Carriage Services Inc (CSV) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services Third Quarter Earnings Conference Call. At this time, all participants are in 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 is Thursday, October 28, 2004. I would now like to turn the conference over to Ken Dennard, Managing Partner, DRG&E. Please, go ahead, sir.

Thank you, Gilbert, and good morning everyone. We appreciate you joining us for Carriage Services’ conference call to review 2004 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 the email distribution list or fax list to receive future Carriage Services releases, or if you’ve experienced any technical difficulties and did not receive your email or faxes yesterday afternoon, please call our offices at DRG&E and relay that information to us. 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. And, additionally, there will be a telephonic instant replay for the next seven days, 24 hours a day, and 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 28, 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 Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of 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-Q’s, could cause the Company’s results in the future to differ materially from 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’s, Form 10-Q’s, and other Carriage Services information and news releases are available at the Company’s website.

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

Thank you, Ken. It’s a pleasure to have you with us on our third quarter call. The third quarter was a good quarter. The EPS of 0.6 cents before special charges was at the top of our guidance range. But there were two factors that I liked even more. As an old credit guy, I get excited when I see our senior debt decline to $216m [$ph] at September 30th, which was our year-end goal. So we actually reached our year-end goal a quarter early. We now expect that senior debt to decline another $4m to $6m, to $110m to $112m by year-end, meaning a 17% reduction in senior debt during the year. I think that’s quite a milestone.

The second thing I liked about the quarter was related to our funeral home operating model. Just a brief history -- we developed this new model late last year, rolled it out, explained it to our field personnel in the last quarter of last year, and made it effective January 1. This funeral home operating model relates to standards that were developed using our best businesses and best practices and substituted for the old budget and control model, which wasn’t working. We do this as an entrepreneurial, local business. And so, we tried to change the operating model. We didn’t try. We did it -- to reflect those characteristics. The operating model based on standards has three major categories of standards -- market share, there are two standards; people, there are three standards; and operating and financial metrics, there are four standards.

In the old days, EBITDA and a budget was really 100% of what we looked at. Now, EBITDA counts for 10% -- just to give you a flavor of the total standards. We then developed incentives, opening up profit sharing according to the standards achieved, so that we aligned the health of the business and made the managing partner more like an owner. This model was intended for our businesses to be not just managed, but to be led in a more entrepreneurial, local environment fashion to grow the business not just to manage the existing business.

We implemented this, as I said, on January 1, 2004. The first six months were really devoted to explaining, getting people thinking differently about what they needed to do and how they do it. We are beginning to see some traction in the third quarter that made a difference in the results in the third quarter, but it’s too early at this point to predict how much difference this will make in our future results. Although, I can tell you that the early signs are very encouraging and the feedback from our field operator is very positive.

With that, I’d like to turn it over to Joe.

Thank you, Mel. Good morning, everyone. As Mel said, we were very pleased with our progress in the third quarter, and this was particularly true given that it’s a quarter that’s traditionally the seasonal low point of our year.

Our earnings of 0.3 cents per share from continuing operations for the third quarter of 2004 were impacted by two significant events during the quarter. One was we decided to change vendors for a new cemetery accounting system, and that resulted in writing off capitalized costs of approximately $500,000 in the quarter. And secondly, we sustained property damage in three of our facilities in Florida during the recent hurricanes this summer, and that resulted in $300,000 of uninsured losses, which we recognized in the quarter.

Together these events reduced earnings from continuing operations for the third quarter of 2004 by 0.3 cents per share. We reported diluted EPS of 0.6 cents per share, which consisted of earnings from continuing operations of 0.3 cents and a gain of approximately $1m, or 0.3 cents per diluted share from the sale of two funeral home businesses and a tract of real estate. I believe if you recall, we talked about these transactions last quarter.

We generated a free cash flow of $1.6m, and together with cash proceeds of $2.9m from sales of these assets enabled us to reduce our senior debt by $5m during the third quarter of 2004. Our senior debt, which excludes the outstanding convertible junior subordinated debentures that are payable to Carriage’s affiliated trust, totaled $116.3m at September 30, 2004, compared to $135.5m at December 31, 2003 -- a reduction of 14.2%.

We had additional borrowing capacity of $15.3m under our unsecured revolving credit facility, and our senior debt to EBITDA ratio declined from 3.44 at year-end 2003 to 3.06 at September 30, 2004. As Mel said, we’re very excited about this improving credit profile of our Company.

On a year-to-date basis, earnings from continuing operations totaled 0.29 cents per diluted share, compared to 0.26 cents per diluted share for the nine months ended September 30, 2003. Net income, which includes the effect of the discontinued operations, totaled 0.21 cents per diluted share, compared to 0.29 cents per diluted share for the nine months ended September 30, 2003. A significant portion of this decrease was attributable to the impairment charge of $3.1m that we recorded in the second quarter of 2004 and we discussed on our conference call last quarter, and that was equal to 0.12 cents per diluted share.

