StoneMor Inc. (NYSE:STON) Q2 2022 Earnings Conference Call August 11, 2022 4:30 PM ET
Company Participants
Keith Trost – Senior Vice President of Corporate Development
Joe Redling – President & Chief Executive Officer
Jeffrey DiGiovanni – Senior Vice President & Chief Financial Officer
Conference Call Participants
Operator
Greetings and welcome to the StoneMor 2Q Earnings Release. [Operator Instructions] As a reminder this call is being recorded today Thursday August 11 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 again for joining us on the StoneMor Inc Conference Call to Discuss Our 2022 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.
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
Thank you, Keith. Welcome again to our second quarter earnings call. The purpose of today’s call is to provide an update on our operational performance during the second quarter. While I’m sure there are questions regarding the proposed merger agreement, we will not be addressing those in today’s call. We filed preliminary proxy materials with the SEC last Friday on August 5. Definitive proxy material will be sent out to our stockholders and will contain important information about the merger. They should be reviewed carefully. The proxy material will also state where additional information can be obtained, if desired.
Now let me move to the second quarter results. As we mentioned on our last earnings call, we are facing tougher comps after the record sales production performance throughout 2021. During the second quarter of 2022 we certainly faced a tougher comp with the second quarter of last year being up 21% over the second quarter of the previous year, making those comps even more challenging where a difficult economic environment coupled with the headwinds associated with declining death rates in our markets with the CDC’s preliminary data for the second quarter reporting a 6% decline in our whole death.
With that said, I’m proud to report that our team has once again stepped up and met the challenge, delivering 6.5% growth in total Cemetery sales production versus the second quarter of 2021, despite a 6% decline in admin sales production in the quarter compared to the second quarter of 2021, a decline that mirrored the CDC’s reported declines.
This new high mark was driven by the strength of our pre-need sales production program which yielded year-over-year pre-need growth of 12%. This one was accomplished by delivering strong monthly results throughout the quarter, including double-digit growth in the month of May and June which recorded historic new high. As we look ahead to the remainder of 2022, we expect to see continued downward pressure on at-need sales production as compared to a year ago, particularly those associated with COVID.
Accordingly, we continue to leverage our pre-need sales production programs to offset, that anticipated decline in at-need sales production. And similarly, we remain focused on continuing the successful strategy of optimizing our net pricing strategy, with targeted price increases and reduced discounts, designed to offset potential at-need declines as well as rising supply chain costs.
For the six months ended June 30 2022, our total revenues were $161 million, which is flat versus the six months ended June 30 2021. For the second quarter of 2022, our total revenues were $80 million, representing a 3.5% decline in total revenues versus the three months ended June 30 2021. The decline in our revenues during the second quarter was driven largely, by a decrease in our trust and investment income that Jeff, will touch on in a minute and the stated decline in death rates that we’ve experienced in our markets.
The Cemetery segment had total revenues of $140 million for the first six months ended June 30 2022, which again was flat year-over-year. Cemetery revenues for the second quarter of 2022 was $70.5 million representing, a decline of 2% when compared to the same period last year. The Funeral segment had total revenues of $21.1 million and $9.6 million, for the six and three months ended June 30 2022. That represented a 5% and 12% decline respectively, when compared to the same periods in the prior year.
As a reminder both Cemetery and Funeral home revenues are largely driven by at-need and pre-need turned at-need production, both of which were negatively impacted by declining death rates. Revenues associated with pre-need cemetery merchandise and service sales, are largely deferred until the contract turns at-need, meaning that the positive impact from the growth in our pre-need sales production, is largely negated when we look at our GAAP financial statements.
Turning to expenses. We continue to experience supply chain and other cost challenges that contributed to a 14% increase in our total expenses or $11.1 million, when comparing the second quarter of 2022 to the second quarter of 2021. These increases, most notably those related to corporate overhead, were negatively impacted by cost and expenses associated with various corporate special projects, including those related to the proposed merger.
Additionally, we continue to reinvest into our properties with necessary repairs and maintenance. That planned increase in expenditures, coupled with material inflationary cost increases in operating supplies and an increase in selling expense, were the main contributors to the year-over-year uptick in cemetery expenses. This increase in expenses was the primary driver of the decline in operating income year-over-year.
Jeff will provide additional detail on both the changes in total revenue and expenses in a minute. With respect to our previously discussed targets for 2022, we remain confident that we will meet or exceed our projected unlevered free cash flow and organic trust growth targets. We utilize and report on these two key targets, as we feel they represent the value that has been created during the year, in not only our operations, but also through our trust management strategies.
