StoneMor Partners L.P. (STON) Q1 2022 Earnings Call Transcript

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StoneMor Partners L.P. (STON)
Q1 2022 Earnings Call
May 12, 2022, 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. [Operator instructions] This call is being recorded Thursday, May 12, 2022. And now I'd like to turn the conference over to Keith Trost, senior vice president of corporate development. Please go ahead.

Keith Trost -- Senior Vice President of Corporate Development and Investor Relations

Thank you. Good afternoon, everyone, and thank you again for joining us on the StoneMor Inc. conference call to discuss our 2022 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 the full release on our website at www.stonemor.com. 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, 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

Thanks, Keith. Thank you, everyone, for joining us this afternoon for our 2022 first quarter earnings call. It's only been about 45 days since our last earnings call, but there are a few items I'd like to update you on before I turn the call over to Jeff for a deeper dive into our Q1 results. As we entered 2022, we knew that we were faced with tougher comps after our strong sales production and financial performance throughout 2021.

We were confident that we would continue to drive pre-need production growth even with an expectation that death rates, particularly those related to COVID, could have a negative impact on our at-need performance. During the first quarter, we achieved 4% year-over-year growth in our pre-need sales production. And this is against a first quarter of 2021 that was up 45% against the first quarter of 2020. We achieved this growth through a concentrated sales efforts, including a focus on volume and pricing optimization.

On the at-need side, our sales production was flat versus the first quarter of 2021, despite a 2% decline in all deaths according to the CDC's preliminary data for the first quarter. Last year, during our first quarter call, we told you that the first quarter of 2021, in terms of sales production, was the strongest first quarter in company history. And that March of 2021 was the largest sale production month in company history. I'm pleased to report that we can, once again, say we achieved record sales production levels again in the first quarter of 2022, having increased 2.5% compared to the first quarter of 2021 and March 2022, exceeding last year's performance, and once again recording the largest sales production month in StoneMor's history.

It was quite a high bar, but I'm proud of our sales and marketing team for, once again, surpassing impressive milestones. As we look ahead to the remainder of 2022, we expect to see downward pressure on at-need sales production due to declining death rates, particularly those associated with COVID. According to the CDC's preliminary data during the first quarter, we saw an 18% decline in deaths involved in COVID. However, this was partially offset by an increase in non-COVID-related deaths and death rates.

Our expectation is that the COVID deaths will continue to subside and drive lower overall death rates throughout the remainder of the year. That said, we will continue to push pre-need sales production to offset that potential decline in that new production. Similarly, we are focused on continuing to optimize net pricing through targeted price increases and reduced discounting to offset both potential declines in the at-need business as well as rising supply chain costs. During the first quarter of 2022, we saw our top line revenues increase by 3.4% with 86% of our revenues driven by the cemetery segment.

The growth was driven by a 3% increase in interment revenue, which is tied to sales production performance as the corresponding revenue is generally recognized at the time of sale. Offsetting that growth was a 9% decline in merchandise revenues, primarily driven by declines in markers and base revenues. For both of these product segments, we've experienced significant supply chain disruptions and delays, resulting in a lower recognition of revenue. And these disruptions negatively impacted the recognition of revenue associated with both pre-need and at-need sales of merchandise.

Although these disruptions negatively impacted the recognition of revenue during the quarter, they also contributed to an increase in deferred revenues as this is more about the timing of revenue recognition and not any negative performance-related metrics. Lastly, we saw a 29% or $3.7 million increase in investment in other revenues. This includes a $1.3 million sale of excess cemetery property during the first quarter of 2022. The remaining increase relates to the recognition of income on our merchandise trust.

From an expense standpoint, we saw a year-over-year increase of $9 million in the quarter, driven largely by maintenance and related costs associated with our cemeteries. Jeff will provide more color on our expenses. The net result of the moderate gain on revenue and the increased cost basis is an operating income that declined by $6.3 million compared to the first quarter of 2021. Despite that decrease, however, our adjusted EBITDA increased by $4.6 million or 16% year over year.

This increase was driven by an increase in deferred revenues, attributable largely to the sales production growth previously mentioned. Additionally, this deferred revenue growth is driven by investment income earned during the quarter that is deferred to line up with the revenue recognition of the underlying contractual obligations. During our previous earnings call, we provided targets on both unlevered free cash flow and organic trust growth. As a reminder, we utilize these targets as they best represent the value created during the year through both our operations and the management of our trust.

We targeted $40 million of unlevered free cash flow and $70 million of organic trust growth for 2022. Collectively, that's $110 million of value creation during the year. And we are on target -- we are on target with both metrics through the first quarter. Specifically, we generated $6.3 million of unlevered free cash flow during the first quarter of 2022.

