StoneMor Inc. (STON) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the StoneMor 2Q Earnings Release. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, August 10, 2021. I would now like to turn the conference over to Keith Trost, VP, Financial Planning and Analysis. Please go ahead.
Keith Trost: Thank you. Good afternoon, everyone, and thank you again for joining us on the StoneMor Inc. conference call to discuss our 2021 second 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. Additionally, a copy of the presentation can also be found on our website. With us on the call this afternoon are Joe Redling, President and Chief Executive Officer; and Jeffrey DiGiovanni, Senior Vice President and Chief Financial Officer. Before we begin, as usual, I'd 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 adjusted EBITDA and unlevered free cash flow. A reconciliation of these measures – 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: Thank you, Keith. Thank you, everyone, for joining us this afternoon for our 2021 second quarter earnings call. I'm pleased to report another strong financial performance for the second quarter of 2021. We've continued to build upon the momentum from the second half of last year and the first quarter of 2021. Q2 results were driven by the strength in sales as we continue to achieve new highs in our overall sales production. In fact, each of the three months in the second quarter represented new same-store highs for StoneMor for those respective months, cumulating with the best second quarter sales performance in company history. Specifically during the second quarter, we experienced pre-need cemetery sales production growth of 26% versus the second quarter of 2020. As you may recall, early April of 2020 was negatively impacted by the early stages of lockdown associated with the COVID-19 pandemic, which has driven some portion of the year-over-year growth. But we also saw similar growth levels in the months of May and June where the 2020 comp was not as negatively impacted by COVID-19. In fact, during May and June of 2020, we began to deliver year-over-year growth in our sales production versus 2019. To put this into perspective, our pre-need cemetery sales production in Q2 2021 also increased the same 26% versus the second quarter of 2019. From an at-need perspective, nationally, we've seen the impact of COVID-related deaths subside during the second quarter. While we've continued to maintain consistent at-need cemetery sales production levels with only a 5% sequential decline versus the first quarter of 2021, despite national death rate declining. In fact, our at-need cemetery sales production for the second quarter of 2021 increased 11% versus the second quarter of 2020 and 32% versus the second quarter of 2019, which again reinforces our improving market share across our portfolio. Combining both pre-need and at-need sales production, total cemetery sales production increased 21% versus the second quarter of 2020 and 28% versus the second quarter of 2019. For the first six months of 2021, we've seen impressive year-to-date increases in cemetery sales production of 32% versus 2020 and 39% versus 2019, which is a pre-COVID period. This remarkable growth in sales production is a testament to our operations and sales teams. These results are on a same-store basis and excludes the impact of any acquired or divested properties. We've been able to accomplish this from a complete change in our culture, from our hiring process to our training process to our compensation methodology. Thanks to the culture that we've established, we do believe that these sales production metrics are sustainable even as the COVID tailwinds continue to subside. This growth in cemetery sales production has certainly contributed to growth in GAAP revenue recognition. We recognized $83 million in revenue during the second quarter of 2021, which represents a 24.6% growth versus the second quarter of 2020. For the six months ended June 30, 2021, we recognized $161.3 million in revenue, which represents a 22.5% growth versus the prior year. I want to reiterate that this is on a continuing operations basis. That is, it excludes any impact from divested locations, and this growth rate was driven 100% through same-store growth. It excludes the results from divested locations and is not impacted by acquisitions, which has typically been a key driver of growth, historically for StoneMor and the industry at large. From an adjusted EBITDA perspective, we again had another strong quarter, delivering $32.1 million in adjusted EBITDA recognized during the quarter. This represents a 113% growth over the second quarter of 2020. For the six months ended June 30, 2021, we recognized adjusted EBITDA of $60.1 million. That's a $37.9 million improvement or 171% versus the first six months ended June 30, 2020. We utilized the adjusted EBITDA metric as a measurement tool for our current performance and the current direction of the company as the adjustments take into consideration our current sales production levels. Jeff will get into more detail on our financial results shortly, but this improvement has been driven by the successful implementation of our turnaround strategy, which included the implementation of $50 million in annual cost savings and the improved sales performance that we've already discussed. Back in March of this year, we issued guidance on two metrics that we feel accurately reflect the ongoing performance of the company. The first was unlevered free cash flow. This key metric demonstrates the ability of StoneMor to generate cash through our operations. It eliminates the timing impact of revenue recognition standards and focuses on how we convert contracts into cash. We have decided unlevered free cash flow guidance of $40 million for the full year in 2021. We generated $14.7 million of unlevered free cash flow during the second quarter, which represents a sequential increase of 28% versus the first quarter of 2021. For the first six months of 2021, we generated $26.2 million in unlevered free cash flow, clearly trending well ahead of the full year guidance and more than doubling prior year's results of