StoneMor Inc.
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the StoneMor Partner's 2015 Second 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 Monday, August 10, 2015. Now I would like to turn the conference over to John McNamara, Director of Investor Relations. Please go ahead, sir.

[John McNamara:]

Thank you, Nicky. Good morning everyone and thank you all for joining us to discuss our 2015 second quarter financial results. With us on the call this morning are Larry Miller, President and Chief Executive Officer and James Pippis, 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 publicly announce the results of revisions to any of the forward-looking statements to reflect future events or developments. In addition, given the provisions of the SEC's Regulation G, which limits our ability to provide non-GAAP financial information, we are only going to discuss that non-GAAP financial information, which is provided in the press in the earnings release and is therefore reconciled to comparable GAAP financial information. Lastly, the full earnings release can be found on our website at www.stonemor.com. Along with the earnings release investors can also find an earnings supplement document where we provide some charts and additional color on the quarter and the year-to-date financial information. With that, I will turn the call over to Larry Miller, who will take it from here. Go ahead, Larry.

[Larry Miller:]

Thank you, John and good morning everyone. Welcome to our second quarter earnings call. As you can see it from our release, as expected we have a strong second quarter. In fact our production based revenue exceeded $100 million for the first time, reaching a record of $107 million. During the quarter, we had positive contributions from our four key drivers, pre-need cemetery revenue, at-need cemetery revenue, funeral home revenue and investment income from trusts. The strength of our balance sheet continues to grow. Our cash, net accounts receivable and merchandise trust net of all liabilities to purchase and deliver all products and services sold pre-need reached $500 million at June 30. Remember this is StoneMor's money, which could be used to pay debt, repurchase units, make additional distributions or reinvest in additional growth. Also, our net backlog increased to $587 million. As a reminder these earnings would have been recorded under all GAAP, but are now deferred until we delivered the product and service. As promised, we've announced another pay [ph] increase in the distribution, payable on August 15th. The acquisition market continues to be robust and we're confident, we will achieve our acquisition goals for the year. Finally, in mid-July we had a very successful secondary offering, initially offering 2.1 million units. Given the strength of the offering and the fact that the share price had not dropped below the offering price. The underwriters exercised issue the next day. As our market capital approaches $1 billion dollars, we are seeing more and more potential investors, who are interested in investing in a solid company, operating and in growth industry whose performance is generally very stable. While we denied ordinarily comment on articles published by individuals, especially when they did not even talk to the company prior to writing, given the volatility of the stock last week, we thought it prudent we comment on a recent article. To begin the author focus is on GAAP, which as you know, does not reflect current performance. GAAP measures delivery, not current period productions based revenue. Under GAAP much of the revenue generated from our pre-need sales is differed while most of the expenses are recorded. Now since we continue to grow our balance sheet, our production based revenue and earnings will far exceed our GAAP reported revenue and earnings. If you look in our balance sheet you will note our differed revenue was $661 million. We have attached a table from our financial statements which reconciles GAAP revenue and earnings and production based revenue and earnings. We supply this information in all of our 10-Q and 10-K filings. The author also suggests the industry is facing headwinds from the growth in cremation. While it is true cremation continues to increase, so does the death rate. We believe that over the next 25 years the growth in cremation will be offset by the growth in the number deaths and what we today consider to be a traditional funnel will remain fairly constant. Thus it is estimated so the industry will grow from approximately $17 billion to $22 billion. The author suggest we would likely cut the dividend in the near future. I would remind you that we have just announced over our 41st consecutive distribution without a cut, which included the financial crises in 2009. Again a testament to the strength and the stability of our company. Several other questions came up last week from investors. The first concerned our trust funds and the suggestion that could be some impairment. To remind you there are two types of trust. The first is perpetual care in which we are not the owners of the trust and therefore any capital gains or losses, they affect the trust but they do not affect our P&L. We are the income beneficiary and managed those trust to receive the cash distributions. The second trust is our merchandized trust. Like insurance companies we set aside money to ensure the delivery of the products and services that we have sold pre-need. Since this is our money our P&L would be effective by gains and losses and this is taken in to consideration by our financial advisors. Because there is a long lead time between when pre-need sale is written and when it is serviced we can tolerate volatility our primary concerned is to have trust generate cash flow without incurring any permanent impairment. To ensure that will not be forced to liquidate assets that may be temporarily undervalued we maintain adequate cash balances and continue to add net new money into the trust. I believe this year the new money going into approximately $70 million. The second question concerned the impact of rising interest rates on the company. To put it simply, our earnings will gradually increase. We have almost 10 times the amount of trust assets and receivables as we do floating debt and since our trust funds are held an assets with relatively short duration and the fact we are currently adding about $70 million of new money annually we will quickly capture the higher yield which will greatly exceed the increased cost of our floating debt. For the last four years our net returns from our trust funds -- our merchandize trust funds were 8%, 7%, 9% and last year 8% and our perpetual care funds were 5%, 6%, 5%, 4%. I would also remind you these trust are not managed by the company, company's executives, but rather are managed through an independent advisor who oversees a number of high quality managers and this group reports directly to a community of independent directors. Hopefully I’ve provided some more clarity on the company and I will hand it over to Jim Pippisto discuss the results for the quarter. But I would like to take the time while we are continuing our search for our CFO, Jim has stepped up as the Interim CFO and he and his team has done a terrific job. So with that I'll let Jim give you some more color on the quarter.

