Carriage Services Inc (CSV) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services second-quarter earnings conference. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (CALLER INSTRUCTIONS). As a reminder, this conference is being recorded today, Tuesday, August 5, 2003.

I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG&E.

Good morning, everyone. We appreciate you joining us for Carriage Services' conference call to review 2003 second-quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be on e-mail distribution list or fax list to receive future Carriage Services releases, or if you experienced any technical difficulties and did not receive your e-mail or fax this morning, please call our offices at DRG&E and relay that information to folks in our office. Our number is 713-529-6600. If you would like to listen to a replay of today's call, it will be available via webcast by going to www.CarriageServices.com. Additionally, there will be a telephonic instant replay for the next seven days, 24 hours a day, and the information is in the press release on how to access that feature.

Please note that information reported on this call speaks only as of today, August 5, 2003, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. As you know, certain statements made today in the conference call or elsewhere, by or on behalf of the Company, that are not historical facts are intended to be forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended, and section 21-E in the Securities Act of 1934 as amended. These statements are based upon assumptions that the Company believes are reasonable. However, many factors that are discussed under forward-looking statements and cautionary statements in the Company's annual report on Form 10-K for the year ended December 31, 2002, and subsequent Form 10-Q's could cause the Company's results in the future to differ materially from the forward-looking statements made today, and in other documents or oral presentations made by, or on behalf of, the Company. I copy of the Company's Form 10-K, Form 10-Q and other Carriage Services information and news releases are available at the Company's Website.

Now, with that out of the way, and with me today is Mel Payne, Carriage Services' Chairman and Chief Executive Officer, and Joe Saporito, the Chief Financial Officer. I would like to turn a call over to Mel.

Thank you, Ken. It's a pleasure to have you on the call to report our second quarter and to discuss the outlook for the future. I will talk about two areas of the Company -- first, operations. The second-quarter operating performance was much better relative to our first quarter 2003, and also better than last year, primarily because of lower interest from -- or debt levels. The first quarter, as we reported, was very disappointing. The second quarter is just the opposite of that; it was quite a pleasant surprise. But a lot of work went into making it a pleasant surprise.

Some of the highlights -- our same-store funeral volumes were down only 0.5 percent, only 22 calls, despite continuing industry weakness in death rates. This was night and day compared to the 8.6 percent same-store volume decline in our first quarter. The funeral division performance was basically flat year over year. I reported in the first quarter -- we reported that we had a group of businesses representing 15 percent of our revenues and EBITDA that did lose market share, in our belief, over the first quarter. That group of businesses performed exceptionally well in the second quarter, but it was not 100 percent across the board. About 70 percent of that group did substantially better, and had huge turnaround in their EBITDA performance, as well as their same-store volume performance. A smaller group -- six businesses -- continued to have weak second-quarter performance. And of that 6, there were basically two larger businesses that accounted for most of the decline. But overall, that group was flat, compared to the last quarter, as well as the entire portfolio. The other highlight for the quarter was that the cremation rate actually declined. The cemetery division again had an outstanding quarter in a difficult economic environment, and our operations continued to improve. We are working hard on curing the issues where we had problems. We have made a lot of changes in the last three months, primarily in management and some other market-share initiatives, and they are paying off. It won't happen overnight, but we do expect to see that group of businesses get substantially better over the next 12 months, and we will comment on them every quarter.

The second area is financial. We have been asked many times over the last few quarters about the refinancing risk it carries, primarily the bank credit facility maturing in mid '04, at the same time when we had our first tranche of insurance company notes maturing. We're delighted to announce our new bank credit facility of 40 million. Joe Saporito is going to cover more of that with you in a moment, but I wanted to just mention a few things. In the second quarter, our debt went down by 7.3 million. That was an excellent achievement, and reflects our continued focus on deleveraging. This did not go unnoticed before, and is not going unnoticed now by our banks. The new bank facility of 40 million is smaller, but adequate, and as a former banker, I can tell you that this was quite and achievement in a market where companies our size and even larger are finding it very difficult to put together credit facilities, especially unsecured credit facilities. This is a market that calls for security. And as Joe is going to talk about, that would have presented some problems. So we're delighted we got this done. It was not easy to do, and it reflects strong support from Banc of America and Wells Fargo, which we are very appreciative of. It was critical to getting it done. This bank facility eliminates the refinancing risk in mid 2004 that we had been asked about. It also allows the management team now to focus entirely on operations, where we need to be focused. And the next refinancing event will not occur until mid 2006, so we're delighted to have been able to put this together.

And with that, I would like to turn it over to Joe.