First, we targeted $40 million of unlevered free cash flow for the full year of 2022. We generated $11.3 million of unlevered free cash flow during the second quarter. Coupled with the $6.3 million that was generated during the first quarter, we’re now sitting at $17.6 million for the six months ended 6/30/2022.
Secondly, we targeted $70 million of organic trust growth. As of June 30 2022, we have generated total trust growth of $46.9 million, including $18.7 million during the second quarter. This growth included $9.9 million of trust assets acquired through our acquisition activity. Excluding these acquired trust assets, we’ve generated $37 million of organic trust growth for the six months ended June 30 2022. This trust growth is driven by the combination of growth in pre-need sales production, as previously discussed, as well as strong investment income that is retained in the trust and not distributed as cash, in accordance with the various state laws.
With that, I’ll now turn it over to Jeff for further discussion on our second quarter and year-to-date financial performance.
Jeffrey DiGiovanni
Thank you, Joe and thank you all for joining us today. Total revenues for the second quarter of 2022 were $80 million, representing a 3.5% decrease, when compared with the $83 million for the second quarter of 2021. Total revenues for the six months ended June 30, 2022 were $161 million, representing a 0.2% decrease, when compared with the $161.3 million for the six months ended June 30, 2021.
As a reminder, when we talk about revenue the application of GAAP revenue recognition standards does not reflect the full impact of our pre-need sales production but instead relies heavily on the timing of pre-need turning to at-need and service on pre-need 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 88% of our second quarter – 2022 revenues were $70.5 million for the second quarter of 2022, compared with $72.1 million for the second quarter of 2021, a 2.3% decline, which was primarily driven by the decrease in investment and other income.
For the six months ended June 30, 2022, Cemetery revenues were $140 million compared to $139.1 million for the six months ended June 30, 2022 or a 0.6% increase. Impairment revenues, which generally are recognized as revenues in conjunction with our sales production performance, decreased $0.8 million or 3.4%, compared to the second quarter of 2021, driven primarily by the decrease in at-need revenues.
Merchandise revenues, which generally are deferred into the merchandises delivered increased by $2 million or 11% compared to the second quarter of 2021. Service revenues, which generally are similarly deferred until services are rendered increased by $0.7 million or 3.8%, compared to the second quarter of 2021.
Investment in other income, which includes interest income, decreased $3.5 million or 25.7% compared with the second quarter of 2021. The decrease was primarily driven by a decrease in investment income associated with the perpetual care trust of $4 million and a decrease of $0.6 million in other income. These decreases were offset in part by an increase in investment income associated with the merchandise trust of $2.1 million. Moreover, Q2 2021 benefited from a one-time investment-related fees of approximately $1.5 million earned in 2021.
General Home revenues, which represented the remaining 12% of our second quarter 2022 revenues decreased $1.3 million or 11.6% ,compared to $9.6 million for the second quarter of 2022 compared with $10.9 million for the second quarter of 2021. The decrease was largely attributable to declining death rates.
From an expense standpoint, our cost of goods on Cemetery revenues increased $0.1 million or 0.7% to $12.5 million in the second quarter of 2022, compared with $12.4 million in the second quarter of 2021. As a percentage of Cemetery revenues, cost of goods was 17.8% and 17.2% for the second quarter of 2022 and 2021 respectively. We continue to experience inflationary cost pressures from our suppliers on key merchandise categories. Our focus on pricing throughout the first half of 2022 has allowed us to effectively manage our margins.
Cemetery expense during the second quarter of 2022 was $21.6 million, representing a $3.5 million increase compared to the second quarter of 2021. Last quarter we discussed some of the key drivers of Cemetery expense, including maintenance and planned repairs and maintenance projects that do not meet capitalization standards.
In addition to transition costs associated with the termination of our relationship, with new landscaping, we discussed last quarter we continue to experience inflationary pressures on payroll and material costs associated with the operations of our locations. We are working diligently to manage these costs and identify opportunities to reduce costs overall.
Of note, Cemetery expense decreased more than $0.5 million, when compared to the first quarter of 2022, when we first noted these cost increases. Selling expense as a percent of Cemetery revenues increased, from 20.5% for the second quarter of 2021 to 24.5%, for the second quarter 2022.
