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StoneMor Partners L.P. (NYSE:STON)

Q4 2012 Earnings Conference Call

March 15, 2013, 11:00 AM ET

Executives

John C. McNamara - Director of IR

Lawrence Miller - Chairman, President and CEO

Timothy K. Yost - CFO

Analysts

John Ransom - Raymond James & Associates

James Farrant - Mojave Capital Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the StoneMor Partners' Year End 2012 Earnings 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 15, 2013.

I would now like to turn the conference over to Mr. John McNamara, Director of Investor Relations; Mr. Larry Miller, President and Chief Executive Officer; and Mr. Tim Yost, Chief Financial Officer. Please go ahead.

John C. McNamara

Thank you. Good morning, everyone, and thank you all for joining us on today's conference call to discuss our 2012 fourth quarter and full year financial results.

Before we begin, I would like to remind everyone that statements made on today's conference call as well as in our public filings, releases and websites, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties and are subject to change at any time.

We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Furthermore, given the provisions of the SEC's Regulation G, which, as you know, 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 release can be found on our website at www.stonemor.com.

I'd now like to introduce Larry Miller, who will take the call from here.

Lawrence Miller

Thank you, John. Good morning everyone. Welcome to our year end conference call. 2012 was another solid year for StoneMor, which we achieved most of our key objectives. Tim's going to discuss the numbers in more detail, but it was a pretty active year for the company. So, I'd like to discuss a number of other important items.

First, at the end of March, our Chief Financial Officer retired and at the end of April, our National Sales Manager retired. These were two key executives who were founding members and collectively I think they worked with me for over 30 years.

I'm happy to report their retirement and subsequent transition to new people has gone smoothly. Tim Yost, who is on the call and will be speaking shortly, has been with us for a number of years and has taken over the CFO's responsibility.

Our Sales Manager's retirement gave us the opportunity to critically review our entire sales organization. As a result, we realized some of our regional sales leaders were spread too thin and we thought they were becoming more like firemen rather than leaders and managers.

To make our sales force more effective, we promoted several individuals and reallocated responsibility to allow them to be better managers and leaders. Additionally, we divided the country in half and promoted two of our individuals to head up our sales organization, so we have effectively in East and West or North and South depending how you look at the map. While it took a few months to get these things in place, the yearly results are quite promising.

On previous calls, we discussed the slight change in our acquisition policy and that we're looking to require more funeral homes than previously. While the income from funeral homes do not qualify for MLP tax treatment, we do have substantial NOLs which we believe offset the taxes for a number of years. Since they are primarily cash businesses, they help to narrow the gap between operating cash and adjusted operating cash.

Last quarter, we discussed the Lohman acquisition, nine funeral homes and four cemeteries in Florida, which have been fully integrated into StoneMor. Recently, we announced the acquisition of six funeral homes and two crematories also in Florida. We are excited about this acquisition not only for the expected financial and cash contributions, but also because of the leadership we are acquiring.

A former owner, Jimmy Young, is a progressive funeral director who has built his business embracing cremation and aggressive merchandising to build volume at all his funeral homes. We expect Jimmy to not only continue managing his Florida operations successfully, but to help us on a national basis.

I do want to mention briefly the fourth quarter. As you know, some of our revenues, particularly the returns from our almost $700 million in trust funds, are not predictable as to the timing. In the fourth quarter of both 2010 and 2011, we realized significant gains. In 2012, the gains were realized earlier in the year and the additional gains realized in January of 2013.

Also, the fourth quarter of 2010 and 2011 had significant revenue and earnings from our contract with the Archdiocese of Detroit. By mutual agreement, we terminated this relationship early in 2012. Because of these factors, it's very difficult to compare quarters. But as I mentioned earlier, we did achieve our financial goals for the year.

I would also point out in the fourth quarter of 2002, our pre-need sales were hurt by Hurricane Sandy more than we had expected. I know we mentioned it briefly on our last call and we were hopeful that the financial support and assistance would flow into the communities quickly, but unfortunately it did not.

We also surprisingly -- our fourth quarter has always been, particularly in the month of December, it's always a terrific quarter for us because our sales force, which are 100% commission and incentive-driven, are all striving to get year-end bonuses, qualify for the sales trip and a bunch of other incentives. And while we had a lot of appointments towards the end of the year, the uncertainty that was flowing around with fiscal cliff caused a lot of our customers to just kind of say, look, we're interested in pre-need, but we just want to wait and see what happens.

