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StoneMor Partners L.P. (NYSE:STON)

Q3 2012 Earnings Call

November 6, 2012 11:00 am ET

Executives

John C. McNamara – Director of Investor Relations

Lawrence Miller – Chairman, President and Chief Executive Officer

Timothy K. Yost – Chief Financial Officer and Secretary

Analysts

John Ransom – Raymond James & Associates

James Farrant – Mojave Capital Management

Operator

Ladies and gentlemen, thank you for standing by and welcome to the StoneMor Partners Quarterly Earnings 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 Tuesday, November 6, 2012. Your speakers for today are John McNamara, Director of Investor Relations; Larry Miller, President and Chief Executive Officer; and Tim Yost, Chief Financial Officer.

I would now like to turn the conference over to John McNamara. Please go ahead.

John C. McNamara

Thank you. Good morning, everyone, and thank you for joining us today. Statements made in this conference call and in our public filings, releases and websites, which are not historical facts may be forward-looking statements that involve risks and uncertainties and are subject to change at any time. We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

Furthermore, given the provisions of the SEC’s Regulation G, which as you know limits our ability to provide non-GAAP financial information. We are only going to discuss non-GAAP financial information, which is provided in the earnings release and is therefore reconciled to comparable GAAP financial information.

The full earnings release can be found on our website at www.stonemor.com and I’d now like to turn the call over to Larry Miller, who will take it from here.

Lawrence Miller

Thank you, John. Good morning and welcome to our third quarter earnings call. As you can see from our release, we had a very strong quarter essentially achieving or exceeding our plan. As a result, we were able to modestly increase our distribution. We will continue to evaluate our performance, the environment and our opportunities for growth and look to increase our distributions accordingly.

We continue to look for better ways to communicate and demonstrate our positive results and we hope you find this release to be more informative. We will be providing more information on our website, which hopefully will enhance your understanding of our business model.

I would like to call your attention to page six of the release. This is an analysis that were required by the SEC to provide in all of our public filings, it’s actually something that you really appreciate the SEC, letting us put that information out because we think it really helps to better understand the business.

And Tim is going to explain a little bit more of it for you, but I think the big takeaway is that when you look at the way we define earnings under this method, which used to be the old accrual method prior to some changes in revenue recognition, that our segment results, that our earnings exceed our distributions. And that’s always been an important issue that, as we monitor the operations, we want to be sure that prior to declaring distributions, we’ve actually earned them and you should be able to see that through this analysis.

The acquisition environment continues to be robust and we expect to have some positive news in the near future. Our recently completed acquisition of the Lohman group, you might remember that was nine funeral homes and four cemeteries in Florida. It’s fully integrated and it’s performing as expected. And as we mentioned to you previously, the Lohman family, they’re well respected industry members and their affiliation with us, will continue to provide benefits well into the future and we’re certainly seeing that through the pickup in the acquisition activity.

Finally, despite the horrific storm in the Northeast recently, we continue to remain optimistic that we will achieve all of our goals for the year.

And with that, I will turn it over to Tim to give you some more details.

Timothy K. Yost

Thank you, Larry. And as we mentioned, we had a really great quarter. Just about every statistic that we monitor to assess the operations of the company improved when compared to the same quarter of last year.

If you remember, we primarily discuss our operating results on a production basis. Essentially this represents our results based on current sales and current expenses. We discuss these results because they are a better indicator of current performance and best represent the value that we created during the period.

For the quarter, our production based revenues increased by 11.4% over last year. Our adjusted operating profit increased by 60.4% and our distributable free cash flow increased by 73.8% over the same quarter of last year. So you see we had a really strong quarter of all the metrics that we hold most dear and follows closely.

The only minor negative that we had during the quarter was that our at-need sales were slightly below those at the same period last year. This is consistent with what other companies in our industry have experienced and we believe that this is a short and not a long-term trend.

As I mentioned, our distributable free cash flow increased over last year and this is primarily attributable to an increase in our operating cash flows. For the quarter, cash flow from operations increased by 17%, when compared to the same quarter of last year. So revenues, cash flow, everything, is up and that’s a great sign for us.

Next, I’ll talk about the operating metrics that we report on quarterly. These are contained in our 10-Q, there will be more detail there and you can see them once the Q is filed later today. But our total interment rights sold increased by 19.6% and this is in spite of a decrease in the overall number of interments that we performed, right.

