minute to late, but could you give the approximate accrual EBITDA shift into the fourth quarter that wasn’t there in the third quarter because of timing and then adjusted also for any of the clean up stuff and additional costs?

[Timothy Yost:]

The approximate EBITDA shift, one of the things John I think you'll see it if you look at last year our operating cash flows were down $1.8 million in the fourth quarter. We believe that this is more of a cash flow timing that EBITDA timing situation. If you add that for ramp up…

[John Ransom:]

Is the accrual EBITDA do you expect accrual EBITDA to be meaningfully higher in the 4Q because of timing or is it just cash flow? I guess that's a better way to ask the question.

[Timothy Yost:]

Oh we believe the accrual EBITDA will continue to grow based on the ramp up of the preneed sales program of the archdiocese and the other programs combined with the insurance problems that we're working on. So there is one factor that I didn’t highlight in the earnings release and it's kind of the heady factor, so it's worth thinking about and if I lead you down the path that gives you a headache I apologize, it's not my intension. But part of our operating results, especially related to the draft the recapture of other than temporary impairment. So in other words if our assets that are held in the trusts are down for a certain period of time or that we believe at the time are not going to recover that full value, we write them down to market and recognize a loss for that.

[John Ransom:]

Okay.

[Timothy Yost:]

Fictitiously what happens is when you later sell those same securities that you marked down you may create a gain. Okay? An OTCI recapture. So the OTTI recapture in the third quarter of last year on our trust funds for things that we sold during the quarter and recognized an accounting gain it was $1.6 million. Okay? The OTT recapture for this quarter and this is not that frequent that is why we don’t generally point it out. But for this quarter it was only $200,000. So there's 1.4 differential in year-over-year cool operating results related solely to this OTTI recapture, but that's such an asset allocation it is very difficult to point out that it's for the discussion but I don’t know how you put that in writing.

[John Ransom:]

Well and again just as you know I'm a simpleton and just as a simpleton you look at accrual but in 2013 and that was 20.2 and in 2014 that was 19.5 and yet you had a lot of M&A activity. So just simplistically you would think well why could accrual EBITDA be down, given you've made all these acquisitions, so what you're trying to figure out this, was it, so what you're telling me is the run rage from a year ago was the million for inflated. So is anything in that 19.5 is that a good run rate is anything of that 19.5 that needs to be adjusted upward for the fourth quarter. So I think you're tell me no, but I just want to make sure I'm clear on that?

[Timothy Yost:]

Well and yeah we are giving you the exact guidance, the answers. Yes because well we get continued increased contributions of the acquisitions, absolutely.

[John Ransom:]

Okay, right, I mean acquisitions were they into the, I know archdiocese was in and that’s ramping that was how many months was Service Corp. then for the three,…

[Timothy Yost:]

All three of the quarters, absolutely.

[John Ransom:]

Okay, all right, but it's just more ramping the premium sales on the sales, yeah right.

[Timothy Yost:]

Yes and you know and the truck right, because we didn’t have the trust we didn’t record earnings on the trust either. That will all get taken care of in the fourth quarter, absolutely. The transition process of the trust…

[John Ransom:]

Why wouldn’t you record earnings from the trust since you had the, when you had the deal in for all treatments?

[Timothy Yost:]

Because we didn’t have the trust themselves. So we didn’t have a reasonable method with which to allocate that income, we necessarily know what it was. So again, we expect those things to come back and I can't give you any magnitude in the fourth quarter but we expect those things to adjust themselves in the fourth quarter as well as continue to ramp up with the sales programs. Larry mentioned we made changes at the SCI properties as well and we are hiring sales people more accustomed to that active preneed sales programs that we run. So we look for very positive things in the fourth quarter and becoming periods but it is difficult for me to give you a dollar or percentage type answer.

[John Ransom:]

And so, and again I mean please don’t interrupt with this reflect any like undue alarm or concern over timing issues, but again not to try to pin you down but when would you expect the accrual EBITDA numbers to more fully reflect all the efforts that you're making? Is it a kind of a six or 12-month I mean because it takes time for sales people to, and I think you don’t sell the time in the winter, but when should it be reasonable to expect the fruits of all this effort to be more material than your accrual EBITDA numbers?

