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StoneMor Partners L.P. (NYSE:STON)

Q1 2013 Earnings Call

May 7, 2013 11:00 am ET

Executives

John C. McNamara – Director of Investor Relations

Lawrence Miller –Chief Executive Officer, President and Chairman of the BoardTimothy Timothy K. Yost – Chief Financial Officer

Analysts

John Ransom – Raymond James & Associates

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the 2013 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 Tuesday, May 7, 2013.

I’d now like to turn the conference over to John McNamara, Director of Investor Relations. Please go ahead sir.

John C. McNamara

Thank you, Magi. Good morning, everyone, and thank you all for joining us today on our conference call to discuss our 2013 first quarter financial results. With us on the call today are Larry Miller, Chairman, President and Chief Executive Officer and Tim Yost, Chief Financial Officer.

Before we begin, as usual I would like to remind everyone that statements made on today’s conference call as well as in prior 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 our 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 releases and therefore reconciled to comparable GAAP information. The full earnings release can be found on our website at www.stonemor.com.

I’d now like to turn the call over to Larry Miller, who will take it from here. Go ahead Larry.

Lawrence Miller

Thank you, John. Good morning, everyone. Thanks for joining us today. As you can see from our press release, Q1 was a strong quarter for StoneMor. As we’ve repeatedly discussed GAAP reporting is not really reflective of our current performance. Since we managed the Company and focus more on what previously was called the accrual method, which we believe provides better matching of revenue and expenses.

So I will concentrate my comments there, the key items that we focus on our production base revenue, which increased 11%, adjustable operating profit, which increased 20%, and distributable free cash flow, which increased 28%.

In addition, we continued our acquisition program and pay down our debt by $16 million this quarter. The acquisition environment continues to be robust and we are evaluating a number of possible deals. As a matter of fact, an interesting point here since 2008, we have increased the Company’s assets from $700 million to $1.4 billion today, while only increasing our total debt from $161 million to $263 million.

As previously discussed, we’re continuing our commitment to add more funeral homes which consume less working capital than the cemeteries. We expanded our presence in Florida this quarter by adding six funeral homes and two cremation facilities for total deal price of approximately $17 million.

Finally, given our strong results and optimism about 2013, we increased our distribution by $0.005 this quarter, which I believe was the second increase in six months.

And with that I will turn it over to Tim, and then I’ll come back for Q&A afterwards.

Timothy K. Yost

Thank you very much, Larry. As Larry mentioned, we’re really pleased with the results of the quarter. All of the aspects of our business improved when compared to the same quarter of last year. When you consider that the comparable quarter last year contained the results of Archdiocese of Detroit that makes results even more impressive. We saw gains in both our pre-need and at-need sales, our pre-need sales increased by approximately 3.7% and our at-need sales grew by approximately 1.5%.

The growth in at-need sales was somewhat muted due to the comparable quarter including the Archdiocese, which did a significant amount of at-need business. The primary reason for the growth in sales overall and specifically pre-need was improved performance in our western region. Larry mentioned last quarter that we have made changes to our sales management structure and personnel, we’re already seeing the positive impact of these changes. Additionally, we mentioned last quarter that there unrealized gains in our merchandise trust accounts that were not taken by investment managers.

During the first quarter of this year, the gains that we didn’t take last year were taken, which was consistent with their investment strategy and the Company’s investment policy guidelines. The recognition of these gains led to an increase in our quarter-over-quarter investment income from our trust of 32.8%.

And finally, as Larry alluded to, we acquired 16 funeral homes last year and an additional six funeral homes on Feb 19 of this year, which enables us to increase our funeral home revenue by 38.3%. Acquisitions did not account for the entire revenue increase during the quarter, but we also saw improved results due to uptick in the death rate during January, which was primarily related to particularly severe flu season.

Our cemetery related expenses were generally in line with our expectations and increases in variable cost related to increases in volume. Our funeral home expenses increased due to the fixed costs added through acquisition, and variable costs related to increased volume. One other worth pointing out is that we have a one-time charge for non-recurring personnel expense of approximately $1.3 million, which accounts for the entire increase in our corporate overhead.

The strength of our quarter results reflected in our operating metrics, our adjusted operating profit grew by 20.2%, which resulted in the growth of distributable free cash flow of 28%. Larry mentioned the same thing, but those are very important numbers and very important metrics to us as they really relates to how much cash we’re generating, how well the business does.

As we discussed last quarter, the timing of the recognition of the gains and our trust accounts can impact these metrics. This quarter, we are seeing the positive effects of that timing. Also during the quarter, we reduced our long-term debt by $16 million, which increased the distribution coverage quarters to 9.72, which is up considerably from the 6.57 reported at the end of last quarter.

