StoneMor Partners' (STON) CEO Larry Miller on Q2 2016 Results - Earnings Call Transcript

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StoneMor Partners LP (NASDAQ:STON)

Q2 2016 Earnings Conference Call

August 5, 2016 11:00 AM ET

Executives

John McNamara - Director of Investor Relations

Larry Miller - President and Chief Executive Officer

Sean McGrath - Chief Financial Officer

Analysts

John Ransom - Raymond James

Liam Burke - Wunderlich Securities

Fla Lewis - Weybosset Research and Management

Richard Verdi - Landenburg

Operator

Ladies and gentlemen thank you for standing by and welcome to the StoneMor Partners' 2016 Second 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 call is being recorded on Friday, August 5, 2016.

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

John McNamara

Thank you, Frank. Good morning everyone and thank you all for joining us to discuss our 2016 second quarter financial results. You should all have seen a copy of the press release we issued this morning. If anyone has not, the full earnings release can be found on our website at www.stonemor.com. Along with the earnings release, investors can also find an earnings supplement document, where we provide some additional color on the quarter.

Joining us on the call this morning are Larry Miller, President and Chief Executive Officer; and Sean McGrath, Chief Financial Officer.

Before we begin, as usual we would ask that you all take note of the cautionary language regarding forward-looking statements contained in this morning’s press release. That same language applies to comments made on this morning's conference call. Although forward-looking statements represent our best estimates and expectations, any forward-looking statements made on this call are not guarantees of future performance and actual results could differ materially from these estimates and expectations. We disclaim any obligation to update any of the forward-looking statements to reflect future events or developments.

In addition, please note that unless otherwise specified we’ll refer to metrics in discussing our second quarter financial results on this call. Our press release provides directly comparable debt measures as well as the reconciliation of differences between GAAP and non-GAAP financial measures. Non-GAAP financial measures that we use should not be considered as alternatives to GAAP financial measures and you should not consider such non-GAAP financial measures in isolation or as a substitute for or superior to our results as reported under GAAP. These non -GAAP financial measures are used internally by the management to measure partnership operating performance and we believe that they are relevant and help investors in understanding our performance.

With that, I will now turn the call over to Larry Miller, who will take it from here.

Larry Miller

Thank you, John. Good morning everyone. Thank you for joining us today. As shown by this quarter’s numbers, our recent sales performance has been below acceptable levels. Before I turn the call over to Sean, I’d like to discuss what happened, why it happened and our plans to make things right.

As we reported, we did not achieve our desired returns on guidance for the quarter. This is very disappointing and frustrating. So let me describe why we came up short and what we’re going to do about it. We obviously missed our sales revenue target and particularly our pre-need sales. As you recall last year, we made a decision that we needed to improve the overall quality of our sales force.

We concluded that the bottom third of our sales team, even though they were writing modest sales numbers needed to be replaced or strengthened. Our turnover was too high, our closing rate per appointment from this group was too low and this group was more likely to earn only minimum wage and incur overtime charges without corresponding results.

Working with a national consulting firm, we came up with a revised compensation structure focused on greater performance accountability measures and began implementing the program on October 1. I truly believe our sales force restructuring plan is progressing and lead to much better results in the future.

However, because of the increased accountability, we immediately lost a number of sales people and we underestimated the time that would take to replace them with higher performing sales people. Because of the lower average headcount for the period there were fewer sales people engaging customers resulting in lower than expected pre-need sales.

We will and are expecting this. While we’ve made significant progress, we’re still short quality sales individuals. Importantly though, we’re encouraged by the results of our more stringy hire requirements, better training and our revised compensation program. We’re seeing lower turnover, greater sales promptly [ph], better presentation rates and higher closing percentages.

More importantly, the quality of the sales is increasing. We grew our new family sales ,that sales to family sets internal rights to families that had no prior relationship with the company by almost 10% this quarter. This all offers well for the future value to be delivered by our sales team.

All of that being said we’re not satisfied with the results, and are taking actions to accelerate these changes. In the next several weeks we’ll be announcing changes which will strengthen our sales organization.

