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Edited Transcript of STON earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 StoneMor Partners LP Earnings Call

LEVITTOWN Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of StoneMor Partners LP earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey DiGiovanni

StoneMor Partners L.P. - Senior VP & CFO of StoneMor GP LLC

* Joseph M. Redling

StoneMor Partners L.P. - President, CEO & Director of StoneMor GP LLC

* Michael Puskar;Vice President, Corporate Finance, Treasury, Investor Relations and M&A

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Presentation

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Operator [1]

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Greetings, and welcome to the StoneMor Partners 2019 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded, Thursday, November 7, 2019.

I would now like to turn the call over to Mr. Michael Puskar, Vice President, Treasury and Investor Relations. Please go ahead, sir.

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Michael Puskar;Vice President, Corporate Finance, Treasury, Investor Relations and M&A, [2]

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Thank you. Good afternoon, everyone, and thank you again for joining us on the StoneMor Partners conference call to discuss our 2019 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.stonemor.com.

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.

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 risk 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.

With that, I'll now turn the call over to Joe Redling, who'll take it from here.

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Joseph M. Redling, StoneMor Partners L.P. - President, CEO & Director of StoneMor GP LLC [3]

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Thank you, Mike. Good afternoon. Thank you for joining us to discuss our 2019 third quarter results.

Since joining StoneMor 16 months ago, we have successfully navigated through several major transitions and milestones. When I joined, I set an agenda that listed 5 major priorities. First was to improve financial reporting and become a timely filer. This was accomplished in Q1 of this year, and our 10-Q for third quarter will also be filed on time. Second, we had an immediate need to recapitalize our balance sheet. And at the end of Q2 of 2019, we announced a $447 million recapitalization, which was a significant step in our overall strategic plan.

In addition to the debt and equity restructuring, we continue to be on track with our conversion to a C Corp, which we expect to complete by the end of this year.

Next was a comprehensive review of our cost structure, with a laser focus on reducing costs. To date, we have identified cost reductions exceeding $30 million. We have addressed many key areas across corporate, G&A, sales and field operations. We have also implemented a second phase of this effort to drive additional efficiencies through the organization that we expect will deliver additional savings in the areas of procurement, field operations and corporate overhead. Jeff will provide additional detail on these efforts momentarily.

We have focused on organizational themes of delayering and consolidation with a goal of improving communication, accountability and execution. Last month, I announced we were eliminating the Chief Operating Officer role, and the divisional presidents would now be reporting directly to me.

Eliminating that management layer has already begun to show benefits as I work more closely with our divisional leaders to clarify priorities, improve support and enhanced decision-making. Simply having everyone on the same page with clear communication and shared goals will make for a more efficient management process and reduce costs.

I also recently announced the promotion of Jeff DiGiovanni to CFO. Jeff was our Chief Accounting Officer and was instrumental in improving our financial reporting process. We will not be replacing the Chief Accounting Officer role, which, again, enables us to consolidate roles and improve efficiency.

I want to officially thank Jeff for his hard work and congratulate him on his recent promotion to Chief Financial Officer. Jeff has an impressive background in public accounting and has already begun to make valuable contributions to the team.

I'd also like to recognize Mike Puskar, who's on the call with us today. Our new Vice President, Treasury and Investor Relations. This change consolidated our treasury and IR functions under one leader. Mike has been with StoneMor for 2 years and has been and will continue to be a valued member of the team. Another key priority was to evaluate our asset base and determine the most effective strategy to divest assets. This is a critical and transformational component of our overall turnaround plan.

As we recently announced, we had engaged Johnson Consulting Group to represent StoneMor throughout this process.

I have been encouraged by our progress and the overall market interest. While I have nothing definitive to report today, I will say that our current indenture agreement allows for asset divestitures of up to $155 million and requires the first $55 million of net proceeds and 80% of the next $100 million of net proceeds to be used to pay down debt.

Subject to further due diligence, we expect closings of these transactions to occur beginning in the first quarter of 2020. This effort will result in multiple benefits: first, we can deleverage our balance sheet by reducing our debt; second, we will generate additional liquidity from the sale of these assets; and third, we will reduce our geographical footprint and improve our operating efficiency. We expect these potential divestitures to be accretive to cash flow, as we are seeing a high level of interest among multiple buyers at attractive multiples.

My fifth major priority was improving sales performance. I have been encouraged by the improvements we are beginning to see across our regions. We had strong sequential improvement from Q1 to Q2 this year, and continues to stabilize sales in the third quarter. Throughout the third quarter, we saw monthly improvements, which culminated with an 8% year-over-year increase for the month of September. Several of our regions showed true strength with a highlight in our Northeastern division with an increase of 13% in the quarter over prior year.

This is an important sign as our Northeastern division accounts for over 40% of our total sales production. Driving this improvement is the continued focus on supporting our top-tier properties with additional staffing, combined with new training and onboarding programs. In fact, on a national basis, our new hires that have been with us for 6 months or less, have had significant improvement in their overall productivity. To be more specific, year-to-date, 29% of our sales force falls within the 6-month or less cohort. Per person sales production in this group has increased 50% versus last year, an encouraging indicator that our focus on improving onboarding and training has been effective. We still have much to do on having steady, predictable growth across all regions, but these results indicate we are making good progress.

