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StoneMor Partners (STON) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribing – Nov 12, 2021 at 10:30AM

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STON earnings call for the period ending September 30, 2021.

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StoneMor Partners (STON)
Q3 2021 Earnings Call
Nov 11, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and thank you for standing by. Welcome to the StonMor third quarter earnings release. [Operator instructions] This conference is being recorded Thursday, November 11, 2021. And now, I'd like to turn the conference over to Keith Trost, vice president, financial planning, and analysis.

Please go ahead.

Keith Trost -- Vice President, Financial Planning and Analysis

Thank you. Good afternoon, everyone, and thank you, again, for joining us on the StonMor Inc. conference call to discuss our 2021 third 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 the full release on our website at www.stonmor.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 Jeff 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.

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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 any undue reliance on 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 filed with the SEC. During the call, we will reference certain non-GAAP financial measures such as EBITDA, field EBITDA, adjusted EBITDA, 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 2021 third quarter earnings call. I'm very pleased to report that our third quarter results have continued to build on the positive performance trends of the past year and a year and a half. Our at-need business continues to outperform the death rates in our markets, and our sales team continues to reach new heights on a pre-need basis.

And as our sales production grows, we continue to stay focused on tight management of our expenses and are driving strong EBITDA results. We're also continuing to drive very strong trust performance results, delivering asset value growth that far exceeds our guidance and internal projections. Unlevered free cash flow continues to trend ahead of expectations as well. So now, let's dive into some of the specifics of the key drivers of our results.

From a pre-need perspective, sales production for the third quarter for 2021 increased nine percent versus the third quarter of 2020 on a comparable-location basis. This nine percent growth in the third quarter is on top of the 32 percent year-over-year growth that we reported in the third quarter of last year in 2020 compared to the third quarter of 2019. We continue to grow our pre-need sales production even as we face the record comps from the second half of 2020. This is truly a testament to our highly productive sales team, the culture that we've established, and the ongoing training regimen that has been implemented.

Our team continues to strive to beat historical highs, and we're very excited to build upon this foundation and even supplemented with new inventory opportunities for our sales team as we look ahead. For the first three quarters of 2021, we've seen our pre-need sales production grow 21 percent versus the first three quarters of 2020 as we continue to build on the impressive pre-need sales gains established last year. In fact, we have seen an increase in overall sales production of 40 percent when comparing the first three quarters of 2021 to the first three quarters of 2019. Looking at our current at-need production, we continue to experience growth in excess of the mortality rates in the states where we operate.

We believe this performance is indicative of improving market share as we continue to focus on improving community outreach while reinvesting in our properties. Our At-need production for the first quarter of 2021 was up 10 percent versus the third quarter of 2020. And again, that is on top of the 29 percent growth reported for the third quarter of 2020 versus 2019. While COVID continues to impact the death rates during the third quarter, we're well below the volume highs we experienced in the first quarter of this year.

Importantly, according to data obtained from the CDC, the death rates, when benchmarked against the 2017 to 2019 days are exceeding even the impact of COVID. We are now in the early stages of the baby boomer generation reaching their life expectancy, which we can reasonably expect to have a positive impact on at-need volume moving forward. For the first three quarters of 2021, our at-need production has grown 20 percent versus the comparable period in 2020. Again, this growth has been positively impacted by the impact of COVID, which really started to drive our at-need volumes during the second quarter.

The growth in our production metrics, coupled with a strong focus on expense controls, has led to strong financial results. We focus our analysis on several key measurable metrics. First is EBITDA, which captures our net income less interest expense, taxes, depreciation, and amortization. We also exclude costs of lots sold, noncash stock compensation, and certain one-time gains and losses from this metric in order to benchmark our performance based upon normalized business operations.

For the third quarter of 2021, we recorded EBITDA of $8.9 million, which represented a growth of $2.2 million or 34 percent versus the third quarter of 2020. For the first three quarters of 2021, we recorded EBITDA of $27.6 million compared with $12.2 million for the comparable period in 2020. Note that one of the adjustments of the 2021 period was the one-time loss of $40.1 million that was recorded in conjunction with our refinancing activities, which negatively impacted our net income results but does not accurately reflect our current business operations. We also look at field EBITDA as a metric to understand the efficiency of our locations.

