StoneMor Partners' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: StoneMor Partners (STON)

StoneMor Partners L.P. (NYSE:STON)

Q2 2013 Earnings Conference Call

August 7, 2013 11:00 am ET

Executives

John McNamara – Director-Investor Relations

Lawrence Miller – Chairman, President and Chief Executive Officer

Timothy K. Yost – Secretary and Chief Financial Officer

Analysts

John Ransom – Raymond James & Associates

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the StoneMor Partners Second Quarter Earnings 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 Wednesday, August 7, 2013.

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

John McNamara

Thank you, [Simran]. Good morning everyone and thank you all for participating on our conference call to discuss 2013 second quarter financial results. With us on the line this morning are Larry Miller, President and Chief Executive Officer; and Tim Yost, Chief Financial Officer.

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 earnings release can be found on our website at www.stonemor.com.

I’d now turn the call over to Larry Miller. Go ahead, Larry.

Lawrence Miller

Thanks, John. Thank you everybody for joining us for our second quarter earnings call. As we stated in the release, it was another strong quarter for StoneMor. Our three key performance measures increased significantly. Our production-based revenue increased by 5.3%, adjusted operating profit increased by 8.2% and distributable free cash flow increased by over 68%. This, of course, included which Tim will talk about, included funds received from several legal settlements.

As we previously indicated, we have made a commitment to acquire more funeral homes and we are pleased with the results so far as we saw 36% increase in revenue, which contributed to a 29.4% increase in our GAAP operating profits, and an even greater increase in distributable free cash flow.

While we’re still heavily focused on cemeteries we will continue to look for good strategic funeral home operations that complement our Cemetery Division and while it may be the first introduction into a market we certainly will look for markets where when we acquire the funeral home, we can in subsequent periods acquire cemeteries to have a good combination of the concept.

The acquisition market continues to be very robust. Last week we closed on a very nice acquisition in the Virginia market, it’s a cemetery, but it had – it’s got a $5 million acquisition and has nice EBITDA and cash flow characteristics. So we’re real excited about that acquisition. And finally, as I mentioned, well, and the market is still very, very robust. We are looking at a number of deals and are cautiously optimistic that we’ll see some additional acquisitions before year-end.

And as I previously mentioned, this quarter included charges for our refinancing, which we did a few months ago and cash received from some legal settlements that involve properties that we had acquired and we brought this to a successful conclusion, and Tim will give you a little bit more information on both of those guidance.

So with that, I’ll give it to Tim and then we’ll go into Q&A.

Timothy K. Yost

Thank you, Larry. As you mentioned it was a strong operational quarter with positive results from both our cemeteries and our funeral homes. In addition to the production based results Larry mentioned, we also had improvements in our GAAP results.

We had increases in our recognized revenue, operating profits and operating cash flows. Normally don’t spend a lot of time discussing our GAAP results, but I thought it was worth pointing out that the funeral homes that we acquired will tend to make this look better optically.

Although we discuss this from time to time, I think it’s a good idea to remind people that the operational information that we provided in our earnings release and quarterly and annual filings is simply all GAAP. The application of FAS 154 back in 2011 changed the face of cemetery accounting and moving from the sales based revenue recognition to a delivery based revenue recognition.

When we talk about production revenues and adjusted operating cash flow, what we are really talking about is all GAAP, which is how we view the operations of our Company. We are sales based organization, we follow, we monitor and we maintain that information and that’s why we provide that we believe this is important for the investor to understand.

I will just spend some time focusing on a few items that were directly impacted by one-time things here in the quarter and some things that is related to timing. So first, our significant growth in distributable free cash flow as Larry mentioned, which increased by almost 70% was primarily related to a cash settlement we received related to a one-time legal settlement. This settlement stems for some properties that we acquired in 2010 and 2011.

When we acquired the properties, they were in receivership and were involved in litigation which for the most part hasn’t set off. Due to confidentiality agreement I am unable to provide much color here, but absent this transaction, our distributable free cash flow would have been in line with or slightly above our expectations.

We saw significant increases in our production based revenue during the quarter; our pre-need cemetery revenues increased by 9%, our interest income increased by 3.4%, and our funeral home revenues increased by 46.3%. If you remember, we added a significant number of funeral homes within the last year and we are happy with the contribution.

When we are discussing our year-end 2012 and first quarter 2013 results, we accommodate all the effects of the timing of the realization of gains in our trust accounts. When comparing this quarter results to the results for the same quarter last year, same is true again.

Last year during the second quarter, our investment advisors realized gains on some of our trust investment, but does not do so in the second quarter of this year; this is entirely related to the timing and the market positions that exist during the quarter. If you look at our year-to-date numbers, our trust have earned slightly more this year than last.

On the cost side, we also had a significant transaction as we had a one-time cost component, so we yield positive cash flow gains for many years. We issued $150 million in 10.25% senior notes in 2009. This is not the best time to be issuing debt, but due to maturation of our previous debt, we are required to do so.

At the time, being a first time issuer, we were satisfied that this was a going rate for company of our size in credit rating. We then had a four year no call provision and we had always intended to refinance the debt at the earliest call day, provided the market conditions were favorable.

