Carriage Services Inc (CSV) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services second quarter earnings conference call. 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. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Thursday, August 12, 2004. I would like to now turn the conference over to Mr. [INAUDIBLE], managing partner of DRG&E. Please go ahead, sir.

Thanks, J.R., and good morning, everyone. We appreciate you joining us for Carriage Services conference call to review 2004 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 our 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 yesterday afternoon, please call our offices at DRG&E and relay that information to us. Our number is 713-529-6600. Also, 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 telephonic instant replay for the next search days, 24 hours a day, and that information to access that feature is in the press release.

Please note that information reported on this call speaks only as of today, August 12, 2004; and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. Also, 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 the 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, 2003, and subsequent form 10-Qs, 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-Qs and other Carriage Services information and news releases are available on the company's web site.

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

Thank you, Ken. It's a real pleasure to be here this morning and report on our results. One thing I would like to focus on in the press release is that we are focused more on the long-term -- and I'm going to get more into detail on what that means -- than on the short-term. This is a long-term business, always has been. And we made a decision to work on the right things, the right way, and then see what results. I'm going to highlight some of those things as we move through the conference call.

First of all, our funeral home operations: At the end of last year, we rolled out a new operating model and made dramatic changes in our leadership, our systems to support our front line service and sales personnel; and most importantly, in the operating model itself, in the incentives for our partners who lead our businesses. We haven't talked a whole lot about that. It's in some of the material on our outlook.

However, I want to emphasize that we are working on a standards operating model that relates to three primary areas: Market share, number one. People, number two -- and that includes the quality of every person, full and part-time, and the continuous upgrading and development of our people. We believe if we get the people part right, everything else will follow. And lastly, the operating and financial metrics are a score card. If you do the market share part right and the people part right, we think the operating and financial metrics will follow.

We also have found these standards on the funeral home side to be not only operational benchmarks, but they also help us define which businesses are really a fit strategically for the long term and where we should be spending our time. As a result of this model, we have made some decisions which led us to dispose of some businesses -- decide to dispose of some businesses in the second quarter, and that caused us to take some losses, which Joe will elaborate on. I am confident that we are now working on the right things the right way, and that operational progress is being made, and that this progress will be reflected in our financial results over time.

On the cemetery operations, our revenues are up because our sales counselors are selling more property, which creates heritage for our business that is long-term in nature. Our margins are still relatively high, although we can do a better job and didn't do as good a job as we should have in the second quarter compared to the first,. But we will be doing a better job and will show better margins, in my view, during the second half of the year. And lastly, our debt reduction continues to exceed expectations because the free cash flow is there.

We had a good second quarter on debt reduction. That enabled us to retire the 22 million of Series A senior notes by drawing down on our revolving credit, with plenty of breathing room to spare. There were some who worried. We were never worried. And we continue to make progress on the debt reduction front. With that, I'd like to turn it over to Joe to get into more details about the quarter.

Thank you, Mel. And good morning, everyone. As Mel said, we expect the changes we are making in our funeral businesses according to our new operating model and standards will have a notable impact on our future operating results during the last part of 2004 and into 2005.

In the second quarter, we reported a loss of 3 cents per diluted share, primarily because of impairment charges, compared to earnings of 13 cents per diluted share for the second quarter of 2003. And this included gains on sales of businesses in that quarter. We had several special items which impacted the second quarter, and I would call your attention to the last table of our press release, titled "reconciliation of earnings before gains and impairment charges to net income." As you know, when we prepare our forward-looking estimates, we do not forecast sales of businesses and other assets.

This schedule disaggregates our earnings for the quarter, and hopefully will help you reconcile our results for the quarter to our estimate. In the second quarter of 2004, we identified three funeral home businesses that will be sold in the third quarter. As a result of this decision to sell the three businesses, we are presenting the operating results and the impairment charges related to these businesses in a new discontinued operations section of our income statement.

Likewise, the operating results and gains or losses from businesses sold in the prior year have been similarly reported for comparability. For the second quarter of 2004, income from both continuing and discontinued operations -- and this excludes the gains from the sale of business assets that occurred in the second quarter -- was 7 cents per diluted share, compared to our -- compared to 10 cents per diluted share last year. A significant portion of the lower earnings compared to the prior year quarter related to a charge for property taxes of $600,000, and that was equal to 2 cents per share, for a retroactive reevaluation of our certain of our funeral and cemetery properties.

