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StoneMor Partners L.P. (NYSE:STON)

Q3 2009 Earnings Call Transcript

November 09, 2009 11:00 ET

Executives

Tim Yost - Vice President of Financial Reporting and Investor Relations

Lawrence Miller - Chief Executive Officer, President and Chairman of the Board

William R. Shane - Executive Vice President, Chief Financial Officer and Director

Analysts

John Ransom - Raymond James & Associates, Inc.

Operator

Ladies and gentlemen, thank you very much for standing by. And welcome to the StoneMor Partners Quarterly Earnings Conference Call. During this presentation all participants are 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 on Monday December 9, 2009.

Our speakers for today are William Shane, Executive Vice President and Chief Financial Officer, and Lawrence Miller, President and Chief Executive Officer. I would now like to turn the conference over to Tim Yost, Vice President, Financial Reporting and Investor Relations at StoneMor Partners. Please go ahead sir.

Tim Yost

Good morning. Thank you for joining us today. Statements made this conference call and in our public filings, releases and website which are not historical facts, may be forward-looking statements and involve risks and uncertainties that 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 releases and is, therefore, reconciled to comparable GAAP financial information. The full earnings release can be found on our website at www.stonemor.com.

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

Lawrence Miller

Thank you, Tim. And as Tim said; good morning and thank you for joining us for our third quarter conference call. Despite the continuing difficult economic environment, we’re very pleased to report another strong quarter for the company. We’ve reported an increase in adjusted operating profits, total revenue and operating profit for the three months ended September 30, 2009.

Adjusted operating profit, the most meaningful measure of economic value added, increased 23%. This increase which is primarily [ph] caused by an increase in sales and cemetery revenue and increase in investment income from our trust funds and a slow reduction in cemetery expenses offset by a slight decrease in funeral home profits and slight increase in G&A.

While we’re pleased with our performance and our ability to continue increasing our sales, despite the very difficult economy it does make it more difficult to understand the impact of growing our sales on operating cash flow. These increased sales build our accounts receivable and our merchandise trust which use cash, but these are only tiny differences which will reverse in the near term and generate cash, and I think Bill will probably add a little more color to that.

The conundrum for us is, do we continue to improve the economic value of the business and temporarily tie up cash in accounts receivable and trust, or slow down our growth and improve cash short term? We continue to believe our model is sound and our choice to continue building the business is correct.

Also, the improvement in the economic value of the business can be reflected in the increase of our backlog to almost $240 million. Another positive is the continued improvement in the fair value of our assets and our trust funds. Year-to-date, we have recovered nearly $60 million in market value. And as a final note, I’m pleased to report two additional banks, since our last call, have joined our syndicate – our bank syndicate - that we [ph] re-raised the 80 million a few months ago, for an additional $20 million.

Now with that, I’ll turn it over to Bill to give you more [ph] details.

William R. Shane

Thanks, Larry. I’m also glad to sit here and talk about another strong quarter that we had. And I’m going to go through a couple of the measures that we talk about in the press release first, and then I’ll go through our earnings statement [ph] and the tax level on balance sheet.

As Larry said, we have this measure called adjusted operating profit and there’s a reconciliation in the press release from the financial statements’ operating profit and how we get to adjusted operating profit. And when we look at our business and we talk about this in every quarter’s press release, we manage our business by looking at the value of our contracts that we write, both pre-need and at-need, and now of course since we’re getting a little bit larger in the funeral home revenues as opposed to the – what we call SAB 101, 104 income recognition criteria which measure income and revenue recognition based upon the purchase of products, rather than [ph] entering into contracts with customers or even the payment of those contracts with customers. And that’s why we have in our financial statements, and when you will see we file our 10-Q we filed later on today, a segment information section, which identifies the income statement based upon how we run our business.

We also that you will find we have something new in our 10-Q. We now have a management’s discussion, we have two different management’s discussion and analysis and I think it’s important to note that this is the first time that you will see that and you will continue to see that in our annual reports and quarterly reports that are filed from here on in. The first management’s discussion and analysis is based upon the way that we run our business, based upon the pre-need value of cemetery contracts written, no deferred revenues, no deferred cost, everything gets expensed as incurred. And we now have a very detailed management discussion and analysis on that. We also have the management’s discussion and analysis on the way that we are required to report under GAAP. So for the first time you will get details on both those methods.