It is calculated by stripping corporate overhead out of the EBITDA calculation to isolate the operational performance of our profits. During the third quarter of 2021, we generated field EBITDA of $18.4 million or 22.4 percent of total revenues. This compared to $16.1 million in the third quarter of 2020, which was 22.1 percent of total revenues. With the first three quarters of 2021, we generated $55.1 million of field EBITDA.

This represents a significant improvement against the comparable period in 2020, where we generated $38.1 million of field EBITDA. The third key metric that we utilize is adjusted EBITDA. That metric utilizes the EBITDA calculation and further adjusts for the changes in deferred revenues and deferred selling. While the EBITDA calculation measures our performance and expense efficiency levels against GAAP revenues, this additional adjustment allows us to analyze our business based upon current sales' production levels, matching all of our fixed expenses with current business operations that they support.

This is the metric that management utilizes most frequently to manage our business and locations. During the third quarter of 2021, we generated $38.5 million of adjusted EBITDA, which represents $14.3 million or 59 percent growth, compared to the $24.3 million for the third quarter of 2020. And for the first three quarters of 2021, we've generated $98.6 million of adjusted EBITDA, compared with $46.4 million for the comparable period in 2020. That remarkable growth is a combination of both our sales production gains and trust performance, coupled with the expense savings initiatives that have generated savings across all of our line items.

Note that each of these metrics are considered non-GAAP metrics, and the reconciliation has been included within our press release. At the beginning of this year, we issued guidance on two key metrics. The first metric was $40 million of unlevered free cash flow. Unlevered cash provided by operating activities is calculated by subtracting capital expenditures from cash flow from operations.

Cash paid for and interest expenses then added back to derive unlevered free cash. During the third quarter of 2021, we drove unlevered free cash flow of $9.8 million, bringing our unlevered free cash flow for the first three quarters of 2021 to $36 million, which is well on pace to exceed our full-year target. I also want to note that the full-year adjustments to derive unlevered free cash flow included $18.1 million paid with the refinancing to satisfy the interest payments on our old notes. For accounting purposes, that was treated as cash interest paid and included in operating cash flow in not with financing activities as you might expect.

This performance compares very favorable to our performance in 2020 when we achieved $8.3 million and $19.4 million of unlevered free cash for the comparable three- and nine-month periods. We expect it was driven largely by the increased EBITDA and adjusted EBITDA levels previously discussed. The second metric was $50 million of trust growth. Even though the second quarter -- even through the second quarter, we were exceeding that full-year target, having recorded $57.5 million worth of growth.

We continue to add to that growth during the third quarter with another $12.4 million of growth, bringing the year-to-date growth to $69.9 million. This has been driven by strong trust asset management, coupled with strong sales production that drove new contributions into the trust. We also benefited from one-time transactions on our investments, including refinancing premiums and origination fees that helped drive this growth during 2021. We highlighted and provided guidance on these two metrics as we feel that collectively, they provide insight into the true value created during the period, particularly in terms of the strength of our balance sheet.

Collectively, we generated value creation i.e. unlevered free cash flow plus trust growth of $105.9 million for the first three quarters of 2021. Before I turn the call over to Jeff for a more detailed review of our financial performance during the third quarter, there are two other items I want -- I'd like to discuss. We're currently sitting with $100 million of cash on our balance sheet, not including restricted cash.

As we look ahead to 2022, we see a year of reinvestment and growth. We expect to utilize a portion of those funds on organic growth, including reinvesting in our current assets to upgrade the overall aesthetics of the locations and through the addition of new inventory projects that can substantially improve performance across key locations. And I've discussed this a few times previously, we're actively engaging in the pursuit of acquisition opportunities. We see a tremendous opportunity to grow our business through strategic acquisitions within our current operational footprint.

With the operational and financial improvements that we've made over the last two-plus years, we are in a good position to integrate the property into our business and drive even greater performance through synergies with our current operations. We continue to monitor our cash and capital position against our project and acquisition pipeline. And as appropriate, we will consider making on a partial repayment of our debt to reduce the cash interest expense and improve our debt-to-EBITDA leverage ratio. The second item was the recent letter received from our majority shareholder, Axar, regarding strategic opportunities.