Although this is down from $11.5 million generated during the first quarter of 2021, the primary difference was related to the timing of our biweekly payroll runs with seven payroll runs in the first quarter of 2022 compared with six payroll runs in the first quarter of last year. This, combined with a similar impact on weekly check processing at quarter end, more than accounts for the year-over-year decrease. In fact, adjusting for this timing impact would have resulted in a year-over-year increase in unlevered free cash flow for the quarter. In terms of trust performance, we generated trust growth of $28.2 million during the first quarter, which included $10.3 million of trust additions from our first quarter acquisitions.

Accordingly, we generated $17.9 million in organic trust growth during the first quarter. This growth was driven by a combination of the growth in pre-need sales production and strong investment income that's not eligible for distribution, pursuant to the various state laws. With that, I'll now turn the call over to Jeff to provide additional detail on our first quarter financial performance.

Jeff DiGiovanni -- Chief Financial Officer

Thank you, Joe, and thank you all for joining us today. Our total revenues for the first quarter of 2022 were $81 million, representing a 3.4% increase when compared with the $78.3 million recognized during the first quarter of 2021. As a reminder, when we talk about these revenues, the application of GAAP revenue recognition standards does not reflect the full impact of our premium sales production, but instead relies heavily on the timing of premium turning to at-need and servicing on premium merchandise and services. The sales production 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.

Cemetery revenues, which comprised 86% of our total revenues were $69.5 million for the first quarter of 2022 compared with $67 million for the first quarter of 2021, a 3.8% year-over-year increase. Interment revenue, which generally is recognized as revenue in conjunction with our sales production performance, increased 3.1% or $600,000 compared to the first quarter of 2021 on the back of our sales production growth. Merchandise and service revenues, which are generally deferred until the merchandise is delivered and the services are rendered, decreased by 8.8% or $1.4 million and 2.4% or $0.4 million, respectively, when compared to the first quarter of 2021. Investment in other income, which includes interest income, increased $3.7 million or 28.9% compared with the first quarter of 2021.

During the first quarter of 2022, we completed a $1.3 million sale of excess land at one of our cemetery locations with no corresponding sale in 2021. The remainder of the increase is largely contributed to higher recognition of income associated with our investment income and our merchandise trust. Funeral home revenues, which comprised 14% of our total revenues, were effectively flat year over year with $11.5 million for the first quarter of 2022 compared with $11.3 million for the first quarter of 2021. From an expense standpoint, our cost of goods and cemetery revenues increased 3.2% with $11.5 million in the first quarter of 2022 compared to $11.2 million in the first quarter of 2021.

As a percentage of cemetery revenue, cost of goods sold were 16.6% and 16.7% for the first quarter of 2022 and 2021, respectively. Of note, the 1Q 2022 expense also includes approximately $700,000 of cost of goods sold associated with the $1.3 million land sale. Excluding the impact of this land sale in both revenues and cost of goods sold would have resulted in a 15.8% cost of goods as a percent of cemetery revenue. Our focus on pricing throughout the first quarter allowed us to manage and even grow our margin despite the costing pressures from suppliers.

Cemetery expense includes maintenance expenditures, including lawn care and other costs associated with the operation of our cemeteries. It also includes planned repairs and maintenance costs that do not meet the capitalization standards, which includes major capital-type projects. Cemetery expense during the first quarter of 2022 was $22.2 million, representing a $4 million increase over the same quarter of 2021, which I'll discuss further a little later. During the first quarter of 2022, StoneMor ended its relationship with Moon Landscaping, which had previously provided outsourced landscaping and maintenance services across most of StoneMor's locations.

The final take back of locations concluded in early 2022. With the maintenance and lawn care of all locations now fully under StoneMor's direct control, we have seen an improvement in customer feedback. In order to ensure that operational performance standards are upheld, we incurred additional expenditures of approximately $1.6 million during the first quarter and onetime incremental costs. Additionally, as properties were transitioned back to StoneMor, there have been disruptions associated with labor shortages and equipment needs.

These disruptions have led to additional costs, including equipment rental and repairs, overtime cost and expensive third-party interment fees, which we estimate cost us approximately $700,000 during the first quarter. While we are working diligently to resolve these issues, it is likely that we would experience additional costs throughout the remainder of 2022 given equipment and employment shortages nationwide. Lastly, as noted, cemetery expense includes approximately $1.5 million of planned necessary capital-type projects that do not meet the capitalization standards. This represents a significant increase over the first quarter of 2021.

We have previously discussed that 2022 is a year of reinvestment, and this increase in spend is directly associated with that internal initiatives. These increases were anticipated and contemplated in our 2022 targets on unlevered cash flow. Selling expense as a percentage of cemetery revenue increased from 21.2% for the first quarter of 2021 to 22.4% for the first quarter of 2022. This increase is largely associated with an investment into advertising to drive our sales production performance.

