StoneMor Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Mar 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the StoneMor Partner's 2014 Q4 and full year 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 conference is being recorded Friday, March 13, 2015. I would now like to turn the conference over to John McNamara, Director of Investor Relations. Please go ahead, sir.

[John McNamara:]

Thank you. Good morning everyone and thank you all for joining us to discuss our 2014 fourth quarter and full year 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 that non-GAAP financial information, which is provided in the earnings releases and is therefore reconciled to comparable GAAP financial information. The full earnings release can be found on our website at www.stonemor.com. And with that, I will turn the call over to Larry Miler, who will take it from here. Go ahead, Larry.

[Larry Miller:]

Thank you, John. Good morning everyone and thanks for joining us today. Tim's going to take you through the numbers, but I thought it would be interesting for me to briefly discuss how we balanced our growth and footprint and increased pre-need sales, which obviously is our acquisition program, with our plan to generate additional revenues from our existing and future markets, for example, our combo operations and our marketing final expense products bundled with the identity theft and the medical Telemed and finally how we reward our investors with increasing distributions. Obviously, there is a fine balance among each of these three but I think our results for the year demonstrate our success in executing this strategy as evidenced by our record revenue both in GAAP and production-based, our assets growing to $1.7 billion, our backlog growing to $543 million, our combined cash, accounts receivable, merchandise trust fund totaling $650 million, which exceeds the merchandise liabilities of $150 million by $500 million. And so let me just focus on that for one second. Remember if we would have purchased everything that we are obligated to purchase, for everything that we have sold to-date, including our outstanding pre-need, we borrow all of that today, it would cost of the $150 million, yet we have $650 million of the merchandise trust and receivables and cash. So what would happen is, the company would have $500 million of cash on its balance sheet, which obviously it could choose to continue growing the company, pay off all its debt or whatever. But it's really, really a solid number. Also during the year, we had two successful public equity offerings raising $120 million to support our significant acquisitions in excess of $110 million. We also received the commitment of $130 million from a private investment firm that we can use, particularly for deals like the Archdiocese. And finally, we increased our distribution two times in 2014 and expect to continue to increase the distribution throughout 2015. As previously mentioned, we formed a new insurance division, which will market pre-need funeral insurance and final expense products initially in our current markets, but potentially nationally. We have stay at three regions currently, completed their training and have started the market in these areas. As we achieve our targets in these markets, we will continue to rollout the program. We expect this division to increase market share for our funeral homes and to eventually be a significant contributor to our earnings and cash flow. We continue to integrate the Archdioceses of Pennsylvania acquisition towards a transaction and the SCI divestive properties. We are still increasing the size of the respective sales forces and look to increasing sales to their target levels during the second quarter of this year. We continue to evaluate a number of possible acquisitions and we will advise you of any deal. One final thought. The market recently reacted negatively to the possibility of an interest rate increase. It's important to note that we currently have over $800 million in our trust funds. These funds are invested in relatively liquid assets with short duration. Additionally, we put $60 million to $70 million of new money in every year. Our total floating rate debt is only $110 million. So as rates rise, our trust fund returns will far exceed our increased interest expense. And with that, I will turn it over to Tim.

[Tim Yost:]

