StoneMor Partners' (STON) CEO Lawrence Miller on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: StoneMor Partners (STON)

StoneMor Partners L.P. (NYSE:STON)

Q1 2014 Earnings Conference Call

May 8, 2014 10:00 AM ET

Executives

John McNamara – Director, IR

Lawrence Miller – CEO, President and Chairman

Timothy Yost – CFO

Analysts

John Ransom – Raymond James & Associates

Fla Lewis – Weybosset Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the StoneMor Partner’s 2014 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 today, Thursday, May 08, 2014.

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

John McNamara

Thank you. Good morning, everyone, and thank you all for joining us to discuss our 2014 first quarter financial results. With us on the call this morning are Larry Miller, President and Chief Executive Officer; and Tim Yost, Chief Financial Officer. Before we begin, as usual we would like to remind you all to take note of the cautionary language regarding forward-looking statements contained in the press release. Any forward-looking statements made on this call are not guarantees of future performance. And we disclaim any obligation to update such factors or to announce publicly the revisions – the results of revisions to any of 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 releases, and is therefore reconciled to comparable GAAP information. Full earnings release can be found on our website at www.stonemor.com.

And with that, I’ll now turn the call over to Larry Miller, who will take it from here. Go ahead Larry.

Lawrence Miller

Thank you, John and welcome as you said to our first quarter earnings call and for those of us in the Northeast actually welcome to spring. Despite a very difficult winter, StoneMor managed to achieve its plan. Our production based revenue, adjusted operating profits, and distributable free cash flow all increased for the quarter. Our backlog also increased by $16.8 million, and now is just shy of $0.5 billion. Demonstrating the strength of our balance sheet, our cash, accounts receivable and merchandize trust exceed our merchandise liabilities by $462 million, that’s all future cash available for distributions or to pay down debt. I think that’s really an important point that people should continue to focus on. When you look at our balance sheet, you look at a company of our size $300 million revenue type company, and you look at $1.5 billion in assets and realize that almost a $1 billion of that $1.5 billion is liquid, between our trust funds, our receivables, our cash. And the balance is mostly land which represents about almost 13,000 acres of land I think and 400 operating facilities. So it’s really very healthy, very strong, stable financial position the company’s in.

Our funeral group continues to grow and is performing well. Actually as near as we can tell in our markets, the death rate was down about 3%, and I think our same store was down around 1%. So we think we’re doing a pretty good job with our funeral group. We’re expanding our commitment to preneed funeral sales, and recently hired a seasoned insurance executive to head up that division. Not only should that increase market share for our funeral homes, but as we’ve talked about in the past, we hope to generate additional cash for the preneed sales. This should be some positive cash between what we’re paid from the insurance company in the way of commissions and what we have to pay to generate that business. So we’re very hopeful we can capitalize on our almost 400 properties and take advantage of that.

We’re moving forward we’re entering into the lease with the archdiocese of Philadelphia, and we expect to close that by the end of this month. As a reminder, the archdiocese has 13 cemeteries involved and they handle currently 7,000 interments per year. So we’re really excited about getting underway with the archdiocese. Likewise, we’re at position to close on the properties acquired by SCI and its waiting final approval from the Federal Trade Commission which is expected shortly. This would include a purchase of nine funeral homes, 12 cemeteries and two crematories. The cemeteries included in this transaction perform approximately 3,500 interments and the funeral homes perform approximately 1,900. Also included in this quarter, consistent with our model that we’ve talked to you about previously, we raised $53 million in equity, we had a successful overnight offering, and we use the proceeds to pay down debt. All in all it was a good quarter and we continue to be optimistic about the full year.

And with that, I’ll turn it over to Tim Yost our CFO.

Timothy Yost

Thanks, Larry and good morning to everyone. You’re right, Larry, the story of the quarter was certainly the weather. We know we would be facing a difficult comp from the same quarter last year, but the weather has certainly exacerbated the results. If you remember, the same quarter last year, was particularly strong throughout the industry and our results mirrored this trend. However, this year ice storms in the Southeast and snow in the Midwest and Northwest made it very difficult for our customers to make it to our locations and our sale people to make it to our customers’ home. These weren’t just isolated incidents, but recurring themes during the first three months of the year. Fortunately, last winter is over and we hope that those extremes are behind us. All that being said, our results were respectable given the conditions. One of the benefits of our business is that we generate revenue from diverse sources.

