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StoneMor Partners LP (NYSE:STON)

Q3 2013 Results Earnings Call

November 7, 2013 11:00 AM ET

Executives

John McNamara - Director, Investor Relations

Larry Miller - President and CEO

Tim Yost - Chief Financial Officer

Analysts

Fla Lewis - Weybosset Research

Nicolas Jansen - Raymond James

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the StoneMor Partners Third Quarter 2013 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 today, November 7, 2013. I would now like to turn the conference over to John McNamara, Director, Investor Relations. Please go ahead, sir.

John McNamara

Thank you. Good morning, everyone. And thank you all for joining us for today’s conference call to discuss 2013 third quarter financial results. With us on the call today are Larry Miller, President and Chief Executive Officer; and Tim Yost, Chief Financial Officer.

At this time, 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, maybe 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 and we disclaim any obligation to update 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 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.

And lastly, before we begin we would also like to remind everyone that on Monday, November 18th at the New York Stock Exchange StoneMor will be hosting its first annual Investor Day. If anyone who has not already signed up, would like to attend, you can find information on how to register through our website again at www.stonemor.com. There is still time to register so, again, if you would like to sign-up please do so and we will see you there.

Now I’d now turn the call over to Larry Miller who will take it from here.

Larry Miller

Thank you, John, and good morning. Thanks for joining us for our third quarter conference call. I am happy to report the company continues to successfully achieve its business plan, which is to increase shareholder value through the purchase of cemeteries and funeral homes.

Even with an unusually large $2.2 million land sale last year, our production based revenue increased 7.3%, our adjusted operating profits increased 4.3% and we generated distributable free cash flow of approximately $15 million. We also increased our deferred revenue by $19 million to a total deferral of $558 million.

Tim is going to discuss more fully our GAAP results, but I do want to remind you that our GAAP P&L is more about delivery rather than performance.

Of particular note, several quarters ago, we discussed increasing our ownership of funeral homes, while we are and will continue to be primarily a cemetery company, we did say that we would acquire more funeral homes provided they are located in good areas where they are leaders in their markets, have quality management and would immediately contribute to profits and cash flow.

Ultimately, we hope to add cemeteries in those markets, so that we can benefit from being able to offer families all the necessary products and services that they are going to need. So far, so good, as we reported the segment is performing well and we recorded a 17.5% growth in funeral revenues.

Finally, the real exciting news this quarter is our entering into agreement with the Archdiocese of Philadelphia. The 13 cemeteries which will allow us to market all five counties in Philadelphia and the surrounding area currently perform 7,000 burials a year.

Historically the Archdioceses has only sold the burial right. So there are thousands and thousands of property owners that have never purchased a merchandize and other services.

As soon as final regulatory approval is given, we will hire between 75 and 100 counselors and substantially increase their sales and profits. This is a huge opportunity for StoneMor and we greatly appreciate the trust and confidence given to us by the Archdiocese of Philadelphia.

Before I give it to, Tim, I do want to just a moment on the investor conference. There will be about six two-hours of presentations and we hope we can add a little bit more transparency to the company.

We hope that people they’re really interested. We can help explain a little better the differences between GAAP and accrual so you can get a better feel for the company and I really encouraged any one if he can stop buy, it certainly a nice venue to come to the New York Stock Exchange, but we look forward to talking to as many people as possible.

With that, I will give it to Tim and then we’ll take your questions.

Tim Yost

Thank you, Larry. As you mentioned, we are quite pleased with our operational results for the quarter. You mentioned the increase in our production based revenues and adjusted operating profit, which helped to lead to a 23% increase in our operating cash flow. The calculation of our distributable free cash flow is present in order to help to read or understand what our cash flow looks like without inherent timing issues in our business.

As Larry mentioned, we had a large sale related to private estate for one individual, this was a $2.2 million our cash sale last year to significantly help last year’s results. Absent that sale, our distributable free cash flow would have increased by little over 9%. With all that said, our distributable free cash flow exceeded our distribution for the quarter by 8.5% and 47.6% for the nine months ended September 31, 2013.

Additionally when the 10-Q is filed you will notice there was a slight dip in our revenue per contract numbers when compared against the same quarter of last year. This is entirely due to the $2.2 million sale that both Larry and I mentioned previously.

Our year-to-date numbers continue to show steady increase when compared to the same period last year.

Our GAAP result represents the services that we’re performed and the products that we’re delivered during the period. As we continue to grow both our pre-need sales program and the number of locations that we own, we will continue to defer a large portion of the revenues that we produce.

These defer profits are captured on our balance sheet and we’ll be recognized in the future. In the release, we provide table that reconcile our current sales and expenses to those that we recognized in accordance with GAAP.

During the third quarter of this year, we deferred approximately $5 million more in profit than the same quarter last year. This deferral accounts for the difference between our GAAP operating profits presented on the basis of our income statement and our actual operational results.

In order to analyze our result it is important to recognize this large portion of operational results that are presented on our balance sheet and those are listed as deferred revenues net and deferred selling and obtaining costs.