During the second quarter of 2022, we implemented several policies designed to attract new sales counselors that resulted in higher fixed costs. Additionally, in an effort to drive sales production, we continue to invest in certain advertising initiatives. Collectively, these targeted advertising and hiring initiatives contributed to the 12% year-over-year growth in pre-need sales production, during the second quarter of 2022. That’s more than a $5 million increase in pre-need sales production when compared to the second quarter of 2021.
Similar to our revenues variable selling costs such as bonus and commissions are deferred to match with the corresponding revenue recognition standards, whereas fixed costs, such as advertising training and base payroll, or expense has occurred. Accordingly, many of these initiatives utilize to drive current period sales production result in an expense in the current period.
Cemetery G&A expense for the second quarter of 2022, was $12.3 million, a $1.6 million increase compared to the second quarter of 2021. The increase is largely attributable to an increase in payroll and related costs. General home expenses increased $0.1 million, or 0.9% to $9.3 million for the second quarter of 2022, when compared to the second quarter of 2021.
And lastly on the expense side, as Joe touched briefly on this, Corporate overhead increased by $3.3 million to $12.8 million for the second quarter of 2022. This increase was largely driven by an increase in legal and other professional fees, including cost in excess of $1.7 million associated with the various corporate initiatives that are one-time in nature. These initiatives include costs associated with the proposed merger agreement.
EBITDA for the second quarter of 2022 was a negative $4 million compared with a negative $31.2 million for the second quarter of 2021. However, the 2021 period included a $40.1 million loss associated with the debt extinguishment. The decrease in EBITDA, excluding the debt extinguishment, impact was largely attributable to changes in revenue and expenses that we’ve already discussed.
Although, our EBITDA calculation does adjust for certain non-cash items, including stock-based compensation, and cost of loss does not give us credit for strong pre-need sales production that Joe discussed.
Our organization is built to support the pre-need sales program. Accordingly, we utilize the adjusted EBITDA calculation that considers the growth in deferred revenue in our view more appropriately measures the performance based on current production levels.
Adjusted EBITDA also adjusts for certain gains and losses, including the aforementioned loss on debt extinguishment. Adjusted EBITDA for the second quarter of 2022 was $12.1 million, compared to $32.1 million for the second quarter of 2022, representing a $20 million decline.
In addition to the revenue expense, fluctuations already discussed adjusted EBITDA was negatively impacted by the decline in trust investment performance. Field EBITDA which adjusts GAAP EBITDA for corporate overhead was $8.3 million for the second quarter of 2022, compared with a negative $23.29 million in the second quarter of 2021.
As with the EBITDA calculation it should be noted that, the prior year number included the $40.1 million loss associated with the debt extinguishment. As previously noted, with the decrease in EBITDA, the decrease in field EBITDA, excluding the debt extinguishment impact largely attributable to changes in revenue expenses that we’ve already discussed.
Joe touched briefly on our key metrics. We remain confident in those targets and our ability to meet those for the full year. First, during the second quarter we generated unlevered free cash flow of $11.3 million.
For the six months ended June 30, we have generated $17.6 million in unlevered free cash flow, against a full year target of $40 million. Last year, we generated $26.2 million of unlevered free cash flow through the six months ended June 30, 2021.
Included in the $40 million target was $12 million in planned capital expenditures. As of June 30, 2022 we had spent $6.1 million against that $12 million plan and that compares to $3.4 million spent during the six months ended June 30 2021.
The second key metric is organic trust growth. Joe mentioned that we have grown our trust by $46.9 million, which included $9.9 million of trust assets acquired as part of our acquisition. Excluding those acquired trust assets, we experienced organic trust growth of $37 million.
As of June 30, our merchandise trust balance was $604.8 million representing $36.9 million in growth for the six months ended June 30 2022. As a reminder, the merchandise trust grows through contributions of new pre-need sales and customer collections. Additionally, the growth was also driven by the retention of investment income and those trusts accordance with various state laws.
The perpetual care trust balance was $349.2 million as of June 30, 2022, representing $10 million in growth for the six months ended June 30, 2022. The perpetual care trust grows primarily through contributions on new impairment sales in accordance with various state laws. Collectively between organic trust growth and unlevered free cash flow, we generated $54.6 million against the full year target of $110 million.
We thank you for your time today. With that, we’ll open — we will now open the floor to any questions you may have.
Question-and-Answer Session
Operator
Keith Trost
Thank you again for your time this afternoon. 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. Thank you.
Operator
And that will conclude the conference call for today. We thank you very much for your participation. You may now disconnect.
Be the first to comment