While commission expense included in selling expense is deferred to match with the corresponding revenue recognition standards, fixed costs such as advertising are expenses incurred. Accordingly, while such initiatives are designed to drive sales production, the expense is recorded in the current period. Cemetery G&A expense for the first quarter of 2022 was $10.8 million, a $600,000 or 5.5% increase when compared to the first quarter of 2021. Funeral home expenses increased 4.6% or $400,000 to $9.8 million in the first quarter of 2022 when compared to the first quarter of 2021.

The increase was partially associated with $200,000 increase in revenues with also an investment in repair and maintenance projects that are not capitalized. And lastly, from an expense standpoint, corporate overhead increased $2.3 million or 23.8% to $11.8 million for the first quarter of 2022. This increase was largely driven by $800,000 in acquisition-related costs, including closing costs, broker commissions, commissions due diligence and related legal costs. We also incurred $800,000 of legal fees associated with extraordinary items, including fees associated with the complex committee analysis, take back on maintenance and year-end procedures with our filing in the 10-K.

Our EBITDA for the first quarter of 2022 was $1.7 million compared with $7.6 million for the first quarter of 2021. The decline was largely attributable through the cemetery maintenance and corporate overhead expense increases that I just highlighted. As a reminder, our EBITDA calculations adjust our performance of certain noncash items such as stock-based compensation and cost of lots sold. However, it's important to note that this does not give us credit for the strong premium sales production that Joe discussed.

Our organization is built to support our premium sales activity and our adjusted EBITDA calculation that considers the growth in deferred revenue more appropriately measures our performance based on current production levels. Our adjusted EBITDA for the first quarter of 2022 was $32.6 million compared with $28 million for the first quarter of 2021, representing a $4.6 million or 16.4% improvement. In addition to giving credit for the current sales production levels, this metric also considers the current period performance and returns on our trust assets. Field EBITDA, which adjusts GAAP EBITDA for corporate overhead, was $13 million for the first quarter of 2022 or 16.1% of revenue.

This represented a $3.6 million decrease versus the first quarter of 2021. The decrease was largely attributed to the increase in sanitary maintenance expense that we previously discussed. As Joe mentioned, we have continued to focus our targets in evaluating our performance based upon two key metrics: Unlevered free cash flow and trust growth. As it relates to unlevered free cash flow, we have targeted $40 million for 2022.

This metric includes $12 million of cash paid for capital expenditures. We remain on target with this guidance. During the first quarter, we had unlevered free cash flow of $6.3 million. This compares with $11.5 million for the first quarter of 2021.

Joe discussed some of the timing issues that negatively impacted our first quarter 2022 performance. Specifically, StoneMor has a biweekly payroll period that resulted in seven payroll periods in 1Q 2022 versus six payroll periods in 1Q '21. And the timing of weekly check processing resulted in one additional week of payables during the first quarter 2022 when compared to the first quarter of 2021, and where such trends will reverse later in the year. On the capital expenditure front, we incurred $2.6 million against the $12 million plan for the full year.

The second key metric is trust growth. As a reminder, we are targeting $70 million of organic trust growth during the year. Through the first quarter, we had trust growth of $28.2 million, which includes $10.3 million added through acquisitions that closed during the first quarter, resulting in an organic trust growth of $17.9 million. We had a $21.9 million increase in our merchandise trust funds, which includes $5.6 million in merchandise trust funds added in conjunction with our first quarter acquisitions and a net organic growth of $16.3 million.

This increase includes contributions from customer collections on pre-need sales. Additionally, this growth is driven by the retention of investment income and trust in accordance with various state laws. In addition, we saw an increase in perpetual care trust fund of $6.3 million, which included $4.7 million in perpetual care trust funds added in conjunction with our first quarter acquisitions, resulting in a net organic growth of $1.6 million. This increase is driven by contributions on main term itself in accordance to state laws.

Collectively, between the trust growth and our unlevered free cash flow, we generated $34.5 million of value creation during the first quarter of 2022. While we experienced certain challenges on expenses particularly related to maintenance, our strong sales production performance has allowed us to see continued growth in adjusted EBITDA, and we remain on target for our key value generation metrics. With that, we'll now open the floor to any questions.

Questions & Answers:

Operator

[Operator instructions] And there are no questions registered at this time. I'll turn the call back to Mr. Keith Trost.

Keith Trost -- Senior Vice President of Corporate Development and Investor Relations

Thank you again for your time this afternoon. If you have any questions that were not answered or discussed on today's call, please reach out to  investor relations at (215) 826-4438. Thank you.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Keith Trost -- Senior Vice President of Corporate Development and Investor Relations

Joe Redling -- President and Chief Executive Officer

Jeff DiGiovanni -- Chief Financial Officer

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