So interments that we sold increased over what we performed and this is significant and that many of our sales leads are derived from the services that we perform. So this is indicative of a really strong performance by our sales team during the quarter. We also had increases in all of our per contract metrics, which increased for both pre-need and at-need sales.

All this led to improved GAAP results as well. Our GAAP revenues increased by 3% and our operating profits increased by 27.5%. So as well as having a great revenue quarter, we had strong controls on our expenses and the results demonstrate that.

There were a couple of items that also contributed to our results during the quarter. Our trust performed extremely well and we’re also able to monetize several of the cell tower leases that we held at several of our properties. So we had contributions from all segments of our business.

As Larry mentioned, we promise to continue to improve the transparency of our accounting. And to that end, we took two tables that are normally part of the Management’s Discussion and Analysis section of our quarterly and annual reports and included them in our earnings release. We did this so that people would focus on them and see them more readily than having to dig through the 10-Q, because we think they provide really tremendous insight into the business.

What these tables do is they reconcile our year-to-date and quarter-to-date production based results to our GAAP results. We believe that these tables’ help to show how much of our net profits are deferred and captured on our balance sheet rather than flowing through our income statements, and to help provide a better understanding of how our accounting works. I personally use these tables frequently while I’m speaking with investors to explain results and they seem to indicate that helps them gain a better understanding.

Also, as Larry mentioned, based on the strength of our results and the performance of our recent acquisitions, we felt comfortable with increasing the distribution this quarter. We continue to perform well this year and are pleased with these results.

Also and sort of one final thing because this question comes up very frequently on our call, I’ll answer it before it’s asked. We have not revised our estimates of working capital borrowings that we made in the beginning of the year. Essentially, terrific quarter, it’s something we’re very proud of and very pleased with.

So with that, operator, I’ll turn it over for questions, if anyone has any.

Question-and-Answer Session

Operator

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

John Ransom – Raymond James & Associates

Hi. I’m sorry I missed the first couple of minutes of the call. So, if you’ve covered this, I apologize. As you guys have been questioned by people who are aggressively on the other side of your stock and if you looked at this, do you – what’s your updated sense about – in this theoretical world where you shutdown external acquisition activity, when your trust and pre-needs build, converts from cash track to actually generating cash surplus relative to what you need? And how far out, is that two to three years out, three to four years out? How do you look at that? And then secondly, more generally, if you – have you kind of done any updated waterfall analysis of your trust funds relative to your cash needs?

Lawrence Miller

We have not done any update analysis or waterfall cash flow relative to our trust fund needs. The answer to your question, John, and again, we always have that difficulty in answering – well, actually we had difficulty in answering because the question is typically post to us, if we stop selling everything today how long will it take for collecting all the trusts. But the three to four year time spectrum that we’ve said and we said all along since the beginning, it’s still an accurate number. I mean, that’s what we work with and that’s what we think from.

John Ransom – Raymond James & Associates

And is that empirically backed up by the acquisitions you have done, I mean the older, maybe it’s like a Service Corp acquisition, one of the bigger ones you’ve done. Are those now in cash surplus?

Timothy K. Yost

Remember, it probably doesn’t ever get to the point where it’s a cash surplus, John.

John Ransom – Raymond James & Associates

Okay.

Timothy K. Yost

Right? We are always going to be pre-need selling. So it will be cash flow neutral, our activities and our trusts and our accounts receivable. So yes, if the question is are they a drag? No, they’re not.

John Ransom – Raymond James & Associates

Okay. Well, I mean, I guess that in another way and I probably word it poorly, I mean there is this initial period where you’re building the pre-need aggressively from a low base and that’s obviously a cash use, but it’s going into investments. And then once activity gets to equilibrium then the cash burn level is off, that’s more what I was talking about.

Lawrence Miller

Right.

John Ransom – Raymond James & Associates

And then – okay. Secondly, have you guys taken – have there been any updated thoughts about ways to address the gap between your accrual EBITDA numbers and your GAAP EBITDA numbers by getting more cash? Are there other things that you’re not doing that you could do theoretically to get more cash in the door today and not have it deferred?

Lawrence Miller

John, it’s Larry…

John Ransom – Raymond James & Associates

For example, trusting – using more trusting and that sort of thing?