And I'm happy to report that those two issues seem to be behind us, which is evidenced by our very strong start to 2013. So while there's still some of the Hurricane Sandy, money is beginning to flow into the communities and people are beginning to understand that they will get support and relief from either insurance or the government, so they're a little bit more willing to spend. And I guess we see that a lot of the retail sales or whatever, the consumers seems to have bounced back nicely.

As for growth, the acquisition market continues to be robust and we are evaluating a number of possible transitions and we look forward to continuing our growth this year. As you know, we do not provide specific guidance but we do expect to have a strong 2013. The aforementioned acquisitions, the reorganized sales organization, the diminishing effects from Hurricane Sandy and the year-end uncertainty headwind abating are all positive factors that should lead to growth in all key metrics including our distributions.

With that, I'm going to turn it over to Tim to talk a little bit more about the numbers and then we'll take Q&A.

Timothy K. Yost

Thank you, Larry. Again, we are very pleased with the results for the year. We've hit almost all of the internal targets that we set for ourselves at the beginning of the year and have been very pleased with the outcome.

We had significant increases in both GAAP and non-GAAP revenues, which in and of itself is good, but if you look a little deeper into the components of the revenue, you'll find even more positive information.

On a non-GAAP basis, we grew our pre-need cemetery revenues by 4.6%. When you consider that we only operated the Archdiocese of Detroit in the first quarter of 2012 and our results are being compared to 2011 during which we operated the Archdiocese for the full year, the growth is more impressive.

As Larry mentioned, the majority of the locations that we acquired this year were funeral homes. So the revenue increase is based in growth in our existing locations. The funeral homes that we added this year helped to increase our non-GAAP funeral home revenues by 18%. So we saw real growth in our primary as a focus during the year.

Additionally, the realized income from our trust was relatively flat year-over-year on a non-GAAP basis. On a space that doesn't sound positive, but again when you look at the details, we had a good year, returning 6.9% on our merchandise trust and 5.9% on a professional care trust.

The important thing to consider is that we recognized significantly more gains in our trust in 2011 than we did in 2012. That is not to say that the gains didn't exist in 2012, but that our investment advisors felt that it would be prudent to realize them at a later date.

At the end of 2012, we had over 13.4 million in unrealized gains and the overall market has performed well since then. These revenue increases resulted in a 41% increase in our GAAP operating profit and an 11% increase in our adjusted operating profit, which was a corresponding non-GAAP metric.

We also saw a 480% increase in our cash flow from operations and an 8% increase in our distributable free cash flow, which was a little under $6 million greater than the amount we distributed for the year. All-in-all, we were happy with the results that we achieved this year and they are indicative of the achievement of our steady goal.

Many of those same items are relative when analyzing our fourth quarter. As Larry mentioned, we did have some operational difficulties related to Hurricane Sandy and consumer sentiment issues in the fourth quarter, but the primary driver of the results was the timing of the trust gains.

As I mentioned before, our investment advisors felt that it was wise to delay the realization of our trust gains in the fourth quarter of 2012. So that comparable period last year contains 5 million in gains that are not in this year's results.

That makes a big difference not only on revenue, but also on adjusted operating profit, because the realization of those gains has no associated costs. Had we had comparable gains during the quarter, our production base revenue would have grown by 3.3% and our adjusted operating profit would have grown by 19%.

Additionally, you can see the results that adding fewer homes and excluding the operations of the Archdiocese of Detroit had on our revenues in the quarter. With a slight decrease in non-GAAP cemetery revenues and a 30% increase in our funeral home revenues.

Due to the non-linear nature of the timing of investment income from our trust, the quarter-over-quarter analysis of our results can sometimes be challenging but an evaluation of the entire year's results is often more appropriate. We're off to a great start in 2013 and anticipate achieving our plan for the year.

Operator, we can turn it over to questions now. Operator?

Question-and-Answer Session

Operator

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

John Ransom - Raymond James & Associates

Hi. It's John Ransom. Just a couple of things. As we think about the first half of 2013, how should we model the effects of the recent M&A activity? How does that change your 4Q, just call it your GAAP revenue number, and what should we be thinking about?

