Carriage Services Inc (CSV) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services second quarter earnings conference call. [OPERATOR INSTRUCTIONS]. Is a reminder, this conference is being recorded Thursday, August 11, 2005. At this time I'd like to turn the conference over to Miss Lisa Elliott, Senior Vice President of DRG&E. Please go ahead.

Thank you, Matt, and good morning, everyone. We appreciate you joining us today for Carriage Services conference call to review 2005 second quarter results. Before I turn the call over to management, I have a few items to go over. If you'd to be on the e-mail distribution or fax list with future Carriage Services releases or you had a technical problem and didn't receive yours yesterday afternoon please call our offices at DRG&E and we'll be glad to help you. That number is 713-529-6600.

Also if you'd like to listen a replay of today's call it will be available via webcast by going to the company's website at www.carriageservices.com. Additionally, in a few hours there will be a telephonic instant replay made available for the next seven days. The replay access number and code are in the earnings release.

Please note that information reported on this call speaks only as of today, August 11, 2005 and therefore you're advised that time sensitive information may no longer be accurate at 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 21E in the Securities Act of 1934 as amended. These statements are based on 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 10-K for the year ended December 31, 2004 and in subsequent SEC filings, could cause the Company's results in the future to differ materially from the forward-looking statements made today. And other document or oral presentations made by or on behalf of the Company. a Copy of the company's Form 10-K, Form 10-Q's and other information and news releases are available on the company's website.

Now with me today is Mel Paine, Carriage Service's Chairman and Chief Executive Officer, and Joe Saporito, the Chief Financial Officer. Now I'd like to turn the call over to Mel.

It's a pleasure to report again our second quarter results. I was very pleased with our operating results in the second quarter, primarily the results in the improvement and results were a function of our funeral home division. Where our standards model is beginning to get more and more traction creating consistency from one quarter -- not from quarter, from one month to the next. Regardless of whether calls are up or down. We're seeing a broader performance, a deeper performance throughout our portfolio.

The other thing that we are looking at and have been looking at since the end of last year is market share. Our standards model focuses on market share in each location as well as leadership and people and operating and financial metrics. But I've been reporting on 27 businesses, that at the end of last year appeared to be losing market share according to our obit reporting methodology.

I know I will get a question on this, so I'll go ahead and answer it in advance. The 27 businesses that we've been following since the end of last year had an outstanding first six months. And I won't report on just the quarter, because we don't look at it on a quarterly basis. Market share as year-over-year long-term trend type of thing that you have to follow by location, by competitor. But for the first six months, our 2005 year-to-date funeral contracts in these 27 businesses were up 3.1% versus last year.

When you look at the 27, we have looked at a 2% threshold the way we count it of market share loss. And we had 7 up, 13 flat, and 7 down. Now, what I need to explain is we try to separate out higher death rates or lower death rates from market share, and there's a way we do that that is -- it's an educated guess but one with a lot of data and we think it's pretty accurate over time. So we're pleased with the fact that our market share is either up or flat in 20 of the 27 businesses.

The revenue for these 27 businesses were up a $1.046 million, or 6% versus last year. So our volumes were up 3%, our revenues up 6% in this group. The EBITDA, and this is the good part -- was up a $1.116 million more than our revenue, or so our margins are going up 400 basis points, so EBITDA was up 19% versus the prior year, and of the 27 businesses we had 17 up materially on EBITDA. This is fill level EBITDA without any accounting or over head allocation. We had five that were flat and we had five that were down.

So we think that's a very good performance both from a market share and an operating point of view and it even looks better when you consider that of the five that were down materially, on EBITDA, there were really two that accounted for 84% of the amount that this group was down. So we know where to focus our attention, and that's where we're putting it. While we're tracking market share quarterly, I want to comment on my earlier perspective that this is really a long-term year-over-year trend thing where you look at it by market by competitor.

What we've learned and we have 10 years of data on each business that we look at it at least quarterly, and we have them on the watch group and we look at monthly, but monthly and quarterly can mean nothing. We look for events. What happened in this market at that business to change the trend?

Typically there are three reasons: A new competitor, a brand new competitor with new ownership in the market, or a new location from an existing owner. Second, an ownership or leadership change of an existing competitor that might be stronger or in some cases weaker. We like that better. And third, something happened in our own business, a change in leadership for the better or worse, or a change in the support or maybe a former owner dies or moves out of the market so we lose that support.