Lawrence Miller

Yeah, John, it’s Larry. I mean, we are continually looking at that. It’s the promise that the other options that are available are not as economically viable as the model that we’re currently running under. I mean, we could still consider – every time we talk to anybody, that wants to factor receivables, there is such little understanding for death care that the discount, it’s just not practical to do. We’ve talked to some of the major insurers about funding the – replacing the trust assets with insurance policies.

John Ransom – Raymond James & Associates

Right.

Lawrence Miller

The problem is, you get an initial pop in the commission upfront, but then you only get like a 1% increase in the death benefit.

John Ransom – Raymond James & Associates

Right.

Lawrence Miller

So you’re actually hurting the future of the business. So, it doesn’t appear to be a good business model. One of the reasons, when we – I mean, that’s why we shifted some of the mix towards buying more funeral homes than we historically had in the past because they are cash businesses, so the GAAP earning and the accrual earnings are essentially the same and then the cash is essentially the same.

John Ransom – Raymond James & Associates

Yeah.

Lawrence Miller

I think that will help going forward and we’ll continue to do that. We’re not going to give up buying cemeteries, but where we can get like the Lohman acquisition. I mean that was a phenomenal acquisition, but I’m not sure two years ago, we would have been an aggressive bidder on that property. And they’ve opened up the doors to other potential deals like that should help to narrow the GAAP.

And then we’re still working, and hopefully, next year will be an opportunity for us to generate additional cash earnings from other products and services that we don’t put a lot of emphasis in today. I mean for instance, we’ve never really geared up pre-need funeral sales and there’s no reason why we shouldn’t do that, I mean, it’s essentially…

John Ransom – Raymond James & Associates

Sure.

Lawrence Miller

…the same product. And it’s not a huge profit item or won’t be a big GAAP item because we would defer the revenue, but we would net something between 7% and 10%, 11%, 12% of the base amount in cash commission.

John Ransom – Raymond James & Associates

Right.

Lawrence Miller

And that will go to help narrow the GAAP as well. So we hear the Street, we understand people’s frustrations and confusion and we’re really trying to narrow it, but we don’t want to stop growing because that’s essentially the model that we built the company on.

Timothy K. Yost

Yeah, that’s the tough part, John. We don’t want to make a bad business decision to fix optics, you know what I mean?

John Ransom – Raymond James & Associates

I know, I understand, I understand. And then just…

Lawrence Miller

Yeah, (inaudible) and we wish everyone else did.

John Ransom – Raymond James & Associates

Yeah, now just finally, I mean, just looking at your and this is a longer-term question, but just looking at your capital structure you’ve got this expensive debt out there. If you were to wave a wand today, and let’s say, you could make that debt go away. How much do you think the bank lenders would be willing to replace of that $150 million? How much bank debt do you think is theoretically possible today, looking at your borrowing base and your EBITDA ratios and that sort of thing?

Lawrence Miller

Yeah, I mean, John, one of the things that you’d probably look at it is not – I mean, I struggle to answer with what the banks would do, I mean, clearly we talk to them very frequently and I am in close communication with them. But answering your question about what somebody else would do is a little tough to do. That being said, I mean, even if you thought about it in terms of us going out and doing another high-yield deal to replace it, we have to imagine that our rates would be significantly better today than they were at the time we did this.

John Ransom – Raymond James & Associates

I guess the question I’m asking is just, I mean, you’ve got 10% money bank debt’s a lot cheaper than that. I mean, is it theoretically, just looking at – say for example, senior debts, the accrual EBITDA, covenants and things like that, how much, I mean, is it reasonable to think that maybe the banks – let’s say you did a combination of equity and senior debt. Is it reasonable to think the banks would replace at least part of that with cheaper bank debt or do you think you’re kind of at your max with bank debt no matter what you do with that high yield bond.

Lawrence Miller

Again, I don’t think I can really answer what the banks would and wouldn’t do.

John Ransom – Raymond James & Associates

Okay.

Lawrence Miller

I mean, obviously, it would be a better solution if we replace some of those bank debts.

John Ransom – Raymond James & Associates

Yeah.

Lawrence Miller

But – and clearly that’s something we think about and talk about, but where the banks are going to come out at the end of 2013, and what’s going on, I don’t want to make a guess at that.