In addition to our increased sales efficiency and hiring, we’ve identified over $5 million in annual expenses that will be eliminated by the end of this quarter, in addition to the $2.5 million of annual cost savings already implemented.

This does not include savings we expect to achieve in professional fees, which for a small company have been very significant. With the recent hiring of our new general counsel, we expect these cost savings to become effective immediately.

In summary, we have an obligation to deliver solid full-year results and demonstrated growth over 2015. In hindsight it appears that the significant changes we made last year were put in place in too short period of time. We underestimated the number of sales individuals that would leave and we have been too slow in replacing them.

We know what went wrong and how to fix it. It requires a commitment to recruiting. Our current problems lie solely with our pre-need sales and specifically and specifically with the number of sales individuals we have. The remaining 60% of our revenue sources are performing well.

One of the key changes we made last year was in transferring the responsibility for recruiting to the home office, this is not working. And effective yesterday, responsibility for hiring has been returned to the 300 field sales managers. Our HR department and our national training staff are here to support their efforts, but the responsibility rests with the field.

We are encouraged by the positive metrics we’re seeing from our recent sales initiatives and when combined with lower operating expenses, will allow us to continue providing attractive distributions to our unit holders.

We are a service business and we believe improving the quality of our sales team will provide an overall better experience for our customers leading to higher sales, lower cost and a stronger reputation in the industry. We made an investment to improve our future results that should lead to our targeted sales levels.

And again, while we underestimated the time that will take to reconfigure our sales force, we’re confident that these investments would better position the company for sustained long-term growth.

And with that I’ll turn it over to Sean, before we get to Q&A.

Sean McGrath

Thanks, Larry and thanks to everyone for participating on the call this morning. Starting with a quick review of our second quarter financial results, overall, we generated adjusted EBITDA of almost 23 million, compared with 26.5 million for the prior year second quarter. The decrease was the result of 6.5 million decrease in trust income, partially offset by 1 million in funeral margin and 3 million decrease in corporate overhead cost, the details of which I’ll discuss in a moment.

In the end this translated into a cash distribution coverage ratio for the period 1.3 times, based on shares [ph] that will catch. To elaborate on the investment trust returns, it caused big change in our quarter-over-quarter results. Overall income was a little over 9 million for the second quarter, a decrease of almost 6.5 million period-over-period. The decrease between periods was almost entirely related to 8 million decrease in realized trust income, which were only 0.5 million during the second quarter of 2016, compared with almost 8.5 million for the prior year second quarter.

Excluding these realized gains, our overall portfolio continued to perform well with investment trust income improving to 8.5 million for the second quarter of 2016 or an annualized return of 4.3%, compared with 7.5 million or an annualized return of 3.5% for the prior year, a 20% improvement. As I mentioned on last quarter’s call, we budgeted income from our trust investments for the full year 2016 to be between 36 million and 38 million and we’re on track to achieve those results.

To provide some color on our operating activities, regarding cemetery margin, we generated over 15 million for the second quarter, which represents a $400,000 decrease compared with the prior year quarter. While these results were relatively consistent with the prior year, it’s ultimately below our expectations for the guidance we provided for the period. As Larry alluded to, our pre-need sales were the primary driver to the underperformance of our cemetery operation, coming in 5 million below our internal projection for the period.

In addition, our at-need sales were lower by 1.5 million compared with the prior year second quarter and our internal attendance to deliver that rates. While revenues fell short, our operation team did not break out managing expenses and cemetery expenses were almost 2.5 million lower than the prior year second quarter due to cost reduction initiatives executed during the period, including lower labor and landscaping cost. We expect to continue to manage these costs in lower levers going forward and more importantly expect to see the revenue numbers improve based upon some of the changes Larry mentioned in his comments.

In our funeral home division, we generated a margin of 4 million for the second quarter, compared with 3 million for the prior year second quarter. On a same-store basis, funeral home margin for the second quarter was 3.5 million, representing a 10% increase in the prior year second quarter from the 97 properties included. This improvement was a result of cost reduction initiatives that moved expenses lower, which more than offset lower revenues due to the decline in death rates.