Those are the main things that create a sudden shift in obit trends and market share trends. We track it all the time. We believe we're making market share progress portfolio-wide. We're doing that by focusing on the leadership at the locations supporting them, getting more entrepreneurial people and better people serving our families and more involved in our communities.

We will continue to report on market share over time. These 27 businesses I'm sure by the end of the year, there'll be some changes there. We hope our progress holds up. And we'll have another group next year. It's just something you continually look at and adjust.

Our cemetary performance for the quarter was down. But it's just a quarter. Our performance in our cemetary group has been outstanding for years. And very consistent. So I don't think this is any indicator that our cemetary performance will continue to be weak.

We have made some changes in the organizational structure and in some of the leadership. We've also moved to a standards model in sales. We don't know if that's affecting in the short term some pre-need sales, but we're not concerned about it. We think at the end of the day, the changes we're making will take the cemetary group to a higher level of performance and less concentrated performance amongst the portfolio.

The accounting change, I like to comment on that. I did in the press release but I'd like to comment a little bit more on the call. Having been here in the CEO spot since inception, I've noticed -- and I'm not an accountant -- that we've moved from expensing pre-need selling -- we've moved from a liberal GAAP accounting for revenue and expenses, say five years ago, prior to SAB 101. This was during the go-go period when our EPS was the highest.

We've moved now over the last five years in this most recent change in pre-need selling costs is a fairly significant impact on EPS to a very conservative revenue and expense accounting method. Interestingly, when we had the maximum EPS, we had the most negative free cash flow. Now that we've had this new accounting change, our GAAP EPS outlook for 05 would be less than 40% of our free cash flow, recurring free cash flow. We happen to like this because that's how we manage the company.

We don't manage the company according to the EPS impact. We do manage the company to create maximum recurring free cash flow while still making the investments in better leadership and people, systems and facilities to grow our local businesses over time. We think that's the way to create shareholder value in a long-term business.

And finally I'd like to comment on our cash investments, which increased materially in the second quarter to $21 million. We had a weak free cash flow in the first quarter but it was because, if you were listening back then, our performance was really strong at the end of the quarter, especially in the funeral division, which built receivables which rolled off during the second quarter. So we had a big hit, increase to cash.

Our goal was to get to $25 million cash by the end of the year. I don't see any problem in achieving that. And we want to invest this cash over time in very smart selective acquisitions. And I'd like simply to comment -- because I know I'll get questioned about it -- about the acquisition activity. I've been personally involved in stirring the water. I will be leading the acquisition effort for the Company, and we are beginning to stir up a few small transactions, but we're in no hurry.

We're working on our processes, our criteria, for acquisitions. And as I mentioned before,, they will be intelligent, and they will be selective. What I won't do -- and I want to say this publicly -- is try to get into forecasting the amount of acquisitions by quarter, by year. What those acquisitions will mean in terms of future performance.

We will report quarterly the amount of acquisitions that we made in that quarter, just like we do dispositions. We will not say at that time where it is, what the forecast performance will be or the impact on EPS or free cash flow. We'll simply report that, and you'll be able to see that over time because it'll be separated out from our same-store operations. We think that's the best way to go forward, continuing to focus on our operations, making smart acquisitions, and not getting caught up in the hype of what we're going to do. We'd just rather do it and then report on it.

We're very confident that we can invest our cash in recurring free cash flow from operations in smart acquisitions over the next five years. We think the next five years will be a good time for our sector. We think we're in a unique position with size for acquisitions to make material difference in our free cash flow and with our EPS as well. With that I'd like to turn it over to Joe.

Thank you, Mel, and good morning, everyone. I'm going to go through our financial results and our outlook for the third quarter and 2005. We reported revenues of $38 million, EBITDA of $8.1 million, and diluted earnings of $0.01 per share including special charges of the accounting change. Excluding the effect of special charges of the accounting change diluted EPS was $0.06 per share, which was in line with our previous outlook.