Thank you, Mel. I am going to cover operations, and then talk about the financing, as Mel said. During the second quarter, I am very happy to report that we met or exceeded our estimates, and we also reaffirming our estimates for 2003, which I will get into a little later. In addition, as Mel said, we're very pleased that we were able to close our $40 million unsecured credit facility, and we will discuss that in more detail in just a minute.

Net income totaled 2.3 million in the second quarter of 2003, or 13 cents per diluted share, as compared to net income of 1.5 million for the second quarter of 2002, or 8 cents per diluted share. Special items totaling about $900,000 were recorded during the second quarter, equal to income of 3 cents per diluted share, and consisting primarily of gains from the sales of three businesses and excess real estate. Excluding the special item, we would have reported EPS of 10 cents per share. The reduction in outstanding debt during the last 12 months resulted in a reduction of interest expense of about $500,000 in the second quarter of 2003, compared to the second quarter of 2002, and this was the primary reason for our 2 cent per share improvement in EPS including special items.

During the second quarter of 2003, we generated free cash flow of 1.9 million, and continued to perform on our plan to reduce debt. As Mel said, we're very committed to this objective, and the combination of free cash flow, available cash on hand and proceeds from the sale of the businesses that we have discussed previously allowed us to reduce our debt from 148.2 million at March 31, 2003 to 140.9 million at June 30. Year to date, we reported revenue of 76.6 million, compared to 78.8 million in 2002, and diluted EPS of 25 cents per share in 2003, compared to $1.03 in 2002. As previously reported, our year-to-date results in 2002 included a 73 cent per share benefit from a reversal of the deferred tax valuation allowance, and excluding the effect of this allowance, our diluted EPS of 25 cents in 2003 compared to 30 cents in 2002. So on a year-to-date basis, that change can be attributed to, really, our first-quarter operating performance, which Mel talked about earlier.

Now, turning to our funeral operations, as Mel said, our second-quarter 2003 results were comparable with the prior-year quarter. Financial results for the second quarter of 2003 for our funeral service volumes and revenues were relatively flat, when compared to the same period last year. The slight decline in our same-store funeral volume of 22 calls and increase from same-store funeral revenues of $100,000 represented a significant improvement compared to the first quarter of 2003, in which we experienced an 8.6 percent decline in same-store call volume. And particularly in light of a death rate which was recorded by the CDC of about 2.5 percent, we think our performance this quarter in funeral operations was very good.

Funeral field EBITDA margins increased 70 basis points to 33.6 percent, from 32.9 percent last year. As Mel previously reported, we identified about 12 percent of our businesses that experienced market-share decline during the first quarter of 2002; and, as he told you, their performance improved significantly during the second quarter. The average price of Carriage's cremation services increased 4.5 percent for the quarter year over year, as we increasingly provide our customers with complementary products and services. Approximately 29 percent of the Company's funeral services were cremation services, compared to 29.2 percent in the second quarter of last year. So we're continuing to deliver on our objective of enhancing our cremation services, enhancing our revenues on cremation services. On a year-to-date basis, funeral revenues decreased 4 percent and same-store revenue decreased 3.5 percent, comprised of a volume decline of 4.7 percent and an increase in average per call of 1.2 percent. Our funeral gross margin has decreased 410 basis points, largely on the weakness of same-store volumes in the first quarter of 2003.

Turning to our cemetery operations, our cemetery performance was outstanding, and that was true particularly in a difficult pre-need sales environment. Same-store revenues increased by 1.6 percent, cemetery revenues were positively impacted by a $200,000 increase in pre-need sales interment rights and a $200,000 increase in at-need revenues compared with the prior period. For the second consecutive quarter, our cemetery gross margin of 27.9 percent exceeded our funeral gross margin, and our financial revenues and deliveries of pre-need merchandise, while they declined slightly, about $100,000, were very comparable with the comparable quarter last year. Cemetery costs and expenses were also comparable, and cemetery field EBITDA margins increased 290 basis points to 40.8 percent from 37.9 percent last year. On a year-to-date basis, cemetery revenues have increased 1.6 percent, and cemetery gross margin increased 490 basis points, primarily from improvements in our bad debt expense.

