StoneMor Inc.
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the StoneMor Partner's 2015 Third Quarter Financial Results Call. During the presentation, all participants will be in a listen-only mode and afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Monday, November 9, 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, Scott. Good morning, everyone, and thank you all for joining us to discuss our 2015 third quarter financial results. A couple of housekeeping items before we begin. 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 where we provide some additional color on the quarter and the year-to-date financial information. Secondly, as many of you know, we will be hosting our Third Annual Investor and Analyst Day this Wednesday November 11 at the Grand Hyatt Hotel in New York City. To any of you in the New City metropolitan area who would still like to attend the event and have not already registered, please contact me after the conference call and we will happy to sign you up. My contact information can be found on the press release. For those of you who cannot attend, the event will be webcast through a link which you can find on our website. Joining us on the call this morning are Larry Miller, President and Chief Executive Officer and we are very happy to be introducing our new Chief Financial Officer, Sean McGrath. Before we begin our comments on the financial results, we would ask that you all take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call. 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. 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 good morning everyone. Thanks for joining us today. Before I briefly comment on the quarter, I would like to introduce you to our new CFO, Sean McGrath. Sean may be young in years, but he is old in experience. Sean came to us from a very large master limited partnership and his knowledge and experience will help us continue building a world class death care company. I would also like to thank Jim Pippisto for holding down the fort as interim CFO. Jim, as you know, is our Chief Accounting Officer and did an outstanding job as we conducted our search for our CFO. Jim will once again concentrate on his job of Chief Accounting Officer and we all appreciate his efforts. Briefly on the quarter, as I noted on last quarter's call, we continue to deliver our strategy of both strengthening our core business through the execution of the successful acquisition strategy and organically optimizing our legacy assets to increase revenue and earnings without the need to use additional capital. In that regard, our insurance division continues to grow. We now have four established regions staffed by experienced insurance executives. We continue to be optimistic that over the next several years this division will become a meaningful contributor to our success. Of note, as we now have over 400 profit centers, we thought it was important we recognized our size and take advantage of our scale. So we now hired an executive who is in-charge of operational risk management as well as procurement for all major products and services we use. This initiative should generate savings in the next couple years. With that, I am going to turn over to Sean and let him talk about the quarter.

[Sean McGrath:]