During the quarter, we recognized gains in our trust and completed a significant commercial land sell which helped to offset the difficult sales environment. As we’ve mentioned in the past, we’re constantly looking to rationalize excess real-estate that has commercial value. The land that we sold this quarter which did not materially decrease the sales life of the location, was the result of something we’ve been working on for years. A closer look at the numbers confirms that the small decrease in preneed and at-need sales as a result of the weather was made up for, with increases in all other categories, and our production base revenue increased by approximately 7% for the quarter. Because we’re able to keep cost in check, this increase in revenue translated to an increase of adjusted operating profit of 24%, with an increase in distributable free cash flow of 25%. We present distributable free cash flow to normalize for inherent cash flow timing in our business and fluctuations and short-term working capital.

For the quarter, our cash flow from operations declined significantly. This was caused by two items that were entirely related to timing. First, we significantly reduced our accounts payable balance. During the same quarter last year, our accounts payable balance grew by $5.3 million, while it declined by approximately $9.6 million this quarter, which accounts for a net change of nearly $15 million and it’s solely related to the timing of the billing of our vendors and the timing of our payment to them. This is not representative of a trend and we believe that this should equalize throughout the remainder of the year. The second item and the one that we’ve discussed many time before is the growth and the amount of money that we put into the merchandize trust. Although it’s a bit counterintuitive when we take gains in our trust and do not pull the money out, this results in a use of cash for the purpose of the statement of cash flows. Absent these items, our cash flows from operations would have grown considerably. Our 10-Q will be sending out later today and when you analyze the supplemental operating metrics, you will see that the primary effect of the weather was in decrease of lot sales. This is consistent with our customers’ inability to access our properties. The positive aspects of these metric is that despite the fact that we wrote fewer contracts, our average contracts amounts increased. Preneed averages increased by a little over 1% and our at-need averages increased by little over 2%. So all-in-all, we are happy with the results despite the fact that we are facing tough comps and the effects of Mother Nature.

Operator, I’d now like to turn it over for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is coming from the line of John Ransom. Please proceed.

John Ransom – Raymond James & Associates

Hi. Good morning. Sorry, I had a little trouble getting on the call, but did you guys talk about any changes that you’ve seen now that the weather has normalized this quarter? And should we look for anything unusual sequentially?

Timothy Yost

What we can say for sure John is that January February we’re significantly worse than March. But we did start out with – early in March wasn’t great but since then it’s continued to improve from there.

John Ransom – Raymond James & Associates

And was there any effect on cemetery constructions that should be pointed? I know the land sales are going to be down, but what about the ability to reconstruction does that have any effect?

Timothy Yost

We really haven’t and believe or not, we haven’t seen much R&M related to the weather either. Obviously the roads are as good as condition but we didn’t have significant damage to buildings or anything like that. So from that standpoint, we’re very fortunate things going well.

John Ransom – Raymond James & Associates

Okay. And as far as the SEC goes, what kind of feedback you’re getting from them? And what could you give us a little more detail on where that process stands?

Lawrence Miller

Sure. I think on the governmental agency it’s a bit of a black box. We haven’t received really any negative feedback from it at all. We had to go through them early in the process in order to buy the Philadelphia properties, and we had to get their approval before we can even be the winning bidder. So, we’ve been discussing this transaction with the SEC for a long period of time. It’s actually reasonably formulaic, we believe that to the extent possible that it’s been expedited and we hear that the process is almost at a conclusion.

John Ransom – Raymond James & Associates

Okay. And is there anything else that we should look out of your balance sheet this year in terms of capital moves?

Timothy Yost

Nothing specific at the time.

John Ransom – Raymond James & Associates

Okay. All right. Thank you.

Timothy Yost

Sure.

Lawrence Miller

Thanks, John.

Operator

[Operator Instructions]. Our next question comes from the line of Fla Lewis. Please proceed.

