Carriage Services Inc (CSV) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Carriage Services First 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"*"followed by the"0”. As a reminder, this conference is being recorded today Thursday April 28, 2005. I would now like to turn the conference over Ken Dennard, Managing Partner of DRG&E. Please go ahead sir.

Thank you and good morning everyone. We appreciate you joining us today for Carriage Services conference call to review 2005 first quarter results. Before I turn the call over to management, we have the normal house-keeping details to run through. If you’d like to be on the 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 folks in our office. That number is 713-529-6600. Also if you would like to listen to a replay of today's call, it will be available via webcast by going to the www.carrierservices.com and additionally, there is a telephonic instant replay service for the next 7 days, 24 hours a day, and that information how to access that replay is in the press release.

Please note that information reported on this call speaks only as of today April 28, 2005 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 27A of the Securities Act of 1933 as amended and Section 21E 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, 2004 and other SEC filings 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 made 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 new releases are available free on the company's website.

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

Thank you Ken. It's a real pleasure to report the first quarter's results which is in press release I mentioned was one of the best quarters we had in years. [inaudible] made it all the more aggressive for us in the company was that --it was better than last year's first quarter which at that time was one of the best quarter we had in years. I have a very fun job and so the job today have reporting why the results or what they are, but I can tell you is because the lot of hard work by our field operators going back year and half and the result are beginning to show.

However, I would like to remind the audience that this quarter and this is not a quarterly business it's a year-over-year long term business, but I will offer some color on the quarter. Our results are better because the operational execution is improving. We are in a fragmented local business. So the way to improve performance overtime is to have broader and deeper portfolio performance. Every year we have prices doing better, other doing worse and what we saw on the first quarter, was that for the first time in a while, we had much broader and deeper performance both in the Funeral Home portfolio and the Cemetery portfolio than a four. As far as the Funeral Home division is concerned, our operating model which we implemented starting ‘04 and change that will allow our leadership some in location and some in the corporate side. It is continuing to have traction. We have more of our managing partners and our corporate people working on the right things at the local level right way, but we are still in the early innings as far as effective execution needed to grow our business. I think we're doing a more effective job of managing. Now we need to move to the next stage and grow the business. Our corporate organization on the funeral side with our new operating model is supporting much more and leading much more than they were before which before it was more managing your budget. This has made a big difference on how our people are spending their time and I can tell you it is paying dividends.

Our cemetery division is also performing well and we're seeing broad performance and in that division we've been working on moving toward a standard's based model and we'll move to that this year as far as sales in people, which were well along with. I wouldn’t say that we've had any results yet based on this model but I think the results will follow.

A little color on the quarter as far as the funeral division. We were up 1% on same-store funeral contracts compared to last year and I would tell you that last year we were up 3.9% which was an incredibly strong quarter. So, to beat last year is really saying something. However, the 1% improvement is a small quarter-over-quarter improvement and I know a lot of you have been very puzzled about death rates and market share and a lot of things like that are on your mind, not just for Carriage, but the sector. Even though it may look fairly predictable, we wrote up 1%, the way it laid out in the quarter was different than anything I've seen in a while.

Last year we had a strong December in ‘03 and a strong January in ‘04. And then we started getting weak and stayed weak for the rest of the year. This year was just the opposite; we were weak in December ‘04 and weak in January ‘05. How weak? We were down 12% volumes in January ‘05 compared to the year ago.

However February and March were both up 8%, so we wind up the quarter up 1% if you do the math. That’s something that relates to the death rate relates to flu, we have no control over that, what is more encouraging though is how it laid out from the profit point of view.

This year we had strong profit contribution in every month. You didn’t have what I call the yo-yo impact. Every month was solid and we are encouraged by that. Last year we started getting weaker after the first quarter, we hope we will have that relative weakness this year, but that’s the nature of our business, so at the end of the year we will look at how well we did.

I also talked about last year's volume decline in terms of 27 businesses that we had identified that were losing market share and we follow that every quarter, every month actually and so I wanted to report to you on those 27 businesses. We defined material market share is down 30% on the obit count relative to their competitors and we can see individual competitors and where we are losing and where we are gaining.

