StoneMor Partners (STON) Q1 2021 Earnings Call Transcript

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StoneMor Partners (STON)
Q1 2021 Earnings Call
May 13, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the StoneMor first-quarter earnings Release conference Call. [Operator instructions] As a reminder, this conference is being recorded today, Thursday, May 13, 2021. It is now my pleasure to turn the conference over to Keith Trost, VP, financial planning and analysis. Please go ahead, sir.

Keith Trost -- Vice President, Financial Planning and Analysis

Thank you. Good afternoon, everyone, and thank you again for joining us in the StoneMor, Inc. conference call to discuss our 2021 first-quarter financial results. You should all have a copy of the press release we issued earlier today.

If anyone does not have a copy, you can find a full release on our website at www.stonemor.com. Additionally, a copy of the presentation can also be found on our website. With us on the call this afternoon are Joe Redling, president and chief executive officer; and Jeffrey DiGiovanni, senior vice president and chief financial officer. Before we begin, as usual, I would like to remind everyone that this conference call will include certain forward-looking statements within the meaning of the Private Securities litigation Reform Act of 1995.

All statements that address operating performance, events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management's good faith, beliefs and assumptions. Our management believes that these forward-looking statements are reasonable. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of today's date.

We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in the reports, which we file with the SEC. During the call, we will reference certain non-GAAP financial measures, such as EBITDA, adjusted EBITDA, unlevered cash from operations and unlevered free cash flow.

A reconciliation of these measurements to the most directly comparable measures calculated in accordance with GAAP is provided in the press release and presentation. With that, I'll now turn the call over to Joe Redling, who will take it from here.

Joe Redling -- President and Chief Executive Officer

Thank you, Keith, and thank you, everyone, for joining us this afternoon for our first-quarter earnings call. It's been just over seven weeks since we provided our last update on our results at the end of March. On that call, we commented on the positive early results we were seeing in the first quarter. And that momentum only strengthened into March and through April.

We are very encouraged by the current trends and remain focused on maximizing performance across our portfolio. An additional noteworthy accomplishment since our last call was the completion of a strategic refinancing, which we'll talk more about in a few minutes. First, from an operation standpoint, we have continued to see strong sales production. Q1 total cemetery sales production increased 45% versus prior year.

This was driven by both significant increases in our pre-need and at-need production levels. We achieved record results in each month of the quarter with March performance representing the largest single month in cemetery sales production in company history. That's the best of any month ever recorded, not just comparing the month of March. Pre-need cemetery sales production for March 2021 was up 98% over March of 2020, which contributed to an increase of 44% in cemetery pre-need sales production in the first quarter of 2021 versus the first quarter of last year.

As a reminder, when we talk about these numbers, we're doing so on a continuing operations basis. And while we've announced upcoming acquisitions, this growth is without the benefit of adding any new locations. It is 100% organic growth, driven by our remarkable sales team. Driven by the strong performance throughout the first quarter, we had the largest single quarter and the largest pre-need first quarter in company history.

After the strong first-quarter performance, our team continued their momentum right into April, driving year-over-year growth of more than 40% in pre-need cemetery sales production versus a year ago. And we're continuing to see high levels of at-need activity. In terms of our financial results, and Jeff will talk more fully on this. We saw significant growth in top line revenue which grew by more than $13 million over the first quarter of 2020, representing a 24% year-over-year increase.

Our cemetery operations drove the majority of this increase, but we're also seeing our funeral home operations drive revenue growth as well. With our transformation process largely completed, we're driving meaningful EBITDA improvement beyond just increases associated with revenue gains. Our adjusted EBITDA grew by more than $20 million to $28 million for the first quarter of 2021 versus $7.1 million for Q1 of 2020. This adjusted EBITDA is reflective of the current health of our business activities as it gives credit to the growth in backlog, driven by our sales infrastructure.

