Carriage Services Inc (CSV) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services’ third quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, October 29th, 2003. I would now like to turn the conference over to Mr. Ken Dennard, Managing Partner of DRG&E. Please go ahead, sir.

Good morning everyone. I appreciate you joining us for Carriage Services' conference call to review 2003 third 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 an e-mail distribution list or fax list to receive future Carriage Services releases, or if you experience 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'd 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 Telefonica instant replay feature 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, October 29th, 2003; and therefore you are advised that current 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, or for the year ended December 31st, 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. A copy of the Company's Form 10-K, Form 10-Q and other Carriage Services information and news releases are available on the Company's web site.

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

Thank you, Ken. The third quarter is traditionally our weakest quarter, with the funeral division being seasonal, winter months being the highest, and the third quarter being the lowest, with the second and fourth somewhere in between.

The third quarter we did beat our estimates that we had previously put out for the public. However, we were down in our EPS from the prior year, which we found disappointing. Our estimates that we have been talking about do reflect continuing weakness in the funeral division. This traces back to the beginning of the year, especially the first quarter when we got off to a very weak volume quarter.

This weakness in the funeral division continued to be true in the third quarter. We previously talked about different parts of our portfolio that were especially weak on market share and so on. This led us down a path, however, of looking at the root causes for a declining market share in some markets, and for a declining operating and financial performance this year in particular.

As you'll note in the press release, this review and the analysis of the causes has been identified as leadership, and some operating approaches to how we execute some of our strategies. Therefore, I have assumed Head of Field Operations about three months ago, and have been reviewing the existing strategies in light of what changes we need to make to get better performance.

We are in the process of developing new strategies. I'm not ready to talk about those at this point, but they're pretty far along. At some later point we will clarify those strategies when they have been developed and implemented. That will be sometime during the first half of next year, but I will tell you that we expect to see improved performance during the course of next year. At this point, I will turn it over to Joe.

Thank you, Mel. As Mel said, we met or exceeded our published estimates for the quarter. We were very pleased with the increase in our same-store funeral revenues, the performance of our cemetery operation, and our continuing effort to reduce our debt. However, as Mel said, we believe our funeral operations have the potential to generate better financial results, and this will continue to be our primary focus in the future.

In the third quarter we reported net income of $846,000, or 5 cents per diluted share, compared to 520,000, or 3 cents per diluted share for the third quarter of 2002. Special items recorded during the third quarter equaled 1 cent per diluted share, and those consisted of gains of $373,000 from the sales of two businesses and a track of real estate, and net of a charge in (technical difficulty) $447,000 to write off the remaining loan costs on our prior bank credit facility.

Last year special items in the third quarter consisted of charges of 1.2 million, or 4 cents per diluted share. So the decrease in diluted EPS after special charges that Mel spoke about earlier was 3 cents. And that would be attributable to decreased margins in our funeral operations.

During the third quarter of 2003 we generated cash flow from operating activities of 2.6 million, and this includes the benefit from the deferral of the interest payments on the TIDES preferred securities of 1.7 million. And in addition, we generated $700,000 from asset sales.

The combination of these sources of cash flow allows the Company to fund 1.4 million in capital improvements, pay fees and expenses of $600,000 related to our new unsecured credit facility, which we discussed last quarter, and reduce total debt by 1.2 million, so that as of September 30, our debt balance is now 139.7 million.

A reduction in outstanding debt during the last 12 months resulted in a reduction in our interest expense of $400,000 for the third quarter compared to the comparable quarter last year. One note, we also reclassified the outstanding balance of our Series A Senior Notes. That amount was 22.3 million. We reclassified that balance as a current liability at September 30, 2003, because it matures within one year, and that is on July of 2004. We expect to use our borrowings on our unsecured revolving credit facility to retire the Series A Senior Notes.

Turning to our funeral operations, our third quarter 2003 same-store revenues increased .5 percent over the prior year. There was a slight decline in our same-store funeral volumes, approximately 35 contracts, 6 percent. And that was offset by higher average value per contract. We realized a 1.1 percent increase in our average value of our contracts.

The percent of funeral services related to cremations increased 200 basis points from 28.2 percent in the third quarter of (technical difficulty) to 30.2 percent in the third quarter of 2003. A substantial portion of this increase occurred in our Western region. The average price of Carriage's (technical difficulty) services decreased .9 percent for the quarter year-over-year, while the average price of the burial contracts increased 2 percent.

Lower revenues and higher cost and expenses negatively impacted the funeral gross profit by 1.2 million during the quarter. This was attributable to higher insurance costs, property taxes, and bad debt expense. In addition, we had higher depreciation expense and funeral merchandise costs for the quarter.