Those 27 businesses, I have some good news. We had 9 of those 27 had material market share gains, more than 30% in the first quarter. We had 12 of those 27 flats up a little bit and yet they performed much better than that. And then we had six of the 27 that were down materially in the first quarter. Down more than 3% but really only one of those six had to perform as materially, as far as, revenues and EBIDTA. So I would – I’m very encouraged by what we’re doing with this group of underperforming businesses. In fact, the way we look at this, you can’t manage consolidated results so out of those 27, we’ve actually 13 events since the beginning of '04 we have changed ten managers. We are actually – we have changed 13. We’re still seeking three but we have replaced ten. To give you a feel for all of our improvement in our funeral division pretty much came out of the improvement in this group. That means the rest of the portfolio still performed at a very high level. In this group pull themselves up to close to the level of the rest of the portfolio. That’s a good thing. As far as cremation rate, we had an uptick of 200 basis points during the quarter most of that occurred in March and again, it’s the nature of the business. You can have an uptick. It’s concentrated. We don’t expect that 200 basis points to last for the rest of the year. Our averages, however, were up more than 3% both on our burials and cremations and we’re working hard on packaging to improve the averages, especially, on our cremations

The cemetery division had another strong quarter. It was especially strong because of the securities gains and our perpetual care trust funds. However, the operational performance during the quarter, it was actually better than what it looked like, as far as what we reported. And the reason for that and it’s covered in the press release. Last year, we had 358,000 of revenue because of the completion of two previously sold [inaudible] and we had none this year. We also differed 579,000 of free construction revenue in third first quarter twice that of last year. To build inventory for cemeteries and it was primarily concentrated in our largest cemetery in east San Francisco Bay where we have a wonderful opportunity to grow. We could have been selling land, relevant pre-selling [inaudible] but we -- that would be recognizable on the land but that’s not the right thing to do for our business so, we made a decision to forego land sales and build inventory which will be completed later this year, early next and then will become revenue and profit.

Our gross margins in the cemetery group remain high and we think they are sustainable. One of the things you don’t see in the numbers which I find encouraging. We are looking at that new model. When you are looking at a new operating model you had to look at the leadership and some of the strategies. So we’re doing in the cemetery group what we’ve already done in the funeral group and I can tell you that it's a leading to some organizational changes in focus, much more support on sales and operations, the details and I think that leadership and improve support well even may occur cemetery performance overtime even better than yesterday. All of that would not be possible without new systems. We have our new systems in place sometime, I think, close to mid-year this year. So very encouraged about operations for the quarter but still a lot of hard work ahead of us to improve the year-over-year.

Now, I’ll turn it over to Joe.

Thank you Mel. I’m going to go through the financial highlights and then also talk about our outlook for our second quarter. We recorded consolidated revenues of 42 million, EBITDA of 13.2 million and a loss of 3 cents per diluted share for the first quarter of 2005. However, the loss includes cost of 22 cents per diluted share to refinance our senior debt. As we previously reported, we have refinanced our senior debt in January of 2005 by issuing 130 million of 10 year senior notes. In connection with the early payment of our old senior notes, we are obligated to make -- to pay and make old payment of $6 million to the former note holders and in addition, we recorded the charge of $700,000 to write off related unamortized loan costs.

Diluted earnings per share from continuing operations in the current quarter, excluding the"make whole"payment and the charge for loan cost totaled 19 cents per share compared to 16 cents per share for the first quarter of 2004, primarily, because our volumes, averages and margins in the funeral division modestly increased and we recognized preneed trust income in the cemetery division. We generated 600,000 of adjusted free cash flow during the first quarter of 2005 compared to 2.7 million in the first quarter of 2004. Higher capital expenditures and working capital increases primarily increased receivables caused by higher revenues towards the end of the quarter, accounted for the decrease in free cash flow compared to the first quarter of 2004. We do not expect these timing differences to affect our estimate of adjusted free cash flow for the year. Cash in short-term investments totaled $16 million at March 31, 2005 and as of today, we have approximately $18 million of cash and short-term investments.