Jeff will provide additional details on this metric that we plan to incorporate into our reported results going forward. Over the last few quarters, we've been discussing the value creation that our production, operating and trust management activities drive. We provided full-year 2021 guidance during our fourth quarter earnings call on the two drivers that we feel best exemplify the value that we are creating. First, in terms of unlevered free cash flow, we provided a $40 million target for 2021, which represented 50% growth over 2020.

In the first quarter, we generated $11.5 million in unlevered free cash flow toward this full-year target. We also provided a $50 million target for organic growth in trust assets. That organic growth is driven by investment returns and new contributions from pre-need sales, offset by distributions. We actually drove growth in the trust assets of more than $30 million in Q1, driven by the strong sales production during the quarter and returns generated on the trust.

These results have truly powered the value creation that we've been targeting as we're currently trending ahead of the previous issue guidance on both unlevered free cash flow and organic trust growth. At the open, I mentioned our now completed refinancing. Our previous refinancing back in June of 2019 was, in many ways, the start of the StoneMor transformation story. It provided the infusion and runway that we needed to successfully implement and complete our turnaround plan.

Now this refinancing truly allows us to close the book on the turnaround and begin the new chapter of the StoneMor store. On Tuesday, we issued $400 million in senior secured notes and an 8.5% annual interest rate and used a substantial portion of the proceeds to fund the redemption of the notes that were issued in June of 2019. Unlike with our previous refinancing, there was no original issuance discount associated with this raise. The lower interest rate represents a significant savings versus the rate on our prior debt.

The new notes have no maintenance covenants and will not mature until May of 2029. The new refinancing represented an important strategic milestone for the company. It provided approximately $30 million of new cash to our balance sheet, giving us $78 million of cash as of March 31, 2021, on a pro forma basis after adjusting for the sale of the new notes and the application of the proceeds thereof. Additionally, the terms of the indenture governing the new notes allow us to enter into a super senior credit facility of up to $40 million, which, if completed, would further enhance our access to cash.

That's approximately $120 million of potential liquidity and growth capital between cash and the new senior credit facility. This new level of financial flexibility will allow us to accelerate our organic growth opportunities, increase our ability to grow inorganically through strategic acquisitions should the right opportunities present themselves. With the increased liquidity, we are taking a strategic approach to capital allocation. We'll continue to be diligent in managing both our capital and operating expenses, while continuing to drive operating free cash flow.

We are certainly looking to improve our existing portfolio with targeted capital spend, including strategic inventory growth opportunities and necessary repairs and maintenance, all of which will drive organic growth in revenue and margin. Additionally, we're targeting accretive and synergistic acquisitions of both cemeteries and funeral homes in our existing markets. And we're looking at infrastructure opportunities that will further our objectives of being a best-in-class operator. Our transformation and cost savings initiatives set us on the right path and trajectory, and the sales culture and production have powered the engine.

The refinancing has substantially reduced potential structural limitations as we are now well positioned both operationally and financially the better to serve our customers, employees and shareholders. With that, I'll turn the call over to Jeff, who will walk you through more detail on our financial performance and give more color on the debt refinancing.

Jeff DiGiovanni -- Senior Vice President, Chief Financial and Accounting Officer

Thank you, Joe, and thank you all for joining us today. Although it's been a short seven weeks since we released our fourth quarter financials, we have accomplished a great deal with both the refinancing and the continued solid performance in sales and operations as we review our first-quarter results. Before we dive into the GAAP results, please note that when we look at our performance for the quarter, we are presenting everything on a continuing operations basis. That is, they exclude the financial performance of the divested West Coast properties.

Joe introduced the adjusted EBITDA metric that will become a key measurement we will be reported on a go-forward basis. We utilize this calculation, which, among other adjustments, adds back the impact of deferred revenues to better approximate the financial results associated with our current production and operating levels. We feel that this presentation is meaningful and provides an additional level of [Inaudible] to our current performance as it matches the fixed facility and overhead costs with the current sales production levels that they support. We generated $28 million of adjusted EBITDA during the first quarter of 2021 compared to 7.1 million for the first quarter of 2020, driven by strong pre-need sales production that Joe mentioned.