Turning to the credit facility, as Mel said, we're very proud and very pleased with what we were able to accomplish in placing a new unsecured revolving credit facility. As Mel said, we have placed a $40 million unsecured facility, and in this difficult credit market, that was a very significant accomplishment for a company of our size and credit profile. There are really two points that I want to emphasize about the new facility, and there's quite a bit of detail in the press release about the terms of the facility and some of the conditions. But the two points I would like to emphasize this morning is that, first of all, by putting an unsecured credit facility in place -- and that was a primary objective of ours going into this negotiation with the banks -- it allows us to retain control of our capital structure. And that is very important, because we have other senior debt that is pari passu(sp) with the our bank debt. And by keeping this facility unsecured, it allows us to retain control over the maturities and pricing of our capital structure, which eliminates a significant amount of uncertainty for the Company. The second point is about the tide (ph) deferral, which we announced in the facility also. The deferral of tide distribution was a condition to the new credit facility, and it was basically put in place to allow us to accelerate the payment of our senior debt, which, if you look at our projections that are in the press release, significantly improved the credit profile of the Company over a three- to five-year period, and really positions us and lays a foundation for allowing the Company to move forward and continue to grow. So I think these two objectives were paramount for us. And what it allows us to do is really eliminate any financing uncertainty until mid '06.

With that, I will turn it over to Mel, who has some additional comments.

Thank you, Joe. Just a couple of final comments. I am real pleased with the operating performance in the second quarter, relative to the first quarter, which was very disappointing. But I will say that the operating performance in the second quarter can be better. We know where it should be better, and we're working on getting it better. A lot of work is going on in the field, and I am spending a lot of personal time on that area. The other thing I would like to comment on is that the credit facility does put us in a great position to go to work on operations and not worry about our capital structure for a while. And the deferral of the dividends as a condition -- one of the other benefits, if you were to look at the outlook, and this was very crucial to the banks, it does put us in the position of being more flexible when it comes to the mid '06 maturities of our senior notes. So that was another consideration, in terms of financial strategy, that was very important not only to the banks but to the Company. We are pleased with this performance.

I would like to put it back to Joe, now, for some brief discussion on the outlook, and then I will have some final comments at the end.

As I said earlier, we reaffirm our outlook for 2003, and wanted to provide third-quarter estimates in this call, also. The third quarter of 2003, Carriage expects revenues to range between 34 and 37 million, EBITDA to range between 7 and 8 million and earnings before any special charges and other items to range between 2 and 3 cents per share. Carriage expects revenues for the full year of 2003 to range between 149 and 154 million, EBITDA to range between 38 and 40 million, earnings before special charges to range between 35 and 40 cents per share, and free cash flow to range between 8 and 11 million. And this is unchanged from our previous estimates. Including cash flow from dispositions and other sources, we expect to reduce our debt between 130 million and 132 million at year end 2003. In addition, we have provided a revised long-term base-case scenario in this release, also. Our operational outlook remains unchanged from the May update, and what we have done in this particular update is to show the impact of deferring the tide distributions on our free cash flow. And as you can see, it significantly enhances our free cash flow and our ability to pay down our senior debt. And as you can also see, it will significantly improve our senior debt ratios over this five-year period that we are presenting in the outlook. So I think, from that standpoint, the impact, as I said earlier, on our credit profile will be significant and very positive in the long term, and will allow us to lay the foundation for future growth.

Thank you, Joe. In summary, this has been a good quarter, with a lot achieved, both operationally and financially, and I think we have made a huge milestone here in positioning the Company for the future. So we're pretty proud of what we have done over the last three months.

With that, I would like to open it up for questions.

(CALLER INSTRUCTIONS). Bill Burns, Johnson Rice.

You have reduced your debt over $7 million, which was a substantial amount higher than your free cash flow. Was the difference from dispositions?

There were several items that were involved in that decrease, Bill. Obviously, free cash flow was one element. Divestitures was an element; that was about $1.5 million. Last quarter, we ended the quarter with an unusually high cash balance, and we took that down by about $2 million during the quarter to pay down debt. And then also, we settled a pre-acquisition contingency related to a prior acquisition, and that provided about another 1.5 million of cash that we used to pay down debt. So all those items together were the reasons that we were able to pay down debt by more than our free cash flow this quarter.

Do you happen to have your cash balance at the end of the quarter?

Yes. At the end of this quarter, it's $3 million.

Still too high, isn't it, Bill?

Yes, it is.

We're working on that.

James Cornet (ph), Sidoti & Co.

I'm wondering if you could discuss, in general terms, the short-term outlook a little bit. I know you have provided guidance for the September quarter, and if I remember correctly, looking back to last year, you had some unusual costs, I believe, related to some tax projects and maybe the termination of some sort of employment agreement that would have otherwise led you to report, I think, earnings along the lines of about 7 cents a share in September of last year. Is that right?

Yes, that's right.