Turning to our funeral operations, as Mel has pointed out, we experienced weak volumes in January which was carryover from the fourth quarter and volumes improved in February and March due to a later flu season and market share improved in certain markets. Better execution of our new standards based operating model contributed to higher gross margins. Funeral revenues from continuing operations increased 3.4% from 30.8 million to 31.8 million. Same store funeral contracts increased 1% and averaged revenue per contract increased 1.9%. The average, however, was negatively impacted by a 200 basis increase in the cremation rate to 32.8% for the quarter. The average revenue for burial contracts increased 3.3% to $6,694 while the average revenue for cremation contracts increased 3.7% to $2,394.

Our cemetery revenues from continuing operations increased 6.1% from 9.6 million to $10.2 million because we saw more property on our averaged revenue for site increased by almost 15%. The comparisons were even more impressive after considering the two [inaudible] that were completed in the first quarter of 2004 which generated 358,000 revenue, while none were completed in the first quarter of this year. Moreover, we differed preconstruction revenue of 579,000 in the first quarter and as Mel has pointed out, this was almost thrice the amount deferred for the first quarter of 2004. This revenue will be recognized when construction is completed either later this year or early 2006.

Our financial revenues increased approximately $800,000 compared to the first quarter of prior year because we recognized $571,000 of gains on sale of securities and our professional care trust investment portfolio this year, prepared to recognize losses of $235,000 last year. We make so certain securities in our cemetery trust investment portfolio during the remainder of the year and realize investment gains or losses as we continue to diversify our investment portfolio. Cemetery gross profit increased by 23.1% largely because of the higher financial revenue that we recognized.

I am also please to announce that we completed the documentation on our $35 million senior secured revolving credit facility and this replaces our existing unsecured credit facility that is scheduled to mature in 2006. Borrowings under the new credit facility, bear interest at the prime rate or a LIBOR plus 3% and the facility matures in five years and is secured by all personal property and funeral home real property in certain stage. No borrowings are anticipated on the facility during 2005. The connection with a new credit facility we expect to write off and unamortized loan cost of about $700,000 or 2 cents per diluted share in the second quarter of 2005.

Now turning to our outlook, I just want to review briefly some of the assumptions underline our 2005 outlook. Our estimates -- our 2005 estimates or estimates results from continuing operations based on same to store volumes. The outlook excludes the affect to that acquisitions or disposition and early extinguishments of debt. The 2005 outlook is based on some following key assumptions. The upper end of the outlook range assumes funeral same store volumes are flat compared to 2004 and the lower end assumes a 2% decrease. The average revenue per funeral contract is assumed to have increased approximately 2.5%.

We expect no additional borrowings during 2005 and accumulative deferred distributions on the convertible junior subordinated debentures or ties were paid in March 2005 and the distributions are assumed to be paid currently thereafter. We expect that our capital expenditures for the year will be approximately $6 million and we expect to use free cash flow to acquire businesses if and when those are available on acceptable terms. We assume free cash flow is invested in short-term investments and we expect our cash in short-term investments will total approximately $25 million at December 31, 2005.

For the second quarter of 2005, we expect our revenues to range between $36.5 million and $38 million. Our diluted earnings per share to range between 5 cents and 7 cents per share, and our EBITDA to range between $9.1 million and $9.8 million.

Our full year 2005 outlook is unchanged from what we previously reported. We will obviously review our results after the second quarter and if any revisions are warranted at that point, we will make them in connection with our second quarter report. We expect our revenues for the full year to be $151 million to $155 million. Our adjusted net earnings -- diluted earnings per share to be 31cents to 36 cents, adjusted EBITDA, we expect to be 40 million to 41.6 million and adjusted free cash flow will range from $12 million to $13.5 million. We expect our cash and short-term investments will total approximately $25 million at year end 2005 excluding any use of free cash flow for acquisitions. Mel.