Our revenues were higher, and our field expenses were managed to our expectations, and as Mel said, our standards- based funeral operating model continues to have a positive impact on our operating results particularly average revenue per contract, operating costs and gross margins. Adjusted free cash flow generated in the quarter totaled $5.3 million, compared to $6 million in the second quarter of 2004 and our cash and short-term investments increased by $5.2 million to $21.2 million at June 30.

Our goal this year is to build our cash and short-term investments to $25 million by year end 2005, and we're making excellent progress. Special items recorded in the second quarter of 2005 consisted of a $600,000 loss on the sale of an undeveloped cemetary property and a $200,000 charge to write off the unamortized loan cost relating to the refinancing of the Company's bank credit facility. These special items diluted earnings by $0.03 per share. Special items in the second quarter of 2004 consisted primarily of after-tax gains from sales of assets that increased diluted earnings by $0.03 per share.

General and administrative expenses increased $455,000 compared to the second quarter of 2004, primarily because of professional fees and costs related to our effort to comply with the internal control reporting requirements of Sarbanes-Oxley and the related costs of upgrading our systems and processes. As we previously discussed, such costs are expected to result in higher general administrative expenses during the remainder of 2005, and should decrease somewhat thereafter.

Interest expense was approximately $300,000 higher than the prior year quarter because our outstanding senior debt increased in connection with our debt refinancing and interest income increased by $100,000 because we invested our excess funds from the refinancing and free cash flow in short-term investments that are yielding slightly less than 3%.

On June 30, 2005, the company changed its method of accounting for deferred obtaining costs, which are pre-need selling costs incurred for the origination of prearranged funeral and service and merchandise sales contracts. Pre-need funerals and cemetary contracts enable an individual to establish in advance the type of funeral service to be performed, the merchandise to be used, and the costs at prevailing prices.

Pre-need contracts permit individuals to eliminate the emotional and financial burden on their families of arranging funeral services and enable Carriage to build future market share. Approximately 20% of our funeral revenues and 58% of our cemetary revenues are generated from pre-need contracts. In our cemetary segment, pre-need sales are a primarily strategy to grow our market share and heritage. Each of our cemetary locations conducts an active pre-need program.

In our funeral segment, pre-need sales programs complement our primary service strategies to grow market share. We customize these programs to local market and competitive environment. We believe this approach balances the current up front costs and loss of future pricing power with the benefit of building future market share.

Prior to the accounting change, commissions and other costs that relate to the origination of prearranged funeral and cemetary service and merchandise sales contracts were deferred and amortized with the objective of recognizing the selling costs in the same period that the related revenue is recognized. Under this prior accounting method commissions and other direct costs, which are current obligations that we pay and use operating cash flow, were not recognized currently in the income statement.

We believe it is now preferable to expense the current obligation for these commissions and other costs rather than to defer these costs. We also believe that new accounting method will improve the comparability of our reported results to the other death care companies in our sector. We applied this change in accounting principal effective January 1, 2005 and we recorded an after-tax charge of $22.8 million to write off the balance of the deferred attaining costs.

The accounting change reduced our EBITDA by $1.2 million and diluted earnings by$0.02 per share for the second quarter of 2005 and $4.8 million and $0.10 per share for the full year. There was no impact on our cash flow. Our press release provides a more detailed summary of the effect of the accounting change.

Turning to our funeral operations, we were pleased with the results in our funeral division because we were able to increase revenues in line with our expectations and improve our management of costs resulting in a 200 basis-point increase in our funeral gross margin. The accounting change had only a nominal impact of 10 basis points on our gross margin.

The second quarter funeral revenues from continued operations increased 2.7% from $27.7 million to $28.4 million. Same store funeral contracts declined 1% from 5,570 to 5,512. Same store average revenue per contract increased 2.9% to $5,055. Our average revenue for burial contracts increased 4%, to $6804, while the average revenue for cremation contracts increased 1.6% to $2,442. We experienced a 70-basis point increase in the cremation rate to 32.5%.

On a year-to-date basis funeral revenues from continued operations increased 3.1%. Same store revenue increased 2.4%, comprised of a slight volume increase of 0.1%, and an increase in the average per contract of 2.3%. Funeral gross margins increased from 27.1% to 28.4% on the strength of higher revenues and disciplined expense management, which we believe is related to our best practice standards.