Corporate overhead rate costs were almost 8 million for the second quarter, a decrease of 2 million from the prior year quarter due to lower labor cost and professional fees, resulting from a number of cost reduction initiatives. As Larry mentioned, we expect to announce additional measures in the coming weeks as we continue to prove the efficiency of our cost structure.

For maintenance CapEx, our investments moderated from 1.3 million for the second quarter of 2016, compared with 3 million for the first quarter, due to one-time investment we made during the first quarter to move to a more efficient corporate office. Maintenance capital expenditures were also down by $800,000 compared with the prior year second quarter due to continued focus on more efficient spending.

Also during the quarter we continue to strengthen our balance sheet, with 495 million of investments with our merchandize trust versus 170 million of liabilities for disassociated merchandize contracts, leaving us with over 325 million of net assets to our account that will be released to us as we service the contract.

Regarding our liquidity position and leverage, yesterday we closed on a new $210 million revolving credit facility, replacing our previously existing $180 million facility. Among other improvements, the new facility reduced our annual borrowing costs on advances by pricing 25% and removes certain owner risk covenants that were not been fitting of an organization of our size.

In addition, the new facility includes an according feature under which it may be increased up to an additional 100 million if needed. Overall, the new facility is a significant step forward for the organization and we thank our lenders for the continued faith in our business.

At the end of June and Performa for a new credit facility, we had approximately 81 million of total capacity on our borrowing base, along with over 9 million on cash hand, giving us total liquidity of close to 90 million, with leverage ratio of 3.1 times compared with the maximum covenants of 4 times [ph].

I also want to remind everyone that we also have a $45 million equity commitment from our general partner to fund certain future acquisitions. Our acquisition pipeline remains strong and there’s no liquidity provided as there’s ample room to execute on our proven strategy.

And finally with regard to guidance, we mentioned in the press release that we’re providing a revised full-year adjusted EBITDA guidance of 100 million to 110 million for 2016, which implies 55 million to 65 million over the back half of the year. At this time we’re not providing a quarterly breakdown of that number, but we’re confident in our ability to generate adjusted EBITDA within that range for the last six months of 2016.

With that thank you for your time and I’ll turn the call back to Larry for closing comments.

Larry Miller

Okay, operator we’ll take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of John Ransom with Raymond James. Please proceed.

John Ransom

Good morning, guys. Let me just touch on obviously the benefit of room [ph], the sales issue. Larry, could you just provide a couple of numbers to us in terms of how many sales people you had at the peak, how many you have now versus maybe the draft and how many more you have to hire to get back to where you are or do you think you’ve to hire to get back to where you are? And secondly, I heard to what you said, but it’s not clear to me why it’s been so difficult to recruit, is it just a shortage of people who want to do this or is there something that was lacking in the execution of this that you’re going to change and if so, what exactly is that other than - I know you mentioned more intensive efforts, but what exactly are you going to do that you want to do for the last few months? Thanks.

Larry Miller

Sure, John. Thanks for your question. As for as numbers and these are approximates because it’s spread out pretty wide and far, but as best I can tell, if you look back about a year ago, actually a little longer than a year ago when we started to really implement performance measures and then went into the compensation change, we had on average 525 to 550 sales people that wrote at least one contract during a week. Today if you look at that same number, it’s down to 400, so arguably there’s a loss of 125, 150 sales people. Now, I don’t want to get back to the 550, I mean that’s not our goal because then we’ll be right back where we were, where we’re probably having less than an efficient sales force. So I think our target right now is to add a 100 sales people that on average are writing something like $30,000 a month, which is not a super start by any stretch, it’s kind of the minimum that we would expect, so I’m given a pretty low number, but if we have a 100 sales people doing 30,000 more a month at $3 million, we would have been jumping around here and dancing, if we’ve had that kind of result. So that’s sort of the way I have laid it out with the sales people.

As far as the recruiting, part of the change that we made in our total was true within stake, is we brought the recruiting responsibility into the home office. We thought we could be more efficient if we just brought it into the home office where we have a good HR department and let them do all of the recruiting for the field. Additionally, as we said, we've beefed up our training department substantially and we now have a national trainer and we have a trainer in each of the region. The problem was, two problems, the home office is not able to provide near enough people. They are trying to call 28 different states and they were not successful in getting enough people. Maybe the requirements were too stringent in what we were looking for, the type of person we were looking for.

