StoneMor Partners L.P. (STON) Q4 2021 Earnings Call Transcript

StoneMor Partners L.P. (STON)
Q4 2021 Earnings Call
Mar 30, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the StoneMor fourth quarter and full year earnings release conference call. [Operator instructions] As a reminder, this conference is being recorded today, Wednesday, March 30, 2022. I would now like to turn the conference over to Keith Trost, VP of financial planning and analysis. Please go ahead.

Keith Trost -- Vice President, Financial Planning and Analysis

Thank you. Good afternoon, everyone, and thank you for joining us on the StoneMor Inc., conference call to discuss our 2021 fourth quarter and full year 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.

With us on the call this evening 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 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 the investor presentation,  which is also available on our website. 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 fourth quarter and full year earnings call. 2021 has been a truly remarkable year for our team. We've continued to execute on the initiatives that supported our transformation plan. The calendar year has also presented unique challenges, and I'm proud of the work that our team has done to overcome those challenges and actually turn them into strength.

One of the key tenets of our transformation strategy was a major focus on improving sales performance. Even prior to the start of the COVID-19 pandemic, we had started to see the green shoots of success. As we reported same store sales growth in the first quarter of 2020, which was a critical milestone for the company's performance. The changes that we made with our sales team, including establishing a new sales leadership structure, implementing new training and compensation programs, and new tools to support lead generation and customer relationship management created a new sales culture that was ready to embrace the challenge.

And they did just that. The full year of 2020, we beat our prior year sales production performance by more than 15%, and the fourth quarter of 2020 delivered growth of 22%, versus the fourth quarter of 2019. That level of growth set a high bar for 2021, as our expectation for this year was to continue to build on the momentum and drive double digit sales production growth again in 2021. I'm excited to share that our team beat those targets and achieved over 90% growth in sales production for the full year of 2021, versus the full year of 2020.

That level of production was consistent throughout the entire year, and the fourth quarter continued the trend. Even after the 22% growth in the fourth quarter of 2020, we also experienced another 10% year-over-year growth in the fourth quarter of 2021. A portion of this growth has been attributed to the increased death rates that we've experienced throughout the country. But even with that increase at-need activity, the team was able to grow our pre-need sales production by more than 14% for the full year of 2021.

Extremely proud of the effort and work that our team has done to achieve these improvements. We set a high bar and we delivered. And as we look ahead to 2022, we still have high expectations and continue to remain focused on profitable growth. Of course, we now have tougher comparisons coming off record performances in 2021, combined with an expected decline in athlete cases associated with the normalization of the COVID-19 impact.

That said, we intend to mitigate that with a variety of tactics, including new inventory offerings, particularly targeting cremation memorialization, and a combination of increase in pricing, decreases in discounts, and a continued focus on driving pre-need sales production growth. With the first quarter nearly complete, we are already seeing encouraging signs that 2022 is heading in the right direction with sales production coming in ahead of expectations. I'm encouraged by the strong sales results we have seen so far this year. And remember, Q1 of 2021 was a record sales production quarter, and represents a very challenging year-over-year comp.

But we are trending right on [Inaudible]. A second key tenet of our transformation strategy was fixing our cost structure, in order to build an organization that is sustainable for the long-term. We believe that we've done exactly that with many of the initiatives that we discussed previously on this call. We are now focused on reinvesting back into our people in our business in order -- to drive improved production and results.

Jeff will dive into some of those investments and cost drivers that have impacted our business this year. However, I do want to focus on one of those now. We previously discussed the outsourcing relationship for all of our maintenance and landscaping services. It was a program that we were excited about, both for the operational and financial benefit that it presents.

The program's initial launch was a success, and we saw immediate benefits to the process through standardization, shared services, and a significant reduction in our overall cost. Unfortunately, it became clear over the term that while the fundamentals of the program were sound, our partners was not. Eventually experiencing challenges in scaling and maintaining the business to our contracted standards, and in managing overall liquidity, which eventually culminated in that partner filing bankruptcy. As a result of those issues, we have now taken back all locations and associated employees.

With the last of those locations being taken back in January of this year. In order to ensure that our locations were appropriately serviced and had continued service through this period, StoneMor made payments directly to vendors and employees that resulted in additional costs to StoneMor during 2021. With that being said, with these services now back under StoneMor's direct management, we expect to retain the operational successes that were learned from the process, while retaining the more efficient lower cost basis. The last tenet of the transformation strategy that I wanted to highlight today was fixing our balance sheet.