Thank you, Larry and good morning everyone. It really has been a very busy year of growth and progress. There is rally growth in both number of locations and pre-need sales, certainly it has had an impact on our financial results. First let me talk about our performance during the fourth quarter. Our production-based revenues increased over the same quarter last year by almost 8%. These production-based numbers include the results of investment income realized in our trust. I mention this because during the same quarter last year, we realized approximately $9 million more dollars in trust revenues. As I have discussed many times in the past, the timing of these returns can have a significant impact on our quarterly results but are not indicative of overall trust performance. This timing effect can best been seen in our adjusted operating profits and distributable free cash flow. Had we had a similar amount of investment income in both periods, our adjusted operating profits would have increased by $4.6 million or 40% and our distributable free cash flow would have increased by almost 9%. These items tend to even out over time, but create variances when the timing is mismatched. The strong growth in our pre-need and at-need sales have primarily tripled attributable to the properties that we acquired from the Archdiocese of Philadelphia and from SCI. The revenue ramp up from these locations is a little ahead of our projections and we are really pleased so far. If you remember, when we began operating the Archdiocese properties, we started with three sales people and now we employ over 60. We are looking to continue to add personnel and buildout the sales force. The demand is certainly there and we look forward to continued growth of these properties. During the quarter, we continued to add to our backlog and we are poised for future success. When you look at our results for all of 2014, we had a dramatic growth in revenues due to the addition of the properties that I mentioned earlier and those will only continue to increase. For the year, our average pre-need contract increased by over 4% and our average at-need contracts grew by about 2%. You will also note that the trust revenues were more normalized for the year. That being said, we still had approximately $2.6 million more in last year. 2013 was a bit of an aberration due to the tremendous performance of the financial markets, especially late in the year. I mentioned last quarter that there is some margin compression during the ramp-up phase of the Archdiocese properties. When we took these properties over with the entity as a whole, it was not profitable. We quickly turned that around, but the impact on the year which is on track with our projections is noticeable. When you combine that with a couple of one time events related to legal settlements and payroll processing fees, our year-over-year results were flat. Absent those one-time events and the variability of our trust returns, our adjusted operating profits would have increased year-over-year by approximately 9%. So the operations were strong but the comparable period last year had higher trust returns that do not have similar one time items. The same story is true for adjusted operating profit and distributable free cash flow. Last year, not only did we benefit from the trust and the lack of one-time items, but we also received $11.9 million legal settlement related to properties that we acquired in Indianapolis. Absent those items, distributable free cash flow would have increased by $3.6 million, or about 6%. For the year, we exceeded our internal plan and are really pleased with the outcome. Our core operations remain strong and continue to strengthen. With the growth of our acquired properties, 2014 was a really big year for us. We grew at a four-time greater rate than average and that growth will continue to pay dividends into the future. One final thing to mention, we will be filing our 10-K on Monday, March 16. We will be using the remainder of the weekend just to finish up the audit and have all of our i's dotted and t's crossed. So operator, with that I would like to turn it over for questions.

[Operator:]

[Operator Instructions]. Our first question is from Richard Verdi. Please proceed.

[Richard Verdi:]

Hi good morning, everyone and congrats on a great 2014. So I wanted to speak a little bit about the Archdiocese deal. Can you maybe give us some indication of how that might change your strategy? Do you think in 2015 and 2016, deals of this fashion maybe more of a focus? Are these deals on the table? I am just trying to wrap my head around the potential of something like this might be able to bring to the company as well as the timing?

[Larry Miller:]

Yes, Richard. It's Larry. It is the focus. It's getting increased focus from us. We have dedicated a fair amount of resources. We have been able to get access to, I think there's 35 Archdiocese, 12 them unfortunately have already filed Chapter 11 or whatever the bankruptcy is for not for profit. So there we may have to wait a little bit. We may go into some and be a stalking horse and see how that works out. But we are contacting all of the Archdiocese. Some of them are already under some type of management agreement and they have been for a number of years, but we are reaching out. I know I wish I could say, geez, there is a high probability of our landing some, but I know the Archdiocese in Philadelphia is pleased. I am sure when they are together, when the Cardinals together with peers and CFOs are together with their peers and I know that because when we tried to open up a couple doors and what we gotten is, boy, you guys have got a great reputation. So hopefully something will happen and we will keep moving through that and eventually try to duplicate that with the municipal markets, which is probably even a biggest potential market, just more complicated to get approvals.

[Richard Verdi:]

Okay. Super, looks great. Thank you. And then, can you discuss capital deployment a little bit? I guess the best way to put it, what's the focus this year in terms of number of acquisitions anticipated spend? And also the breakdown of the components of that spend?

[Tim Yost:]

Rich, this is Tim. Generally we set out and we are opportunistic acquirers. As Larry mentioned, we have a large backlog of properties and deals that we are working on. We see a great deal. We believe we see every deal that's put in front of the industry. So it's more of a push than a pull from us, which is the position that we like to be in. So it's difficult for us to project in advance which of these acquisitions will close. We have on a fairly consistent level done about $25 million worth of acquisitions annually. We would like to do that many or exceed that number, if we can. But again, what we are not willing to do is break our discipline in an acquisition and negotiations will or won't fall out because of that. But we want to have conservative proper financial growth rather than to set a target of acquisitions and go out and get it, if that makes sense.

[Richard Verdi:]

Okay. I got it. That's fair. And then just one more and I will jump back into queue after this. Looking at the business activity in the quarter, I would think that with cold and flu season being more pronounced in the fourth quarter and somewhat in the first quarter as well of any year, the will be a pickup in business because of the potential, you have elderly, they are frail, they are exposed to the flu, et cetera. So I am just wondering how much of the quarter could have been based on something along those lines versus maybe business brought in from the Archdiocese deals, et cetera?