Thank you, Joe. It's a real pleasure now to talk about the future little bit. With the press release, we established five year goals. Those have been -- who have been following our company for a while will remember that starting in October 2002, we published five year operating performance and debt reduction goals by a year. We were in defensive mode and reducing debt was the primary goal. We came up, if you look back at what we did we came -- which we updated from time to time, we came up somewhat short on the operating performance goals, but we were reasonably close, but we exceeded the debt reduction goals which allowed us to refinance our debt this past January.

However today, we are very different and I will say a much better company operationally, in leadership wise and systems wise than we were in October 2002. Our existing operations are more predictable and they are gradually improving because of our new operating model with our leadership to execute against high standards.

Now that our balance sheet has strengthened, we can use our free-cash flow and as Joe mentioned to grow by selective acquisition and I wanted to go over what that might look like. In 2005 and 2006 we will get back into the market, but do it very cautiously and very selectively. We want to continue our focus on improving our existing portfolio performance and from that we will continue to build cash as Joe mentioned.

I would expect that we would have cash equal to 36 million to 40 million by December 2006, assuming no acquisitions. We expect to make some acquisitions during '05 and '06, but it will be modest.

We’re just getting a word out. I’ve been personally talking to people about expectations and family issues and so on. I think it’s going to take a little while for consolidation to pickup. When that happens, I hope we have the relationships with the right operators, so that we’re the chosen solution.

We’ll use our cash; we will do it smartly, using very tough criteria. We want to make sure the operations we buy, fit with our new operating model and can be a win-win, from the seller and the buyer. I would think that most of the acquisitions that we would make will occur in '07, '08 and '09, toward the backend of our five year goal timeframe. We will accelerate the acquisition pace if an when the momentum picks up in the quantity and quality of acquisitions warrant

As far as our five year goals, this is what we’re looking to achieve and we think this is achievable. 195 million of total revenue for the company by the end of '09 would be an annualized amount. About 170 of that would be from existing operations and 25 million of that would be acquired. We will have 55 million of EBIDTA without any additional leverage. The 55 million would include 10 million of acquired EBIDTA, 45 million from existing operations. We would have 70 cents per share of earnings without any additional equity, compared to about half of that this year. And we will have 20 million if free cash flow after we start paying cash taxes in '07 or '08, we’d have 20 million of free cash flow after paying cash taxes, or if you look at it today that’s a little over $1 a share.

During this time because we wouldn’t issue any more debt, we would improve our credit profile by growing revenues and EBIDTA in free cash flow, into increasing our leverage ratios. We don't know how to model the acquisitions year-by-year and we don’t intend to try and do that. We could do that more with paying them debt, we can't do that yet on the acquisitions and that was the problem I think that lot of companies got into in the 90’s, so we don’t intend to go there. But we do think the five year goals are reasonable, the dollar amount of acquisitions would probably amount to about 40% of what we spent in 1998 alone except this 40% that would be spent over five years, so we think it's doable. We’re in no hurry, and we’re going to be smart and do what’s right for the shareholders. 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"*"followed by the"1"on your pushbutton phone. If you would like to decline from the calling process, press the"*"followed by the"2". You will hear a three tone prompt acknowledging your selection. Please ask one question and one follow up and re-queue for additional questions. If you’re using a speaker equipment, you will need to lift the handset [before] broadcasting the numbers. One moment please, for the first question. Our first question comes from Bill Burns with Johnson Rice. Please go ahead sir.

Good morning Mel and Joe.

Good morning.

Looking at cemetery revenue, I see it’s up 6.1%. Have we not had security gains? Any indication of what that might have been?

Well the security gains were about 500 and -- a little over $500,000, Bill so --

Okay, well that answers that.

I’ve not done the math on that.

No, not. Actually I can do that.

Okay.

Then second, follow-up question is looking at average revenue for preneed contract written and the average interment sites sold. They were up double digits, looks like average revenue per preneed funeral contract increased 10.2% and average interment sites sold was up like 14.7%. [Provide a little] information about -- those were pretty significant increases, what’s happening there?