[James Pippis:]

Thank you, Larry and good morning everyone. As previously mentioned during the quarter we recognized record levels of both GAAP and production based revenues. With GAAP revenues of $81 million and production based revenues of $107 million. Further our production based revenues for the quarter exceeded our prior year quarter by approximately 20 million or 23%. This growth was across all line of our business and was primarily driven by our recent acquisitions. If you remember near end of the second quarter last year we completed two very large transactions. One commands the properties of the Archdiocese of Philadelphia and one to acquire 12 cemeteries and 9 funeral homes from the SCI Stuart divestiture. Those two transactions have fueled our growth from the current quarter. Further our production based revenues also included an increased in investment income from trust of $6 million when compared to the prior quarter. We engage in independent investment advisor to actively manage our trusts and during the quarter we had an opportunity to recognize gains that had built up in this asset. As we have discussed in the past, the timing of returns from our trust can vary from period-to-period as it relates to realized gains. For the quarter our operating profit decreased by approximately $2 million on a GAAP basis and our adjusted operating profit increased by about $6 million driven by largely by the increased investment income from our trust. Also impacting the comparison to the prior year quarter we had some increased corporate expenses arising from the combination of budget expending increases to enhance our back office capabilities as we continue to build our infrastructure as a result of our acquisition growth and increased advertising and other expenses associated with the ongoing integration of our new properties. As we've discussed on previous calls, the accounting rules that we've required to follow under Generally Accepted Accounting Principles or GAAP, are very complex and can be difficult to understand. As Larry mentioned at the start of this call, GAAP requires us deferred revenue recognition on products and services until the underlying merchandising services are delivered. I want to take a moment to further elaborate on this point, as a company pre-need cemetery sales are a significant portion of our business strategy and a place where we feel we have a competitive advantage overall peers. When we sale pre-need products on a GAAP basis we must defer all the revenue until delivery, but we only get to defer certain direct cost. As a result under GAAP, we've engaged in transactions that may generate no revenue, but all indirect fixed cost that are locations in corporate office expenses still continue to be reflected in our operations. As a result, our GAAP operating profit significantly trails our adjusted operating profits in periods when we are increasing our pre-need sales. Our balance sheet actually depicts the effect of this discrepancy has had over time. At June 30, we had approximately 660 million of deferred revenue compared to 105 million of deferred selling and obtaining cost. The resulting difference of 555 million is the net profit that we have deferred over time, related to our pre-need sales. And it is the amount that we'll recognize in the future when we deliver the underlying products and services. I think it's important to note that our pre-need sales are fairly unique, given that you have a buyer and seller and our contract without certainty when performance will ultimately occur. In addition, depending on varying state was a portion of our pre-need sales must be placed in the trust until delivery occurs, at June 30, of the fair value of assets in our merchandise trust was $479 million, while the liability recorded on our balance sheet to satisfied those merchandise liabilities was 153 million. In addition, we also have a 162 million of accounts receivable that is a difference of 488 million more that we have in trust and accounts receivable than we will need to service or liabilities. As we continue to build our pre-need sales, this amount has continued to increase. From time to time, as was the case last week, articles are written about our company that focused on GAAP earnings and lack of profitability on a GAAP basis. As Larry mentioned earlier, we provide alternative non-GAAP metrics in this release as well as our management's discussion and announces in our SEC filings to provide investors will additional information that can be used to obtain a more complete picture of our business and view it the same way that management does. We did this because we do not believe that using GAAP accounting alone will give investors the true picture of our financial results and overall value. Further, the articles that focused on GAAP earnings often intend to ignore the value that has been built up on our balance sheet, it’s worth repeating that our cash, net accounts receivable and merchandise trusts net of liabilities is approximately $500 million. This was a tremendous value built on our balance sheet and it does not consider the value of our underlying cemetery properties which have an estimated remaining life of 247 years. In summary, we were pleased with our second quarter. The strength of our recent acquisitions is evident in our revenue growth and we have increased our backlog by an additional 20 million. Further, subsequent to June 30, we've acquired one cemetery and four funeral homes for approximately $6.5 million as our acquisition pipeline remains strong and we continue to evaluate opportunities for additional growth. Operator, I would now like to turn it over for questions.