As a quick update, upon receipt of the letter, the board of directors delegated to the conflicts committee of our board the responsibility to address and review potential strategic options. Conflicts committee is comprised of three independent board members who are best-equipped to review and evaluate those strategic options and how they might impact all of our shareholders. The conflicts committee has engaged both legal counsel and a financial advisor as they pursue this analysis and evaluation. We will provide further updates as required.

With that, I'll turn the call over to Jeff to further review the financial performance.

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

Thank you, Joe, and thank you, all, for joining us today. Before we talk about the GAAP results, I want to remind you that we are presenting these numbers on a continuing-operations basis. That is, they exclude the financial performance of our divested properties. Additionally, while we anticipate that we will be completing acquisitions in the near future, we have not done so as of this point.

And so, these results do not have the benefit of such acquisitions. So, all of the results are truly on a same-store basis. From the top-line revenue standpoint, we drove total revenues from continuing operations of $82.3 million in the third quarter of 2021, which represented a $9.6 million or 13.2 percent increase, compared to the $72.7 million recognized in the third quarter of 2021. And as I've mentioned, this growth is being generated without any benefit from acquisitions.

That increase was driven largely by the cemetery segment, which represented 86 percent of our revenue and experienced an $8.8 million or 14.2 percent increase in revenues for the quarter compared to the third quarter of 2020. Specifically, during the third quarter, in addition to sales growth that Joe already talked about, this growth was also driven by the growth in investment and other revenues, which grew $5 million on the strength of our trust performance. The funeral home segment, which represented the remaining 14 percent of our revenue, also grew revenues by 7.4 percent for $800,000 for the quarter compared to the third quarter of 2020. We continue to see a tremendous opportunity to grow our funeral home segment by both focusing on evaluating and transforming our current assets, similar to the work that we already completed in the cemetery segment and through strategic acquisitions.

The third quarter continued the strong results that we reported during the first half of 2021. For the nine months ended September 30, 2021, we recognized $243.6 million in total revenues, a $39.2 million or 19.2 percent increase versus the nine months ended September 30, 2020. As with the third quarter results, the growth for the first three quarters of 2020 is largely driven by the cemetery segment, which grew $36.2 million or 20.9 percent versus the comparable period in 2020. As we talk about our GAAP revenues, I'd like again to remind you that the application of GAAP revenue recognition standards does not reflect the full impact of our pre-need sales production, and instead, relies heavily on the timing of pre-needs turning to at-need and servicing on pre-need merchandise.

The non-GAAP sales production metrics that Joe discussed earlier are a measure of our current period sales production and are not directly reflected in the current GAAP revenue results. From an expense standpoint, our cost of goods and cemetery revenues increased $1.4 million or 14.5 percent for the quarter ended September 30, 2021, driven by an overall increase in sales volume. On a percentage of cemetery revenue basis, cost of goods sold was effectively flat, increasing to 15.6 percent for the third quarter, versus 15.5 percent for three months ended September 30, 2020. We're starting to see the impact of supply chain issues both in our ability to deliver merchandise and in terms of rising costs.

We've been successful at maintaining our margins effectively through targeted price increases and strong vendor management. Cemetery expense, which includes cost associated with landscaping, repairs and maintenance, real estate taxes, and other costs, increased by $3.1 million or 19.1 percent for the quarter ended September 30, 2021. The increase was partially attributable to repairs and maintenance costs that did not meet the capitalization standards as part of our strategic efforts to improve the quality of our locations. Cemetery selling expense increased $1.3 million or 10.2 percent for the quarter ended September 30, 2021, driven by the increase of revenues.

As a percentage of cemetery revenues, cemetery selling expense for the third quarter ended September 30, 2021, decreased 75 basis points to 20.4 percent versus the comparable period in 2020. Historically, from 2016 to 2019, our cemetery expense ran between 23.8 percent and 25.3 percent. So, this has truly represented a tremendous improvement. This decrease was despite a $0.5 million increase in advertising and marketing spend, which we curtailed last year due to the uncertainty surrounding the COVID-19 pandemic.