So the adjusted operating profit concept is the concept that we look at in the way that we manage our business and as you can see, that increased 23%. Now Operating profit, on a GAAP basis, also had a significant increase for the quarter as you can see and Larry already discussed some of the reasons why and it’s also in the press release so I am not going to re-go over the same thing. But we put a chart also in the press release which is in a little more detail, which I like, that reconciles our total cemetery revenues to the value of contracts written. And you can see the total revenues, on a GAAP basis, are up 1.8% but the value of contracts written are up 5.4% for the period in the total revenues. And that’s how we manage, that’s how we manage our business and in the period of economic uncertainty that we have been in since really the third from the end of the third quarter of last year, I think it’s terrific that our business continues to see increases.

And you can see the increases in the pre-value of cemetery contracts written up almost 10% over the same period last year we did have a drop in funeral home revenues and our drop in funeral home revenues is directly related to the decline in the overall death rate. I am sure that there’s a lot of people on this call who have seen some of the other financial statements of other deathcare companies to have all discussed the fact that the death rate is down. And we get asked the question I would say almost every single day why do we, why do we think the death rate is down. Earlier in the year people were attributing it to the flu but with respect to our business that really doesn’t have a significant impact.

What does have a significant impact and I think it’s common consensus now is the birth rate, the average life span now is about 78 and if you go back and you take a look at the birth rate 78 years ago you will find a dip in the birth rate. It went down and that makes sense that that translates into a reduction in the death rate today. What also makes sense in some of the other charts that we look at that in 2011 to 13 and thereafter, there was a significant, 78 years ago there was a significant increase in the birth rate.

So the comments for today is that within the next couple of years we are going to see a significant increase in the death rate because a life time ago, 78 years, there was an increase in the birth rate.

So when you see the funeral home revenues that’s, that’s really the only reason why they are down is the number of deaths are down. The investment income owner trust is good and we talked about over this past year a number of things with respect to our trust fund as many companies did, we had a significant drop in the market value of our trust and our trust [ph] on market-to-market on our financial statements predominantly through the third revenues.

And even though we had a significant downturn in the value. the market value of the trust which now has significantly come back in the third quarter, our revenues our cash flow from the trust has remained the same.

We have, one of the investments in our trust is master limited partnerships just like us and the master limited partnerships just like us have suffered a decline in the value not related to the, in my opinion anyway, not related to the basic nature of the business, but related to the overall economy. But the master limited partnerships in general have continued to maintain redistribution and have continued to distribute cash flow as they always did.

And all – the majority of the other investments in our trust – and so I won’t say all, I think we had one or two that – that were not significant, that didn’t make their distribution, but overall our cash flow from our trust was increased this year even though the market value of the trust has declined.

And that’s – that’s why the investment income on the trust has gone up. And all that contributes to about a [ph] 5.5% percent increase in the total value of contracts written and again that translates back into either reconciliation to a 1.8% increase in the GAAP reported throughout the first.

Operating cash flow and distributable free cash flow was down when you compare it to the same quarter last year. I will point out even though everybody realizes that we reduced borrowings to build our business and we’ve discussed that in every quarter of the earnings call that – that there weren’t any borrowings of that nature in the third quarter. And that doesn’t mean that there are not going to be in future because as we’ve continued to acquire and grow, there certainly will be. But there weren’t any in the third quarter of this year.

We report in, as you know, a number of different states and each state has different laws with respect to the management of our trusts. In two of the states the trusts set a market value requirement, and if you drop below market value requirement, you don’t get to – get the cash flow for the earnings in that particular trust, until the market value rises back up to the level that’s required by the sate.

In two of those states, income is distributed once a year. Most of the other states, the income is distributed monthly, it flows from monthly distributions to distributing the income when the services are used by our customers. But in two of the states the way it works is that we have an audit done every year at December 31. The audit then is compared, they compare the market value of the trust with what it’s supposed to be and if it is in excess of that, you get to take out the income that you earned for that year. So in this case, in every September for these states we get income that was earned for the preceding year.

This year the market value of our trust – and this is – the test is done at December 31. If we were to do the test today that – this – the market value of the trust is back up, so we would get the distribution but you only can do it once a year. So, in these two states – [ph] I know this was low on explanation – we did not get in the month of September which we normally get every year $2.5 million in cash flow from the trust. So the main reason why the operating cash flows are down compared to the same quarter in the prior year is the fact that we did not get the distribution for the income earned in 2008 of approximately $2.5 million.