[Operator:]

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

[John Ransom:]

Good morning, guys. Thanks for touching on the investments portfolio. Can you just talk a little more specifically about the exposure to some of the tougher areas of market such as BBCs [ph] and energy MLPs that are income producing assets and is there anything to note in the post quarter performance of the trust funds that we should know about?

[Larry Miller:]

John, thanks. No, our funds are kind of in a variety of intermediate term, investment grade fixed income securities, some high yield REITs. We do have some MLPs but actually, I don’t know, call us smart, call us lucky, but before year end, we substantially lightened up the MLP portfolio, we were 30% to 40% something like that, we're down around 10%, I think of our total portfolio. And the ones that we're holding we do believe are all strong solid LMPs, they are going to continue to give a nice distribution and hopefully the ones we’re invested in will continue to increase their distribution but as we try to tell people given the long life nature of these assets, as long as we're not given with permanent impairment, we can tolerate that volatility because it doesn’t effect this and we still continue to get the higher yield but to my knowledge nothing has happened subsequent to the quarter that would change anything.

[John Ransom:]

Okay. And then, secondly, I know you can't give accrual EBITDA numbers that aren't on your press release, but could you just talk generally about how the Archdiocese deal and the SCI deals are progressing relative to your expectations?

[Larry Miller:]

Yes. They are both going well. As we said the SCI deals -- they were good properties, they were mature season properties that were not for the divestiture, part of the acquisition, they would have never been divested. There is not a lot of margin source there, we acquire them at a fair price, we're generating what we expect them to generate. The Archdiocese is doing well and we hope there is opportunity there to really continue to grow that whole market and as you might recall we have the opportunity to do some potential land sales there, there is the opportunity to increase to markets to other Christian fates. So we’re really pleased there, hopefully good Pope Francis when he comes to town in the next month, we’ll be able to get some nice positive stuff out of that as well.

[John Ransom:]

I have never heard anybody cite the pope before.

[Larry Miller:]

We’re a cemetery, but we’re hoping -- you know, if I don't get a ride in the Pope-mobile, at least I can get to meet him and having say something nice about the deal. I said it's about a 1% change of it happening, but who knows.

[John Ransom:]

That's funny. And then just lastly, just talk a little bit about how your sales force stands now versus maybe two years ago. I know you have made some changes there. And how many salespeople are you adding? What is the productivity looking like? And is there further work to be done there? Or is it kind of cranking along like you had hoped?