The decrease was largely attributable to changes within our sales organization, to align compensation with proper profitable sales production, and create a more efficient sales platform and leadership team. Cemetery general and administrative expense increased $0.5 million or 5.1 percent for the quarter ended September 30, 2021, partially driven by increased insurance premiums and an increase in credit card processing fees that is tied back to the sales increases that Joe talked about. Lastly, we have increased the bonus opportunities for our field leaders, specifically our general managers and division management teams to drive those EBITDA and sales growth production, which the results of that plan are clearly evident in our operating results. Additionally, we saw an increase in legal fees related to ongoing operations.

These cost increases were offset by decreases in costs associated with acquiring PPE supplies during the onset of the COVID-19 pandemic. In total, the cemetery segment produced operating profits of $14 million or 19.8 percent for the third quarter of 2021, compared with $11.5 million or 18.5 percent for the third quarter of 2020. We have made tremendous strides on improving this performance and that is even more evident when we look at the nine-month period. We generated cemetery segment operating profits of $40.4 million or 19.2 percent during the nine months ended September 30, 2021, compared with $24.1 million or 13.9 percent for the nine months ended September 30, 2020.

As Joe mentioned, this is truly a testament to the hard work put together by our sales and operational teams, which have pushed the increase in sales production while driving a more efficient organization. In our funeral home segment, our operating expenses grew 10.2 percent for the quarter ended September 30, 2021, versus the comparable period in 2020, compared with 7.4 percent growth in funeral home revenue for the quarter ended September 30, 2021, versus the comparable period in 2020. Now, looking at corporate overhead, we saw a 2.3 percent or $200,000 increase for the third quarter of 2021 versus the third quarter of 2020. As a percentage of total revenue, corporate overhead for the third quarter of 2021 was 12.1 percent, compared to 13.4 percent for the third quarter of 2020.

We have made great strides over the years, particularly compared to the full-year 2019 when corporate overhead was 17.7 percent of total revenues. Joe talked about the full-year guidance, both unlevered free cash flow, and organic trust growth. We continue to perform ahead of those targets. We do not plan on issuing new or updated guidance, but we remain confident that we will exceed the annual guidance over the course of 2021.

As Joe mentioned, the $36 million of unlevered free cash for the nine months ended September 30, 2021, is on target to exceed the annual $40 million target and is $16.6 million ahead of the nine months ended September 30, 2020. I wanted to provide some additional details on this performance. The calculation of unlevered free cash included $31.3 million of cash interest payments. Those cash interest payments included the $18.1 million payment of paid-in-kind interest on our own notes that was paid in conjunction with our refinancing.

The calculation also includes $5.7 million of cash paid for capital expenditures, specifically $2.3 million for maintenance capex and $3.4 million for expansion capital expenditures. This increase -- this is an increase versus the $4.8 million spent during the nine months ended September 30, 2020. The increase of $900,000 spend included a $200,000 increase in maintenance capital expenditures and $700,000 increase in expansion capital expenditures. The increase in expansion capital is consistent with our reinvestment in growth lines.

Through the nine months ended September 30, 2021, we have increased the value of our trust by $69.9 million, which is -- which included $12.4 million of growth during the quarter. This growth is being driven by three new sales production efforts and by enhancing investment returns on our trust assets. The largest driver of the growth was in our merchandise trust assets, which grew $47.1 million for the nine months ended September 30, 2021. The growth was driven by $43 million in contributions on pre-need sales and $56 million of realized and unrealized gains, net of fees, offset by $52.1 million in distributions that were included in operating cash flow.

Additionally, the perpetual care trust assets grew $22.8 million for the nine months ended September 30, 2021. The financial transformation over the last three years has been truly remarkable. Looking back to December 31, 2018, we were sitting with just over $18 million in total cash. While, where today, we had nearly $100 million in nonrestricted cash with another $16 million of restricted cash.

Our balance sheet is healthy and we've driven nearly $100 million in adjusted EBITDA for the nine months ended 2021. In addition to the cash on the balance sheet, we also have the ability to add an additional $40 million in super senior debt to our strategic growth plans. This management team and the whole StoneMor team has delivered, and I'm excited as we take the next step in our strategic growth plan. Finally, I want to thank each of our StoneMor team members for their strong commitment during the quarter and continued success to help us transform the company we aspire to be in the future.