John Ransom – Raymond James & Associates

Do you have the ability to buy any of that debt in today?

Lawrence Miller

On the open?

John Ransom – Raymond James & Associates

Yeah.

Lawrence Miller

On the open market? I’m not positive that we do. I’ve spoken to the bank about it and I can’t at the moment remember the answer, but we’ve never had enough of an opportunity to buy enough that would make any difference.

John Ransom – Raymond James & Associates

Okay.

Lawrence Miller

We haven’t pursued it that heavily.

John Ransom – Raymond James & Associates

Okay. Thanks very much.

Lawrence Miller

Thanks, John.

Operator

(Operator Instructions) And a question from the line of Andrew Jones. Please go ahead.

Unidentified Analyst

Yeah, thank you for taking my call. I was wondering does StoneMor own any StoneMor stock in any of their merchandise trust or perpetual care trust?

Lawrence Miller

We would love to, but we are prohibited to from by state law. The laws that govern what those trusts can be invested in prohibit us from doing so.

Unidentified Analyst

Okay. Thank you. That’s all I’ve got.

Lawrence Miller

Sure.

Operator

And there are no further questions on the phone.

Lawrence Miller

Okay.

Operator

We do have one now – I’m sorry. We have one now from the line of James Farrant. Please go ahead.

James Farrant – Mojave Capital Management

Thanks guys for taking the question. Just a quick one here. If I take a look at the sort of debt outstanding at the end of the quarter and relative to the size of your overall credit facility, you’re kind of reaching the upper end of that facility and given the working cap kind of burn that you mentioned for the full year, it looks like you’re going to get to upwards of 80% or 90% of that facility outstanding by year-end. So just want to get a sense for how you guys are looking at the cap structure, I mean do you think you’ll need some sort of incremental equity here by year-end or do you think you can do something there with the credit facility? Thanks.

Lawrence Miller

Yeah, I mean, Jim, obviously, we’re looking at the same thing that you are and we are making plans, but not plans that we will announce publicly.

James Farrant – Mojave Capital Management

Sure.

Lawrence Miller

Again these are difficult questions to ask because clearly we’re looking at the same things and thinking about the same thing that you are, but I’m sort of limited in my ability to talk about it until we have concrete, structured things. I mean, obviously, we’d look at debt and obviously we’d look at equity and we’d look at the facility and we talk to the banks. And those are all options for us on things that we are doing.

James Farrant – Mojave Capital Management

Okay, great. And I assume that you sort of measure that with the – give you guys sort of some incremental capacity to do further acquisitions?

Lawrence Miller

That would absolutely be our, yes, that’s absolutely where we want to be.

James Farrant – Mojave Capital Management

Okay. Thanks.

Operator

We have a question from the line of Mark Burger. Please go ahead.

Unidentified Analyst

Yeah, hi, thanks for taking my question. I missed the beginning part of the call. Could you tell me what you attribute the great quarter to, was it the economy, was it the Lohman acquisition or could you put your finger on it and will it – could we see it forward?

Lawrence Miller

Some of it relates to the economy, I mean, sorry, sorry, some of it relates to Lohman acquisition, some of it relates to hard work on the part of our sales people over the quarter. The economy may or may not be a factor, I can’t speak to that directly, but we had some larger sales that come through that helped our bottom line, and we just did a good job of blocking and tackling. We don’t – there is no magic bullet risk – we have 900 sales people out there selling every day and to the extent that they continue to push hard and work hard, we get better results. We anticipate these results going forward, that’s why you saw an increase in our distribution for the quarter and it’s pretty much as easy as that.

Unidentified Analyst

Now distribution was nice, but nothing really to write home about. Do you anticipate that distributions will go up a little bit more in the next quarter if things continue like this?

Lawrence Miller

If we earn distributions in the quarter and we’re comfortable that they are at a sustainable level, we’ll increase it. This is the increase that we made for this quarter and that’s where we stand.

Unidentified Analyst

Okay. Thanks.

Lawrence Miller

Sure.

Operator

And it appears we have no further questions on the phone at this time.

Lawrence Miller

Okay. Operator, thank you, and thanks to everyone that was on the call. We appreciate it. And we look forward to talking to you at the end of year. 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 line.

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