I am looking at the way your margins are trending, and particularly the strength on the cemetery side. And I am wondering if -- are you projecting a significant decline year over year in funeral gross margin, for example, that would get you to 2 to 3 cents? Because, judging by the way some of your numbers are trending, it seems that 2 to 3 cents, in my opinion, appears to be somewhat conservative.

Just to comment there. You know, the first quarter was so bad, and it was a surprise. We don't want to be surprised again, so we're being conservative.

Okay. You don't want to count your chickens before they're hatched?

We had huge margin problems in the first quarter in the funeral division, and the third quarter historically has been the weakest quarter. The first quarter has historically been the strongest. Now you see that the second quarter was not much different than the first, so we just don't -- we are still a little uncertain about what the margin outlook will be for the rest of the year, on the funeral side. And while I'm very encouraged about this particular group that had the most weakness, it was only one quarter. So we are still working and hoping that we will continue to show that kind of improvement. But we appreciate the point.

Bobby Richardson, Argent (ph) Financial.

I was wondering if you could comment on any other financing alternatives you evaluated as part of the process to obtain a new credit facility. I am kind of stunned that a company of your condition couldn't obtain a facility that didn't require you to defer the preferred dividend. Did you look at the private placement market again, et cetera?

We looked at both equity and debt alternatives, Bobby. And I think it is fair to say that, from the standpoint of equity alternatives, there were two issues. One would be pretty significant dilution, and therefore cost to the Company; and second of all, execution risk in getting a transaction of sufficient size done to really benefit the Company to any great degree. The debt markets, at this point, for a Company with our credit profile, would be very, very expensive. And again, there was what we believed to be significant execution risk in getting that done. So either alternative that we looked at really was not appealing, both from a pricing standpoint and from an execution standpoint, and to our way of thinking, only increased the uncertainty of the Company. We think that this alternative significantly decreases uncertainty, really takes the uncertainty away for an extended period of time.

We looked hard at those alternatives. We looked with third parties, and there was no good answer, either in raising junior capital or even privately-placed debt. There's simply -- for our Company at this point in time, it's not just Carriage and our sector; it's across the board. We confirmed that. It's a very difficult capital market to access capital. The capital wants to go into bigger companies and companies that have more liquidity. So we looked at that hard. It really wasn't available. Even if it had been, as Joe pointed out, it would have been very expensive and very dilutive to existing shareholders. But the real risk would have been getting it done, period. We set out to put together credit big enough so that we could continue to pay the dividends. You need to know that. We could not get that done on an unsecured basis, and it was not just important -- critical -- that it be unsecured, because we ran into this in 2001 we started fresh start. Any kind of security would have required 100 percent approval of our senior noteholders, and we could not get 100 percent approval in 2000 on the modifications that we needed. But there was a plan B that allowed us to do that then. There was no such plan B as it related to security. So we were left with this. Not only is it basically the only thing we could do and still retain control over our capital structure, from the Company's point of view, but it was also a condition of the banks to get it done. So we looked hard. I understand your point.

Debbie Downing, Miller Tablack Roberts (ph).

On the new facility now that you have, the 40 million, what is outstanding and what is available? I would just like to -- this would be true available; there's no asset base, obviously. And then can you just go over your capital structure right now, with the 40 million revolver?

Debbie, right now, we have about 28 million outstanding under the facility. The full 40 million is available under the credit facility. And I'm sorry; what was the rest of your question?

So you have 28 million outstanding under the new 40 million revolver, so you have about 12 million in availability?

Currently, yes.

So now, your capitalization currently now would be the 28 million outstanding under your revolver, and then on the notes that are due, the 22.5 million due in July of '04?

Correct.

And how much -- is it 54 is on July '06?

53 million in '06.

And then 22.3 in '08?

That's correct.

And then the only thing else would be the capital lease obligations; right?

Correct.

And that's roughly about 5 million?

Yes, about 5.5 million.

And other than the tide, that's the only debt you have?

No, there is some other debt. Our total other debt, including the lease obligations, is about $19 million as of June 30th. But basically, if you looked at our capital structure at June 30, there's about 97.5 million outstanding of the senior notes, about 19 million of other senior debt outstanding, basically, at that point in time. And we have some additional information coming out, obviously, in the Q on the capital structure.

Evan Dreyfuss (ph), Pallin (ph) Asset Management.

Was there ever a thought of doing a senior secured high-yield deal to take out those senior notes and get rid of that negative pledge? And also, in the current bank agreement, if you start paying down the debt, which you plan to do, by differing the tides and things get a little bit better, is their a way to reinstate the dividend or is it never going to come back until this credit line is replaced? And then the third question is, even with the deferral, you still will expense that interest on your income statement, and your liabilities will actually grow by the deferral. Is that correct? If you are defering 6 million a year, your liability will actually increase by 6. So even though you are paying down debt, 8 million, you're really going to show only a net change of 2, because you will be accruing that on your balance sheet; is that correct?