This makes it difficult to fully understand the performance of the company without carefully analyzing all of our financial results. Rather than solely being able to discuss how much we sold during the quarter we wind up spending in order amount of time discussing the timing differences between when we sell an item and when we deliver it. Ordinarily company that defers the recognition of revenues, they will recognize it over define time period, our industry is quite different. Currently, we have over $450 million in deferred profits awaiting future recognition.

And additionally, we were to add up our accounts receivable and our merchandize trust and compare it to our liability to deliver products and performs service within the future, we have over $400 million in excess funds to satisfy all the liabilities, which at the end of the day we’ll still leave us with over a $120 million in excess cash.

It was a strong operational quarter, it was highlighted by nice growth in our operational cash flow and continued increases in production base revenue and adjusted operating profits.

And with that, I would like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question is from the line of Fla Lewis. Please go ahead.

Fla Lewis - Weybosset Research

Hello, Larry and Tim.

Tim Yost

Hey Fla.

Lawrence Miller

Hey Fla, how are you?

Fla Lewis - Weybosset Research

Just fine. I wanted to ask about this arrangement with the Diocese in Philadelphia, kind of reminiscent of something we tried in Detroit and tried it and it didn't work. Is this a similar arrangement and why will this one work? Just wanted to know more about it?

Lawrence Miller

You may know more from just a couple of our presentation slide -- the Detroit deal was very different. No cash exchanged hands. We knew going in that the archdioceses had a lot of reservation about outsourcing what they thought it was a responsibility for the church. At the time, they entered into the transaction, their financial condition was really, really in poor shape and while we were successfully operating the properties, probably little better than they had expected, they did a very significant capital raise and they raised a lot of money for their archdiocese which essentially relieved the financial pressure.

And we in agreement with them -- based on having gone into with the knowledge that it might be a short-term deal, obviously we were hoping that there was long-term situation but -- that’s why we had build into provisions to protect us. So that when we did agree to terminate, we recovered all of our profits, the trust funds, the receivables, everything, so we came out ahead of the deal.

Obviously we did a pretty good job because when we entered into the discussions with Philadelphia, part of their due diligence was to talk to the archbishop in Detroit to make sure that we were the right people to deal with and he gave us a very solid endorsement. The deal with Philadelphia is much different.

For all intensive purposes, we looked at it like it’s an acquisition. We are paying them a lot of money for the right to have 100% of the benefit and bear 100% of the risk. As the 60-year lease, there is a very limited window beginning in year ‘11. Obviously, if there’s cause, that’s a different issue but absent gross negligence were caused on our part.

They have a limited window in year ‘11 where they can exercise an out but the cost that are build into that, for them to exercise their out, we could substantially, most of the money that we paid them has to come back plus all of the profits that are laid up in the trust and the receivables. So it would really, really be punitive for them.

So we think this ultimately will function for 60 years and we are really excited about it. As I said in my opening comments, all that we ever sold is the burial right. So all of the merchandise and all the services they go along with that have never been sold and there is thousands and thousands and thousands of lot owners that on their space but have not purchased anything else and obviously that’s a great opportunity for us.

Fla Lewis - Weybosset Research

I know one of the advantages of the Detroit deal was the hope that word gets out that we're good at running cemeteries and so we're running a bunch of Catholic cemeteries. Do you think you'll get the same opportunity here?

Lawrence Miller

Yes, absolutely. And so we are hopeful that other archdioceses particularly -- you know, it’s a struggle for the church because the church has always felt an enormous responsibility to take care of the bodies. But the reality is they are under -- many of the archdioceses are under such financial pressure that like municipalities, they have to try and rationalize their assets.

And we are very hopeful that -- we certainly did a good job in Detroit, because had we not, I don’t think Philadelphia would have given us the chance to -- because it was out for public bid. There were other bidders involved. I mean, it wasn’t a question. We were the only guys in the game. There was competition for the deal. But clearly, they felt we could do a good job.

Fla Lewis - Weybosset Research

So it sounds good and well done.

Larry Miller

Thank you.

Fla Lewis - Weybosset Research

See you in New York.

Larry Miller

Okay.

Operator

(Operator Instructions) And our next question is from the line of Nicolas Jansen. Please go ahead.

Nicolas Jansen - Raymond James

Hey guys. Maybe just following upon on that question. In terms of kind of the financial impact, how should we think about the revenue contribution or just kind of the cash outlay associated with this transaction? And maybe remind us where you are as of the end of the third quarter with regards to your balance sheet capacity to support that level of deal?

Tim Yost

What you will see -- Nick, it’s Tim. What you will see is, we have sufficient room on our balance sheet to handle that kind of transaction, especially growth in the accounts receivable and our merchandise trust. We’ve modeled it all out. We are bit hesitant in giving projections on the revenue characteristic or those things. But what we can tell you is that there historically are 7,000 interment rights. There is no historical pre-need sales program and that we look to ramp it up consistently with all the other acquisitions that we do. The models are similar to an acquisition model and how we view all other properties with no historical pre-need sales.