just over $11 million. The second item that we provided guidance on was growth in trust assets. This metric is important as it reflects two things: First, the strength of our sales production activity as that creates new deposits into our trust accounts; and second, our ability to generate meaningful returns on our trust investments. Our full year guidance for 2021 was $50 million in trust growth. As of June 30, 2021, we have already generated trust growth of $57.5 million during 2021, 115% of our guidance for the full year. That growth is net of cash distributions including distributions related to divestiture activity, which was contemplated in our initial issued guidance. Our ability to outperform the full year guidance has been driven largely by outperformance on both sales production and positive investment returns. We are currently sitting with more than $90 million in cash on our books. This cash was generated not only through cash flow from operations, but also from the refinancing that was completed early in the second quarter, which we discussed at rent during the first quarter earnings call. We previously announced the small acquisition that we are looking to close during 2021, and we continue to take a strategic approach to our capital allocation. We're diligently managing both our capital and operating expenditures while driving operating cash flows. We continue to opportunistically pursue additional accretive and synergistic acquisitions, utilizing our cash on hand. As we previously discussed, we have the ability under the terms of our indenture to secure up to an additional $40 million in a super senior credit facility should we need additional capital to complete a strategic acquisition. We are also continuing to improve our existing portfolio and targeted capital, both in terms of needed repairs and maintenance, but also with new growth inventory, particularly cremation-related inventory. We expect that these investments will continue to contribute to the organic growth of our sales production levels and expanded margins. While the successful execution of our turnaround strategy was an important step, it was only the first phase of the StoneMor transformation. We're now on the right trajectory and have the tools and team in place to execute on the next phase of our transformation, which is already in full force, a continued focus on growth. Our strong liquidity position and the ongoing profitability and cash flow improvements of our business will enable us to drive both organic and inorganic growth as we focus on the continued optimization of our core operations and accretive acquisitions. We have executed the initial turnaround plan and delivered and we expect to execute on our growth plan with the same level of focus and commitment. With that, I'll turn the call over to Jeff, who will walk you through a more detailed review of our financial performance during the second quarter.
Jeffrey DiGiovanni: 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, these results do not have the benefit of such acquisition. So all of our results are truly on a same store basis. Last quarter, we introduced the adjusted EBITDA metric that Joe talked about. We utilized this metric, which, among other adjustments, add back the net impact of deferred revenues, including merchandise and service liabilities to better reflect the financial results associated with our current production and operating levels. We feel that this presentation is meaningful and provides an additional level of transparency to our current performance as it matches the fixed facility and overhead costs with the current sales production levels that they support. We generated $32.1 million in adjusted EBITDA during the second quarter of 2021, which compared favorably to the $15.1 million for the second quarter 2020. As a percentage of revenue, adjusted EBITDA increased to 38.7% from 22.6%. For the six months ended June 30, 2021, adjusted EBITDA was $60.1 million, which represented a $37.9 million increase from the six months ended June 30, 2020. These increases were attributable to both the increased cemetery sales production and to the successful transformation of StoneMor through cost reductions and revenue optimization that resulted in improved margins. As part of this calculation, we saw a $21 million increase in deferred revenue, net of the change in deferred selling cost for the second quarter of 2021. Deferred revenue growth is driven by combination of pre-need sales production and merchandise trust income, both of which are deferred until the underlying merchandise and services are delivered, offset by the recognition of revenues associated with the delivery of previously deferred revenues. From a top line revenue standpoint, we drove total revenues from continuing operations to $83 million in the second quarter of 2021, representing a $16.4 million or 24.6% increase compared to the $66.6 million recognized in the second quarter of 2021. Again, this increase is on a same-store basis and does not include any benefit from acquisitions. Net increase was driven largely by the Cemetery segment, which represented 87% of our revenue and experienced a $15.3 million or 26.8% increase for the quarter compared to the second quarter 2020. The Funeral Home segment, which represented the remaining 13% of our revenue, also grew 11.4% or $1.1 million for the quarter compared to the second quarter 2020. We've talked about this in the past, but we 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 on the Cemetery segment and through strategic acquisitions. The second quarter was a continuation of strong results that we've reported during the first quarter. For the six months ended June 30, 2021, we recognized $161.3 million in total revenues and $29.6 million increase or 22.5% increase versus the six months ended June 30, 2020. As we talk about our GAAP revenues. I like to again remind you that the application of GAAP revenue recognition standards does not reflect the full impact of our premium sales production, instead relies heavily on the timing of pre-need 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 on Cemetery revenues increased $3.2 