On a year-to-date basis, funeral revenues decreased 3.5 percent, and same-store revenues decreased 2 percent. And this was comprised of a volume decline of 3.6 percent, and an increase in average per contract of 6 percent. Overall funeral gross margins on a year-to-date basis decreased 410 basis points. These variances were primary the result of weaknesses in same-store volumes in the first quarter of 2003 and higher operating costs.

Turning to our cemetery operations, our cemetery revenues and gross profits have continued to be strong in a pre-need sales period made difficult by current economic conditions. Cemetery revenues were positively impacted by $500,000 for the completion of mausoleums in which sales had previously been deferred. This offset a $100,000 decrease in financial revenues and a $300,000 decrease in deliveries of pre-need merchandise and services.

Cemetery costs and expenses were about $200,000 higher than third quarter of 2002, and this was roughly equal to the cost allocated to mausoleum spaces sold and recognized when they were completed. On a year-to-date basis, cemetery revenues have increased 1.9 percent, and cemetery gross margin has increased 310 basis points.

Turning to general and administrative costs, on overall basis our cost decreased $1 million compared to the third quarter of 2002. However, in the third quarter of 2002, we had a $1.2 million charge related to the termination of an employment agreement and professional fees in connection with a project. And after considering those special charges, G&A expenses increased $200,000 for the quarter. And this is primarily attributable to insurance and other costs where we have experienced increases during the year.

As I said earlier, interest expense decreased by $400,000. And this is primarily because our average outstanding debt has decreased by 15.8 million, or 10 percent, since the third quarter of 2002.

Turning to our outlook for the full year 2003 and for the fourth quarter. For the fourth quarter of 2003, we expect revenues to range between 37 and 42 million; EBITDA to range between 8 and 10 million; and earnings before any special charges and other items to range between 8 and 13 cents per diluted share.

For the full year, we expect revenues to range between 149 and 154 million; EBITDA before special charges to range between 38 and 40 million. We expect free cash flow to range between 8 and 11 million. Including cash flow from dispositions and other sources, we expect to reduce our debt to between 134 and 136 million at year end 2003. This debt target has been revised upward by $4 million because there are about $4 million of dispositions that we no longer expect to close in 2003. Mel?

Thank you, Joe. As I mentioned earlier, we're not happy with the funeral division results. The rest of the Company is doing well. That gives me time to devote my energy and skills to the funeral division. I have called in a lot of help from some of our best operating partners. And we have a lot of things going on right now that are leading to a lot of new excitement that is too early to get detailed about. But I can tell you that we do have some operating strategies that are dramatically different than the ones we have employed, and expect the results to get better in 2004 and beyond.

As we go through 2004, I will be glad to report what some of those strategies are as they get executed, and we begin to get some traction. At this point, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS) Bill Burns, Johnson Rice.

Mel, big picture question. Do you see us ever cycling through these higher insurance costs and property taxes? Can we get beyond these, or is this just something that we're just going to continue face in '04 and '05?

I think we will have -- you go through cycles. We're trying to do a better job of operating, so we don't have as many claims. And I do think we're getting better at that. I think that will continue to improve. What we can't do, Bill, as you know, is dictate what the market does. And I think the market insurance went through a tough cycle. They're catching up. We're going to pay the price for a year or two, but I do think we will get out of it. And I don't think that is the core problem of our operating results.

No, no, I agree with you. I was just looking for some help since these costs are rising, and our revenues are tending to be flat here in this market.

That's correct. We need to do something about the revenues.

That's right. Yes, but I didn't want to get on you hard this morning. I'm in a good mood, so I didn't want to --.

That's okay.

I did find your taking over the funeral home, that was going to be my main question. What prompted you to do that?

What prompted me to do that was the continuing trend in our operating performance in the funeral division. And I didn't like what I saw there. As you know, we have been analyzing the portfolio and slicing and dicing and looking at where we have had concentrated problems. But the more I looked at that and got deeper and deeper into why, I decided that you could put band-aids on things, and we didn't really need any more band-aids. What we needed was to step back and see the very nature of what we're doing here, which is a local entrepreneurial business, and look at the operating model. So we have done that; continuing to do that. And I think we're going to roll out some changes that will make a difference.

James Clement with Sidoti.

A quick question for you. I think that the perception has sort of always been that price competition is not so much of an issue at the local level of your operations, and of the operations of some of your competitors. The economy has been relatively weak for quite some time. Looking at the individual facility level where, perhaps, you have not maintained the market share that you, perhaps, that you should have, how much is price an issue?

I don't think price is the big issue at all. I think it comes down to -- price can become an excuse for losing market share. And it is easy thing to point to as the reason you're losing market share. If you're losing market share because of price, my own view is you're not delivering enough value to the families you serve. Only if you don't deliver enough value will price become an issue.

