StoneMor Inc.
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the StoneMor Partner's 2015 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 conference is being recorded Friday, May 8, 2015. I would now like to turn the conference over to Mr. John McNamara. Please go ahead, sir.

[John McNamara:]

Thank you. Good morning everyone and thank you all for joining us to discuss our 2015 first 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, as usual we would 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 now turn the call over to Larry Miller, who will take it from here. Go ahead, Larry.

[Larry Miller:]

Thank you, John and welcome everyone to our first quarter earnings call. As we indicated in our release, we’re pleased with our first quarter results. We performed slightly ahead of our plan and are looking forward optimistically to the balance of the year. Comparison with the first quarter of 2014 is difficult because in 2014 we netted $4.5 million from the land sale and $3.6 million from higher trust fund returns. And as you know, we basically sell off some of our undeveloped property as these sales are infrequent and unpredictable. It’s always been part of our business strategy to look for opportunities to sell these undeveloped pieces of real estate, but as you know with joining issues and everything else, we can’t control the timing, but it’s just don’t happen to fall on last year. And then the trust fund difference is generally just due to timing returns. As you know we consistently had differences quarter to quarter, but again we don’t control the distribution or the timing on that. Actually these two items our adjusted operating income increased by 15.7% and our distributable free cash flow increased by 11.6%. Our ramp for the Archdiocese cemeteries continues and we expect to reach our optimal sales levels shortly. We’re really doing well there. We’re really pleased with the performance. This Saturday, actually tomorrow, one of the properties which is in a very attractive community in the upper Bucks County area has only had one burial and it’s about 300 acres, but it’s in a very highly populated sub urban area. We’re dedicating that cemetery tomorrow and that’s the last part of the build out of a sales force. We’ll be developing a sales force to just sell in that whole community, so we’re really excited about where we go from the Archdiocese. We continue to test various marketing programs for our newly formed insurance division and we expect to start ramping that up by year end. I think I mentioned on the last call, part of our strategy was; one, to get an infrastructure in place, which that’s pretty much completed. We wanted to break the country up into four regions and have four Vice Presidents in charge of each of those regions. We just hired the fourth individual the other day. That was our western region. They’re now beginning to hire the professional insurance liaison sales people. We geared in [ph] on the products we know what we’re going to sell. Most of it will be a final expense product, so not that were locking the price of the funerals. But included in the package, we’ll be offering identity theft protection and something called Telemed, where you can actually have access to position 24 hours a day. If you have an issue at home with your child in the middle of the night, you can pick the phone and reach someone and get some advice and what have you. So that should start by year end. We have to really start to see some results from that. And then finally, the acquisition market continues to be robust. Towards the end of last year it kind of slowed down a little bit, but I don’t know what happened all of a sudden, we have a lot of activity, we’ve got lot of letters in the tent out. We’re still doing a lot of analysis and we hope that before the end of the quarter or shortly thereafter, were able to announce some additional acquisitions. So things are positive right now, we’re looking forward to the rest of the year. And with that I’ll turn it over to Tim Yost, our Chief Financial Officer.

[Timothy Yost:]