million or 34% for the quarter ended June 30, 2021, driven by an overall increase in sales volume and product mix. On a percentage of Cemetery revenue basis, cost of goods sold increased to 17.2% versus 16.3% for the three months ended June 30, 2020, largely attributed to product mix as markers, which carry a higher cost of goods rate, represented a larger percentage of our merchandise related revenues during the second quarter of 2021. Cemetery expense, which includes cost associated with landscaping, repairs and maintenance, real estate taxes, and other costs increased by $900,000 or 5% for the quarter ended June 30, 2021. The increase was largely 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 $2.6 million or 21% driven by the increase in revenues. As the percentage of Cemetery revenues, Cemetery selling expense decreased nearly 100 basis points to 20.5%. Historically from 2016 to 2019 our Cemetery selling expense ran between 23.8% and 25.3%. So this is truly represented a tremendous improvement. This decrease was despite a $700,000 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 profitable sales production. Cemetery, general and administrative expense increased $1.5 million or 16.6% largely driven by increased insurance premiums. Additionally, we saw an increase in credit card processing fee that is tied back to sales increases that Joe talking about. Lastly, we have increased the bonus opportunities for our field leaders, specifically our general managers individual management teams to drive both EBITDA and sales growth production, with these results of that plan clearly evident in these results. In total, the Cemetery segment produced operating profits of $14.7 million or 20.3% during the second quarter of 2021, compared with $7.4 million or 13.1% for the second quarter of 2020. We have to make tremendous strides on improving this performance. From a funeral home perspective, expenses drew 11% – nearing the 11% growth in Funeral Home revenues. And looking at corporate overhead, we saw an 8.9% or $800,000 increase versus the second quarter of 2020. This increase was driven largely by increases in corporate payroll, insurance premiums and IT products and services. Joe talked about the full year guidance for both unlevered free cash flow and organic trust growth, we continue to perform ahead of those targets. As we talked about last quarter, we do not plan on issuing new or updated guidance during this year, but we remain confident that we will exceed those annual guidance over the course of 2021. In terms of our unlevered cash flow, we generated $14.7 million during the second quarter of 2021, bringing us to $26.2 million for the six months ended June 30, 2020. We are more than $15 million ahead of the six months ended June 30, 2020, which is attributable to the efforts of the entire StoneMor team. The unlevered free cash flow for the second quarter included the effect of $22.5 million in interest paid, which included $4.1 million interest paid on our old notes for the stub period from March 31 to the closing of the refinancing at the full cash rate of 9.875% compared to $6.7 million for the second quarter of 2020 at the cash rate with PIK election of 7.5% for the full three month period and $18.4 million in PIK interest that had accrued and was repaid with the closing of the refinancing. During the three months ended June 30, 2021, we paid $1.6 million in cash associated with capital expenditures compared with $1.7 million for the three months ended June 30, 2020. During the early stages of the COVID-19 pandemic, we slowed down the approval process for new capital expenditure projects, which are showing in the reduced spend today. As things have now stabilized, we are continuing to approve new capital investment projects, including both growth inventory and capitalized maintenance projects. Joe mentioned the $57.5 million in growth in trust assets for the six months ended June 30, 2021. This is against the $50 million guidance previously issued. Of this growth $27.4 million occurred during the second quarter, we continue to drive this growth both through new sales production efforts and by enhancing investment returns on the trust assets. The merchandise trust assets grew $19.6 million during the second quarter and $42.8 million for the six months ended June 30, 2021. The growth was driven by $28.6 million in contributions on pre-need sales and $52.4 million in realized and unrealized gains, net of fees offset by $38.2 million in distributions that were included in operating cash flow. The perpetual care trust assets crew $7.8 million during the second quarter and $14.7 million for the six months ended June 30, 2021. This growth was driven by $4.4 million in contributions, plus $30.8 million in realized and unrealized date, net of fees offset by $20.5 million in distributions that were included in operating cash flow. Collectively, between unlevered free cash flow, trust growth, we created more than $42 million in value during the second quarter 2021, and this is on top of the $42 million created during the first quarter of 2021. This is a testament to the success of our transformation plan and the hard work of every member of the StoneMor team. We are on the right trajectory and we are excited for what the future holds. Between the closing of our refinancing in the second quarter and our current cash flow performance rate, we are currently sitting with a significantly improved liquidity position. That is, we have more than $90 million of cash, compared to $39 million at year end. And as part of our refinancing, we have the ability to add an additional $40 million in a super senior debt revolver. So overall, we are in a good position to deliver on our strategic growth plan as we look ahead. With that, we will open the floor to your questions.
Operator:
Keith Trost: Thank you again for your time this afternoon. We look forward to talking with you again for this third quarter update. In the meantime, 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. Thanks and have a wonderful afternoon.
Operator: That does conclude our call for today. We thank everyone for participating, and you may now disconnect.