We started that process with the divestiture program, through which we exited the West Coast and refocused our footprint on a more regionally focused operation in the eastern half of the United States. It certainly created operational efficiencies and allowed us to better focus on our performance, but it also served to reduce our debt levels by more than $66 million. That debt reduction, coupled with our improved operating performance, put us in a position to refinance our debt, which we did in April of 2021. That refinancing provided us with a new infusion of capital while reducing our interest rate, and eliminating cumbersome maintenance covenants on our prior debt facility.

It also provides for additional opportunities to raise new debt and capital to support our long-term growth initiatives. And that really leads us to the next step in our transformation. Accelerating our growth through acquisitions. I'm excited to announce the completion of three separate acquisitions during the first quarter of 2022.

Prior to these acquisitions, StoneMor had not completed any acquisitions since 2016. We needed to make sure that we were in a strong financial and operational position to successfully acquire and integrate new properties. I'm confident that our transformation has now reached that point and we are now well-positioned to be an efficient acquirer. These three recent acquisitions include four new cemeteries and three new funeral homes located in Virginia, Florida, and West Virginia for a total purchase price of $18 million.

This has been a strategic process focused on identifying high quality operations at accretive multiples that leverage synergies with our existing locations. We continue to seek out additional opportunities that fit the same criteria. Throughout 2021, we've been reporting on two key metrics and our progress toward the guidance that was previously provided. Collectively, these two metrics measure the value creation in terms of operating cash generated and trust appreciation.

We targeted a collective $90 million in value creation based on these two metrics. And we have exceeded that target by nearly $43 million in 2021, with a total of $133 million of total value creation. Individually, the first of those two metrics was trust growth. We have provided guidance of a $50 million growth target for 2021.

We've exceeded that target with $93.3 million of growth. This performance -- and in excess of our guidance has been driven by several factors. First, the performance of our trust have exceeded our expectations, and has led to a compounding effect that contributed to the growth. Secondly, we benefited from certain one-time origination fees and refinancing premiums earned.

And additionally, the strong pre-need sales performance has led to contributions into both the perpetual care trust, and merchandise trust that was above our initial expectations. The second metric was $40 million of unlevered free cash flow for the year. We ended the year at $93 -- $39.3 million, just missing the full year guidance due to the accelerating investment spend in the fourth quarter. During the fourth quarter, we generated unlevered free cash flow of $3.3 million as we strategically reinvested into our properties and facilities and as previously discussed, supported the transition of our maintenance services.

This was also evidenced with increases in capital expenditure spent. Specifically, we had $6.4 million of capital expenditures during the fourth quarter, compared with $5.7 million total for the first three quarters of 2021. During the fourth quarter, we also saw an increase in repairs and maintenance spend but did not meet the capitalization standards. As we look ahead to 2022, these two metrics will be continue to be indicators that we manage and watch as they represent the growth of the business that being created during the year.

We are now targeting $70 million across asset growth for 2022, adjusting for the one time earnings during 2021, and utilizing a more conservative return estimate, which would result in growth that is less than 2021 performance. For our unlevered free cash flow, we are targeting the same $40 million number for 2022 that was targeted last year. We are continuing to reinvest in our properties and our infrastructure with a capital expenditure plan that exceeds our 2021 spend level, which is all accounted for within our current year targets. With that, I will now turn the call over to Jeff to discuss the financials. 

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

Thank you, Joe, and thank you all for joining us today. Before we talk about the cap 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 properties divested in 2020 and 2021. And as Joe mentioned, we have recently completed several acquisitions.

However, those were completed during the first quarter 2022, and accordingly, they have not -- they have no impact on the 2021 or 2020 financial results. So these GAAP results are truly representative of same store sales basis. From a top line revenue standpoint, we drove total revenues from continuing operations of $79.3 million in the fourth quarter of 2021, which represented a $4.3 million, or 5.8% increase compared to the $74.9 million recognized in the fourth quarter 2020. And as I mentioned, this growth was generated without any benefit from acquisitions.

For the full year 2021, our total revenues from continuing operations was $322.8 million, which represented a $43.3 million or 15.5% increase over 2020. The increase in revenues was largely driven by the cemetery segment, which represented 86% of our 2021 revenue, and experienced a $4.8 million or 7.5% increase in revenues -- for the quarter compared to the fourth quarter of 2020, and a $41.1 million or 17.3% increase in revenues for the full year 2021, compared to the full year 2020. Specifically, during the fourth quarter, the year-over-year growth in cemetery revenues was largely attributable to impairment revenue, which increased by $4 million compared to the fourth quarter of 2020, and was directly impacted by the sales production growth that Joe already talked about. The funeral home segment, which represented the remaining 14% of our 2021 revenue, also grew revenues by 5.4%, or $2.2 million for the full year 2020 compared to the full year 2020.