Thank you, Larry and good morning everyone. Before I get started I just want to clarify one point that Larry had made. I’ve received questions on this time to time and I just want to make sure that we’re very clear in what we’re doing. When we talk about insurance sales, we are talking about acting as brokers and license representatives, but we’re not taking on any insurance risk. So that’s the question that many investors have asked in the past. I want to make sure that we’re very clear in what our plan is and what our growth is in that area. So just before I get started, I wanted to make quick mention of that. But as we discuss this quarter was very similar to last quarter and we exceeded our internal projections, but we were facing a difficult comparison for the same quarter of last year. If you recall at the end of 2013 and the beginning of 2014, the stock market was very strong. As such our investment advisor sees the opportunity to realize significant gains in our trust funds. We mentioned this at the time, we’ve also mentioned that the returns from trust funds fluctuate and are based on the timing of the income received from the specific investments that we make and the overall market conditions that exists during the period. The other aspect of our business that some of the regulators have sold back that land [ph] and they’ll not be in for cemetery operations. We sell parts of the land every year and always have some sort of a deal in the work, but the timing and the amount is always unpredictable. Last year during the quarter we had $4.5 million of land sale and this year during the first quarter we did not. So a great thing about having company that drives its revenues from a wide variety of sources. The opportunity to capture value and made different ways, the difficult part is the timing of the recognition of the revenues from these various sources. It can lead to some lumpy results, which are solely based on timing and I know that somewhat we petted with the first things that Larry said, but I wanted to mention them as well. Just because it’s important to always think about our company, that these timing aspects do exist. Because our results were not consistent quarter-to-quarter, we have to take this into account in our planning. If you look at last year’s results, you’ll see that our performance far exceeded the amount that we distributed. You’ll also notice that we did not increase our distribution based on these results. We’re very aware of and budget for these period-to-period fluctuations and take a much longer view when establishing our distribution policy. All of this information is worth considering while [indiscernible] results. Now, on to the discussion of our cemetery and funeral home operations for the quarter, based on the success of our recent acquisitions we have had dramatic growth in our revenues. Specifically, our pre-need cemetery sales grew by almost 20%. Our at-need cemetery sales grew by over 30% and our funeral homes increased in excess of 31%. In the [indiscernible] cemetery results, this is driven by the properties that we acquired last year preservatives of the speed of our integration. For our funeral homes, not only do we benefit from newly acquired locations, but also from strong growth in our same store volume. For the quarter we saw 13.3% growth in total volume in our same store. Towards [ph] that our previous cemetery sales have grown a little more slowly than our at-need, this is due to the ramp up of our sales force Archdiocese of Philadelphia properties, which is exactly as we have expected or communicated to you in the past. The fact is, that we’re actually a little ahead of our plan and continue to be encouraged by these results. When we look at the expenses, similar themes hold true. We’ve increased the number of locations that we operate, which increased the amount of fixed cost related to the operation of the properties. And we’ve also increased the amount of variable expenses related to our increased sales. The most important factor to consider when making your quarter-over-quarter comparison is the source of the revenue. Last year, a significantly larger portion of our revenue was the contribution of our trust funds and the sale of excess real estate. Trust revenues have no associated cost of sales and the cost of land sold is based on the historical cost of the cemetery and could be a very high margin sales. These volumes obviously have a disproportionate effect on our adjusted operating profit and distributable free cash flow. All of this resulted in an increase to our backlog of $24 million during the quarter which is representative of current operating results that would be converted into GAAP profits in the future. Finally, I want to point your attention to our table of cash flows. You will notice that our net cash provided by operating activities is $8.8 greater than the same quarter of last year. The main reason for this is that a larger portion of our profits last year were related to trust income, which was not released in the trust during the quarter. This year’s results indicate a much larger contribution from our base business. As Larry mentioned, we’re very pleased with the results from the quarter. We continue to see growth greater than our expectations from our acquired properties and we have exceeded our internal projections overall. We look forward to continued growth in our operations. With that operator I’d like to now turn it over for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jeff Filler [ph]. Please go ahead, your line is open.

[Unidentified Analyst:]

Hi, guys. I was just curious with the IRS proposal that came out on an uptick qualified income. How that would actually impact your business? It wasn’t very clear in that proposal.

[Larry Miller:]

Tim, I can answer that because I thought to – I actually did have some questions about it. It has nothing to do with us, actually Jeff about how many less the [indiscernible] fund, that has nothing to do with this either. It’s got something to do with the oil servicing people, obviously no impact what so ever on us.

[Unidentified Analyst:]

I was just curious about – I’m not using the name that hits your target guys that like became an MOP, I mean you’ve been an MOP since like 2004, did you guys get like an original like letter from that IRS and everything and I’m just curious how do you providence that in the MOP structure?

[Larry Miller:]

I can answer that. We originally did go for an IRS ruling and the IRS basically told us that we met all the qualifications, but they preferred not to issue a ruling letter because they just didn’t want to, in other words open up indoors box [ph] and have other companies take advantage of it. So what we did, before we could go public, to ensure that everything was satisfactory, we actually had Vinson & Elkins do a will opinion and a will opinion is essentially equivalent to an IRS ruling. They won’t give a will opinion unless they’re almost 100% certain that in any challenge we would win. And then Tim do you want to mention the audit?

[Timothy Yost:]

Yeah, more importantly in 2013 we were audited by the IRS. They did all of their work, one of the [indiscernible] that they audited was the nature of our qualifying income. At that time they determined that our income in fact is qualifying. So actually it’s the IRS. So they didn’t say that it’s qualifying, they said that we’re in compliance with the rules and that we’re filing appropriately.