And compounding is, while we had a trainer in each of the region, the regions are fairly large. Remember we are in 28 states and we have seven regions. So, the time that a trainer can afford to schedule a two-week training program, it's spread out over [indiscernible] lengthy period of time. So, even if they hired somebody, let's say, August 5, the next training class in that region might not see until August 29. So, what happens in that three or four-week period and I think what we've found is a number of people that were attracted by the opportunity to get a training salary see if this is the right thing for them were not waiting three or four weeks.

So, and that's not the way our industry was built. That's not the way we were built. We've always put the responsibility - I personally, when I was directly running the sales, always put the responsibility on the sales managers. If you can't train - if you can’t recruit and train, then you really shouldn’t have the [indiscernible] and that's where the disconnect I think came in. So, what we're now back to is putting the focus back on the field. They have the responsibility. They've got guidelines now that are more stringent than they might have had previously, but they still - they are the primary responsibility for bringing on a recruit, getting that recruit trained.

If we have a training class that's about to happen shortly, they can defer to that, but if it's three, four, five weeks down the road, then they should be capable of doing the two-week training themselves, get that salesperson out in the field and get them producing and then we can support them and reinforce them with better training lately. I think that's the best way I can answer your question.

John Ransom

Yes. I may have missed it, I'm sorry. But - so how long do you think it'll take you to close the gap? And I'm sorry I may have missed them. How many [indiscernible], I know you’d done a 100, you want to get another 100?

Larry Miller

Yes, we want to end up with the net 100, unfortunately again it’s an industry that’s always going to have turnover. So, if I hire 15 people next month, I might lose five, six, seven, eight, I'm not sure. I wish I could tell you that we'd have all 100 producing by the end of the year. I'm certainly internally would like to establish that as a target publicly. As you said, you hear marketing, marketing, marketing, location, well, this is all about recruiting, recruiting, recruiting. So, what I would expect is every month to see a steady increase and not only in numbers, but in the quality, because we have tightened up the requirements. I think we’ll end up with a better salesperson.

The problem, John, is and you asked in another part of your question, it really is becoming a bit more challenging to get people who want to work on straight commission. People got a little bit lazy. They're a little bit comfortable with salary, minimum wage, and overtime issues I don't think help a commission organization, because we're - prior to being required to be paid minimum wage, they had to go out and sell if they wanted a paycheck on Friday. Now, if you're in a state with $10 minimum wage, you know you've got a $400 paycheck coming Friday. So, we're sort of fighting our way through that. But I think at the end of the day, certainly this time next year we will have the kind of sales force that we think can really drive this company and drive its future growth.

John Ransom

Okay. So, I guess the next question would be, I guess, I don't see that it's going to take, let's say, six to nine months to get the sales force back to where you wanted. I can't really draw a line then to the third and fourth quarter improvement that you're talking about other than the cost cuts? So, what's the bridge? I mean, so we're running at 23 million or so liquidity [ph], but I you know we've got the cost cut. How do we get that to that at $28 million quarterly number if the sales force is going to be kind of a slow ramp like you said?

Larry Miller

Well, it will be a slow ramp, but it will certainly ramp and again part of the things that we've done, we are, as I said, all those metrics that I mentioned, our existing sales team is producing more. So I don't want to tell you the slope is going to go straight up. But I believe the slope will be steadily increasing and then when you match that with the cost cuts and the efficiency that we are bringing to the new organization, we should be able to achieve our guidance and then really look to 2017 as the big increase.

John Ransom

Okay. Great. And then the last one, this is for Sean. So, good improvement in your cash burn and that's something we've - you guys have really been focused on with the archdiocese behind you. My question for you is what should we think about as the ongoing level? I know we can sort of straight line out kind of a $20 million trust investment, but once you ramp your previous sales back to where you want to, let's assume something like the 110 million run rate, 110, 120 million run rate quarterly, but what does the ongoing trust investment look like under a more normalized sales effort?