During the second quarter, we disposed of investments in two business ventures and sold surplus reestate, which generated a gain of 3 cents per diluted share. Finally, we recorded after-tax impairment charges of 2.2 million, or 12 cents per diluted share, related to the two of the businesses that we identified for sale. During July, 2004, the company closed on the sale of two of the three funeral home businesses, which generated proceeds totaling 2.5 million and a gain of approximately $1 million. The gain was from the business we did not write down in the second quarter, and will be reported in our third quarter results.

On a more positive note, we are very pleased with the cash flow generated and the reduction of our senior debt during the second quarter. Carriage generated free cash flow of 7.4 million and paid down long-term debt by 7.9 million during the second quarter of 2004. Carriage's senior debt -- and this excludes the convertible junior subordinated debentures that are payable to our affiliated trust -- totaled 121.3 million at June 30, 2004, compared to 135.5 million at December 31, 2003, and this was a 10.5% reduction.

On July 30, 2004, we paid the outstanding principal and interest on our senior -- our Series A senior notes, which had an outstanding balance of 22 million. As of June 30, 2004, we had 10.9 million outstanding on our revolving credit facility. Subsequent to the payoff of the Series A senior note, we have 32.1 million outstanding on the revolving credit facility, and have additional borrowing capacity of 11.8 million dollars. On a year to date basis, earnings for 2004, excluding the gains in impairment charges, totalled 24 cents per diluted share, compared to 24 cents per diluted share for the six months ended June 30, 2003.

GAAP earnings totaled 14 cents per diluted share, compared to 25 cents per diluted share for the six months ended June 30, 2003. The decrease was primarily attributable to the impairment and real estate tax charges we recorded in the second quarter and I discussed previously. Turning to our funeral operations, generally, our second quarter 2004 funeral results were lower than we expected, because we believe the improved performance in the first quarter would carry through to this quarter, which did not happen.

The decline in our same store funeral volume of 139 contracts, combined with the increase in the cremation rate, had a greater impact than we expected on the quarterly results. After increasing a robust 5.6% in the first quarter, the national death rate, as reported by the Centers for Disease Control, decreased .4% in the second quarter, and this contributed to our lower contract volume. Cremation services represented 31.8% of the number of funeral services performed during the second quarter, compared to 29.1% in the second quarter of 2003.

The average revenue of -- the average revenue for our burial contracts increased 6.5% to $6,543, while the average revenue for cremation contracts was essentially unchanged at $2,404. The change in our burial versus cremation mix alone impacted our revenues by $600,000, and earnings per share by 2 cents. Our funeral operating costs and expenses were comparable to the prior year quarter, though we did -- we did record a $300,000 charge for property taxes on the funeral properties, as previously discussed, and that was the principal variation in our operating costs.

On a year to date basis, funeral revenues increased 1.1%, and same store revenue increased 2.9%, comprised of volume increases of .9%, and an increase in the average per contract of 2%. Funeral gross margin has increased slightly to 27%, primarily on the strength of the higher revenues we reported in the first quarter. The -- on the cemetery operation, as Mel said, our focus continues to be on the premium sale of property rights.

We achieved an 8.2% increase in revenues, primarily because of the higher pre-need sales, and 91% of our pre-need contracts included sales of cemetery property. Cemetery revenues were positively impacted by a $700,000 increase in pre-need property sales and the completion of two mausoleums, which contributed 400,000 in revenue compared to the prior year.

Financial revenues, which are trust earnings and finance charges on installment contracts, declined $100,000 compared to the second quarter of last year, primarily due to lower earnings on our perpetual care trust funds. Cemetery gross profit and gross margin percentage declined because of higher promotional costs, bad debts, customer discounts, property amortization, and the property tax charge that I discussed earlier. On a year to date basis, cemetery revenues increased 12.5% and cemetery gross profit decreased 2.6% for similar reasons that impacted our second quarter results.

Turning our outlook for the third quarter, for the third quarter of 2004, we expect revenues to range between 35 and 37 million, EBITDA to range between 7 and 9 million, and diluted earnings per share to range between 3 and 6 cents per share -- and this would exclude any gains or losses from the sale of the three businesses that we previously discussed. Our full-year 2004 estimates are unchanged. Mel?