[Larry Miller:]

Your statement, Richard, is generally true that more will die in the winter than they do in the other quarter or time of the year. But the reality is that since pre-need sales is such a strong driver for our business, the second quarter, where more people are out in the cemeteries visiting their loved ones and relatives, it's a stronger quarter for us as far as pre-need revenues go and drives our business more than the winter months.

[Richard Verdi:]

Okay, great. Thank you, guys. I will jump back in the queue.

[Operator:]

Our next question is from Noah Lerner. Please proceed.

[Noah Lerner:]

Good morning, everybody. A couple of real quick ones. Tim, I was just wondering, the huge payment on accounts payable in the fourth quarter this year versus last year, what gave rise to that? From reading the announcement, it seems like as long as you are holding back paying bills until the fourth quarter from the third quarter. So I am just trying to get an understanding what was driving that?

[Tim Yost:]

To be honest, Noah, it's how payment dates fall out more than anything else. It's timing. If you look for the year, we had an increase in accounts payable of about $2 million. We weren't holding anything back for the end of the third quarter. It's just that the third quarter happened to fall when it happened to fall and there are payments that are due on the first or second rather than 31st, just because of the timing of the bills that we receive. Nothing more, nothing less.

[Noah Lerner:]

Okay and then, I guess the other question is and obviously this is from an earlier quarter, but I am just wondering, it just caught me, can you remind me what the $1 million for additional payroll processing fees are? That's a heck of a lot to pay to an ADP.

[Tim Yost:]

Yes, well, what it is, Noah, is that in 2013, we made some changes to our payroll processing system. Along with those changes, we had significantly reduced rates for all of 2013 and we are really happy about that. Well, it turned out that they had been mis-billing us for all of 2013. So we caught it up in 2014. So in other words, that's 2014's and 2013's combined this year.

[Noah Lerner:]

Got you. Great. Thanks a lot.

[Operator:]

[Operator Instructions]. Our next question is from John Ransom. Please proceed.

[Bilal Yehia:]

Hi, guys. This is Bilal Yehia, in for John Ransom. Sorry if I may have missed this, my call dropped, right as Tim started talking. But how should we think about the puts and takes for 2015 with respect to investment income, accrual EBITDA, distributable free cash flow and growth in the backlog?

[Tim Yost:]

Again, one thing that I mentioned was, that you may have missed, is that the timing quarter-to-quarter can be fluid, but the overall year-over-year is pretty close. So as we view 2014 and 2015, we think of 2013 as being a little bit abnormally high for that period. But we have a larger invested base. So we would expect our 2015 returns to be somewhere pretty much in line with 2014.

[Bilal Yehia:]

Great and I just had another just quick follow-up on the insurance division, nice to see that's already out in three markets. What sort of internal expectations you guys have or milestones are you setting? And can you just refresh us as to when you think this will really start impacting the P&L more meaningfully?

[Larry Miller:]

Yes. There's actually two parts to this division. One, we want to assist or funeral homes by selling a product that won't have a lot of immediate cash or operating benefit, but it will build market share which is a future benefit. But we are also rolling out a final expense product which there is no dedicated funeral home involved. It's more just traditional insurance and we are bundling it with ID theft and something called Telemed and the nice thing about it is, we think we can sell a lot of it, but most of the benefit is through the renewal commissions. It should never be cash negative for us, other than the buildout where we have all this infrastructure in place and having really begin to market. But as our sales people start to market it, we will get enough compensation directly from the insurance company in form of commissions to offset our sales and marketing costs. It's really the renewals and when you really realistically look at it, it's probably year three where it starts to become really meaningful. We won't get much in the first 12 months. You won't see much of it. We will probably report on the face amount that we have written, but as far as cash into the company, it's not going to be a big deal in the first year. It starts to grow nicely in second year and then in the third year, the rollover of referrals really begin to kick in. The renewals, I am sorry.

[Bilal Yehia:]

Appreciate the color. Thanks guys.

[Larry Miller:]

Sure.

[Operator:]

[Operator Instructions]. There are no further questions registered at this time.

[Larry Miller:]

All right, everyone. Thank you everyone joining us on the call. Thank you for supporting us in a wild and crazy year, but we are really happy where we are and look forward to 2015. 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.