[Larry Miller:]

No actually your question is very timely. The consultant that we have engaged is sitting in our office right now, when I get off the phone here, I’m going to go join the rest of the team. We've been working to -- when Dave Mires [ph] came in -- the COO that had come in from Service Master, he looked at our sales force and he realized what we all realized that, like anything else in this world 80% of your productivity seem to come out of your top 20% or 30% and we followed that pattern as well and were close to 900 sales people, but I think as Dave’s believes that we actually could use a lot less and what we want to do is we're going to reorient our compensation packages to reward performers and our hope is that this time next year we might have less actual numbers, in numbers, but with higher productivity from the team. So we’re pretty excited about that, we think there is some real opportunities there to lower our overall selling cost and improve the overall quality of the sales force.

[Operator:]

Our next question comes from the line of Liam Burke with Wunderlich. Please go ahead.

[Liam Burke:]

Larry, could you give us a sense -- in some of your regions, everyone is pretty comfortable with traditional burials being stable. But with the increase in cremation, could you give me a sense of the economic opportunity that that could provide in some of the regions you have that do have heavier than average cremation rates?

[Larry Miller:]

We are always looking we do have some regions particularly out in the northwest, we probably have some share homes that do almost 90% of their business in cremation. But we're beginning to really understand the market and fortunately for the industry people choosing cremation is not because they run away from the traditional ceremony around the burial or the legacy that one's trying to create. So we’re doing a lot of education, first of all we’re educating ourselves on how to expand into these market places and then we’re drilling that down into the organization. But fortunately, I think I mentioned because of the substantial increase in the death rate over the next 25 years, you are going to kind of see -- that's why we suggested the market actually is going to increase and I think you will see us as we get more and more knowledge, personally, I would like to see a look more towards the European -- particularly countries like France where you will see funeral facilities that handle thousands and thousands and thousands of event a year, and they’re indifferent as to whether a family comes in and wants a traditional funeral or wants cremation. There is a whole host to products and services that again help people celebrate that individual’s life. So we're looking at it is as a good opportunity, it's certainly -- the margins are terrific on it. The dollar amount per event is not what one would spend on a full traditional service within the funeral home, but Stuart was able to prove a number of years ago is if you put these lovely beautiful cremation gardens in your cemetery and there are places that are very peaceful, serene, there is lots of shrubs, flowers, water, granite, marble structure that families actually find that to be such a peaceful place, that while they may spend a little less in the funeral home, they’re actually coming back into the cemetery and spending more. So we're early on our education as to how to really market cremation, but it's clearly one of the key strategies for the company.

[Operator:]

And our next question comes from the line of Richard Verdi with Ladenburg. Please go ahead.

[Richard Verdi:]

Just a few questions. The first couple of callers addressed some of my other inquiries. The Company clearly had a nice sales quarter across the board. When thinking about it, weather in Q1 was on the soggy and cold side, so markers and the likes couldn't necessarily be immediately put in the ground from a pre -- and from a pre-need side, it may delay seniors from driving out and exploring the pre-need care. But in Q2 we saw more favorable weather patterns. So I'm wondering, Larry, if you can give us a sense on how much of -- if there was any -- Q1 pushed out business played a factor in Q2 on both of pre-need and at-need basis?

[Larry Miller:]

Richard, I think you find it historically, I know you relatively using comp -- back over time to see that our second quarter is historically a very strong sales quarter and that's again on a pre-need basis, remember the GAAP is delivery and you are right, GAAP could be affected by weather I mean it’s hard to install vaults and things like that, but again we're focused more on the production based and when you think about the second quarter for us, you're talking about very, very meaningful events like Mother’s Day, Father’s Day, generally Easter, something Easter falls in the first quarter, this year it felt on the second quarter which will have -- clearly has an impacted. If that happened in the first quarter, you might have had a little shift back in the first quarter, but then you have Memorial Day, it just -- it's always been a good time for pre-need selling.

[Richard Verdi:]

Okay, great, excellent color. Thank you. And we are, I guess, almost 6 weeks into Q3 so far. And you mentioned the holidays. We have Fourth of July, a lot of your vets will come out and visit the cemeteries at that time. Weather has been warmer. The precipitation has been sporadic and somewhat heavy at times. Can you give us a sense of how the pre-need business is tracking so far in Q3? And also the at-need business, maybe -- what you think of volumes now and in the back half of the year as well?