Now, that being said, when we do the test for 2009, as long as the market value continues to stay approximately as they were, if they even go down, I mean, we have plenty of cushion from where it is to that level then stress funds, we will get two year’s worth of distributions. So it is a timing difference.

And we talk about the timing differences all the time; investment of money into the trust, we look at the timing difference because as we purchase products we get it out. But the biggest timing difference in the operating cash flows and the reason why [ph] it was down and the distributable cash flow is because we didn’t get 2.5 million, because of that cash, we [ph] can deduct a $2.5 million of cash this year but expect to get two year’s worth next year. So I hope that’s not too long winded of an explanation.

Our financial statements look really good. We did have something that deserves comment that I think is appropriate. You will see a federal tax credit and rather the income tax expense we had, the income tax credit; we constantly look for ways to take best advantage of the tax laws for the benefit of all stake holders in this company, and we did some corporate reorganizations.

The corporate reorganizations that we did were generally in the taxable subsidiary level and they allowed us to recognize the benefit of net operating losses today that we will get in the future. There is a counting literature which gives us specific criteria on when you are required to recognize the benefit that you get from a net operating loss carryover, and because of our restructuring of our taxable entities we were required to take that [indiscernible] in this quarter. That’s what the tax credit is.

As you can see all our expenses are in line; cost cutting program is still giving us a significant benefit. However, in this year we have seen a significant increase in our healthcare cost. We reevaluate our scientific programs constantly, we – excuse me – [indiscernible] on the gain. And changed the deductibles and change with covenant not covered but we have experienced some significant increase in our medical plan [ph] course this year so that’s somewhat has offset the entire [ph] summary of benefit that we got from the cost cutting program.

On a year to date basis operating profit you see is down but up on a quarter basis and the reason why operating profit is down on a year to date basis and we have discussed this in other calls is we have a new item resulting from change in accounting principle in 2009 called acquisition related cost, and as everybody on the call knows we built our business through acquisitions and we spend money in due diligence and legal costs and all other related type costs – getting audits for companies before we close the acquisition. Previous to this year those costs were included as a part of the acquisition and capitalized and allocated to the assets that we acquired.

This year we are now required to expense them as incurred. So we see almost $2.1 million in expense in the financial statement on a year to date basis comparing to nothing in the prior year. This is the way the accounting principles have you implement this particular rule. And with that it puts the year pretty much equal [ph] towards an operating faces.

Revenues; still the revenue are down on a year to date basis, up on a quarterly basis. They were down because of the predominantly the [indiscernible] is down in service area and the products that we purchase were slightly down.

We didn’t discuss the balance sheet yet, and I’ll mention just a couple of things. When you take a look at the balance sheet you see that we went up $100 million since December, almost $100 million in assets. We had a couple of acquisitions, couple of minor acquisitions this year, in fact three properties in Ohio we acquired during 2009, but majority of the increase is the increase in the merchandise trust and that’s the difference between 161 and 194 in the merchandise trust and 152 and 186 in the perpetual care trust. So we had significant increases in the value of our trust funds as Larry talked about.

We also had an increase in deferred selling and obtaining costs and that’s related to the increase in deferred revenues and that represents the cost of the revenues that are deferred until we satisfy the purchase requirements and delivery requirements of accounting principles.

There aren’t any other major items in the – in the balance sheet that I think deserve comment. Overall, we had an excellent quarter; we are looking forward to continued good quarters and continued success in the future.

And with that operator, we’ll open it up for questions.

Question-and-Answer Session

Operator

Absolutely, sir. Ladies and gentlemen, we’ll now proceed to the question-and-question session. (Operator Instructions). And our first question comes from the line of John Ransom from Raymond James and Associates. Please proceed with your question.

John Ransom - Raymond James & Associates, Inc.

Hi, good morning.

William R. Shane

Good morning.

John Ransom - Raymond James & Associates, Inc.

The – kind of looking forward to 2010, what kind of working capital reversals should we expect from the service [ph] corp build-up, and when do you think that might happen?

William R. Shane

Yes, the reversals are not going to happen till, I think, sometime late in 2010, beginning of 2011.

John Ransom - Raymond James & Associates, Inc.

