StoneMor Inc. (STON) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings. And welcome to the StoneMor First Quarter Earnings Release. During the presentation, all participants will be in a listen-only mode. Afterwards we’ll conduct the question-and-answer session. This call is being recorded, Thursday, May 12, 2022. I would now like to turn the conference over to Keith Trost, Senior Vice President of Corporate Development. Please go ahead.
Keith Trost: Thank you. Good afternoon, everyone, and thank you for joining us on the StoneMor Inc. conference call to discuss our 2022 first 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.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 any 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: 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 preproduction 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 achieve 4% year-over-year growth in our pre-need sales production. And this is against the first quarter of 2021. That was up 45% against the first quarter of 2020. We achieved this growth through a concentrated sales effort, 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 sales 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 have the increase 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 these 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 involving COVID. However, this was partially offset by an increase in non-COVID related deaths and death rate. 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 premium sales production to offset that potential decline in at-need 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 increased 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 was 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-needs and at-needs 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 and other revenues. This includes a $1.3 million sale of excess cemetery property during the first quarter of 2022. 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 all this 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 generate 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.
Jeffrey DiGiovanni: 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 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 pre-needs 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 comprise 86% of our total revenues were $69.5 million for the first quarter 2022 compared with $67 million for the first quarter 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 and 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 on our merchandise trust. Funeral home revenues, which comprise 14% of our total revenues were effectively flat year-over-year, with $11.5 million for the first quarter 2022 compared with $11.3 million for the first quarter of 2021. From an expense standpoint, our cost of goods on cemetery revenues increased 3.2% with $11.5 million in the first quarter 2022 compared to $11.2 million in the first quarter of 2021. As a percentage of cemetery revenue, cost of goods sold was 16.6% and 16.7% for the first quarter of 2022 and 2021, respectively. Of note to one 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 from 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 expenses during the first quarter of 2022 was $22.2 million representing a $4 million increase over the same quarter 2021 which I’ll stress further a little later. During the first quarter 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 takeback 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 in onetime incremental costs. Additionally, as properties for transition 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 costs, and expensive third party and tournament 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 the 2022 is the year of reinvestment and this increase in spent 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 expenses deferred to match with the corresponding revenue recognition standards, fixed costs such as advertising, our expenses incurred. Accordingly, while such initiative initiatives are designed to drive sales production expenses recorded in the current period. Cemetery G&A expense for the first quarter 2022 was $10.8 million, a $600,000, or 5.5% increase when compared to the first quarter 2021. Funeral home expenses increased 4.6% or $400,000, to $9.8 million in the first quarter 2022 when compared to the first quarter of 2021. The increase was partially associated with the $200,000 increase in revenues but also an investment in repair and maintenance projects that were not capitalized. And lastly, from an expense standpoint, corporate overhead increased $2.3 million or 23.8% to 11 point 8 million for the first quarter 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 of procedure procedures with our filing of a 10-K. Our EBITDA for the first quarter 2022 was $1.7 million compared with $7.6 million for the first quarter of 2021. The decline was largely attributable to the cemetery maintenance and corporate overhead expense increases that I just highlighted. As reminder, our EBITDA calculations adjust our performance to certain non-cash items such as stock-based compensation and cost of loss sold. However, it's important to note that does not give -- 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 2022 was $32.6 million, compared with $28 million for the first quarter 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 adjust GAAP EBITDA for corporate overhead was $13 million for the first quarter 2022 or 16.1% of revenue. This represented a $3.6 million decrease versus the first quarter 2021. The decrease was largely attributed to the increase in cemetery maintenance expense that we previously discussed. As Joe mentioned, we have continued to focus our targets and evaluating our performance based upon two key metrics unlevered free credit 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 a one additional week of payables during the first quarter 2022 when compared to the first quarter 2021 in which those trends will reverse later in the year. On a 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're 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 is $17.9 million. We had $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 recent 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 new term itself in accordance with 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 and adjusted EBITDA, and we and we remain on target for our key value generation metrics. With that will now open the floor to any questions.
Operator: Thank you. There are no questions registered at this time. I'll turn the call back to Mr. Keith Trost
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Keith Trost: 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: That concludes the call for today. We thank you for your participation. And ask that please disconnect your lines.