In May of this year, we determined that based on market conditions and growth of the company, the rates that we will be able to issue new debt was so favorable that we would not only make a tender offer for the notes and pay the call premium, but we would also be able to reduce our annual cash interest expense by $1.6 million. So that’s exactly what we did. We issued a $175 million in new notes, with the 7.875% coupon and repurchase the outstanding notes. In addition, we were able to put some maturity to 2021 further eliminating any near-term maturities.

In our income statement for the quarter, you will see an expense titled, Loss on early extinguishment of debt. This includes $14.9 million related to the tender and early call of the notes, at $6.7 million and written-off debt issuance cost and original issued discount from the previous calendar quarter notes.

We think this is a very positive move which will serve to reduce our cash interest cost for years to come. So in closing, on top of a really good operational quarter, we had two positive one time events, one which provided an infusion of cash and increased the amounts held in trust. I wonder will provide significant cash interest earnings for the next eight years.

So with that operator, I will turn it over to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of John Ransom. Please go ahead.

John Ransom – Raymond James & Associates

Hi, just wanted to settle down a little bit more on your interim acquisitions. First of all, does the quarter fully reflect the run rate of all these acquisitions, or were some of these cost enter the quarter and you might get a little boost from timing back half of the year?

Lawrence Miller

The quarter fully reflects all the things that we acquired previously John. But we sort of believe that they will perform better as we go forward. As you acquire and integrate cemeteries particularly the C1 – excuse me funeral homes, particularly the C1 wins ones, we are in the process of folding them in and utilizing Jim Young, who is the previous owner and now an employee of the company, to help us ramp those and other locations up. So we do see some growth in those funeral homes.

John Ransom – Raymond James & Associates

And do you – how much a) pipeline and b) room do you have to keep adding these acquisitions and also continuing to pay your distribution and meet all your other obligations?

Lawrence Miller

Well, we have a significant pipeline of acquisitions and currently we are limited on room, but has spoken to banks in the past and has had discussions that if we needed to create some more room, we probably can. The trick will always be leverage and how we finance them. If we finance them with that offerings or debt or equity, we’d look to do a balance of both if large scale transactions came up or there were anything out there for us to do. So we have flexibility, visibility to do that, a traditional equity as well to keep our leverage ratio and debt levels in line.

John Ransom – Raymond James & Associates

And I know the advantage of funeral is current cash, I mean generations versus cemetery which you get the backlog. Is it as accretive to your other metrics, EBITDA, distributable free cash flow as a cemetery acquisition? Is it less so because you pay more for current cash and how should we think about that?

Lawrence Miller

I am going to give a sort of cheesy answer, I apologize. The answer is it depends how well we buy the cemetery or funeral home. I mean to the extent that we buy them attractively they will be as accretive. Historically cemeteries we have had the ability to grow much more significantly than funeral homes. So they tend to have been more accretive in the past, but I don’t want to say that the future deal for funeral home bought well would not be equally accretive.

John Ransom – Raymond James & Associates

I don’t know what to do with that answer, but that was good.

Timothy K. Yost

I talked a lot whether I said anything or not, John might be an issue?

John Ransom – Raymond James & Associates

You might want to go into politics, that was good.

Lawrence Miller

John, it’s Larry.

John Ransom – Raymond James & Associates

Hi.

Lawrence Miller

I think the biggest thing when you look at the model is that with the cemetery, the positive is, we generally can substantially increase the prior performance, because we are so aggressive on the pre-need selling. The negative to that is the use of cash, the whole optic issue.

On the funeral homes, I would say there is kind of two differences; one, there is definitely more competition for funeral homes. So we got to be very selective and very careful, where we spend our money, because people for some reason seem willing to pay a little bit more for funeral homes than they do on the cemetery side.

And then the second thing is, we are not going to get a significant percentage growth in the business except for states like for Florida where the trust laws relative to pre-need funerals are very favorable. So that’s I think what Tim was indicating, we might see some upside in the acquisitions we did specifically in Florida. It’s because of the pre-need. I mean the at-need we can’t change dramatically, but the good news is, it’s a cash business. So we sort of balancing kind of three or four those variables to try and come up the right acquisition strategy, that they helps the overall performance.

John Ransom – Raymond James & Associates

And Florida for example, are you – can you just make sure understand that instead of when you sell a product in the pre-need are you getting paid by a third-party trust company. And then they take the investment arbitrage or I think about, another foot FDI does quite, I think there are 70% of the funeral pre-need is trusted. Is that the kind of leverage you’re talking about?

Timothy K. Yost

No, John what happens is that 70% of the selling price of services are required to put into trust, and 30% of the sales of merchandise are required to be put into trust. So it’s very similar to a cemetery for us, in which we are putting percentage of the sales price at the items that we sell into trust. That money is managed by the same third-party managers that we have today.

John Ransom – Raymond James & Associates

Okay. There is more cash, and more profit, more GAAP earnings realized in Florida than in the state where we funded doing insurance product.

Lawrence Miller

I see.

John Ransom – Raymond James & Associates

I see, okay, very good. Nice shot.

Lawrence Miller

All right thanks John.

Timothy K. Yost

Thanks John.

Operator

(Operator Instructions) And there seems to be no further questions at this time, sir.

Lawrence Miller

Okay, thank you operator, and everyone thanks for joining us and look forward to talking to you next quarter. Thanks everybody.

Operator

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

StoneMor Partners (STON): Q2 EPS of -$0.54 misses by $0.43. Revenue of $62.4M (+1.5% Y/Y) misses by $2.03M. (PR)