Lawrence Miller

Change to our GAAP revenue run rate…

John Ransom - Raymond James & Associates

In other words, how do we model -- the effect of these acquisitions, how do they change the first half of the year in terms of revenues?

Lawrence Miller

The tough part is I'm not looking at the segregated, I'm looking at a model that has been integrated. So I'm trying to figure out in my head quickly, John, what the difference is. We added six reasonable volume funeral home locations. We believe the margin on these locations is good. I'm struggling to give you specifics as to…

John Ransom - Raymond James & Associates

It's hard to put that in a spreadsheet, right?

Lawrence Miller

I know.

John Ransom - Raymond James & Associates

That's all right. We can move on to the next question. You can come back to me on that one if you want.

Lawrence Miller

Okay. Thanks, John.

Operator

Our next question comes from the line of James Farrant. Please go ahead.

James Farrant - Mojave Capital Management

Thanks for taking the question, guys. You talked a little bit about this particularly with the [reliefs] of Sandy, but obviously sort of the deferred cemetery revenue was down quite a bit and the fund flows into the trust were down quite a bit. The cash in the 4Q and -- as you talk about the sort of rebound in the first quarter, are you expecting sort of a ramp in pre-need again?

And then the follow-up there is usually in your K, you kind of disclose that you kind of use your credit facility to fund working capital. Do you expect to have to do that this year or do you think you'll sort of generate cash from working capital?

And then just a last question I have is, you're kind of -- based on where we are now, I know you got these credit line increased to use quite a bit of the cash on that acquisition, so you're sort of bumping up against the top end of the cap here. Historically that has usually led to kind of an equity raise in a market here.

And so I wanted to get a sense for how you're thinking about the capital structure in 2013 and when we should sort of kind of think about when you might address that? Thanks.

Lawrence Miller

Okay. There's a whole lot of questions in there, James.

James Farrant - Mojave Capital Management

Yeah, sorry.

Timothy K. Yost

I'd like to (inaudible) think about. And one of the ones that wasn't a question, it seemed to be more a competitive statement is that we didn't put as much money in the trust in the quarter. I think that's a bit of miss. Now you got to remember, that's a net number. So, the fact that we drew more money from the trust is a different issue. The thing that in the fourth quarter of last year when you do a year-over-year comparison, again the largest driver of that increase of money in the trust was the gains that we took during the quarter, right?

That becomes a net cash inflow to the trust and the cash flow statement and that's primarily what you're seeing. That on top of the fact that we acquired a significant amount that we replaced, cemetery revenue with funeral homes during the year contributed to a lower net contribution to the trust. The grosses don't change, but the nets change. So that's an important fine line to make. We anticipate borrowing somewhere in the range of $20 million to fund working capital this year. That's in our models. That's how we have it projected.

But again, as you look at acquisitions, you look at the things that we do, over the year those things will change. We are obviously continuously evaluating our capital structure. I can't necessarily speak to timing or exactly what it is that we intend to do until we intend to do it. But please rest assured that is the top of our list and one of the things that we work on. And again, not just now but constantly daily we [revalue] our capital structure to ensure that we're at optimal levels in order to be able to deal with whatever comes our way.

Lawrence Miller

James, it's Larry. Yes, that's a pre-need. Yes, we -- based on our year-to-date 2013, we definitely see we're back trending up on our pre-need sales. As I said, I think we still might have a little bit of headwinds from Sandy because we do have a number of properties along the East Coast here. But because the money is beginning to flow and insurance companies are making commitments, people I think are feeling more comfortable.

But this thing really I think was more the overall uncertainty that we faced, because that's -- I mean I've been in the business 30 years and I've never seen the tail end of December quite as slow as it was this year. But it wasn't for lack of appointments, it was just lack of -- it's just people just telling our sales people to come back and we saw that in January when things seemed to lift, we had a terrific market. So, we think things are back on track.

Just to -- I'm sorry, Jim. I want to follow-up with one of the -- the answer to John's question. I was able to put my hands on the correct piece of paper. It appears and we project that we will probably be able to increase our funeral revenues from this acquisition by about 15% year-over-year from related just to that acquisition. Sorry, Jim.

John C. McNamara

Operator, go ahead.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of [Noah Lerner]. Please go ahead.