Thank you, Joe. Clearly, as you've listened to Joe go through all the details, we had a lot of noise in the second quarter. My job is not to listen to all the noise, but to make sure our [INAUDIBLE] so that we're working on the right things the right way, as I articulated earlier. I firmly believe we are, and over time, I hope the noise will decrease and that the performance will show the progress I know we're making in our operations. With that, I'd like to open it up for questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, press star two. You will hear a three-tone prompt acknowledging your selection. Please ask one question, and one follow-up, and requeue for additional questions. If are you using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question. Our first question comes from Bill Burns from Johnson Rice. Please go ahead with your question.

Good morning, Mel and Joe.

Good morning, Bill.

On the property tax, Joe, the 2 cent charge, I was wondering, is that -- was that a one-time event? Or -- or you experienced just a higher level of taxes going forward?

Yeah, most of the charge, Bill, was a one-time event. We had several properties that were revalued going back to 1997. Now, some of the increase will be ongoing, but a much smaller portion than the 600,000.

Okay. How was it split between funeral and cemetery? 50/50 or --

Approximately 50/50.

Okay. And then in looking at the gross profit on the cemetery, one of the negative impacts was customer discount. I wonder if you could elaborate on exactly what those are?

Elaborate on what customer discounts are?

Yeah. What are you actually discounting?

We're actually discounting our merchandise and/or property from our posted or listed prices. So those are basically incentives that our sales people are able to give to encourage people to close transactions.

Okay. Thank you very much.

Thank you, Sir. Our next question comes from James Clement from Sidoti & Company. Please go ahead with your question.

Good morning, guys.

Good morning.

Just to sort of follow up with Bill's question there, I mean obviously, you see cemetery revenue during the quarter up, you know, obviously fairly substantially --

Right.

-- off the June quarter last year. But, you know, gross profit being down in absolute terms. And you know, I know you list some reasons for that in the press release, and I think that, you know, you discuss some of this on your first quarter earnings conference call, as well. I know you've said that you look to manage this business long term. But you know, how -- how should we think about cemetery margins kind of going forward? I think you said, you know, you alluded to, you know, improvements, you know, in the second half of the year, but can you talk a little bit about what -- specifically what's driving the higher cost in the segment?

Yeah, Jamie, this is mel. I've been spending most of my time in funeral operations over the last year. And cemetery operations have been really performing exceptionally well, as you know. The second quarter was, in fact, a disappointment. Although our sales have been going up, some of the underlying causes on the expenses are being reviewed in detail as we speak. I don't think that it's anything other than some of the programs that we talked about, discounts to have more property sales, and we're looking in to, in detail, some of the incentives and the programs and why, you know, we've had some of those expense, including bad debts, go up. I don't expect that will continue. That's all manageable. And I'm optimistic that our results will get better.

Okay. All right. Just ask a quick follow-up. I'm a little unclear on -- you know, if you're -- from a sales perspective, if you're stressing pre-need contracts that include property rights, do you take a short-term hit on the expense, or have you been taking a little bit of a short-term hit on the expense side, you know, in the form of promotions or discounts? Is that specifically related to that program or is that just sort of overall?

It absolutely is. And you do have to strike a balance between the amount of profit you want and creating heritage for the long-term.

So you think it would be fair to say that some of these costs actually could be viewed as an investment in the future?

Yes, that's right. And we have -- I've been on trips with our sales people, and we have these incentives -- you know, two laps a week -- I mean we really are working on building heritage. If you build a heritage, you are just locking in future business from other family members, and so that is an investment in the future, and that is not managing just for the short term. But I'm not saying that it's perfect.

Okay. If I could just change gears slightly. I mean obviously, I think you have, Joe, I think it's, what, 51.8 million or so of the senior debt that comes due in 2006?

Yes.

That's right. So, you know, if you recently updated a base case scenario in your investment profile, I think -- I don't have it right in front of me, but you know, if you, you know, accept your EBITDA number and then the ongoing debt reduction, at the end of 2005, I think you imply a total debt to EBITDA ratio of, I think it's, what, roughly 2.3 times or so?

I don't have that number in front of me, but it sounds close.

I think that's about right. Now, you know, as you look to 2006 -- and I know that we're basically two years off -- but I mean, I know that you manage your business for the long run, and you know, have you been talking with your lenders, you know, about kind of what the results need to look like and whether the base case scenario as you've laid it out, like what that would imply from a potential refinancing standpoint? Or whether you, you know, you may have to do some kind of equity component -- I think you've discussed that in the past? Can you just sort of fill us in and sort of where your thoughts are, and you know, just sort of how you sort of foresee the scenario of how this might play out over the next two years?