Nicolas Jansen - Raymond James

So in terms of the cash burn over a few year period, before you start getting the cash flow and that's just how we should anticipate this transaction?

Tim Yost

Yes. Historically, the Catholic Church customer has fit into a little bit of different demographics for us. But their payment rates were different, their down payments were different. We are not making any projection that that’s the case but if it is, it’s only upside positive to us.

Larry Miller

Nick, we will probably give a little bit more guidance once we -- we just want to get our arms around it. When we close the deal, we are kind of being silent at the request of Archdiocese, so we actually close so sometime soon after closing. As Tim said, if it follows the pattern, our historical pattern -- we can kind of tell you where it is today.

But based on our experience in Detroit, we actually found that the -- even though people were buying it on an installment basis, the percentage down payment was substantially higher than the company average. And we’ve been told from other people involved and they are selling on behalf of Archdiocese that that seems to be a pattern. And if it is, then the cash burn obviously will be less but we will give a little bit more on that once we close.

Nicolas Jansen - Raymond James

That's helpful. And then maybe think about the M&A environment in general outside of this transaction. Obviously, there's a lot going on with regards to acquisition activity in the space and perhaps some divestitures. What's your pipeline look like today and how should we think about your ability to pursue some of those with this large Philadelphia deal in the works?

Lawrence Miller

Well, we certainly think -- I mean based on discussion with our bankers, they appear ready willing and able to support us, if we like the properties that are spun out. No one yet has seen the divesting properties from the Stewart, SCI transaction. No one even knows for certain but it’s going to go through, I guess we’re all operating on an assumption that ultimately it will go through and there will be properties and like a lot of others we’re sitting here waiting to take a look.

Depending on how attractive they are and the kind of pricing, we’ve always been very successful in dealing with SCI when they had divested properties. I think it’s fair to say they like dealing with us. We’re smart, intelligent buyers. We could get through the process quickly. And we’re hopeful, I mean, if they come out with a lot of quality cemeteries, we’ll be at the table.

Other net -- our other -- our pipeline is fairly constant. I mean there seems to be a steady supply of opportunities and we continue to evaluate them and I’m sure we’ll have some more deals in the future.

Nicolas Jansen - Raymond James

And maybe, Tim, I'm sure the 10-Q will come out shortly, but what's the current balance on the revolver?

Lawrence Miller

It is $99 million.

Nicolas Jansen - Raymond James

Okay, that’s it for me guys. See you in the couple of weeks.

Lawrence Miller

Okay, thanks.

Operator

(Operator Instructions) and our next question is from the line of [Tom Lamb]. Please go ahead.

Unidentified Analyst

Yes, good morning gentlemen. I have a couple of questions. One question Tim, it looks like the adjustments this quarter are greater than the adjustments a year ago in the year ago quarter. Is there anything to that or do adjustments vary?

Tim Yost

Tom, I want to answer your specific question. When you say adjustments, do you mean the adjustment between our GAAP revenues and our non-GAAP segment and revenues?

Unidentified Analyst

Yes, exactly.

Tim Yost

The adjustments are greater this quarter and that’s the truth and that’s how it works when we grow. It is that all of our current sales get differed on to the balance sheet until the products and service are delivered. We are continuing to grow and we grew this year at a greater percentage rate than we did last year on a larger base. So that deferral is necessarily larger. Does that make sense?

Unidentified Analyst

It does. Of course, it does make sense but I’m just curious the adjustment seem to be on a -- I understand that you’re growing and there is a larger base. But I want to say comparing the three month time periods, it just looks like for a similar amount of growth, it doesn’t look like the growth was that much larger and there’s the adjustment seem to be of a magnitude greater than they were last year, that’s all. I was wondering

Tim Yost

And Tom, what makes that happen is the timing and I won’t say it again in this conversation because it’s get confusing. What I was trying to talk about in my release is that the timing of the delivery of the products that we sold in the past, the mix of those products, all of those things is different this quarter than it was same quarter last year.

So it can point to different things. The customers that passed away, they could be previous pre-need customers or they could be true, you add these customers. So when you get through the difference from that mix between pre-need and at-need from the delivery standpoint that changes things as well. So matter of fact, if you look at deferral of the at-need revenues, its pretty constant quarter-over-quarter, but if you look at the pre-need that’s where you see the real difference.

Unidentified Analyst

Right. Okay.

Tim Yost

So it’s fairly a mix and timing of pre-need and at-need customers.

Unidentified Analyst

All right, all right. Fair enough, Tim. Thank you very much. Appreciate it.

Tim Yost

Thanks Tom.

Operator

And there are no further questions at this time.

Lawrence Miller

Okay, everyone, thank you for joining us and again I encourage you to come up to New York. We’ll have a nice breakfast, probably a lunch and we’ll try to give you some real good information on the company. Thanks everyone.

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.

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