Unidentified Analyst

Good morning, everybody. Just a question regarding the contract with the archdiocese and this was covered on an earlier call, go back with (inaudible). But I'm just curious what drove that mutual decision to cancel the contract when in the past where you think that might be a model to try to rollout in other areas?

Lawrence Miller

Noah, it's Larry. There's a lot of variables in there and to be very candid when this whole thing came about, there was a new archbishop in Detroit. They had actually started to move this forward and we've been having conversations with them. He came from an archdiocese where they actually hired an individual to work for the archdiocese, not outsource; an actual employee. And they managed properties out in Oakland themselves. So when we came out on the scene, he had a lot of hesitancy and that's why we actually built into the agreement sort of no harm, no foul.

If he wasn't comfortable down the line and preferred to keep it in-house, we had a formula in place that would ensure that our time wasn't wasted, that we would have been paid for the time that we were in place and we would be able to collect out our profits that were sitting in the receivables, in the trust. And there was just a lot of variables. So he came in kind of with a bias against outsourcing. Honestly, again this is -- we had a very friendly termination but we didn't really sit and go through a forensic order as to why. But I think they were somewhat surprised at the success that we were achieving as quickly as we were achieving and maybe thought that they were giving up too much money.

And about the same time, the fellow that was running their West Coast operation that he was very close with, hired a few people that were very active in the catholic community to kind of create and operate the company or a management company focusing in on Catholics. And the archbishop wanted to give them an opportunity to do the deal. So, as I said, we were well compensated for the time. We would have loved to been there and if things don't go the way they expect them or hope that they go and call us back, I think -- we certainly didn't burn any bridges and I think we will be welcomed back with open arms.

Timothy K. Yost

Noah, this is certainly something that we continue to look at. I mean the archdiocese and the catholic business is something that we're striving or we're looking for. I mean, it is definitely an area of our focus and this does not change that nor does it inhibit future growth in that way.

Unidentified Analyst

Okay, great. Then a quick question regarding the merchandise trust, I noticed (inaudible) earlier questions that basically the value went up and the value or the amounts of the liability actually went down year-over-year, which is nice. You win on both sides. You have more on future money of about $30 million that can come to us investors. But is part of that also that 5 million -- does that factor in at all to that differential with the realized gains or it's just totally different?

Timothy K. Yost

Yeah, it's not totally different, Noah. But you got to remember, our merchandise trust is mark-to-market. So the market performance, right, the unrealized gain portion of the trust does increase significantly, at least $6 million over last year and the overall trust itself has grown. So what you're seeing there is market increased value on the trust and the taking of less gains, if you will. If the market value of the trust increases, that does not create a negative on our cash flow from operations. If we realized the gains, it's as though we have contributed additional money to the trust and we do see negatives on our cash flow from operations. Is that helpful at all?

Unidentified Analyst

Yes, it is. And then the last question I had, if I may, on the distribution coverage for quarters on page 6, at least it's my printed app page 6 of the press release, we went down almost two quarters. Did you guys look into what was driving that or can you explain to me what caused that falloff? Is it just the additional units that might have been issued during the year?

Timothy K. Yost

Actually it's the additional debt balance.

Unidentified Analyst

Additional debt, okay. So you've taken away cash flow availability?

Timothy K. Yost

Yes, we've created -- we have additional obligations. That's how that calculation may have factored.

Unidentified Analyst

Okay, great. Thanks for all the information. I really appreciate it.

Operator

(Operator Instructions).

Timothy K. Yost

I just wanted to follow-up one more thing on Noah's point is that that calculation does not include the benefit of the new acquisitions. That's also a very important point. So that the asset value of the things that we acquired lags behind the outlay of cash in debt of equity that we use. Sorry, thanks.

Operator

Our next question is a follow-up from John Ransom. Please go ahead.

John Ransom - Raymond James & Associates

Hi. Just thinking about your M&A activity, as you do a forensic analysis of all the acquisitions that you've done, can you say definitively they involve then additive to your distributable cash flow per share? And any lessons there that you're applying for future of deals. And then the other thing I want to follow-up on was, did the -- the tax cliff at the end of the year, has that created any (inaudible) of sellers this year or has it continued to [crack] along?