Sean McGrath

Yeah, I mean, John, great question. I mean I think it definitely needs to be $30 million a year and that’s not - our acquisition strategy is focused on more cash accretive deal. So, it’s not that we love the Archdiocese sort of the deal, but obviously it's very cash intensive for contributions and trust to relatively pre-need sales. So, I think most of the deals we're looking at are very cash flow accretive. So, I mean $29 million obviously is a run rate, but you still have a little bit of growth on the Archdiocese in there. So, I think we should be able to maintain it below $30 million and my goal personally is to maintain below 20 with not only having more cash flow accretive deals, but also doing things to accelerate the amount of cash that we're taking out of trust by delivering balls and markers [ph] sooner, so it’s a goal of ours and I think we've done a good job executing, but it’s the only thing needed to be done to make sure that we’re pushing that in the lower.

John Ransom

And is there - you know if I were to look at a couple of years, is the funeral mix going to be meaningfully higher as part of a strategy to get more cash flow today?

Larry Miller

I'm not sure the mix will be higher. I know we want to continue to develop the combination properties, John, so to the extent we can put funeral homes in with in or near our cemeteries, we certainly want to do that. But again with the MLP structure and the tax damages, buying the cemeteries, I think what we're dealing with, Sean mentioned, is that we're just not going to take into the LP deals that are burning cash. If we have an opportunity to do a really, really attractive deal, like the Archdiocese, as we had the opportunity two years ago, we would have put the archdiocese deal up in the general partner and absorb the cash negative problems out there and when it turned positive as it now will soon be, we would have dropped it down into the LP. So, if we have deals like that, that is great long term. We'll use the GP to acquire them and just try to do deals in the LP truly and when I say cash accretive, I mean without borrowing working capital, they’re actually generating positive cash and we can do the deal, we can do the deal.

Sean McGrath

Yeah, we’re keen on deals in our pipeline right now. So, obviously as you were saying, John, those are going to be less cash flow intensive. We've raised, as Larry was mentioning, we've raised the bar on our cemetery acquisitions, just because the deals [indiscernible] probably would have done and it would have been great returns, but they're not cash flow accretive, something that maybe like it's comparable to funeral home deal. So we're definitely trying to enhance the overall acquisition strategy to make sure that you know it's not adding for a burn rate whenever possible.

Larry Miller

The cash will be the driver, John.

John Ransom

Okay. I realize, of course, MLP structure, but you also have a pretty big interval and I was just thinking you’ll generate GAAP losses and you could have absorbed the profit in the funeral home which are kind of in your annual intervals and not - I mean why not try to consume your interval every year with funeral home income is sort of my sort of my thinking?

Larry Miller

Yeah. No, no, you’re right. It makes sense I said. Deals we look at, we grew up as a cemetery company. We've learned how to operate a funeral home company pretty successfully. We really want to try and get cremation under our belt and being leader in cremation for cash would be the driving issue of everything we do around here.

John Ransom

Okay, great. Thank you.

Larry Miller

Thank you.

Operator

Our next question comes from the line of Liam Burke with Wunderlich Securities. Please proceed.

Liam Burke

Good morning Larry and good morning Sean. Larry, going back to diocese of Philadelphia, has the transition in the sales force affected your near-term performance increasing pre-need sales out of the diocese or property?

Larry Miller

Actually the Archdiocese is doing everything that we expected it to do. We knew it’d be an attractive opportunity, we knew that we would have the ability to recruit much easier than we do in the outlining areas, I mean they were all centered around the Philadelphia market. We have a lot of people to draw from, people understand that. There are opportunities to sales person is much greater because they’re selling on behalf of five or six active catholic cemeteries. So the Archdiocese standing alone is during terrific. It’s just a part of our cash burn that is turning around now.

Liam Burke

And understanding between bankruptcies and diocese preferring not to open up their business to the general provisoners, do you see more any kind of additional diocese - acquisitions similar to the diocese of Philadelphia.