Yeah we had -- I had the same question Bill. And --

Well it's okay and it’s just good to see something going in the positive direction now.

Yeah and, I mean it is and we are doing a better job, pricing our property and our products. No question about that. Well, also we had a decline in some of the numbers there and the reason for that is we had one operation, it's a fairly significant operation, it's actually a management contract. I won’t mention the city, where the city changed the rules on us a little bit and took away burials which were at a higher average and went to cremations. So that actually had a significant impact because of our smaller cemetery operations compared to the funeral it maybe increases in some of the averages look a little better because you weren’t comparing apples-to-apples. Took away some low priced interments, replacing with cremations with we are not even handling. That accounts for some of that but I think we're just doing a better job and execution place-by-place.

Sounds good Mel. Thanks.

You bet.

Thank you. Our next question comes from Mike Scarangella from Merrill Lynch. Please go ahead.

Hey guys. Good morning. Nice quarter.

Good morning. Thank you, Mike.

I had question about the acquisition plan over the next couple of years, you know, you've talked about being discipline and looking for acquisitions at reasonable multiples and you talked about also building cash until you can find them. Is there some guideline around how long you will build cash in other words just if its 18 months from now and you haven't found much and you have a pretty big cash balance. Do you look to redeploy that? How do you think about that over the next couple of years?

The -- it's a good question. And you know they are working so hard on defense and we've been in the trances so long. It's good to come out and look at the future but I will tell you that we've done no looking. I have heard some of the other companies report that they have been looking and talking and that price expectations were too high. My view on that is a little different. We haven’t looked all the while. We will tell you that in the last month, I have [traveled] around a little bit and I am not doing it through anybody I am talking to the independent operators myself. Family issues were still cropping up. They have been cropping up five years, these are not going to way. It’s a big industry. And I think given our size the amount of acquisitions we want to make over five years is not unreasonable and you know I talked in annual report about our stock price and over the last four years our stock price has gone up about the amount -- the debt has gone down per share, close correlation. Looking now, we want to be able to grow organically and we are working on it through our model but we also want take what we have learnt and make some acquisitions in this turn around get it right. I think that's best way for us to grow shareholder value and improved by credit profile at the same time and I do not want to get into what you if you can do it, what happens 18 months for now because I, you know, you get to know me. I am convinced that we can do it. I can't tell you of the timing.

Okay. Fair enough. Let me just ask you one question about cremation that kind of maybe take about when I saw the cremation rate up a little more than expected. I know you are going to focus on you know more focus cremation packages and training to get that revenue per cremation up. Can you just update us on how that's going?

Sure. Well, we have packages out there that we developed and where we have them are doing well. We haven’t rolled them out broadly and that’s to come but I can tell you, take a big market in California where we testing it for the last few months. And the operator where it has been long time, well known operator in California, is [raising] about it and he actually joined our company about year and half ago and he said I will head this challenge in California for 20 years and for the first time I have got a tool work with that the employees like and he is present in the families really love. So, we have seen it like a big difference in that particular business and we're hoping that we can roll it out and do a lot of training with our people so that it's effectively presented. But we think there is upside there and we're working on it. You know, its funny, the cremation rate picked up 200 basis points. As I mentioned most of that was in March.

Okay.

So its, you know, its going to go up but we don't think its going to stay up that much this year.

Okay and just one clean up item for Joe. Joe, on the free cash flow, you said the timing differences accounted for the lower than expected free cash. Do you expect that to reverse itself fully in the second quarter or you think that kind of reverses throughout the remainder of the year?

That's a little hard to say at this point, Mike, because, you know, we don’t know how the revenues will work for this quarter, current quarter yes, but I'd certainly think by the end of the year we're very comfortable with our year estimate of free cash flow. The reason we don't make quarterly estimates of free cash flow is exactly this reason. It tends to be volatile from quarter-to-quarter. But I think we are very comfortable with the estimate for the year.