Thanks, Larry, and thanks to everyone for participating on the call this morning. Before I get started this morning I want to take a quick moment to say thank you to Larry, our board and the rest of our management team for giving me this opportunity. It’s humbling to work with such a great collection of people, and I am hoping to do my small part to make the partnership even better. As probably everyone has seen, we made some significant modifications to our earnings release for the third quarter in an attempt to give more clarity to our performance and move it towards metrics that are comparable to other MLPs and death care enterprises. I’d love to take credit for it, but the team had already put in a lot of work to move in this direction as part of my arrival. I think they were just waiting for the new guy to take the blame in case no one liked it, hopefully from [indiscernible]. We’d love to get your thoughts on ways to make it even better. Please reach out to myself or John McNamara if you get a moment in it, so let us know. Enough of the boring topics. Regarding our third quarter financial results, overall we generated adjusted EBITDA of $23.5 million, which represents an increase of 20% over the prior year and distributable available cash of $32.2 million, which represents an increase of 13% over the prior year. The increase in adjusted EBITDA was principally related to a $6.5 million increase in cemetery margins and $1.7 million increase in funeral home margin and lower SG&A costs, partially offset by a $5.3 million decrease in Trust Investment Income, the details of which I will discuss in a moment. These results translate into cash distribution coverage ratio for the period of 1.6 times based upon distributable available cash and 1.2 times on an LTM basis. We increased the quarterly cash distribution to limited partners by any another $0.01 during the quarter to $0.66 per unit or $2.64 per unit annually, a 7% increase from the prior year, consistent with our earlier guidance of increasing the cash distribution $0.01 per unit for the remainder of 2015. As for the details for the third quarter, cemetery margin, which we consider it to cemetery revenues less cemetery expenses and cost of goods sold, was approximately $42 million, which represented an almost 20% increase compared with the prior year third quarter. This increase resulted from a 12% increase in revenues, but only a 3% increase in costs as the impact of our acquisitions, particularly our agreement with the Archdiocese of Philadelphia that was signed in May of 2014 drove revenues higher with little impact to cost. The execution of our acquisition strategy some of the value we can bring can easily been seen by how we arrived at the higher revenue. As we push pre-need contracts to a 7% increase period-over-period while at-need contracts remained stable. In addition, revenue per cemetery contract increased 7% period-over-period, a well deserved kudos are due to our sales team presenting a higher-end mix of products and services for contract. Before moving on, I wanted to note that our cemetery revenues and margin for the third quarter were impacted by a $1.8 million for discounts we provided to installment contract customers for annual early payment marketing program. In determining our distributable available cash for the period, we consider this non-recurring and it is unlikely that we will offer such programs in the future. Regarding funeral home margin, we recognized approximately $5.5 million during the third quarter, which represented a 44% increase compared with the prior year third quarter. This increase resulted from an 18% increase in revenues, partially offset by a 9% increase in costs as funeral home calls reached over 3,800 for the period, a 7% increase. Our revenue per call reached approximately $4,500 per call or 11% increase. Once again, kudos are due to our funeral home team for selling higher-end mix of products and services per contract year-over-year. Regarding investment trust returns, almost $9 million was recognized during the third quarter, a decrease of $5 million or 30% period-over-period which is principally due to the timing of realized gains. Total investment return on our trust net of fees was a combined 4.2% annualized for the third quarter compared with 6.4% annualized for the prior year third quarter. Combined selling, G&A and corporate overhead costs were $34.7 million for the third quarter, a decrease of $600,000 between periods, which reflects our commitment to maintaining a lower and more efficient cost structure even while growing margins from operating activities over 20%. Before moving onto our balance sheet and liquidity. I want to note that we did have a $3 million litigation settlement and associated legal costs which occurred during the period. Due to the non-recurring nature of this item, we added it back in our determination of distributable available cash. Regarding our balance sheet, I would like to take a moment to mention one of our most underappreciated, the significant free cash that resides with our merchandise trust balance. We have almost $630 million of assets within our merchant trust, AR and cash as of September 30, with only approximately $160 million of liabilities to merchandise contracts leaving us with approximately $470 million of free cash to our account, more than enough to pay down our entire debt and funded years worth of acquisitions, we reserved this contract from the current period. This free cash would cover our current quarter’s cash distribution almost 22 times, which provides great security for our equity and debt investors. Regarding our liquidity position and leverage, at the end of September, we had approximately $67 million of total capacity under our $180 million credit facility borrowing base along with approximately $12 million of cash on hand giving us total liquidity of close to $80 million with a leverage ratio of three times compared to a maximum leverage ratio covenant of four times. With that, I thank you for your time and I will return the call to Larry Miller for closing comments.

[Larry Miller:]

We’ll take questions now operator.

[Operator:]

[Operator Instructions] And we have question from John Ransom, please proceed.

[John Ransom:]

Hi, good morning. Couple of things. How should we think about the ongoing results in the quarter if you stripped out the two large acquisitions you made? How is the business performing as you look at it on what I would call a same-store basis?

[Sean McGrath:]

John, this is Sean. Overall, I think the enterprise is performing very well. I think on a same-store basis, our results are performing unfavorably, I think when you take out the acquisitions that we completed year over year, I think when you look at and I think we’ve put this in one of the slides but the increase from the acquisition from the Archdiocese of Philadelphia resulted in a significant increase quarter-over-quarter as we continue to make deals and push new contract standpoint. So there was a significant increase over that point, but I think our same-store sales has been very steady, they continued to grow organically and I think we expect good results as we’re coming into the fourth quarter in 2016.

[John Ransom:]

Great. And, maybe this is for Larry, I'm not sure, but could you just elaborate a bit more on your insurance imitative and I guess longer term, how should we think about the gap if you will between your accrual EBITDA and your GAAP EBITDA and cash you know generation of current cash, how much of that gap you think will be closed as you grow that business?