Larry Miller

We’re engaged with a couple. I don’t want to suggest that we’re going to get them. We are engaged with a few, you’re right. It’s difficult for them to turn it over a secular company, but it’s an ongoing effort with us and we continue to try and reach out and find diocese that we can help.

Liam Burke

And then on the cremation front, part of the reason these cemetery, the cascade of burials were down, were shifting cremations during the quarter, are you seeing any pick up either on the cemetery or funeral home side on cremation being modernization?

Larry Miller

Yes, if Ken was here I would have him explain where - we might have been three or four years ago where, particularly in our funeral homes where families were taking direct services without a lot of embellishment, we put a lot of energy and effort to offering greater value, offering other products and services that go along with the cremation and I think we’re seeing our average cremation package is increasing and we hope to continue increasing that. On the cemetery side, it’s as not measurable, cremation isn’t hitting our cemeteries yet as much as it might be our funeral homes, but with the development of these beautiful cremation gardens and a whole array of products and services that families are finding appealing, I think our averages on the cremation side will also increase.

Liam Burke

Great, thank you Larry.

Operator

Our next question comes from the line of Fla Lewis with Weybosset Research and Management. Please proceed.

Fla Lewis

Good morning, its Fla Lewis. I appreciate you’re being so forth right with the sales force problem and I’m sure you’ll wrestle it to the ground, you’ll pull it your way along. But I wanted to ask you about the way the trust funds are invested, if I recall correctly, you changed managers last year and just what changes have taken place in the investments in the trust fund.

Sean McGrath

Sure, actually it’s true. We brought Cambridge on January 1; in most cases what we’ve done is new cash going into the trust, which we just talked about as small amount of cash probably 10 million in total since the beginning of the year. We redeployed that towards other alternatives, like private debt, we’ve provided some - the same level of risk as the rest of our portfolio which is very low, but offered higher returns. So I would say, the new cash has been invested in that manner along with some of the perpetual care funds where we could transfer those assets to alternative investments, but for the most part our merchandize stressed on because in most cases our investment timeline is very long as we put money in the trust. You can come back towards and fix the 10 years somewhere in that range could be sooner, but the way out here is that we have a long investment timeline, so there is no need for us to move above the axis per say until we need to, so in most cases it’s mostly been with the new funds going into the trust.

Larry Miller

Hey, Fla. It’s Larry, I just want to put a footnote on that. One of the things we were able to accomplish with Newbridge and it’s been a struggle. We’ve been able to centralize it into primarily in the one trustee as opposed to having notable trustees all over the place and it will allow the - it allow Cambridge to create investment pools. So we’ve managed - we had a lot of - we do have a lot of small properties with smaller amounts and unfortunately if you didn’t have the pooling capability, what happens? If you have $100 million how are you going to invest that, who wanted to manage that money and we ended up putting it into a lower yielding instrument. Now in most states, I think there’s one or two states where we can’t pool, but in most states we can create these common pools and allow Cambridge take advantage of that larger asset base to negotiate better terms on the investments that we make and investments that hopefully overtime will have a better yield and a lower cost attended to because that will be pooled.

Fla Lewis

So up until January 1, you might have a cemetery say here in Rhode Island, but it was invested separately from everything else or might be?

Larry Miller

It was a small property, that’s correct. So we definitely should see a lot better efficiency, better opportunities, more attractive investment vehicles, without increasing risk and lower cost from the various asset managers.

Fla Lewis

What is Cambridge charging us?

Sean McGrath

I’m struggling, I don’t know what the exact number, but it’s probably few basis points I would say, somewhere in the 10 points rates,15 basis point - I’d have to go back and refer, but it’s probably somewhere in that range though. Overall the fund is pretty cost effective.

Fla Lewis

It sounds pretty reasonable, okay good. Thanks very much and happy autumn.

Larry Miller

Thank you Fla, thanks for your support.

Fla Lewis

Sure.

Operator

Our next question comes from the line of Richard Verdi with Landenburg. Please proceed.

Richard Verdi

Hi, good morning guys. And thanks for taking my call here. Larry, I wanted to clarify something, at least from my end it is a cut out there when you were answering the first call, I think just maybe why you might have followed up. When you were talking about the sales force, am I right to take away that right now your desire is to have a 100 sales employees and that over six to nine months’ timeframe you’re expecting to ramp?