Cemetary revenues from continuing operations totaled $9.6 million, the same as prior year quarter. The number of interments performed decreased 7.2% but at-need property revenues remained flat because the volume decline was offset by an increase in the average revenue by at need determined. Sales of a few large private estates and family mausoleums during the current year quarter significantly increased the average value of our pre-need contract and average determent sales.

Revenue of $900,000 from advanced sales of mausoleums will be recognized when construction is completed either later this year or early in 2006. We completed mausoleums in the second quarter of 2004, which generated $300,000 of revenue, while none were completed in the second quarter of this year. Financial revenues increased $100,000 compared to the second quarter of the prior year. Cemetary gross profits decreased $600,000 or 29.5%, substantially all of which is attributable to the accounting change. On a year-to-date basis cemetary gross profit is decreased 14.7%, again primarily because of the accounting change.

Turning to our updated outlook, we updated our outlook this quarter to reflect both better-than-expected operating results and a change in the accounting principal previously discussed. The accounting change has the effect of reducing our prior estimates of EBITDA and net earnings for the year, and we revised upward our expected operating results.

For the third quarter of 2005, we expect revenues to raining between 35 and $37 million, net earnings per diluted share to be $0.01 to $0.02 per share and EBITDA to range between 7.5 and $7.9 million. For the year 2005, our revenue outlook is now 153 to $157 million, our net earnings per diluted share will range between $0.24 and $0.28, and our EBITDA will range between $35.8 million and $37.3 million.

Our press release includes a table which reconciles the current estimates to those previously reported for the year and breaks them down between change for operating results and the change for the accounting, -- the update for the accounting change. Our adjusted free cash flow for 2005 is expected to be 11.6 to $13.1 million.

Mel.

Thank you, Joe. I would like to mention one positive thing about this accounting change. It didn't affect our free cash flow but it will affect our free cash flow in the future.

And the reason is while we have a NOL now and are not paying federal income taxes, cash taxes, this will extend our NOL by fairly significant amount. And push out the year in which we pay cash taxes probably to 2008. We're going to do some more work on that to try to fine tune it but we ought to fix up 5 or $6 million in additional pretax free cash flow over the next few years which we'll invest smartly. 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. [OPERATOR INSTRUCTIONS]. Our first question comes from James Clement. Please state your company name followed by your question.

It's Sidoti & Company Good morning, guys.

Good morning.

Morning, Mel you guys showed an impressive funeral gross margin increase. I'm wondering from your perspective, how much of that is due to better cost discipline, and how much of that is due to perhaps just an increase in the revenue per funeral?

Well, we're definitely showing some cost discipline. One of the -- as I talked about the standards, we have four operating and financial metric standards. The biggest cost we have in our company and in our industry is people. So we're focusing on better people, better trained, better organized and we have the system support that we've implemented to let our managers better schedule funerals over time and things like that, staffing levels.

We've eliminated some administrative staff positions because our systems that have been rolled out are very user-friendly and we've been able to get some efficiencies. So it's not all revenues. It's definitely cost discipline, especially on the people. And what I'm seeing, Jamie, that's very encouraging, is that it's more consistent month after month regardless of the call levels and the revenue levels. I can see in the businesses, more broadly than in the past, that the standards are making a difference in terms of cost management.

If I could ask just the follow-up question, you alluded to the systems and it sounds like you obviously saw a SG&A increase this quarter. You said primarily due to Sarbanes-Oxley compliance and that sort of thing. Looking out to next year or beyond, the incremental expense that you're absorbing this year, you said it probably should decline slightly next year. What kind of magnitude are we talking about? Do you know, Joe?

Yes. I think in our previous outlook, we had talked about $0.03 per share is being the impact and I think we still believe that's good number. I mean, all those costs won't go away, Jamie but we think to the tune of $0.03 is probably a realistic number.

Declining about $0.03 a share.

Declining $0.03 a share from what we see this year.

One last quick question. With the accounting change that you adopted, is there any meaningful seasonality to the sales seasons of pre-need selling, like in other words, during the flu season, are you absorbing more pre-need sales costs or is it pretty much constant throughout the year?

There is some seasonality. The summer is slower. You know, the fall and the spring, the winter season is a little higher. So we do see some seasonality in our business. Holidays and things like that can impact it. But typically -- and I don't know the range of seasonality, because I haven't really looked at that, but I know it's lower in the summer.