Fla Lewis – Weybosset Research

Good morning everybody.

Lawrence Miller

Hey, Fla.

Timothy Yost

Hi, Fla.

Fla Lewis – Weybosset Research

Another good quarter behind us. My question is always cash is coming in may be a little later than we thought but it’s coming. How about the future of the distribution?

Lawrence Miller

Fla, I think right now because of the significant amount of acquisitions that we’re going to take on in the next 30-45 days, plan on keep our powder dry a little bit. But as we’ve said in the past, the two different transactions has different cash juristics. The archdiocese is an incredibly good opportunity for the company, but we’re starting it out from the very low basis of preneeds so there is going to be a strong bill in the preneed sales, and obviously receivables and trust. Fortunately, the other acquisition, the one coming through out of the Service Corp., their mature properties are generating significant positive cash flow. I reminded people they are not properties that either Stewart or SCI would have sold absent the merger. These are quality properties that they were forced to sell for competitive reasons not because they didn’t want to operate them. So these are mature properties that are cash accretive day one. And so we’re confident we’re hopeful and optimistic that once we get everything under our belts, know exactly where we stand, we can address the distribution.

Fla Lewis – Weybosset Research

Okay, good. And if I may, jog my memory Larry, the transaction with the archdiocese of Philadelphia, is that something for the one that we started with in Detroit? That is to say we don’t have to put up any cash up front to run the things we’re not buying this from the archdiocese, are we?

Lawrence Miller

No actually it’s more like an acquisition. It’s a 60 year lease that is very different in that the – when we went into the one in Detroit, there was a whole different mindset in Detroit and there was a lot of hesitation on behalf of the archdiocese. I think we’re just in a very financial pickle. They really struggled returning it over to a non- sectarian group. So we just went in to that deal with just a trial, let’s see if it works and while we did a fantastic job for them, they were also able to swab their financial crisis through a major capital campaign. So they were able to get back financially on solid footing, and decided that they really wanted to keep control and ownership of management and the properties. Philadelphia is a very different situation. Their financial problems are public knowledge. They are very significant, and they are taking lots of action steps in order to restore the archdiocese to financial stability and one of those were to essentially turn over to complete control of their cemeteries for 60 years. They have one walk away right beginning in year 10 for just through I guess it’s actually year 11 I think, where they can exercise the right to take the properties back, but it’s so expensive, it’s hard to see them ever doing that.

Timothy Yost

But I think it’s also worth noting that that one of our references were completing the deal with archdiocese at Philadelphia was the archdiocese of Detroit. They weren’t unhappy with our performance in any way.

Fla Lewis – Weybosset Research

Right, right.

Timothy Yost

And in fact that deal gave us good recommendation.

Fla Lewis – Weybosset Research

I’m just trying to remember that the beauty of the Detroit transaction we didn’t actually have to buy those cemeteries we just

Lawrence Miller

No, but we didn’t have control. We didn’t have control – Here, we’re obviously we have to respect the traditions of [inaudible] and we’ll certainly will. We are for all intention purposes, we look at four may be lease substance we own these properties.

Fla Lewis – Weybosset Research

And reducing them that is saying we’re paying them every lease fee is that –

Lawrence Miller

There is an upfront payment and then beginning in year six.

Timothy Yost

This is referring to year 11.

Lawrence Miller

We start to accrue some additional rent payments.

Fla Lewis – Weybosset Research

Okay.

Lawrence Miller

This is going to be a fabulous deal for the company. They’ve never had a meaningful preneed program. And as I said they do 7,000 burials throughout the archdiocese, and we’re gearing up our sales force right now. We’ll probably hire close to 75 sales people or the entire five county area because the properties fortunately are geographically dispersed throughout the five counties.

Fla Lewis – Weybosset Research

Okay. Well, thanks for jogging my memory on those matters.

Lawrence Miller

Okay. Real good. Thanks, Fla.

Fla Lewis – Weybosset Research

Thank you.

Operator

[Operator Instructions]. I’m showing no further questions at this time.

Okay operator. Thank you and thanks for everyone for joining us and we’ll look forward to talking to you at the end of second quarter. Thanks.

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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