Yes. We will be accruing the interest liability and paying down senior debt. So our senior debt is going to be going down as we accrue the liabilities and tide folder; so that's correct.

How about maybe doing a senior secured deal? It's interesting that you have a company that in a tough time is doing 40 million of EBITDA, and there is no secured debt. So you could do maybe a smaller bank line and do a 100 million senior secured deal, which only be 2.5 times leverage, which -- if you do it without -- and then you could get around the bank shutting off the distribution.

There would be a couple of impediments to doing that. One would be there is a very substantial economic penalty to paying off the senior notes early. And that penalty would be in the range of $10 to $12 million, which we viewed as unacceptable. And the second would be that we really would need to -- we couldn't really do any debt ahead of our current senior lenders without their consent, and I think in the current environment, that would have been difficult, if not impossible.

So is it your intention, now, just to leave this deferral until this credit line is gone, or things get better or we get a better market so you can put it back in place??

The condition that the banks have imposed is that the deferral will stay in place for the term of the credit facility, and the facility expires in March of '06. Beyond that, we would have to evaluate where the Company sat at that point, and what our alternatives are at that point before reinstating a dividend.

And the terms, you can go for five years, and then is there any point at which the deferred starts to get Board seats?

The only mechanism for the deferred to have any rights like Board seats would be if we defaulted on the payment, reinstatement of dividends in September of '08, which is when it would be due.

One quick question -- from a capital market standpoint, I guess you are hoping that the equity markets like the fact that there is no refinancing risk and the equity would do better, because you are really not deleveraging. You are deleveraging on a senior basis, but overall, by the deferral, you are only reducing debt by a couple of million a year? So there's a trade-off?

There is a trade-off, that's right.

It's a financing alternative; that's correct.

The deal was, any other alternative would have been pretty much a capital structure disaster, in terms of the economic consequences for the Company.

It was just the prepayment penalty, there was no way to really get around that?

No. The big issue there with our senior noteholders, seven insurance companies, even though rights have popped up, they still have a rates risk in the market. And so, because of that, they don't want to be reinvesting. And so, in order to prepay them, they require -- I can remember; it's 10 to 12 percent prepayment penalty.

(CALLER INSTRUCTIONS). Bill Burns, Johnson Rice.

Your estimate for earnings for the year -- 35 cents to 40 cents before special charges -- is this before like the 3 cents you made this quarter? Or does that include the 3 cents from asset sales that you recorded this quarter?

The 35 to 40 cents, Bill, excludes any special items, whether it be charges or gains in this quarter.

Robert Tessik (ph), First Research Financial.

As far as the improvements that were made in the field, could you kind of characterize the competitive environment?

Sure. The competitive environment is still difficult, and some of our markets where we have had new competition, in particular. We looked at those businesses that suffered the most in the first quarter. Clearly, some of that decline was death rates, but we still lost market share, according to the data that we look at in the first quarter in those businesses. And we began to look hard beneath the covers at what was going on in the markets, and found that we had made -- we had some leadership that needed to be changed, we had some relationships with former owners that needed to be improved. We had done all of that, and it's amazing how quickly some of that action has led to sudden improvement. And some of the businesses -- remember, this was first quarter -- some of the changes were made late in the second quarter. So I think we will continue to see some improvement as the year goes on. But it's tough out there; everybody is fighting for market share. And we think that's the most important aspect of this business. You can't manage profitably what business you don't have. So we know that, we are working on it, and we feel pretty good about what we have done here recently. But it's all about leadership, it's all about people. This is a people business, and that's where I spend most of my time.

James Clements (ph), Sidoti & Company.

Joe, just a quick question. Did you say in your remarks that the CDC's mortality data suggested that deaths were down 2.5 percent during the June quarter? Is that right?

Yes, 2.5 percent is what I said.

Gentlemen, at this time there are no additional questions. Please continue.

Thank you very much. We appreciate the support, the input and the understanding of what we have done and what we have achieved. Some of you understand better the deferral of the tides, and we look forward to reporting our progress for the rest of this year and in the future. We are very pleased about the operating improvement in the second quarter, and we will continue to report against our expectations as we go through the year. Thank you so much.

Thank you, sir. Ladies and gentlemen, this concludes today's Carriage Services second-quarter earnings conference. If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by access number 547651. We thank you for participating. You may now disconnect.

(CONFERENCE CALL CONCLUDED)