We continue to see tremendous opportunity to grow our funeral home segment, both by focusing on evaluating and transforming our current assets, similar to the work that we've already completed in the cemetery segment, and through strategic acquisitions. As we talk about our GAAP revenues, I like again to remind you the application of GAAP revenue recognition standards does not reflect the full impact of our pre-need sales reduction, and instead, relies heavily on the timing of pre-need turning at-need, and servicing on pre-need merchandise. The sales reduction metrics that Joe discussed earlier, are a measure of our current period sales activity and is not directly related to the current GAAP revenue results. From an expense standpoint, our cost of goods on cemetery revenues increased $5.3 million, or 44.8% for the quarter ended December 31, 2020, driven by an overall increase in sales volume.

For the full year 2020, our cost of goods sold on cemetery revenues increased $11.6 million, or 29%. During the fourth quarter 2021, we recorded a $1.9 million impairment charge on cemetery caskets held in inventory that we determined did not have an economic value. Excluding the one time impairment charge on a percentage of cemetery revenue basis, cost of goods sold was 17.9% for 2021, compared with 16.9% for 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 done a good job mitigating the impact of these margin pressures through targeted price increases, and strong vendor management. Cemetery expense, which includes costs associated with landscaping, repairs and maintenance, real estate taxes and other costs increased by $2.6 million, or 14.5% for the quarter ended December 31, 2021. For the full year ended 2020, we experienced a $7.8 million, or 11.4% increase compared to the full year of 2020. The increase was partially attributable to repairs and maintenance costs that did not meet capitalization standards, as part of our strategic efforts to improve the quality of our locations.

Additional, increases in the line items related to the transition of landscaping and maintenance services, that from our third party provider as Joe previously discussed. Cemetery selling expenses increased $3.2 million, or 26.3% for the quarter ended December 31, 2020, driven by the increase in revenues. For the full year 2021, we experienced a $9.3 million, or 18.7% growth in cemetery selling expense. As a percentage of cemetery revenues, cemetery selling expense for the year ended December 31, 2020, remains effectively flat at 21%, compared to 20.9% for the comparable period in 2020.

Historically, from 2016 to 2019, our cemetery selling expense ran between 23.8% and 25.3%. We maintained this lower rate despite an increase of $2.4 million strategic target advertising spend utilized to drive revenue and sales growth production. Cemetery general and administrative expense increased $1.3 million, or 14.4% for the quarter ended December 31, 2021. For the full year 2021, we experienced a $4.0 million, or 10.7% increase compared to the full year 2020.

This increase was partially driven by increased insurance premiums, and increase in credit card processing fees that is tied back to the sales increases that Joe talked about. Additionally, we have increased the bonus opportunities for our field leaders, specifically, our general managers and division management teams, to drive both EBITDA and sales reduction with the results of that plan clearly evident in the results. These cost increases were offset by decreases in costs associated with acquiring PPE supplies during the onset of COVID-19 pandemic in 2020. In total, the cemetery segment produced operating profits of $43.8 million, or 15.7% as a percentage of cemetery revenue for the 12 months ended December 31, 2021, compared with $35.0 million or 14.7% for the 12 months ended December 31, 2020.

As Joe had mentioned, this is truly a testament to the hard work put together by our sales and operations teams, which have pushed to increase sales production while driving a more efficient organization. In our funeral home segment, our expenses grew 13.6% for the quarter, ended December 31, 2021, versus the comparable period in 2020. For the full year period, our funeral home expenses grew 10.8% year-over-year, compared with 5.4% growth in -- funeral home revenues for the same periods. And looking at corporate overhead, we saw a 21.4%, or $1.9 million increase for the fourth quarter 2021, versus the fourth quarter 2020.

For the full year 2021, we saw 11% or $4 million increase compared to the full year 2020. As a percentage of total revenues, corporate overhead for the full year of 2021 was 12.4%, compared to 12.9% for the 12 months ended December 31, 2020. We have made great strides over the years, particularly compared to full year 2019, when corporate overhead was 17.7% of total revenues. Joe talked about the full year guidance for both unlevered free cash flow and organic trust growth.

As Joe mentioned, the $39.3 million of unlevered free cash flow for the 12 months ended December 31, 2020, missed the $40 million target by approximately $700,000. This performance represented a more than $15 million increase over our performance over the comparable period in 2020. I want to provide some additional details on this performance. The calculation of unlevered free cash flow included $48.7 million of cash interest payments.