Now let's take a look at the financial results for the quarter. Revenues were flat compared to the prior year period as we were able to benefit from the stabilization of our pre-need sales production and the servicing of our deferred revenue backlog. Total costs and expenses were down 4% compared to the prior year period driven by reductions in COGS, cemetery expense and corporate overhead.

Our increased operating loss in the quarter was negatively impacted by a $24.9 million noncash impairment of goodwill as well as nonrecurring expenses in both corporate and the field. Were it not for these onetime items, our operating loss in the third quarter would have narrowed materially.

Our strategic initiatives of sales force productivity improvement and cost reductions increased segment operating profit to $5.3 million for the quarter compared to $3.1 million in the prior year period, representing an increase of $2.2 million. We will continue to focus on further improvements to 4-wall profitability going forward.

Let me now turn the call over to Jeff to provide more detail on the financial results.

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Jeffrey DiGiovanni, StoneMor Partners L.P. - Senior VP & CFO of StoneMor GP LLC [4]

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Thank you, Joe. Good afternoon, everyone. Before I get into the financial details for the quarter, I want to provide some additional context and spend a few minutes elaborating on the recent initiatives that Joe mentioned. We are pleased with the progress on our divestiture program for selective assets. We have completed the first round of review with potential buyers and are encouraged by the level of interest that we've received from these parties.

We continue to work with Johnson Consulting Group and potential buyers through the due diligence process and expect to have final offers in the upcoming weeks. Executing this divestiture program will delever our balance sheet, generate additional liquidity and optimize our geographical footprint for operating efficiency.

Our indenture permits asset sales up to $155 million. Under current terms of the indenture, StoneMor received 0% on the first $55 million of net proceeds and 20% on the next $100 million in proceeds, with the remainder being utilized to pay down the notes.

The reduced debt load will immediately reduce our cash and noncash interest expense. The company intends to reinvest its portion of the proceeds into capital and other projects to further improve our locations and operational capabilities.

Throughout the process, our goals were to identify the properties that would generate significant multiples on EBITDA, while strategically retaining high-quality assets and improved operating footprint. A smaller portfolio of assets will allow us to better focus on strategically improving sales and operational efficiency at our retained locations.

While no agreements of sale have yet been executed, we are making progress on our goals and expect that these divestitures will start to close in the first quarter of 2020. In addition to the divestiture program, reducing our cost base, rightsizing our organization and optimizing our infrastructure remains a critical component to the future success of StoneMor.

As part of the restructuring plan announced in June of this year, we have executed over $18 million in annualized cost savings, with the majority of these savings being generated from cemetery operations and corporate overhead. A second phase of cost reduction is already underway and further focuses on procurement, supply chain and field operations.

I'd like to talk about procurement for a moment. Today, we have a decentralized supply chain with added purchase order system. As an example, we manually process over 11,000 invoices each month with minimal technology infrastructure to support our administrative process. Upgrading our procurement and supply chain functions, strengthening strategic supply chain partnerships and introducing state-of-the-art technologies presents a material opportunity for the company. To realize economies of scale and labor efficiencies, and is a significant step on the pathway to operational transformation. Accordingly, we signed an agreement with Coupa, the leading cloud technology business management platform.

Today, 85% of our vendors already transact on the Coupa platform. This presents a tremendous opportunity to digitize the vast majority of our manual invoices upon implementation, reducing administrative expense and providing real-time cost management of major spend categories. We have engaged KPMG to facilitate this implementation.

Our target completion date for this implementation is the second quarter of 2020. We're targeting annualized savings ranging from $3 million to $5 million directly related to utilization of this platform.

To maximize the benefit of this platform, we are creating a procurement team to work with our direct and indirect vendors to enhance strategic partnerships and policies.

As Joe mentioned, another key area of performance improvement is sales. Earlier this year, we focused on our top 50 properties that were experiencing significant shortfalls compared to prior years. This group of locations have previously experienced a year-over-year deficit of close to 50%. Our efforts have improved the performance of these locations, which collectively delivered a 4% year-over-year increase in September, completely reversing the underperformance that we saw in the first quarter.

The key drivers of this improvement were rightsizing staff, improved sales productivity and new training and onboarding programs, as evidenced by the 50% increase to new hire productivity.

Finally, we made significant strides on corporate overhead, having generate annual of savings totaling $5.2 million. We are aggressively delayering the organization, as evidenced with the elimination of the Chief Operating Officer and Chief Accounting Officer positions.

In the first half of 2019, our corporate head count decreased 20%, resulting in $3.3 million in annualized cost savings. We have implemented other actions that have reduced our recurring corporate overhead spend by $1.9 million on an annualized basis. Offsetting these corporate cost reduction efforts is the continued impact of high, nonrecurring expenses associated with the rights offering, the upcoming C Corp conversion and outside consultants.

Our expectation is that these onetime expenses will not continue as we enter into 2020. We will discuss these onetime expenses in a few minutes. Our rights offering concluded in late October with a subscription of over 3 million units and the associated retirement of preferred units on a one-to-one basis.