We do not see an our surveys that price is the driving issue of people not being satisfied. It is just not getting all the details handled in the basics of delivering service to families. And the other reason is funeral services is more than service, it is a business. And it is an entrepreneurial business, and so you have to go get business from your competitor, and you have to be good at that part of it. That is the other -- that relates to the entrepreneurial nature of the business at the local level.

So if you're competing against someone who is entrepreneurial at getting the business, in addition to serving families, you might lose market share. So we're looking at that, both sides.

Let me switch gears a little bit. You alluded in your earnings release that under funeral operations same-store average revenue per contract was up about 1.1 percent?

Yes.

Is a function of the customized services that you guys are providing? I know you have talked a little bit about that in the past. Could you elaborate a little bit more on what is driving that?

Jamie, I think there are several factors driving that. One, would obviously be the mix of services that we deliver quarter to quarter. But also I think we've had a strategy of trying to raise our prices and also, as Mel said, deliver more value to families. I think as we're successful in doing that, that results in a much better average price per contract per service.

So I think there a number of factors driving that, but it is certainly a conscious effort to deliver more value, and also to raise our prices in line with the costs that are going up in our business.

If you don't mind commenting just briefly on the pre-need sales environment versus perhaps where it was at the beginning part of this year?

This is Mel, Jamie. I think the pre-need sales environment has been talked about by all the public companies as being challenging. We have found it to be challenging as well, because our pre-need sales are actually down year-over-year. But I don't think, again, that is the core reason. I think it is a matter of how we are executing the pre-need sales plans.

And as part of this reorganization we have realigned the pre-need sales strategy, as well as the reporting, and brought in some resources to focus on pre-need sales. Because, as I mentioned to Bill earlier, we want to change the revenue line, not look at the cost line. And to do that, you have to bring in more business. So we're looking at a different way of approaching pre-need compared to the way we have done it the last two years, but that is just kicking off.

Debbie Downey, Miller, Tablack Roberts.

Just two quick questions. Under your revolver, the new 40 revolver, how much is available at quarter end? And also could you give the breakdown of your 240 basis point decrease in gross profit margin for your funeral homes? I know on the call you said it was because of increases in insurance, property taxes, bad debt expense and higher merchandise cost, and I was just wondering if you maybe could allocate that, specifically concentrating on your bad debt expense?

Okay, Debbie, on your first question about availability under the revolver, at September 30 we had about $15 million available under the revolver. In terms of breaking down the 240 basis point change in the gross profits, I don't really have the information to do that, but I can certainly try to provide that to you afterwards.

Did bad debt expense that you said (inaudible) has it been trending up each quarter, and how badly?

In the funeral operations our overall bad debts are running about .6 of a percent of revenues. It is not a huge number. It is not a huge -- and it hasn't been a huge increase. So you're not talking about a trend there that we're concerned about at this point.

Thank you. And so on your revolver then you had about 25 million borrowed?

Correct.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up question from Bill Burns. Please go ahead.

Just real quickly, the asset sales in the release, they are going to be 4 million less than you thought. I was just wondering, is this just a timing issue, or do you want more time to look at these businesses?

This is Mel, Bill. We want a little more time to look at these businesses, because with all the operating changes that we have initiated, there are some good chances that some of the business that we had targeted for sale might respond to these changes and some new leadership. So we wanted to allow a little more time to see -- make sure we weren't selling something that had some upside that would be worth keeping.

And even if it ultimately wound up being sold, possibly could be sold for a higher price. Because what we're doing now with these changes in strategies that I mentioned, but didn't define, I have some good -- there are some opportunities that some of the underperformers might respond, and we wanted to see. So we held back.

And, Joe, on your Senior Notes you moved to the current liability of the first tranche 22.3 million?

Correct.

What is the total balance now those?

Hold on just a minute.

Do you have that in front of you?

Yes, I do. The total balance in the Senior Debt is 96.3 million.

96.3. And I'm having a senior moment, have you and I talked about the FIN 46 rule that is showing up in a lot of the funeral home companies?

Yes, we have talked about that last quarter. We will have to implement FIN 46. We are still evaluating how that is going to impact exactly what we're going to have to consolidate. We know we will have to consolidate some of the trusts, some of the pre-need trusts, but there are some questions about which ones.

The implementation of the accounting standard was deferred until the fourth quarter, so we have a little more time to evaluate that. And it will be implemented in the fourth quarter, so therefore are our year-end results we will discuss it. And it will be part of our reporting for the year end balance sheet.

I have no additional questions at this time. I would like to turn the conference back over to Mr. Payne for any additional comments. Please go ahead.

Thank you very much. We appreciate you tuning in, and again we look forward to reporting against our progress the next time around. Good day.

Thank you, sir. Ladies and gentlemen, thank you for participating in today's Carriage Services third quarter earnings conference call. You may now disconnect.