Turning to the funeral operations, as Mel said, we have continued to make progress in the third quarter in executing our new funeral model. Same store funeral revenues increased 1.1%, from $26.1m to $26.4m because our same store average revenue per contract increased 3.7%. While same store funeral contracts decreased 2.5%, from 5,519 to 5,382, the decline was consistent with the 2.3% decrease in the death rate as reported by the Center for Disease Control for the third quarter of 2004. While CDC data does not necessarily match the markets in which we operate, it is an indicator of a national trend which we are subject to. We expect these seasonal variations in the death rate and our strategies to grow market share should impact our longer term results.

Cremation services represented 31% of the number of funeral services performed during the third quarter of 2004, compared to 30.1% in the third quarter of 2003. The average revenue of burial contracts increased 4.8%, that’s $6,549, while average revenue for cremation contracts increased 3.5% to $2,398. So we were very pleased with both the increases in our burial and cremation contract averages.

Our gross profit for the third quarter increased 2.8% compared to the prior-year quarter because our operating cost increases were nominal and we achieved positive operating leverage for the quarter.

On a year-to-date basis, funeral revenues increased 1.9%, and same store revenue increased 2.4%, comprised of a volume decline of 0.1% and an increase in the average revenue per contract of 2.5%.

Funeral gross margin has increased 20 basis points to 25.8%, primarily on the strength of our slightly higher volume in revenues.

Turning to the cemetery operations, we achieved increases in both our at-need and pre-need businesses during the quarter. The number of pre-need contracts written increased 4.7% to 2,080, and the average revenue for pre-need contract increased 3.5% to $2,631, and the average pre-need property life increased 18.5% to $1,828. The number of interments performed decreased 5.1% to 2,228, and the average revenue per interment increased 13.7% to $1,200. A substantial portion of the increased cemetery revenues for the quarter resulted from delivery of the pre-need merchandise and services.

Financial revenues decreased $0.1m for the third quarter compared to the prior year, in part due to lower earnings on perpetual care trust funds. Cemetery gross margins declined by 130 basis points.

Because our product sales niche changed to a higher proportion of merchandise and services, increased sales resulted in a higher provision for bad debts, sales discounts, and property taxes.

On a year-to-date basis, cemetery revenues increased 10.5% and gross margins decreased 290 basis points for similar reasons that impacted the third quarter results.

Now, turning to our outlook for the fourth quarter, we expect revenues to range between $36m and $39m; EBITDA to range between $9 and $11m; and diluted earnings from continuing operations to range between 0.9 and 0.12 cents per share. We confirm our previous estimate for revenues for the full-year 2004 to range between $150m and $154m, and EBITDA to range between $39m and $41m. We have narrowed our estimate for earnings from continuing operations for the full-year to range between 0.38 and 0.41 cents per share, and raised our estimate for free cash flow to range between $16m to $18m. We also raised our estimate for reducing our senior debt. We expect senior debt to range between $110m and $112m at year-end 2004.

The estimate for free cash flow and debt reduction increased and the estimate for full-year earnings decreased based on actual year-to-date results. Mel?

Thank you, Joe. Financial results for the quarter in nine months are remarkably similar to last year, with some incremental improvements, and looking at the numbers, it’s really quite remarkable. [But to beat [ph] the numbers, we are steadily improving the quality of our systems, our processes, our people, and our competitive positions in many of our markets. And, we are completely focused on better execution of the new funeral operating model and are developing a standards-based cemetery operating model that will be implemented January 1, 2005.

Our business is not a month-to-month or quarter-to-quarter business, so we tend to look at year-to-year progress. So far, this has been a reasonably good year and the outlook for continued improvement for the rest of this year and into 2005 is very good.

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. (Caller Instructions). Our first question comes from Bill Burns. Please state your company affiliation followed by your question.

Johnson Rice. Good morning, Mel and Joe. I have a question, Joe. On G&A expense, you talked about compared to third quarter last year -- they were up $204,000 because of Sarbanes-Oxley and higher insurance costs. I wonder if we could do that same comparison sequentially. If I got my number right, in quarter two G&A was like $2,545,000, and then in now quarter three it’s $2,748,000. Sequentially, what was the increase due to?

I think pretty much the same reason, Bill. What you’re seeing during this year is we’re incurring higher consulting fees as we go through the year in preparing for Sarbanes. We’re not an accelerated filer, so we will not have to report until 2005. But we have a pretty substantial effort -- an ongoing effort -- to look at that, as well as we’ve had consulting fees relating to systems projects -- or primarily a cemetery system project, which have impacted us in the last half and will impact us in the last half of this year.

Okay. And then from the cabin [ph] perspective, the property damage in Florida -- where did that flow through the P&L?