[Timothy Yost:]

Again and we've talked about this a lot John, the ramp up from 0 to maturity in a cemetery preneed sales program we've always viewed as a three to four year event. That being said, we'll continue to see rapid gains early and it will fly now more towards this cash.

[John Ransom:]

I'm sorry? Say again?

[Timothy Yost:]

12 to 18 months out, we will be fully mature sales organization program. But again, when you go from the 0 to 60 sales people in one quarter and you're only targeting somewhere in the ballpark of 100 the ramp up will be seen.

[Lawrence Miller:]

You know John, its Larry. You now the reality is unfortunately our industry still suffers from a lot of churn over. So we now, if I count heads, if I go out to the cemeteries today in New York size you see count heads, there is probably 60 people there, but you know in fairness three, four, five, six months from now at least half of those 60 probably won't be working here. That will be another 60 new heads you know so it takes a little while to actually, organization is terrific, the leadership is terrific. As I say we're actually, I think you know probably slightly ahead of where we would have expected to be on the integration. But you know we should steadily every quarter we should see a steady increase and SCI should come on line a little bit quicker.

[John Ransom:]

Right. And again Tim, just to go back to my first question just so you know and I just pulled these numbers up, we had modeled…

[Lawrence Miller:]

You've missed our revenue number only by a couple million, but we had just modeled too much and funeral are not enough in cemetery. So I just want to we are going to obviously reallocate that but I just want to make sure I wasn’t missing something in the mix? We thought there was too much funeral revenue out of the SCI deal I think so that was our modeling here. So it was more of a $2 million mess if you will on the total numbers and not anything in the order of magnitude that's too material.

[John Ransom:]

And you know Larry, I guess my last question you guys have a lot of NOLs and you know funeral doesn’t have the amount but you could shield that within a wall, do you think funeral is something that will be three to four years out that's going to be bigger, smaller or the same as a percent of the mix do you think?

[Lawrence Miller:]

Yeah John, it's likely to stay somewhat comparable to where we are. We've seen that kind of locked into a 3

[John Ransom:]

Yeah and I'll get with you offline to try to understand that a little bit better but I think that's, is this going to be a captive insurance company you hold on your like SCI or you're looking at more commission sales people and other people will be riding the horses?

[Lawrence Miller:]

Yes almost completely right now there is no thoughts about having our own insurance company. We've got multiple providers and that's like a pretty good time we should put together the products and we're actually going to tie in a few other products into it to make it attractive for our sales people so that we can get a high caliber sales team. We're going to have identity sets as part of it. We're going to have a Telemed as part of it. They are inexpensive but it's attractive .

[John Ransom:]

I don’t recommend that Florida comp shares but any way if you think that…

[Lawrence Miller:]

Yeah I think the guys sells, they sell $700 million to $800 million worth of it of the premium insurance.

[John Ransom:]

That’s a bit.

[Lawrence Miller:]

Yeah they sell a lot, I mean and so we're not going to hit that big much bigger footprint but we're not limited by fixed facilities to sell this really limited by and out a good sales and marketing organization.

[John Ransom:]

And so given that, so Tim maybe you could tell me given that that will generate some GAAP income, how big is your interval how much income can you shield with your interval? And what are the annual limitations?

[Timothy Yost:]

The annual limitations, our and I'm flipping throughout our 10-Q right now which you have the same. Our state NOLs are I'm sorry our state NOLs are about $238 million and our federal are about $195 million. So we have significant ability to utilized those in the businesses that are operated in the nonqualified entities. I don’t know if there is any annual limitation unless using them. As a matter of fact

[John Ransom:]

Yeah, yeah, you know sometimes there is an annual limit but it sounds like you are, I don’t think you're going to be anywhere close given your, you don’t generate the ton of GAAP net income.

[Timothy Yost:]

I will be writing that.

[John Ransom:]

Okay.

[Lawrence Miller:]

We are considering are we thinking all of our acquisitions and buys funeral homes and mix and modeling in all those things absolutely.

[John Ransom:]

Right okay. All right sorry for all the questions, but thanks, thanks guys.

[Lawrence Miller:]

That should be clear. Thanks.

[Operator:]

(Operator Instructions) And there seems to be no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

[Lawrence Miller:]

All right every one thank you. I apologize for the complicated quarter but that's kind of the nature of our business, though we're very optimistic. We're looking forward to a nice fourth quarter and we'll talk to you again I guess in March. Thank you.

[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 line.