[Unidentified Analyst:]

Okay and how about for the insurance during this year, so you’re going to have to stick that in like a separate, like C Corporate insurance or will that be also qualifying income?

[Larry Miller:]

That won’t generate qualifying income and yes it will be held in a C Core. We do have significant intervals at the C Core level right now, so we don’t foresee that being creating tax or income – tax [indiscernible].

[Unidentified Analyst:]

Okay, great. Thank you, guys.

[Larry Miller:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of [indiscernible]. Please go ahead, you’re line is open.

[Unidentified Analyst:]

Hey guys, I had a few questions. You have a few things on your plate that are sized [ph] you feel recently acquired assets from Stewart and SCI and your insurance division. Can you just tell us, where you’re placing your focus, how the integration is going across the board and what you see on the horizon once you accomplish the milestones and goals that you’ve set, obviously in addition to the roughly $25 million in M&A spend that you guys spoke each year?

[Larry Miller:]

Yeah, it’s Larry again. As far as – we have the country split up into ten regions and when we acquired the lease Archdiocese we created a new region and it has its own separate senior leadership structure. So is integrated quite well, they’re doing fine. The properties that came from the SCI through divestiture, they were distributed throughout – in multiple states, I forget how many states, five or six states. But again they would just drop into an existing region and just like any other acquisition it was readily integrated and I think they’re performing at or above where we expected them to perform. The insurance divisions and that was relatively new. Now, when you think about insurance for us, we’re talking about either a final expense product or the equivalent of a pre-need funeral. And that will state driven, because in some states we actually can, we’ll start a pre-need funeral and have the benefit of trusting as opposed to using an insurance funded vehicle, but we kind of lump it in as one entity. We hired a senior executive from one of the national, very large insurance companies who had a lot of experience in selling this type of product and he’s leading that up. He’s actually based in our home office, so we kind of sit and work very closely with him. So all in all that kind of – just everything’s integrated well. The insurance division gets a little bit more attention because it’s new and we’re looking forward to [indiscernible] a bogie of $25 million or so in acquisition and they should also integrate quite easily.

[Unidentified Analyst:]

Great, and then kind of just tailing on that question about the M&A, can you just give us an idea for the activity? I know you mentioned that it stepped up. Any particular reason or are you seeing an increased competition or targets coming to market, how are the multiples looking?

[Larry Miller:]

Now, it’s really – these things have their own timing, I mean sometimes it’s very active than it seems to be bit of a low and all of a sudden and I don’t think we can put a finger on. There’s nothing specific that we know of that would be triggering it and maybe it’s the time of the year. I don’t know, but I would say it’s strong. I haven’t seen any change valuations or notables [ph]. So hopefully we will be successful with some of the deals that we’re negotiating now and I think you’ll find it pretty much we purchased at the same notables and valuations that we have for the list four or five years.

[Unidentified Analyst:]

Great, and then just one last one for me. A couple of peers mentioned the strong flu season and you guys were mentioning weather is a headwind. Can you just kind of describe what potential impact this may have on 2Q and the quarters ahead in terms of maybe pulling and pushing some demand forwarded out? Thanks.

[Timothy Yost:]

I mean Blou [ph] the comment that we made in our earnings release was that it was a tough winter, but we exceeded our expectations in sales. We did see strong growth and like I said, we exceeded our internal projections. We did better than we thought we would do, so the noise in our quarter is more around the timing of land sales and the recognition of trust revenues. We were very happy operationally from our growth and as I mentioned our funeral homes themselves on the same store sales basis had a 13.3% growth in total volume. So we saw very similar things to what they saw and I don’t know that there is any compression. The one thing to always remember is, well, since we’re primarily in the cemetery businesses and lesser on the funeral business although it’s a significant part of what we do. Cemetery business is heavily weighted to the second and the third quarter from a pre-need sales standpoint. We’re seeing more families during the cemetery were out talking to people. So seasonally the second and third quarters are generally our best.

[Unidentified Analyst:]

Great, thanks for the question.

[Operator:]

[Operator Instructions] And presently there are no questions on the phone line at this time.

[Larry Miller:]

Okay, thank you operator. Well, we appreciate your continued support and if anybody has any follow up questions. Please give Tim or I a call or John and look forward to talking to you guys in August. Thank you. Okay. Operator, thank you.

[Operator:]

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