That flowed through our funeral costs -- operating costs.

Okay. Just -- okay -- funeral operating costs. Does that have any impact on the same store volumes being down 2.5%?

We obviously believe it impacted some of our pre-need business in Florida. I’m not sure --

I’m sure it was pretty difficult.

No, it didn’t impact our at-need business.

Okay.

We were having funerals, you know, without power and lightning storms. Our people did a wonderful job during the circumstances.

Yes. I would think maybe you even had an advantage to independents in the sense that, you know, if an independent lost his roof, he’s out of business; whereas, you might could move things around.

Well, we don’t have that kind of density, but we got through it and I don’t know of any situation where a family wasn’t served.

Our next question comes from Ted Vagenet [ph]. Please state your company affiliation followed by your question.

Hi, guys. I’m calling from DDJ Capital Management in Boston. I wanted to see real quick if you guys could just review again the volume picture for the quarter and also discuss what your plans are for the deferral of interest payments going forward on your junior debt.

Congratulations on your World Series win.

Thank you very much.

I’m surprised you’re on the call.

Frankly, so am I.

The volume in the third quarter was -- the third quarter is historically our weakest quarter and it’s a little unpredictable. We had a great January this year -- way up from normal, and since then we’ve giving back volumes in some months. But if you look at the nine months, we’re flat. That’s the nature of the business. We don’t think we’re losing market share in those numbers. We have places that are gaining. We have a few places that are losing. But we’re doing a lot of good things in the local markets, especially with this new model, to make sure we grow our businesses, but that’s a long-term enterprise.

As far as the other question--

On the deferral of the distributions -- as you may know, we are deferring the distributions pursuant to our -- the terms of our revolving credit facility, and we will continue to be doing that at least through March of 2006 when the credit facility matures. Beyond that, I don’t think we really have any plans at this point. It will depend on our financing situation at that point.

Okay. Very good. Thanks, guys.

(Caller Instructions). Our next question comes from Jeff Enlew [ph]. Please state your company affiliation followed by your question.

Sure. Zaslov [ph] Associates. What EBITDA is associated with the assets that you sold this quarter? [Indiscernible] EBITDA?

Actually, if you look at the EBITDA from what we’ve sold, it’s almost neutral. Those operations were pretty much flat in terms of EBITDA.

In other words, zero?

In other words, zero.

We got a good mouthful on those.

I guess just in general when we talk about asset sales, what -- how do you go about determining whether an asset should be put up for sale or not?

That’s a good question, and this new operating model that we’ve developed has been very helpful at looking at whether we should stick with a property if it’s underperforming and try to turn it around or dispose of it. It has become a good sort of metrics, not only technically, but also strategically. But generally, the profile of something that we would consider for sale would be smaller, more rural, weak leadership, and a weak, competitive position in that particular market. What does a weak, competitive position mean? It means if you’re not a strong number two and you’re a weak three or below, you probably should look at it. And so, that’s the profile of what we would consider to exit.

Who do you typically--? Oh.

A lot of it relates to the competitive position, but also the local leadership. And it’s just more difficult to get a strong leader, not just a manager, to turn around a property in a smaller property. That shouldn’t be a surprise.

Who are you typically selling to?

We’re selling to the people who have the greatest motivation to pay us the highest price. That would not be an area consolidator, a regional consolidator, or a national consolidator. That would be a local operator in most cases. In some cases -- and this is just what we learned by experience -- the person who would pay the greatest price is the local competitor to that business because they can do their own local consolidation.

Okay. And lastly, are there any more plans for asset sales in the near future?

I don’t know that we can say that. I think we had this operating model and we’re looking at it on a continuous basis. And if we see properties over time that don’t seem to fit strategically and we’re working too hard trying to -- and getting too little, we would consider it. But at this point, I don’t think we have identified.

Thank you.

We have a follow-up question from Bill Burns from Johnson Rice. Please go ahead, sir, with your question.

I was just curious what the balance was on the cited [ph] series B and C senior notes.

Yes. It’s Joe. I have my totals. I was just wondering if you had --

I can look. Off the top of my head, Bill, -- it’s Mel -- I think it’s like $52m on the --

$51.8m and $21.3m.

I missed the 200,000. Will you forgive me, Bill?

Hey. No, no. Given my estimates, you were right on target. Thanks, Mel.

[Indiscernible]. There are no further questions at this time. Please continue.

Thank you very much, everyone, for tuning in on the call, and we look forward to reporting our progress in the future.

Ladies and gentlemen, this concludes the Carriage Services Third Quarter Earnings Conference Call. If you would like to listen to a replay of today’s conference call, please dial (303) 590-3000 and enter a pin number of 11011934. Once again, if you would like to listen to a replay for this conference call, please dial (303) 590-3000 and enter a pin number of 11011934. Thank you for using ATT Teleconferencing. You may now disconnect.