[Larry Miller:]

I'll touch on the insurance and then Sean can talk about the second part of the question, John. As far as the insurance division, I think it's obvious now that we've made a very serious commitment. Nothing new for us, we’re calling in insurance but at the end of the day it's really selling preneed funeral products and services. In our previous companies we've sold hundreds and hundreds of millions of dollars of this stuff. It just wasn't to the previous sales team, it wasn’t something that was really that important, they wanted to concentrate on building out the cemetery group. But as we said, or probably year, year and a half ago, two years ago that he wanted to start capitalizing on our footprint and finding other products and services that we could offer into those same communities and not just totally be driven by acquisitions. And we thought that since we have these expertise since we have relationship with hundreds and hundreds and hundreds of thousands of living lot owners that have just made sense. So we took our time, the five people that are in leadership roles are extremely experienced sales personnel. They’ve come from major companies, there are in the process now of beginning to fill out their organizations and actually getting down to the hiring and licensing of individuals. We wanted to make sure we had the right products, the right relationships with the right companies, but we are up and running. I mean, we’re very close to our first-year plan. As I think I've said, the one issue with the products that we’re selling because we want them to be affordable. I mean, if you're going to talk in terms of selling hundreds of millions of dollars of this stuff over the next few years. We want to be sure that the marketplace, there is a lot of late night TV for final expense stuff. So we want to be competitive, but at the same time, we want our salespeople to be able to earn a fair living. So we've bundled other products, things like ID theft which kind of fits the same demographic Telemed, which is a wonderful tool for people where 24-hour access to physician. See, you know we all have kids, you think about at 3 o'clock in the morning when the child starts screaming, here you, you can actually pick up the telephone and access to a doctor to help you through that process. The issue with it, we’re still a little bit negative right now because we are building out the organization, we’ll soon get to breakeven, and its a couple year build because the big value comes in the renewal commissions. The way we've structured the products and the relationships is what we want is to cover our sales and marketing costs initially and then as we continue to develop the renewal commissions, we’ll become very meaningful. So I don't think we'll see a huge impact in 2016, but according to our model, once we get to 2017 on it actually should be something that will talk about. And to your second part, I will turn over to Sean.

[Sean McGrath:]

John, your question on the combining our I guess the variance from GAAP and non-GAAP, did you mean that with regard to the insurance division, the new insurance division or you just mean in general?

[John Ransom:]

Well I just wondered you know if that was going to have a material effect any time in the next three or four years on helping to strength that gap and the cash burn of the business?

[Sean McGrath:]

I mean obviously, as we've -- most of GAAP, non-GAAP issues come on the cemetery side, so I think as we increase our funeral alongside those variances that you're seeing will be bridged with that division. Funeral homes in general grow, but we're doing the best we can to kind of strength that as much as possible and we’re looking at all opportunities to do so.

[John Ransom:]

Okay, thanks a lot.

[Operator:]

Our next question is from the line of William Wynn. Please proceed.

[Unidentified Analyst:]

Yes, I have a question about your balance sheet data, in particular, the liabilities. The total liabilities are listed there in the line just above total liabilities says other liabilities. It doesn't say what other liabilities are which are a very large fraction of total liabilities, could you tell me what's involved in that one line there other liabilities?

[Sean McGrath:]

It says other long-term liabilities on there of $2 million?

[Unidentified Analyst:]

No, it just says the one I have just says other liabilities, total. And I can give you the number there for the second-quarter information is, the number that’s listed there is 1,157 and the total liabilities are listed as 1,547. So whatever this other is it’s a very large fraction of your liabilities, what's involved in that?

[Sean McGrath:]

I think what you're looking at is it’s probably an online summary, what they did is condensed our balance sheet and put other liabilities included. I mean, I could read I’m just reading off our press release balance sheet we have a perpetual trust liabilities of $311 million. We have long-term debt of 287 million and deferred cemetery revenues of 645 million. So, I think what somebody did is summarize the balance sheet of whatever you're reading online and they threw a lot of it in other, which is I can totally understand what you're saying, but if you look at our actual press release, I think you can see broken out in the level of detail all the components of liabilities.

[Operator:]

And we also have a question from the line of David Rodshaw. Please proceed.

[Unidentified Analyst:]

Thank you for taking my question here. I've been a long-term investor in your guys’ units, I’ve been very pleased with it over the years. I'm concerned a little bit about the trend toward cremation. Of your funerals that you perform, what percentage are actually cremations?