With that, we will open the floor to questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] We have a question from [Inaudible] with [Inaudible]. Please go ahead. Your line is open.

Unknown speaker

Yes. Good afternoon, guys. Joe, I apologize. I missed some of your opening comments.

I was just wondering if you had commented earlier on, you know, what the special committee is doing. You know, it was my understanding going back to when that announcement was made, that it -- the special committee wasn't considering any kind of offer from an outside party. It was more strategic whether it's selling off pieces or merging, you know, etc., etc., And I know you can't comment on a lot of the details, but what are the parameters of what the special committee is looking at, Joe?

Joe Redling -- President and Chief Executive Officer

Yeah, Jack. I think you've covered it well. I think there is no predisposed focus of one direction or another. So, their goal is to work with their advisors to evaluate a number of strategic alternatives that we could consider.

So, there's really not a defined, you know, matter to go after. So, they are going to look at how we can, you know, leverage the results of the business, and think about how we can, you know, really look at this business strategically and how we can do, you know, structure things where it's better for shareholders. So, it's really up to the committee to work with their advisors on bringing that back to the board.

Unknown speaker

OK. And is there -- I guess it's been a -- maybe a bit better than a month going to two months. Is there any, you know, potential timeframe on when their, you know, I would think there are a limited number of things you can do, you know, on when they might bring that back to the board?

Joe Redling -- President and Chief Executive Officer

Yeah. I mean, they have -- as I said in prepared comments, they have engaged with a legal advisor and a financial advisor. And as soon as we hear something from them, obviously, we will share that with the market. I don't have the time [Audio gap] to share with you today.

Unknown speaker

Right. Just -- and in terms of potential acquisitions even though you haven't completed any major ones, you're probably kicking the tires and getting a feel for what's out there. Does the acquisition market look attractive? And I assume anything you do would be within existing geographic areas?

Joe Redling -- President and Chief Executive Officer

Yeah, that's correct, Jack. I mean, we definitely want to stay within our footprint. We think -- with our general manager structure, we think we could have, you know, quite a bit of operational synergies. We think the market is, you know, very attractive right now.

You know, our pipeline looks very strong, so we're very active in that review. As you mentioned, we kind of just got started on this. So, we're -- there'll be more to come on this, but we feel really good about the activity we're seeing.

Unknown speaker

OK. And then just last question in terms of the capex. For the nine months, you know, you're up $1 million or so, but for the third quarter, it was your, you know, doubled 2.5 times last year. And I know there were some comments made on why that was the case.

But looking forward, is the $2 million rate something we should annualize, or is that just kind of a catch-up number?

Joe Redling -- President and Chief Executive Officer

The $2 million rate for the quarter?

Unknown speaker

Yes. In capex. $2 million --

Joe Redling -- President and Chief Executive Officer

Yeah.

Unknown speaker

$2 million-plus of --

Joe Redling -- President and Chief Executive Officer

Yeah. I think -- look, we're, you know, I think, you know, we'd probably higher than that, honestly. I think we're looking to reinvest in these properties. You know, with our financial position now, we think that we have huge opportunities within our portfolio.

So, if we can leverage capex to generate, you know, additional inventory opportunities for us and upgrade our properties, we're going to do that. So, more to come on that, but we'll share that, you know, more as we start talking about 2022.

Unknown speaker

OK. All right. Thank you.

Joe Redling -- President and Chief Executive Officer

You bet.

Operator

And there are no further questions at this time. I will turn the call back to Keith Trost.

Joe Redling -- President and Chief Executive Officer

Keith, are you there?

Keith Trost -- Vice President, Financial Planning and Analysis

OK. Thank you again for your time this afternoon. We look forward to talking with you again for the fourth quarter update. In the meantime, if you have any questions that were not answered or discussed on today's call, please reach out to our Investor Relations team at 215-826-4438.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Keith Trost -- Vice President, Financial Planning and Analysis

Joe Redling -- President and Chief Executive Officer

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

Unknown speaker

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