Well, you know, first of all, Jamie, I don't think there's just one scenario. I think we're looking at a number of different scenarios as to how to refinance the '06 maturities. But, you know, I think it's safe to say that we would like to have more equity. I don't think there is any question about that. Both from the standpoint of, you know, supporting our debt, but also from the standpoint of increasing the float on the quarterly in our stock, which we believe is too low. So you know, we're looking at options to do, that but I think, you know, the overriding objective is, you know, not to have the current shareholders suffer significant dilution. And that's -- you know, that's the overriding objective we've been managing towards. I think in terms of our credit profile, it's improving, and you know, from the discussions that we've had, you know, I don't foresee any issues, if we just want to do a straight-up refinancing, you know, at that point in time, based on what our credit profiles should look like. So that's -- that's something that I think we're pretty confident about.

Okay. I guess the question -- and not to be a pain in the neck here -- is just that, you know, if you're managing the business for the long run, and you know, we allude -- we talked a little bit about the cemetery side of the business -- if by, you know, the end of 2005, you know, you can't realize substantially improved profitability, then, you know, what makes you so sure that the share price by then will necessarily be much higher and that you wouldn't be sort of in the same boat where you are now? And I guess, you know, not to be rude or anything, but that is -- you know, I guess that's sort of what the concern might be, is that, you know, the share price -- I mean, let's say it is not substantially different, you know, then what do current shareholders have to worry about from a refinancing standpoint? I hope that question is not too rude.

Jamie, there are no rude questions. This isn't A-Rod. We don't mind your questions. It's a good one. And from my point of view, you hit the nail on the head. I think what we're working on in operations -- which is where I'm spending my time with our people, on leadership -- should make a difference in the operating results. And I have a confirmed conviction if the operating results are different, the share price will be different. That's what I've been told.

Okay. All right. No, the only thing I wanted to clarify was just simply, you know, when you look at managing for the quote-unquote long run, that you still sort of had 2006 in mind, and I was just attempting to kind of get an idea about when you would expect, you know, these improvements to sort of happen, and I think you -- I think you did a very fair job -- an admiral job of answering that question. So I will let somebody else get on the call, thanks.

Thank you, sir. Ladies and gentlemen, as a reminder, if you do have a question, please press the star followed by the one. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. Our next question is a follow-up question from Bill Burns. Please go ahead with your follow-up question.

Okay. It's about cremation. In the quarter, I think it was 31.8% --

Correct.

-- which was up substantially. In fact, up sequentially from first quarter. You're almost up 100 basis points just sequentially. Are you doing something different to go after that market?

Bill, this is Mel.

Uh-huh.

Clearly, that is a secular trend issue, and we are doing something. We are looking at packaging to address cremation families where they have options that are clearly much more than direct cremations. We need training -- we're working on training, along with the packaging. We probably won't roll this out until sometime toward the end of the year, but absolutely, we're working on it. It is an issue. We understand it. We know what needs to be done, and we're going to get it done.

Okay. Well, Mel --

I do think the significant increase in cremation in the second quarter was possibly an uptick that might not be sustained. It was fairly concentrated. We know where it is, and we were surprised in some cases that these were traditional markets. And so we will wait and see whether that continues to tick up, or whether it ticks down. I would tell you that while it hurt us in the second quarter, it's not something that I'm really worried about in terms of performance in the second half of the year -- or going forward.

Okay. And then also, just the pricing, I think in the first quarter, the average price went down, and this quarter, I think you said it was flat.

Flat, correct.

And how are you addressing that?

We're addressing it by looking at every business, looking at the mix, looking at the arrangers who wait on our families and making the proper adjustments and development in the training. That's under way.

Okay. Thank you all.

And I do see some progress there.

Okay.

Thank you, sir. Management, at this time, this are no further questions. Do you have any further comments?

I appreciate the attendance on the call. We look forward to reporting our progress as we go through the year. Thank you very much.

Ladies and gentlemen, this concludes the Carriage Services second quarter earnings conference call. If you would like to listen to a replay of today's teleconference, please dial 303-590-3000 and enter the access number of 110045 -- excuse me, 4573. Again, that number is 303-590-3000 and enter the access number of 11004573. We appreciate your participation today. You may now disconnect.