[Larry Miller:]

Are we talking about, well, because we have both cemetery and the funeral, I don't think right now I have that information, but I’d say roughly a third, somewhere in that area. If that makes sense. Yes. About a third and let me just speak about cremation for one second, I mean, there is no question that cremation is growing. We fully expect it to continue growing over the next 15, 20 years, but as far as our industry is concerned, kind of ironic to say the good news, but the good news is because of the ageing of the population, the actual death rate is going to go up dramatically over the same period of time. And if you actually overlay the growth in cremation with the expected growth in the number of deaths, what you’ll see is that what today we would consider a traditional funeral, that’s we’re all accustomed going to visitations, having or cascade the bodies there available for the viewing, going to church or whatever the next day, they should stay relatively flat. That's not -- they are not going to fall off because again, because of the increase. So even if you run cremation out over the next 25 years, 75%, which kind of follows what most of the world is, it’s around 75%, you’ll see that the number of full cascaded funerals stays relatively flat, there might be a little shrinkage, but pretty much flat and the actual increase in cremation has been offset with the increase in death.

[Unidentified Analyst:]

I know you guys get a lot of higher profit margin on your cremations. The question ultimately I wanted to ask on that though is, if it’s roughly a third, the more so third that you perform the cremations for than still buy a cemetery plot to bury their earn-in or do they take the box away and sprinkle the ashes some place. I mean have you tracked that and okay, we perform this number of cremations, well, half of those still get a cemetery plot, so they have a reminder I guess or stone there to?

[Larry Miller:]

Yeah. It's a really good question and I’d say as an industry, I think it’s fair to say that many people in the industry tried to resist cremation, because yes, on a percentage basis, the margins are terrific on utilization of our inventory of our land or our upright Muslim structure is fantastic, but there was a lot of resistance and there wasn't a recognition. For some reason, we all thought cremation was a threat and so specifically, I would say for the industry and we’re probably somewhat in that area, only about 15% of the cremations today actually have what we would consider a full memorialized service, which could include ground burial, if I include a Muslim, what have you, but I think we’ve all -- and I think if you talk to any of the people involved in death care, that when you present families with the opportunity to still have the same type of service, the family gathering, the celebration in someone’s life, they say, oh, I thought with cremation, we weren’t allowed to have that. We are all getting a little bit more educated, we’re understanding, it's just a form of disposition. So we’re developing multiuse cremation gardens in all of our larger cemeteries right now and we’ll run that through all of our properties. So when families commit with cremated remains, they can bury them in the ground. They can put them in some type of outright Muslim structure, they will be able to scatter them in beautiful flower gardens or nature areas, nature trails, they will be able to put them in benches, something that creates a living memory. So I think you will see, and I'm sure if you go back and look at the other death care companies, you'll see all of them are beginning to see an actual uptick in what they are being able to offer families.

[Unidentified Analyst:]

Okay. The last question I have is just in relation to your guys’ structure with the GP. As I say, I’ve owned your stock -- your units for many years, I know as your distribution has gone up over the years and it's been very nice and vaster, but also the general partner who has come in for bigger percentage of the take, it’s the way it was originally structure, has your board ever given any thought about maybe trying to buy out the GP and taken it all in house, has there ever been talk of that?

[Larry Miller:]

Well, this is Larry again. At this moment, no. I'm sure it's something that as we get closer to the 50% split, that there will be conversations on what's the best way so that we balance what's good for the GP with what’s good for our illuminants. I mean, we’re sitting here and my role -- my job is to run this company for all the stakeholders. So we have to do what's right for everyone, but now at this point, we’re still early in that second split, so we really haven't approached that yet.

[Sean McGrath:]

Yeah. And this is Sean. I have worked years with public general partners, private general partners. I will tell you having a strong general partner, which our general partner is, it’s great having that level of partner. I think there are ways of making sure that the company is incentivized to grow the business and the general partner is in the same business, a strong general partner is only as strong as his underlying company. So we expect our general partner to work well with us and be able to enhance our growth, not be inhibitive. So I think we’re looking for a strong trajectory kind of going forward with our general partners.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

[Operator Instructions] And I believe that's all the questions registered for today.

[Larry Miller:]

Okay. Well, thank you, operator and to everyone on the call. Thanks for joining us and again thanks to Jim for standing in and doing an outstanding job. And again, welcome to Sean and we look forward to talking to you in a few months. Thank you.

[Operator:]

And ladies and gentlemen, that concludes the call for today. We thank you for your participation and ask that you please disconnect your line.