Okay. All right. Thank you very much.

Thank you, sir. And our next question comes from Mike Scarangella. Please state your company name, followed by your question.

Hi, it's Mike Scarangella from Merrill Lynch. Good morning, guys. Mel, I'm not sure if this is a fair question, but in terms of funeral volumes you guys were down 1% which I know is I think consistent with your guidance. Some of your public peers were up kind of kind of in the 1.5 to 2.5% range. Any color why you might be a little softer than they were this quarter?

I can tell you that we're 1% of the national volumes.

Yes.

Our portfolio is very concentrated in certain areas. We don't fit their profile where their locations are. I can't speak for them, but if you went back and looked at the first quarter, we probably had a better performance than they did. And you have to look at this on a year-over-year over year-over-year over-year basis. I'm not concern about it. I don't look at the national statistics, I look at every market.

And in general you're happy with the volume growth in your market.

Yes.

Okay. That's fair enough.

The last half of last year was weak, especially the fourth quarter. So I don't know what will happen the last half of the year. But we're flat through the first six months. So we're looking hopefully to be flat or better for the whole year.

Okay. That's great. And Mel, I just want to check back with you on the topic of dividends and share buybacks. Some of your peers have been active there and you've not had much interest of that in the past. Can you just give us an update on where you stand.

Absolutely, Mike. That's a good question. Our profile, our capitalization profile is completely different than the other companies. They have a lot more shares, a lot more equity capitalization, and I think what they're doing especially Service Corp and Stewart is absolutely the right strategy for them. They have a good balance sheet. They have free cash flow and they have a lot of shares. So it doesn't make any sense for them to be buying mom and pop operations because it won't make a difference because they've got so many shares.

What will make a difference is for them to pay dividends and to buy-back stock over the next while and I think that's their stated strategy. Ours is different. We didn't issue a lot of equity. We were more leveraged. We have all that now put to bed. Our balance sheet is strong. It's long-term, low cost and we have considerable free cash flow per share.

So for us to make acquisitions, smartly in areas where we're already strong, we think is of the best strategy for our shareholders and our bond holders because it will delever the company over time because we'll be buying EBITDA and free cash flow without incurring more debt. We think this is the right strategy for us. We don't have any intention of buying back any stock. And or paying any dividends.

Great, thank you. Looking at free cash flow, I just want to gauge your comfort on meeting your guidance of 11.6 to 13.1. You did 5.3 in the quarter, and if I remember, Q1 was fairly negligible. That kind of implies that the second half of the year needs to be a little stronger. Are you comfortable with that?

Yeah, I'm comfortable with that.

We're about $5.9 million at the six month, Mark, so we need to basically replicate that in the second half and I think we're pretty comfortable with that.

I notice the EBITDA for the third quarter is a little lighter than the second. Is there a a reason for that? Or is there just some conservativism baked in there?

Our third-quarter is always our weak quarter. I don't know about the other companies. But it's always been that way, and it's going to continue to be that way and there's no concern about it.

Great. And the last one for you Joe. The leverage stat that you have in your press release. I'm just wondering, the LTM EBITDA that's based off of, is that all pro forma for the new accounting change, is that a mix of both, how does that work? No, it's all been pro forma for the accounting change. The LTM was adjusted back to include the accounting change. Wouldn't -- because I think you were about 3.5 times last quarter. Wouldn't we expect that to go up post the accounting change?

No, well, if -- it should have gone up slightly. But, no, I think, you know, as I said it's been adjusted for the accounting change so --

I mean, maybe the accounting change just modest enough --

Well, and I think the other impact that -- the other impact that you might have to take a look at is the cash balances which also play into that because we're doing this on a net debt basis.

Okay.

Cash balances also went up.

Okay. That could be it. All right, guys, thank you very much.

Just to comment, Mike, on some of your questions.

Sure.

-- the accounting change hit our EPS, and we're saying it's going to be about a $0.10 a year impact which is much greater than the other companies. That doesn't mean we're spending a lot more on pre-need than the other companies. In fact, I don't think we are. I think Stewart is a much more aggressive for the size of company. I'm not sure where SEI is coming out. I know there's been a lot of changes.