Mike, just a little color on that, you know, I was concerned when I saw that because I am cash flow guy, but when I started looking at the monthly layout last year versus this year, it was interesting because the last two weeks of '03 and all of December '03 and all of January '04, huge revenue, I mean it was unbelievable. Now, all of that rolled off in February and March because our days are outstanding on the funeral side is about 26 days. This year was just the opposite. Very weak in December and January and all the revenue showed up in -- I mean not all of revenues but a big increase in February and March. So, a lot of that increased revenue won't turn into cash until the second quarter.

Yeah, that’s what it sounds like.

And I think, Joe already mentioned that our cash is up $2 million since the end of the quarter which is less than a month.

Great. Okay. Thanks for the call guys.

You bet.

Thank you. If there are any additional questions please press the"*"followed by the"1"at this time. As a reminder, if you are using speaker equipment you will need to lift the handset before pressing the numbers. We have a question from Jeff Stroh (phonetic) with Oaktree Capital Management. Please go ahead.

Yeah, I have a really quick question regarding the 27 businesses that were down, I guess, my understanding is those 27 businesses should be down 3% market share. Is that a year-over-year or I am misunderstanding, what that is exactly?

Mel Payne Yeah that’s what we track every business, every month and we have a data bank of obit comparisons in every market by competitor going back five and 10 years. We have this new operating model and so it's one of our standards that a business needs to be not losing their obit comparison and we have statistically define what's relevant. In it's 3% in any one year or a 1% two straight years if you decline or if you go up, that means you are growing. Now that’s just sort of our internal definition and you have to look at it over a period of years to really know, but last year we did suffer some market share declines according to those definitions in 27 businesses. And so we have been tracking those 27 businesses for the first quarter comparing the first quarter to all of last year and while one quarter is just a quarter. We’re encouraged by what we saw because we’ve been making some changes in the businesses out there and continue to work on that. So, out of the 27 we had a lot of good performance, in 9 of those we had outstanding performance because the market share was up. The revenue and EBIDTA performance was way up. Twelve of those were flat on market share but up on performance, as far as, revenues and EBIDTA and only six of those had a material decline and pull that group down, but not much and most of that was concentrated in one business. So we track it.

Okay, and then I guess, following that line of thought, the last call you mentioned that out of those 27 businesses, there are 15 that you try to fit majority, which is something like 1.3 or some million dollar decrease in EBIDTA.

Yeah.

Out of those 15 were -- so for this month you said 9 had really strong performance, 12 of --

Mel Payne That was that of the 27. Out of the 13 we got eight of these 15 to gain more than 30% in the quarter.

Okay, so eight of those nine --

Yeah, out of the 9 [inaudible]

Strong performance [was approximately] 15.

That’s right,

Okay.

We only have 3 of the 15 that lost more than 30% in the quarter and then 4 were flat. But that group of 15, if you look at the revenue and EBIDTA performances, accounted for most of the total portfolio improvement.

Okay.

That’s a good thing.

So then you don’t see any -- I guess you said 8 performed well, 3 went down, and 4 were flat. So, those other 7 you think overtime should get it?

Yeah of the 3 that went down, one of them accounted for 90% of the underperformance. So -- I mean you got to define, you know what the issues are, and you work on them.

Okay.

But I am encouraged by this group, because as a total group and looking at the -- I look at the bill level EBITDA margins in funerals without the accounting in the overhead allocations and if you look at this group, EBITDA margin came up 350 to 400 basis points close to the total portfolio performance which is high.

Okay great, that was my only question.

Okay.

Thank you sir. Gentlemen at this time we have no additional questions. Do you have any closing remarks?

Thank you for your support and your interest in our company. We’re delighted to report on a good first quarter and realize that we have to keep working to make sure we some other ones. So we look forward to continuing to report our progress during the year. Thank you very much.

Ladies and gentlemen this concludes the Carriage Services First Quarter Earnings Conference Call. If you would like to listen to your replay of today’s conference please dial 303-590-3000 and enter access number 11028652. Once again if you would like to listen to your replay of today’s conference, please dial 303-590-3000 and enter access number 11028652. You may now disconnect. Thank you for using ACT teleconferencing.