The purpose of the rights offering was to provide all unitholders an equal opportunity to participate in our June equity recapitalization.

From a liquidity perspective, we continued to diligently manage our cash position, as evidenced by the $1.6 million increase in unrestricted cash in the quarter. The increase in cash was driven primarily by working capital management. We will continue to improve the liquidity profile of the business through the contemplated divestitures, increasing profitability, both through revenue enhancements, cost reduction initiatives and effective management of working capital.

Lastly, before jumping into the quarterly financial results, we announced that our unitholder meeting is scheduled to take place on December 20, with regards to the pending C Corp conversion, which is on track to close by year-end.

We're excited about transforming the company through all these initiatives and the progress that we've made to date.

With that, let's take a look at our quarter performance. Our gross commissional sales were flat in third quarter 2019 when compared to the third quarter of 2018. This is a positive development, given that we started the year with a first quarter that was down 19% and a second quarter that was down 10% over the same periods in the prior year.

From a GAAP standpoint, in the third quarter 2019, our total combined revenues were flat year-over-year with $73.2 million recognized in both the third quarters of 2019 and 2018. In the third quarter of 2019, we had an operating loss of $6.6 million, which is a $2.7 million improvement over the third quarter of 2018. We lost $9.3 million.

For the 9 months ended September 30, 2019, we had an operating loss of $26.1 million, which is a $5.2 million improvement over the 9 months ended September 30, 2018. The improvements in operating loss were driven by improved gross margins and better cost management related to the initiatives that we previously discussed.

During the third quarter 2019, we incurred a $24.9 million noncash goodwill impairment charge that negatively impacted our net loss. The goodwill impairment charge was primarily driven by the decline in our market cap.

Our cemetery segment represents [82%] of total revenues for the 3 months ended September 30, 2019. Total cemetery GAAP revenues was $60.8 million for the third quarter 2019, representing a 1.1% decrease compared to the third quarter of 2018. The decline was primarily driven by less revenue recognized from preconstruction projects.

Cemetery segment income for the third quarter 2019 was $4.2 million compared to $2.1 million in third quarter 2018. The 6.9% operating margin realized in the third quarter 2019 represented an increase over the 3.4% operating margin realized in the third quarter of 2018.

The improvement in operating margin is driven primarily by improved gross margins as well as cost rationalization and reductions in field operations that were completed in July of this year.

Our Funeral Homes segment, which represents 17% of our total revenues for the third quarter 2019 was $12.4 million for that period. This represents a 5.3% increase over the third quarter 2018. Call unit volume was stable for the third quarter compared to the third quarter of 2018. While the average revenue per call increased, operating profits for the Funeral Homes segment were flat year-over-year with a $1.1 million segment operating profit for the third quarter of 2019 compared to $1 million in the third quarter 2018.

Corporate overhead expenses, which include both recurring and nonrecurring costs, decreased 10% compared with the third quarter of 2018. We are seeing the benefits from our previously infomatic cost-saving initiatives, although those benefits have been partially offset by certain onetime expenditures related to recapitalization, rights offering and C Corp conversion.

We have also experienced a 12% decline in corporate overhead from the second quarter 2019, further evidencing the success of our initiatives and efforts to date.

Excluding nonrecurring charges, our corporate overhead expense declined to $9.4 million in the third quarter compared to $9.7 million for the third quarter 2018.

We're beginning to see the signs of our progress in prudent expense management and cost savings initiatives. The nonrecurring charges in the third quarter of 2018 -- 2019 were $2.2 million.

This summarizes the key financial information for the third quarter 2019. As always, additional details and information can be found in our quarterly report on Form 10-Q.

There is much work ahead of us for the remainder of 2019 and in 2020. We continue to seek ways to improve our cash flow profile and liquidity, including revenue enhancements, cost savings and working capital initiatives.

Thank you, and I'll now turn it back to Joe.

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Joseph M. Redling, StoneMor Partners L.P. - President, CEO & Director of StoneMor GP LLC [5]

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Thank you, Jeff. The actions we have taken over the last year have positioned the company well to continue our turnaround plan. We've navigated through some challenging times and have achieved many critical milestones. As we approach 2020, StoneMor will be better positioned for growth. We will continue to execute across our key priorities. We'll complete our conversion to a C Corp by year-end. We finalized divestitures in Q1 to optimize our footprint, deleverage to increase liquidity, continue to drive integration and synergies to reduce additional costs through our Phase II operational improvement plan and continue to drive sales productivity improvements to return to sales growth in 2020.

As always, I'd like to take a moment to thank the StoneMor team for their continued dedication and hard work. Even though we still have much to do, I'm proud of the accomplishments and progress we have made to date.

I remain confident in our leadership team and appreciate and recognize all our associates in the field for their commitment and dedication to the families and communities we serve.

We will now open the line for questions.

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Operator [6]

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(Operator Instructions) And we appear to have no questions queued up over the phone lines at this time.

We will now go ahead and end the conference. We thank you for your participation and ask that you please disconnect your lines.