But the reason the impact is so great for us is that we have such a low share count, which the other side of that coin is the free cash flow doesn't change. If anything, we're going to make sure that where we spend our pre-need dollars especially on the funeral side, we're getting the bang for the buck. It really focuses your attention on intelligent capital allocation and smart strategies. So we don't like the EPS impact, but from a shareholder point of view, we're looking at a cash flow business.

We're real happy with what we're doing and from a bond holder point of view as we've talked to the bond holders over time. They take the EBITDA, they ask us what the deferred obtaining costs are, they've subtracted it, now they won't have to do that any more.

That's great, Mel. Take care guys.

You bet.

Thank you, sir. Our next question comes from Tom Bacon. Please state your company name, followed by your question.

It's Tom Bacon, from Lehman Brothers.

Hi, Tom.

Hi, how are you, Mel?

Good.

I was just wondering if you could maybe expand a little bit on your acquisition strategy and what type of properties are you looking for in terms of services that they perform or funerals versus funeral homes versus cemetaries. What sort of range do you think you have to pay?

Yep. The first thing we're doing is looking where we already are. The so-called tuck-ins, or next market over if they're pretty close to where we are and we have strong management. That is that's the first place we're looking, and we have a little activity going there.

The second-place we're looking is to go where we are in a region that has strong demographics. And we are very big in northern California between San Francisco and San Jose. There's a lot of growth out there. We have great franchises, a great reputation, and while California gets a lot of bad press, we would like to grow there. Those are some of our biggest and best franchises. The various entry or greater out there, the demographics are more positive than we see in other parts of the country. So that's a real area we'd like to grow.

We'd like to grow in the suburban markets of fairly significant cities. And we already are in suburban markets primarily, 70% of our places are in suburban markets of significant cities. So we're looking there. We have, you know, those cities identified. I wouldn't say that we have a lot of activity there yet, but we know that it is -- it is there over time.

And then lastly, we would look at getting into a new market, but it would have to be a significant franchise foothold. Fairly large. As far as the profile of where we're looking at, we are putting in our cemetary systems this year. We already have our funeral systems in. It's a great system. We can integrate very fast. So we're looking at funeral homes first. We would look at cemetaries later but not right now.

The size, we want -- our sweet spot on funeral homes is 3 to 400 -- 300 funerals a year out of one facility. And we're going to be looking at that sweet spot. If you look at a cluster of businesses that are under one ownership, they're going to have to have some of those businesses like that in there or we won't do it.

What we don't do is go to rural markets and buy smaller places. We've been there and done that and that's what we've been selling off over the last five years so we'll be going to bigger places out of one piece of real estate that allows us to hire, if we need to hire and very often we might, first class, more entrepreneurial managers with leadership skills, not just serving skills and some -- some risk-taking and competitive spirit about them. That's what we're looking for.

We're going to be tough, selective, and I'm not saying this is going to take off tomorrow but I see it happening over the next five years. Our total five-year plan which we put out, I think earlier this year, maybe the last quarter, is to acquire about $25 million of revenue over the next five years with most of that being on the back end. We would acquire about $10 million of EBITDA, and at end of five years we'd have $195 million, $200 million in revenue, and about $20 million in free cash flow after taxes and right now we're not paying any. Which using today's share count would be over $1 a share. We still feel very good about those goals.

Now, it's hard to model. We're not going to try. And you I can tell you that what will probably happen won't be that, but we're optimistic that whatever happens could be better than that. But we don't want to put something out there as a goal that we can't do. Hope that helps.

Just out of -- I mean, you said in some of the markets one of the things that you see in terms of I guess a negative impact on market share is when a new competitor enters the market.

Yep.

I mean, are you thinking at all about building new facilities? I mean, that way you get the facility you want and with the type of attributes that you want? Is that something that you're looking at that is a good deal if you would?

We're looking at building one new facility. It would be a big one. It would be on our largest cemetary which has no funeral home. It would be taking --

Hello.

Hello?

Hello. Hi, this is Tom --

It would be taking a stand-alone cemetary and turning it into a combo. We have no plans to build new facilities, funeral home facilities, in existing markets, not right now. We looked at one earlier in a really nice market that's growing and decided that that wasn't the best strategy.

And in terms of, -- can you, -- I don't know if this is something you're really starting to gear up, but I mean, can you comment a little bit about what you're seeing in terms of the bid as spread in the market right now.