Larry Miller

Yes, and let me try to clarify one thing. Again, if you take the gains that we had last quarter out and you adjust for - we actually had it down to our - our burial rate is still down. Our burial rate from all of our cemeteries is down 4.5%, the number being torment and that has a tremendous impact on obviously the at-need revenue and it has an impact on the pre-need because a substantial part of our pre-need sales comes from funeral follow up. So if we have - in this quarter we had 600 less interments, well, that’s 600 less opportunities that our sales people can follow up on and then do referrals after that. So when you strip it down, we were actually up year-over-year without the trust gains, realizing that we’re in an environment where the yield on the trust - we’ve had a pretty good run with our trust funds over the past six, seven, eight years whether it was good investment or luck, I’m not sure, but we did a pretty good job and in many, many years we had gains.

They were lumpy but they were there. We don’t want to project that going into the future, we wanted to target something more reasonable like 5%, hopefully we can do better than that, but that was sort of a modeling number and if you use that then we had - we wanted to make that up in pre-need sales. We don’t want to just say, except the fact as an organization that we’re not going to get the higher trust returns, so therefore we’re going to have to have less growth or we pull lower earnings or anything. So what we said to ourselves is, look we know how to run a pre-need sales organization, we can make the organization more efficient, it’s a numbers gain. You put more people into the funnel, you’re going to end up with more sales that will look at our scale.

We never really stopped and caught our breath and said, you know what, we’ve grown quite a bit, we’ve got 400 profit centers, we’re spread out 28 states, there’s got to be opportunities to create efficiencies, there’s got to be opportunities to take advantage of scale. We have a procurement officer now today that’s going around and getting national contract signed up for everything that we buy. We have risk managers out in the field that are identifying opportunities to lower our insurance cost. We’re doing all the things you would expect us to do and by doing that and increasing our pre-need sales over our historic levels, we can offset the decline in the trust yield and still continue to grow our core business and then with selective acquisitions we should make it additive.

Richard Verdi

I got you, okay. And then kind of a follow up on that, so the number of sales employees now, [indiscernible] Q2?

Larry Miller

You broke up, Rich.

Richard Verdi

I’m sorry, how many sales employees did you have at the end of Q2?

Larry Miller

Well, what we had and what was effectively writing on average, we had about 400 sales people writing each week, not everyone writes every week. Some people spend a week developing their leads and their opportunities and then they go out following couple of weeks and write the sales. If they come off and have a great month they may not really work hard the first week, they’re going to get the bonus check. So when I measure that what I’m looking at is the number of sales people on an average that are actually writing a reasonable amount business and that was around 400 and in its peak it was probably closer to 530, 540. But he people that we have today are more efficient, so it’s not a straight - that’s why I said, we’re not looking to get back 150 people, I’m looking to get a 100 higher quality people than what we might have had two years ago, three years ago.

Richard Verdi

I agree with you. I mean that’s [indiscernible]. Thanks you for that Larry. And then - and maybe I missed this or I think the last caller had asked this and he asked about the trucks and I’m sorry, I had 17 companies report the last three days, so I’m going to go slide. For the investors in the trusts, can you give us a break down maybe Larry or Sean on the equity side of what that’s invested in. I believe there’s a lot of MLP investments in there, am I right or wrong there?

Sean McGrath

Yeah, so I mean, each - the professional carriers might be different than the merchandize trust. They’re generally somewhere in the range of 55% to 65% debt securities either mutual funds or direct corporate securities, the reminder is either in government securities or equities. A lot of the equities are in MLPs and REITs, that type of yielding securities, so it’s somewhere in the range I would say of generally 25% to 30% kind of on the equity side. So those run in MLPs as well as REITs, so yeah, there is some exposure in MLPs, I think we’ve already had the kind of [indiscernible] to run down back in 2015 and early part of this year. We kind of thought better that this was kind of the unrealized losses related to those. But I think there’s probably more upside to the securities and given our investment time horizons with those, it’s six to 10 years, all of investments are in R&D, I would call the top third of MLPs and so they have - we believe they [indiscernible] and kind of weather the storm and provide long-term overall returns to the portfolio.