Our GAAP results were impacted by the timing of the recognition of revenues during the quarter when compared to the same quarter of last year – when compared to the same quarter of last year, we differed $7 million more in net profits. This fact alone accounts for all of the variances in our GAAP results. One final note, in our year-end 10-K, we announced that our 2010 tax returns were under audit by the IRS. The audit included an audit of our status as a partnership. On April 9, we received a letter from the IRS indicating that they had completed their review and we’re not proposing any adjustments to our returns.

So, in summary, it was a really good operational quarter and we saw the added benefits and performance our trust funds. We’re also pleased with the added contribution of our funeral homes, which is consistent with our recent growth strategy.

And with that, operator, I’d like to turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question is coming from the line of John Ransom. Please go ahead.

John Ransom – Raymond James & Associates

Hi, good morning. First of all, let me just compliment you on how [helpful] you guys have gotten. I remember 30 minute accounting lesson. So we’re nominating with the call for questions. So that’s a good thing.

Lawrence Miller

We’ll try.

John Ransom – Raymond James & Associates

Yeah. I’m curious about the funeral. Could you just talk a little bit about, first of all, what kind of accretion to distributable cash flow you get from these funeral acquisitions, how do valuation compares, how do pipeline looks, and also if you look at a couple, three years, how big you think funerals could be as a percent of your overall mix, say, revenues and operating profit?

Lawrence Miller

I think I heard four questions. I wrote down two.

John Ransom – Raymond James & Associates

I’m sorry. I’m sorry to attack this morning. So, I’ll come back in a moment if you need to.

Lawrence Miller

I’ll answer the value proposition pipeline and maybe Tim or the other...

John Ransom – Raymond James & Associates

Value pipeline accretion and mix of the…

Lawrence Miller

As we evaluate the – I think our metrics are fairly similar between cemetery and funeral home. We’re still looking to in that four to six times EBITDA range where we’re looking at cash flow. We’ll find cash flow. We still do our discounted cash flow model. So, I think when you first look at, when you look at them, there’s really little difference in how we’re valuing them. Other than the fact we’re consciously looking to acquire similar to help the optics on our cash flow.

The pipeline, right now, I guess the pipeline for us is, because we sort of shifted focus, is a little bit stronger on the funeral home side. We’re still looking at a number of attractive cemeteries, but given the acquisition of the Lohman family and now with the Seawinds acquisition, Jimmy Young, these are very prominent people within the funeral side of the business, and they’re introducing us to a number of services. Tim, you can try the other question.

Timothy Yost

John, I think your question was related to accretion as well. On a cash flow basis obviously, the results with the funeral homes are more readily apparent as cash flow from operations. And as Larry mentioned, I mean, we look at accretion the same level that we look at accretion with a cemetery deal. So we expect them to be somewhat consistently with cemetery deal, the only difference being the optics of how the cash flows flow through the cash flow from operations section of the cash flow statement.

John Ransom – Raymond James & Associates

Would you think about trusting any of that funeral business?

Timothy Yost

In the states where it is advantageous for us to do so, we do.

John Ransom – Raymond James & Associates

Okay. Okay.

Lawrence Miller

John, we haven’t set down a long-term modeled out, so we want to be 50-50 or 70-30. I mean, I think, we’re still a cemetery company with a strong expertise in preneed. So, I mean, we’re going to continue that to drive that side of the business, but...

Timothy Yost

And, as always, John, we always look to make opportunistic strategic accretive acquisitions and that really hasn’t changed other than the fact that we’ve gained and traded some better funeral properties that were...

Lawrence Miller

And one final point. What we’ll try to do, John, with our presence in Florida, like the Seawinds acquisition, I mean, we’re going to aggressively look to acquire cemeteries in that same market, so that we get dealt with the combination benefits.

John Ransom – Raymond James & Associates

Or maybe how big your NOL is now?

Timothy Yost

$200 million state, $160 million federal.

John Ransom – Raymond James & Associates

So basically, both of our lifetimes before you can say that. Probably, so you’re going to like, in other words, the point is you have a lot of room to by those assets and not consider your NOL?

Timothy Yost

Yes. Exactly, right.

Lawrence Miller

Yes.

John Ransom – Raymond James & Associates

Okay. Thank you.

Lawrence Miller

Thanks, John.

Operator

(Operator Instructions) There appears to be no further questions at this time.

Lawrence Miller

Okay. And these are kind of calls we like. We like to put out good information. Hopefully it’s clear and people are getting a better understanding of the company. As always, I want to thank all of our employees. Thank you for your support. Look forward to talking to you in a couple of months. Thanks. Thank you, operator.

Operator

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

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