That's a really good question and I've heard some of the other companies comment that price expectations are still high. Our view is -- and this is a strong opinion, it could be wrong, but it's our opinion -- that if you find a business that has the right profile, that right profile must be that the owner has a very good reason to sell, either because of age, health, no successor in the family, employees can't pay -- the right amount or they have to finance it.

If you find that profile, the price will be right. It has to be mutually agreeable, of course, but we think the price can be in the five to six times EBITDA, based on historical revenues, and we're going to trendline things according to the secular trends which is cremation and so on. We think you got to find the businesses that have the reasons and the motivations to want a solution to their problem. If you don't have that kind of profile, the price will always be too high.

And is it safe to say, I mean, that's sort of what you think you'll have to pay in the five to six times EBITDA range?

Yes, yes. Except for the tuck-ins. We'll get them for less.

Great, thanks for your time, good luck.

Thank you.

Thank you, sir. And our next question is a follow-up question from James Clement. Please go ahead, sir.

Hi, guys. I figured with the accounting changes probably as good a time to ask this question as any. And with regard to pre-need spending, you know, it seems like that the four public companies all have certain different attitudes about pre-need spending and you guys are obviously free cash flow focused. Mel, like to you, what is a good pre-need dollar spend? Like when you look at devoting your -- the company's resources from a pre-need perspective, can you give us a sense of what your feeling is, what you look for? I mean, is it -- do you feel like you're spending pre-need because you have to in a particular market or, where do you want to spend those dollars?

That's a good question, Jamie, and I can tell you that having looked at this over the years, we went from a very aggressive pre-need strategy broadly, deeply in the 90s with a separate pre-need organization, sales organization that was a company onto itself, layers and layers of sales leadership overrides and we were selling funerals. And we were going broke.

And I couldn't see, I couldn't see where it was accomplishing the two goals that I always was told should be accomplished by pre-need. One growing market share and the other increasing your margins over time because of smart investments. I could never look at any data that proved that's what we were accomplishing. So we collapsed that and today, I'm not saying we have the right balance and formula, but we look at every market as a unique market, and we adopt a pre-need program and this is our focus this year, we're looking at it, and accounting change really complements that.

We -- a good dollar spent on pre-need is a pre-need contract, for a client family that has historically used a competitor, and we get it at an average that's greater than our at-need average, and we grow our business by taking business away from somebody else over time. That's the best pre-need dollar. The second best pre-need dollar is to secure a family that you would have gotten anyway on an at-need basis, but the market is competitive and there are competitors in the market that are aggressive pre-need sellers. We have some of those.

We mostly have those where we compete against the other consolidators, SEI is our greatest competitor and they have aggressive pre-need programs in some of the markets where we compete. So from that point of view, it's not just offensive, it's also defensive. There aren't many of those.

The worst pre-need dollar is spent in my view where you have a dominant market position. You have a weak number two, a really weak number two. You have strong leadership. You do great service for families, and you have a lot of pricing power. The competitors can't take your business because of price and we find that in most of our businesses.

If you're the dominant provider, you provide a lot of value, it makes no sense to me to have an aggressive pre-need program, lock it in market share you would have gotten anyway, fixing your prices, so you eliminate the pricing power on your pre-needs and we have conservative investment practices here so there's no way you're going to make up the pricing power if you've got a great business through good investments.

So that's kind of where we are, Jamie, in markets where we have the dominant presence and weak competition, or no competition, or small business where there's no pre-need competition and you really can't get enough income to anybody to have a full-time program -- we have a passive program. So we're going to be smart, selective, and make sure we get the return on invested capital for this money that we deserve.

Okay. Thanks very much.

Thank you, sir. Mr. Paine, at this time there are no further questions. Please continue.

We appreciate everybody's interest in our company and our quarterly results but they're just quarterly results, and we'll be back next quarter and the next quarter and we look forward to reporting our progress. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the Carriage Services second-quarter earnings conference call. If you'd like to listen to a replay of today's teleconference, you may do so by dialing 303-590-3000 and enter access code 11035668. Again the dial-in number for a replay for today's teleconference is 303-590-3000 and access code 11035668. Thank you again for your participation. You may now disconnect.