Richard Verdi

Perfect, thanks Sean. Just to clarify, when we say 25%, you mean 25% of the overall portfolio in equities or 25% of the portion that is not in some sort of debt instrument.

Sean McGrath

Yes, out of the total portfolio it’s like in 25% to 30% somewhere in that range. I mean we break it out that level of detail in our 10-Q and that generally would range in those trusts.

Richard Verdi

Okay, great. And then another question Sean, you had mentioned about landscaping expense, can you just give me a - I know that seasonal, but kind of a percentage of overall expenses you saw for that in Q2?

Sean McGrath

Of what - of the cost reductions Rich, that we saw?

Richard Verdi

No, of how much you spent on landscaping expense in Q2?

Sean McGrath

Landscaping, I need to look back. I don’t have than number on my head, but give one second, I have the details here. Sorry, Rich, I remain to putting pages making - But yeah, you’re right, it tells it is seasonal. I would say that’s it probably - total expenses in the second quarter of ‘16 were about 17.5 million and landscaping was probably in the call it $4 million range, somewhere in that cost impact. Now, that will vary. I mean if you’re in the winter months, it’s going to go down, but second quarter it’s about 4 million of the 17.5.

Richard Verdi

Yeah, I’m wondering because when you talked of the water utilities, I mean you guys had a dominant Philadelphia presence, the water utilities are dominant in the Philadelphia area, they’re expecting - I don’t know how they get - well, I kind of understand how they get there, but they expect weather kind of be unfavorable, more rainfall, so that could be a tailwind for you guys, that’s why I’m asking. Okay and then last question, I guess for Larry. Is there any update on the insurance business or is that kind of being put on the backburner due to the sale force - you’re kind of focused on that more heavily?

Larry Miller

Yeah, it’s a good question Rich. No, it’s not on the backburner, I still think it’s a very important for the future of the company and certainly if you pass through SEI you’ll see that it’s certainly a meaningful part of their revenue and I’m sure it is for Carriage. But I think our division is performing very well and if we look at our current run rate, we think it’s about $1 million in face amount of the policies, so we’re kind of tracking at 12 to 13, 14 million a year and we’re still in the early stages of ramping it up. Now, as I’ve tried to explain before, the type of product that we’re selling, the commission that we get initially through our general agency offsets for the most part our expenses that we have to pay our sales people on our marketing. The real bill, the real value is in the recurring commissions that we get off of these products, so every time we make a sale we get enough up - pretty much enough upfront to cover our current cost and then every year as you run this out 10, 15, 20 years, you’re going to see we get the recurring commissions on it and that really begins another 12 to 18 months from now really starts to be meaningful where we can actually point to what the number is.

In addition we’ve been pretty successful in signing up a number of independent funeral homes. What we decided strategically was, to not only market pre-need funerals for our own funeral homes to drive market share and to build value in the trust funds, but to go out and represent independent funeral homes and through our general agency to be the beneficiary. And that doesn’t even discuss the state having a sale person on site; that can simply be in a funeral home where typically what happens, one person in the family passes away, one husband or wife, when they make their funeral arrangements, what the funeral director, the non –sales people, but it’s an easy transition for them to provide the coverage for the remaining spouse or members of the family through an insurance product or they can write that contract up, pass it through to our general agency and we ultimately get the benefit of the commissions that come off of that. So we’re going at it internally, but we’re also offering it externally and this time next year we’ll probably have a lot more to say about it and I think it’s just continuing to build.

Richard Verdi

That’s great. Thanks for the update Larry and I appreciate the time guys. Thank you very much.

Larry Miller

Thank you.

Operator

Mr. Miller, I’ll not turn the call back to you. Please continue with your presentation or closing remark.

Larry Miller

Well, thank you operator, for those of you on the call and this seems to be a nice summer day around here. Thank you and we really appreciate your support and we’ll get this thing fixed. Thank you.

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. Have a great day everyone.

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