As a percentage of revenue, our adjusted EBITDA increased to 15.6% from 4.2% in the first quarter of 2020. We saw a $20.4 million change in deferred revenue, net of the change in deferred selling costs for the first quarter of 2021, which compared with a $5.3 million net change for the first quarter of 2020. Deferred revenue growth is driven by a combination of pre-need sales production and merchandise trust income, both of which are deferred until the underlying merchandise and services are delivered, offset by the recognition of revenue associated with the delivery of previously deferred revenues. From a top line revenue standpoint, we drove total revenues from continued operations of $78.3 million in the first quarter of 2021, representing a $13.2 million or 20% increase compared to $65.1 million recognized in the first-quarter 2020.

This increase was driven largely by our cemetery segment which represents 86% of our revenues and experienced a $12.2 million or 22% increase in revenue, driven by the increase in death rates and strong pre-need sales results. While the increase was noted across each of our cemetery revenue components, interment, merchandise services and investment income, the biggest increase was driven by interment revenue, which grew $5.8 million and includes revenue recognized from both at-need and pre-need sales activity. The funeral homes segment, which represents the remaining 14% of our revenues, also grew by 10% or $1 million. This remains a significant opportunity for StoneMor as we continue to evaluate and transform our funeral home portfolio, similar to the strides that we've already made on the cemetery segment.

As we talk about GAAP revenues, I'd like to remind you that this is largely a function of the revenue recognition standards, particularly as it relates to our pre-need sales production, which relies heavily on the timing of pre-need turning at-need and servicing on pre-need merchandise. These non-GAAP sales production metrics that Joe referenced earlier are a measure of our sales productions are not directly reflected in our current GAAP revenue results. From an expense standpoint, our cost of goods sold on cemetery revenues increased 19%, or $1.8 million, driven by the $12.2 million increase in cemetery revenue. On a percentage of cemetery revenue basis, cost of goods sold decreased by 50 basis points to 16.7% as we continue to drive savings through our previously discussed initiatives.

Cemetery increased by $1.2 million, or 7%, as barrier activity increased. We also saw an increase in repairs and maintenance that did not meet the capitalization standards, real estate taxes and other expenses, including COVID-19 PPE purchases. Selling expense increased 18% or $2.2 million, again, driven by increase in revenue recognition. As a percentage of cemetery revenue, selling expense decreased 80 basis points to 21.2%.

This decrease is despite increased marketing and advertisements, which we have cut back in March of last year in response to the uncertainty surrounding the COVID-19 pandemic. General and administrative expense increased 7% or $700,000, largely associated with increase in insurance premiums. We have also increased the bonus opportunities for our field leaders, especially our general managers, to drive EBITDA and revenue growth, with the results of the plan evident in these results. In total, our cemetery segment operating profit more than doubled versus the first quarter of 2020, generating 11.6 million in the first quarter of 2021, compared with 5.2 million.

From a funeral home perspective, expenses grew 10%, nearing the 10% growth in funeral home revenues. And lastly, when we look at corporate overhead, we saw about a million increase versus the first-quarter 2020. This increase was driven by corporate bonus accrual that was booked for Q1 '21 based upon the strong results during the quarter. There is not a corresponding bonus accrual at Q1 '20 given the uncertainty of COVID-19.

Joe talked about the full-year guidance that we previously issued. We performed well against those targets with $11.5 million of unlevered free cash flow and $30 million of organic trust growth in the first quarter. We do not plan on issuing new or updating the guidance during the year, but we are extremely confident that we will exceed the annual guidance numbers over the course of 2021. In terms of the free cash flow, the $11.5 million generated for the first quarter is an improvement versus the $300,000 utilized during the first-quarter 2021 -- 2020, representing $11.8 million improvement year over year.