And what’s the …..

William R. Shane

We still have some projected borrowings and we will have some projected borrowings.

John Ransom - Raymond James & Associates, Inc.

And so you built up what, close to 20 million I guess, 20 million of receivables and will that all come back out or just a portion of it?

William R. Shane

Just a portion of it. And I don’t have the exact number off the top of my head what was built up in receivables from those acquisitions. I think it was probably significantly more than that. That…

John Ransom - Raymond James & Associates, Inc.

Okay.

William R. Shane

[ph] …receivables but I don’t have that number at my fingertips.

John Ransom - Raymond James & Associates, Inc.

And [ph] Shane, how should we think about that? Is that not going to reverse? Is it sort of a [indiscernible] investment…?

William R. Shane

It’s going to reverse itself so that we will not have to borrow and it will generate cash flow. And that will start probably, yeah, the end of 2010 into 2011, but what we hope to have is we hope to have continued acquisition and continue other acquisitions will run the same track. So I think if you talk about two and a half to three years…

John Ransom - Raymond James & Associates, Inc.

Okay.

William R. Shane

…to start to reverse in the past; and we bought that in ’07. So we are looking at the end of ‘010. Well, we bought it in December ’07, yeah, really, it’s – we only had it two years.

John Ransom - Raymond James & Associates, Inc.

Right, right.

William R. Shane

So, it is going to take a little while longer.

John Ransom - Raymond James & Associates, Inc.

And is that – has that expectation changed any or is that in line with what you thought?

William R. Shane

We are doing terrific.

John Ransom - Raymond James & Associates, Inc.

Okay. So, secondly, when you – now that you’ve had a couple of years to look at that property, what do you find that they were not doing that you do, and then also how do you find that they run from an efficiency standpoint compared to what you do? Just to give us a little more sense of how you think about these acquisitions, how you improve them, and how long it takes to get to what your level of operating profit and cash flow [ph] you try to meet?

William R. Shane

Let me talk about what we do rather than what somebody else doesn’t do. Okay, because we bought those acquisitions from [ph] SCI and they’re a great company and they do really well and we get along really good. So I would never even presume to get what they don’t do. They have a different operating philosophy that we do. Our niche is in smaller cemeteries. Their niche is in larger cemeteries. So they operate differently because it’s a different market.

What we do in cemeteries is – and I am going to talk about our acquisition in general – number one, we invest the trust funds especially perpetual care funds to generate income to offset maintenance costs and get to use professional managers. Individual cemeteries can’t access the market as we can. So generally we see an increase in the value of trusts. Now when we buy from a larger company they of course can access it and they have different requirements in the way they manage their trust funds, though, than we do.

We do not have a general management. We’re totally centralized. So when we are making the acquisitions, there are a number of people at the individual location who are involved in counting functions or paying bills or things like that that we don’t need because we are totally centralized. So the only people that we have at the locations are sales people and a couple of cemetery administrators who deal with the customers. We have – and maintenance and the maintenance people of course and we are able to use professional maintenance techniques.

We put chemicals on the grass, which cause it to grow slower and things like that. We get professional maintenance. We also buy our products cheaper than the average cemetery does, because we buy in volume. And we do not have middle-level managers in our cemeteries. We have three tiers of managers, the head superintendent and the head salesperson and the head administrator and there is no general manager and there is no middle management. So those are some of the benefits that we get from and also we have a significant effort on [indiscernible] which is really number one and those are the main things that we when making an acquisition.

John Ransom - Raymond James & Associates, Inc.

Got you. Okay. Thank you for that.

Operator

And thank you for joining us [ph] for questions. (Operator Instructions). Gentlemen, it appears our audience has no further questions and so I am putting you back to the speaker once again. Thank you.

William R. Shane

Well, thank you everyone. I am glad we are so informative that we didn’t trigger a whole bunch of questions but in closing I would be remiss if I didn’t – do not thank our 2,500 employees for their continuing dedication to the company and the customers we serve and we look forward to discussing our year-end results with you in a few months. Have a great year. Thank you.

Operator

Thank you sir. Ladies and gentlemen that does conclude the conference call for today. So thank you all for your participation and ask that you please disconnect. Thank you once again. Have a wonderful day.

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Source: StoneMor Partners L.P. Q3 2009 Earnings Call Transcript
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