Those cash interest payments included the $18.1 million payment of paid-in-kind interest on all notes that was paid in conjunction with a refinancing, as well as the $17 million in interest payments made during the fourth quarter under our current notes. The calculation also includes $12 million of cash paid for capital expense -- expenditures, which included $6.3 million during the fourth quarter 2021, alone. This increased spend was a strategic decision to jump-start the reinvestment in our cemetery and funeral home properties, despite the impact it might have had on hitting our target. It was the right thing to do to accelerate the reinvestment in our facilities.

For the full year, that represented a $5.6 million increase in capital expenditures compared to 2021 -- 2020. We expect a similar reinvestment of capital into our locations in the $12 million to $15 million range annually. However, we remain flexible to either increase or decrease that target based upon external market factors as well as our own internal needs and opportunities. Through the 12 months ended December 31, 2021, we have increased the value of our trust by $93.3 million, which included $23.4 million of growth during the fourth quarter.

This growth has been driven by both through new sales reduction efforts, and by enhancing investment returns on our trust assets. The largest driver of growth was in our Merchandise Trust Assets, which grew $66.4 million for the 12 months ended December 31, 2021. The growth was driven by $63.1 million contributions on pre-need sales, and $75.4 million of realized and realized gains net of fees offset by $72.1 million in distributions that were included in our operating cash flow. Additionally, the Perpetual Care Trust grew $26.9 million for the 12 months ended December 31, 2021.

As Joe mentioned, these two critical metrics really do demonstrate the value created by the team over the year. I also want to note that these two metrics are linked particularly with the way the Merchandise Trust operates, with both contributions to the trust the income retained in the trust now flowing into an operating cash during this year. The financial transformation over the last three years has been truly remarkable. Our balance sheet is healthy and we're driving strong field and adjusted EBITDA performance.

During 2021, we generated $63.3 million of field EBIDTA. This represents a 17%, or $9.2 million improvement over 2020. We defined field EBIDTA as total revenues, less cemetery and funeral home expense. The second metric we look -- we like to look at is adjusted EBITDA.

We discussed this metric a few times in the past, but as a refresher, this metric adjusts our performance for changes in deferred revenues, as well as other adjustments for non-cash items such as stock based compensation and cost the lot sold. We utilize this metric as it provides a baseline performance metric based more on our current sales production levels. We generated adjusted EBITDA of $105.2 million for the year ended December 31, 2021, this represents a 40.5% increase or $13.3 million compared with the year ended December 31, 2020. In addition to the cash on our balance sheet, we also have the ability to add additional senior secured debt to support our strategic growth plans.

This management team and the whole StoneMor team has already delivered, and I'm excited as we take the next steps in our strategic growth plan. Finally, I want to thank each of StoneMor members -- team members for their strong execution during the quarter and continued commitment to helping us transform the company we aspire to be in the future. With that, we will open the floor to questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from the line of David Beard with Jefferies. Please proceed with your question.

David Beard -- Jefferies -- Analyst

Hey, everybody. Can you just give a quick update on where things stand as far as the strategic review that was announced late in 2021? Maybe, how that's evolved and what kind of things remain on the table with that?

Joe Redling -- President and Chief Executive Officer

Yeah. Thanks for the question, David. I think we stated when we initially announced the receipt of that letter last September, that we really weren't committing to providing any updates on that matter unless, we had a legal obligation to do so. I don't really have any further comments to add on that matter or updates at this time, but I would suggest we're filing our 10-K tomorrow.

I would suggest you kind of review those reports that we'll be filing tomorrow in the 10-K for any specific information about that particular letter. 

David Beard -- Jefferies -- Analyst

OK. Got it. And then if I can ask on the -- I see the footnote here around EBITDA being impacted by the one time $15 million realized trust loss adjustment. I guess, any color you can give around what that is and maybe -- maybe it'll be more clear in the 10-K, but just how that's running through -- is that running through a cost line item on the income statement -- where maybe that shows up on the income statement here and EBITDA?

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

Sure. Yeah. This is Jeff. So that $15 million net adjustment was from 2018 and 2019 where we took impairments on certain MLP investments.

So that had already [Inaudible] back unrealized. That component is the cash settlement of those transactions. There was a rebound in the MLP market, and we decided--  the trust decided to de-risk that and the net impact was $15 million in a -- in cash.

David Beard -- Jefferies -- Analyst

OK. So this is not a new investment write-down, this is -- Yeah --

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

[Inaudible] happened back 2018, 2019. Now it's just realized.

David Beard -- Jefferies -- Analyst

Fantastic. Thanks very much.

Operator

There are no further questions at this time.

Keith Trost -- Vice President, Financial Planning and Analysis

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

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

David Beard -- Jefferies -- Analyst

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