The first quarter 2021 includes a $1.8 million of capital expenditures spent and $8.6 million of cash interest paid. For the first quarter, again, we did not elect to pick interest option on our old notes, which increased the cash interest component but decreased the overall interest expense. As we talk about our debt, we are excited about the refinancing that Joe already introduced. Earlier this week, we closed on a new eight-year, 8.5%, $400 million senior secured notes.

This represents a 300-basis-points improvement versus the peak interest option on our prior notes and a 125-basis-points improvement versus the cash interest option on those notes. The current notes were issued at par and did not include any original issuance discount as our prior note stand. In total, our previous notes carried a fully loaded cost in the mid-teens. So the 8.5% rate truly represents a sizable savings for StoneMor.

Additionally, the indenture governing the new notes allows us at our option to redeem up to 40 million annually in principal amounts of the new notes in each of the first years at 103, and as Joe mentioned, includes a carve-out for up to 40 million in a super senior secured revolving credit facility. The proceeds from sale of the new notes were utilized to fund the redemption of our existing notes, including an approximate $18.5 million prepayment premium, and to pay other fees and expenses associated with completing the transaction. The remaining net proceeds of approximately 30 million represents cash that's available for general corporate purposes, including acquisitions. The indenture governing the new notes does not have any maintenance covenants and provides significant flexibility for StoneMor as we look ahead at our strategic growth plan.

This transaction provides more than adequate powder to fund our strategic plans while also derisking the company with the extended maturity date. Joe discussed the $30 million of organic growth in our trust against the 50 million guidance previously issued. The first quarter was a good indication of our ability to drive value with both strong production levels and fantastic trust returns. Looking at the merchandise trust, the value increased by approximately 23 million.

That growth was driven by 13 million in new contributions on pre-need sales, and 25 million in realized and unrealized gains net of costs. These increases were offset by 15 million in cash distributions to operating cash flows. As a reminder, the merchandise trust is funded from pre-need sales activity in accordance with various rules and regulations of each state in which we operate. Depending on the state, investment income is either distributed annually or retained until the underlying merchandise and service is performed.

The principal balance is released along with any retained investment income as the merchandise and services are performed. The perpetual care trust value grew by $7 million. As a reminder, the principal balance of the perpetual care trust remains in the trust in perpetuity, while the income generated is utilized to defray the land staging and maintenance cost of our cemeteries. The growth was driven by $2 million in new contributions, plus $14 million in realized and unrealized gains, net of costs.

These increases were offset by distributions of $9 million into operating cash flows. Collectively, between the growth in trust and the unlevered free cash flow, we created more than 40 million -- $41 million in value during the first quarter of 2021. This is a testament to the hard work of every member of the StoneMor team. I'm beyond excited what the future holds for us as we enter this new chapter of the StoneMor story.

With that, we will open the floor to questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question is from the line of David Beard with Jefferies. Please go ahead.

David Beard -- Jefferies -- Analyst

Good afternoon, guys. Great to hear the continued capture of pre-need planning trends. I know you're not updating the targets, but could you maybe just give a sense on the sustainability of the 1Q pre-need selling through the rest of the year? As in terms of were you initially contemplating some slowdown later in the year? And is there anything you're seeing through March and April that would kind of take you off any original cadence assumptions as we look to model the rest of the year?

Joe Redling -- President and Chief Executive Officer

Sure, David. This is Joe. So we actually have seen pre-need actually strengthen. We are expecting with the programs we have in place to pre-need kind of to stay at the sustained level.

I mean, obviously, our comps in March and April were pretty easy because that's when we got hit with COVID and everything kind of shut down over those periods. That said, like our March and this first quarter was actually up like 80% over March of 2019. So we feel we've really structurally changed kind of the dynamics in pre-need. Our marketing is really working well, and our sales culture is responding.

And we think that's consistent. What we're expecting is to see a moderation in the at-need levels. They're still running pretty high. They stayed sort of high through the first quarter and into April.