[Larry Miller:]

Yeah Richard, we generally don't give that kind of detailed guidance, but there is something happening that would suggest we’re concerned about third and fourth quarter.

[Richard Verdi:]

Okay, excellent. That's what I'm looking for. And last question here. One of your top competitors is now discussing publishing a white paper to help the investment community that understand how to pre-need accounting significantly differs from at-need. And -- which at-need is pretty straightforward. Given the circumstance that unfolded last week -- you addressed it today -- could there potentially be any possibility that the Company could deliver something along these lines as well?

[Larry Miller:]

I'm sure we can. Historically, we have -- I don't know, if we want to call white paper, but we used this part of all of our road show presentations, we've always included in the back and in appendix a very, very detail discussion or difference of clarifications, almost to the tiny [ph] count level. Filing a pre-need sale through its processor, through its life and how it impacts financial statements, how it would impacts cash flow and overtime, Rich, to sit down with someone like yourself, yeah it’d be very helpful for you. But what we found is that with the average investor, I stand up there in front of 100 people and 80 of them were glazed over, what is this guy talking? So, what we've tried to focus on -- I’ll be glad to come back and revisit it and Jim and will certainly would be happy to sit down with you and really drill through and see if it makes sense to put something that you could distribute to your investors, we’ll glad to do that. But what we’re really trying to do is to get people to look at our balance sheet and realize just how -- I think our net receivables are about 160 million, that's backing out deferred interest as well as a reserved, well almost $200 million of gross receivables today and then you know, you're talking $900 million in the trust funds, we just have a very, very strong balance sheet and that's why we feel confident, we've increased the dividend, we feel confident in the distribution and going forward. So, that's where we're trying to get people, so we stayed out of it, but we'd be happy to look at again with you.

[Richard Verdi:]

Okay, excellent. I appreciate the invite, and I will probably take you up on it. I remember that slide from when we were on the road. So okay. Thanks, guys, I appreciate it. Good quarter.

[Operator:]

[Operator Instructions] Our next question comes from the line of Fla Lewis with Weybosset Research and Management. Please go ahead, you’re line is open.

[Fla Lewis:]

Hello, Larry, it's Fla Lewis from Weybosset Research. No question. You answered my question. I just want to make a comment, if I may, and that is applauding your taking on the bear raters. This would be about the fourth time in five years, and the story is always the same -- always mistaken. And they never bother to call the Company. You don't make a habit of commenting on market action. You keep your mind on the business, and that's as you should. However, these things do raise your cost of capital -- our cost of capital quite a bit. So I don't think you have any choice but to take them on.

[Larry Miller:]

Yes. Again were not I don’t want to debate each and every one and actually play -- it’s unfortunate there has been far more favorable articles on this blogs and there has been needed, but for whatever reason, the retail investor I guess just gets nervous and thumbs and we hear all about program trading and we got caught up in the MLP world too, it wasn’t the day that you stop and think about it, it was almost the perfect negative storm for us. We always have selling host the ex-dividend date within a 48 hour period you have the ex-dividend date, you had oil crashing which effected MLPs, it shouldn’t have had an impact on us but it did, than you gets that the momentum trade start coming in, the program trade -- the so called Black Box and it all sort of just crashed within a 48 hour period. But I've come to expect it in August and one of these days I'll be happy to get through August without having a short seller try making few dollars.

[Fla Lewis:]

I was concerned that, while digging a grave, you might have hit oil.

[Larry Miller:]

That’s okay, we’re pretty confident in that long terms energies because I won’t be too [Multiple Speakers].

[Fla Lewis:]

Okay. I'm glad you address the problem. Thank you.

[Larry Miller:]

Sure. Thanks for your support.

[Operator:]

And I'm showing no further questions at this time. I'll turn it back to you.

[Larry Miller:]

Thank you operator. And everyone thanks and if we've missed something or you need some Additional information please give Jim, John or I a call and we thank you for your support. Have a good day.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you once again for your participation. And ask that you please disconnect your lines. Have a great day everyone.