Lawrence Miller

John, I'll take the first one, the acquisitions. I don't know if I want to say every or all or use words quite, but for the most part and if you think about when we're out on the road, there's one slide that we often present. We group the acquisitions either by the year that we made the acquisitions or we might have a couple of larger ones we might carve out. But we generally show the operations prior to the acquisition, what the estimated return to us was going to be or what multiple we were going to pay and then where we are actually.

And I think almost in every instance, we beat our projections. The recent ones may not be fully up to scale, but the other ones I think you'll find when you look at that slide, we've done pretty well our acquisitions. So, we're still very confident in our model. We think we got a really, really good model that gives us a very, very accurate projection to that discounted 10-year cash flow. The only thing that is always a challenge is to try to time when the revenue actually gets through receivables, through the trust and back out into the company as cash in our pocket. And other than that, we're pretty upbeat on the taxes.

Timothy K. Yost

John, as to your question about the fiscal cliff and the taxes, we definitely saw and along with all other MLPs a large sell-off in the last two weeks of the year. And we were a little bit delayed in selling off and then we sold off a little harder to catch up. Since that time, people thought our stock price were up 25% to 30%.

John Ransom - Raymond James & Associates

Yeah, I wasn't asking about your stock price. I was asking potential sellers to you from cemetery…?

Timothy K. Yost

Oh, I'm sorry.

Lawrence Miller

John, it's as robust. I've seen absolutely no slowdown and it's a nice mix between cemeteries and funeral homes. And absolutely the market -- I think a lot of us might have been expecting that it was all being driven by the tax change in 2012 but I think maybe we're just in kind of a normal [stifle] where people are still looking for succession.

Timothy K. Yost

I also think some of the selling in the industry was initially related to the tax cliff, but I think that once you put the idea in people's minds and they see other people selling, it fuels the market as well and we've seen that. We've seen no falloff in deal flow whatsoever.

John Ransom - Raymond James & Associates

Can you look at your numbers -- it's a little hard for us outside looking in, but can you parse your numbers for 2012 and look at your borrowings to say, this is what the working capital would have been ex-acquisitions, and this is what kind of the acquisition-driven working capital, i.e. build up of pre-need of property that you borrow on the cap? I mean I'm just trying to get a sense of how the business looks today in terms of cash burns, if you were to strip out some of the investments you're continuing to make and some of the stuff you bought?

Lawrence Miller

The one thing that I do look at, John, and I understand your question and I'm not quite there is that -- and I do this all the time. I look at all of our growth related uses of capital. I look at acquisition costs on the income statement. I look at accounts receivable, increases on the -- cash flow used for accounts receivable growth on the cash flow statement.

I look at contribution -- net contributions to the merchandise trust on the cash flow statement and then I look at two investing items being acquisitions that we made and the mausoleums for additional space growth that we've created in our existing parks. I look at those and I compare them to the amount of money that we borrowed, again net borrowed during the period and that is our source and our use of capital.

So if you wanted to just back out the amount that we borrowed for the location and the amount that we borrowed for the mausoleum growth and the location growth and back out the acquisition costs, then you'd see that we just -- how much we borrowed was solely related to our increase in accounts receivable and merchandise trust.

John Ransom - Raymond James & Associates

What's your calculation or have you done that calculation for calendar '12?

Lawrence Miller

No, I haven't. But our uses of capital are in excess of the [burnouts] that we borrow on our revolver.

John Ransom - Raymond James & Associates

Right. You said this year, you expect 20 million or so of working capital borrowing. How much of that is growth build out of pre-need versus kind of ordinary gross?

Timothy K. Yost

All gross (inaudible).

John Ransom - Raymond James & Associates

Okay. And we've talked about this before, but if you were to shut the growth down, when does the cash burn from excess cash generation, as you said, to harvest some of that, is that kind of three years, three or four years out? What would you see? I know you haven't put numbers out there, but I'm curious internally how you think about the waterfall?

Timothy K. Yost

John, we look at -- it's still in the same three to four range that we always talked about, three or four-year range on a location basis.

John Ransom - Raymond James & Associates

Okay. Thank you.

Lawrence Miller

Thanks, John.

Operator

(Operator Instructions). We have no further questions on the phone lines, sir.

Lawrence Miller

All right. Thank you, operator. Thank you for everyone who participated on the call and for any of our employees that are listening as well to the transcript. I thank them for a terrific 2012. We're looking for bigger and better in 2013. Thank you.

Operator

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

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