We're expecting those by the second half of the year as vaccines become more and more prevalent. We expect our at-need business will moderate somewhat. But we expect the pre-need business to continue to be strong.

David Beard -- Jefferies -- Analyst

Got it. And I'm sorry if I missed it earlier, but can you just give an update around cost initiatives, namely around the 50 million originally contemplated? What's been captured already? How do you think about the rest of 2021 as far as what's actually going to get captured this year? And then maybe where you think you're going to be run rating on those cost saves as we look at the exit of 2021?

Joe Redling -- President and Chief Executive Officer

Yes. I'll start and just strategically, I think kind of the run rates you're seeing now, I mean, what you're seeing in terms of expense increases really year over year is due to volumes, right? We're seeing some pretty significant increases in volume. And we've had some onetime costs that hit us in Q1. So I do think kind of if you look at Q4 and Q1, that's sort of our run rate on the expense side.

I think there's still some opportunities in the second half of the year to get some pickup. But a lot depends, we have a lot of variable costs as we start moving that top line. But I'll let Jeff and Keith add their comments. But I would think we're -- when you look at Q4 and Q1, you're pretty close to our run rates.

Jeff DiGiovanni -- Senior Vice President, Chief Financial and Accounting Officer

Yes. This is Jeff. I would really echo that. I would just look at the Q4, Q1 run rates.

And as Joe mentioned, in the second half, we have levers if we need to -- always to pull.

David Beard -- Jefferies -- Analyst

Got it. Thanks so much.

Operator

Our next question is from the line of Jack Kelly with Brooklake Group.

Unknown speaker

Good afternoon. Joe, you talked about the momentum in pre-need, that 44% of the first quarter. How broad is that? And I don't mean geographically, but you know, you have x number of properties, is it kind of like the 80-20 rule? 80 -- 20% of them are generating that kind of gain, or is it pretty broad across all your properties?

Joe Redling -- President and Chief Executive Officer

On a percentage basis, Jack, it's pretty broad. I mean we're seeing very consistent growth across the properties on a percentage basis. Obviously, in terms of the contribution of dollars, our bigger properties are generating more dollars for us, but actually been really encouraging to see the consistency across all the geographical areas. We're seeing really great results across the board.

We have a very competitive group now, and we're sharing a lot of the sales KPIs on a weekly basis. And there's a lot of activity among our salespeople to be competitive in kind of get those numbers -- those top three slots, so it's very consistent across the board.

Unknown speaker

OK. And then, just secondly, Jeff, you discussed the growth in the merchandise trust with the realized gains, etc. But you seem to imply that you're managing the assets differently. Are you being more aggressive with the investments? Or what's kind of the underlying strategy now versus a year ago? Is it any different?

Jeff DiGiovanni -- Senior Vice President, Chief Financial and Accounting Officer

No. The strategy is relatively the same. We have some fixed-term securities, mutual funds and then we have the big in the pooled funds. The strategy has been consistently the same.

I think whether the change that you're seeing through the numbers is in the past, the company invested heavily in the MLP sector. So there's been a lot of traction, a lot of value coming back in the MLP. So that's where you're really seeing now come through. But the strategy has been relatively the same for the past year.

Unknown speaker

Thanks.

Operator

Mr. Redling, we have no further questions at this time.

Joe Redling -- President and Chief Executive Officer

Great. Listen, as I always do in closing, I just always like to conclude the call with a heartfelt thanks to our teams, particularly those that work directly with our families and serve our communities. They are truly the backbone of this organization, and they have gone above and beyond during these challenging times, and they remain incredibly committed to our mission, and I thank them for their continued hard work and dedication. So thank you all for joining us today, and look forward to upgrading you -- updating you on our progress when we talk about our second quarter results.

Thank you.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Keith Trost -- Vice President, Financial Planning and Analysis

Joe Redling -- President and Chief Executive Officer

Jeff DiGiovanni -- Senior Vice President, Chief Financial and Accounting Officer

David Beard -- Jefferies -- Analyst

Unknown speaker

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