Carriage Services Inc (CSV) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Carriage Services third quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

I'd now like to turn the conference over to Mr. Ken Dennard, DRG&E

Please go ahead, sir.

Thanks, Jamie, and good morning, everyone. We welcome you to Carriage Services conference call to review 2006 third quarter results.

Before I turn the call over to management, I have a few of the housekeeping details to run through. If you would like to be on the e-mail distribution or facts list for future Carriage Services news releases or if you had a technical problem or didn't receive your release yesterday afternoon, please call our offices -- or yesterday evening, by the way -- please call our offices at DRG&E and we'll be glad to help you on that. Our 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 Carriage's website and that address is www.carriageservices.com. Additionally, in a few hours, there will be a telephonic instant replay that will be available for the next week. And the replay access number and code are in the earnings release.

Please note that information reported on this call speaks only as of today, November 9th, 2006. And therefore, you are 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 27A 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 Form 10-K for the year ended December 31st, 2005 and in subsequent SEC filings could cause the Company's results in the future to differ materially from the forward-looking statements made today or other documents or oral presentations made by or on behalf of the Company.

The copy of the Company's Form 10-K, Form 10-Qs, and other information and news releases are available on Carriage's website.

Now with me today is Mel Payne, Carriage Services Chairman and Chief Executive Officer and Joe Saporito, Carriages Chief Financial Officer.

I'd like to turn the call over to Mel.

Thank you, Ken.

As I mentioned in the press release, we are disappointed that our performance this year has been much weaker than expected. When we started the year, we had high hopes that we would do a lot better than what we've done. However, as also pointed out in the press release, the underperformance is highly concentrated in the central funeral home division region, which has accounted for 76% of the underperformance in our funeral home portfolio. And Rolling Hills Cemetery in California, which has accounted for 90%of the underperformance in our cemetery group.

Those two areas together have hurt the Company by $0.14 a share through the first nine months compared to the year ago periods. If we had that $0.14 back, which we don't, we would have earned $0.28 per share in the first nine months. We intend and have implemented plans to get that earnings back in 2007. But more than that, we have made major changes this year in our organizational structure and our operational leadership that have been designed to position each business, each region, and the Company to produce results beginning in the first quarter of '07 that are closer to the sustainable earnings power of Carriage under the standards operating model.

We've talked about a standards operating model now for a while. I'm going to take a few minutes to explain why all of us are more excited than we've ever been about the earnings potential, and the future of Carriage. In 2003 we decided to move away from a budget and control operating model, which has been the model used for consolidation in the death care industry. The reason we decided to move away from that model is it wasn't working. We were not able to see that we were able to grow the customers of our businesses using a budget and control model.

The nature of the business, especially on the funeral home side is much more dynamic and entrepreneurial at the local level, and we did not think the model took that into account. So therefore, we -- we invented what we have called a standards operating model. First for the funeral home group and secondly for the cemetery division. The model was designed to do the following: Focus on growing the number of customers served over time, capitalizing on the strong operating leverage in a high fixed cost business.

Number two, focus on developing top quality of staff in every position in every business, which is necessary to grow your business not just manage it.

Third, design to enable a Managing Partner in charge of the local business to make choices in that market and in that business on key drivers that would lead to more market share and profit in the intermediate and long-term. Notwithstanding in some cases lower short-term profits.

And then last but not least, it was designed to empower local management and reward them for success with an incentive bonus for growing their business close to most independent owners. And much greater overall compensation than the other consolidators are offering.

And then finally, it was designed to lead to a flatter more responsive total organizational structure. We moved away from the budget model three years ago, and we've been asked, "Where's the beef?" So after three years, what are the conclusions? I can tell you the first conclusion was we had no idea at the beginning how significantly this would change our Company. We had no clue.

Secondly, the changes required to properly execute the standards model are still evolving. But those changes accelerated in 2006 once we had two years of data to see how this worked best and what didn't work. At this point, we are very close to the end as far as knowing how to execute this model with our funeral operations. And closer to the end than the beginning, with our cemetery operations.

We will be positioned by year-end 2006 to have an outstanding earnings year in 2007 beginning in the first quarter and have been working on that for the last six months in particular without regard or much concern over short-term quarterly performance during 2006.

The changes that we have made and that have accelerated during 2006 fall into four major categories. Almost all of the changes have occurred since the beginning of 2006.

First, we have taken a much more strategic -- strategic view of our portfolio. Secondly, the organizational structure of field operations has changed dramatically. Third, the responsibilities and duties of corporate leadership has changed dramatically. And fourth, the leadership characteristics required to execute this model have become clear after the first two years. And we have moved rapidly during 2006 to get in place both corporate and local leadership that can execute the model.

I'm going to go over each one of these major categories so that there will be a better understanding of what has occurred within Carriage this year. The strategic view of the business led us to look at a business not in a short-term way. And -- in analyzing our portfolio, we developed five criteria. Each with a ranking of A, B, or C. Our entire portfolio was reviewed and ranked by business on March 31 of this year. The five criteria are, first, size of the business. The second is size of the market. The third is the competitive standing. The fourth is demographics. And the fifth is strength of the brand.

We have found that over the first two years, it's the larger businesses and the larger markets with a number one or strong number two competitive standing, stable or growing market share compared to the competitors with strong demographics and an institutional brand or a very strong independent brand that have led to growth in costs, volumes, pre-need sales, revenues and earnings.

What we found when we ranked our portfolio based on these criteria and looked back at the last five years is that our portfolio broke down much like a bell curve.

The portfolio EBITDA could be divided as follows: About 20% of our portfolio was As in terms of EBITDA performance. 60% of the EBITDA performance came from Bs, and 20% came from Cs. Over the last five years, the As have produced substantial revenue and earnings growth, the Bs have produced modest revenue and earnings growth, and the Cs have produced substantial declines in revenue and earnings. Offsetting the growth in the other two categories for the most part. That has continued in 2006.

This portfolio profile in terms of strategic view will drive the acquisition and disposition strategy over the next five years. Our acquisition dispositions will be guided by a goal of achieving the portfolio balance closer to 45% performance from A's, 45% from Bs, and 10% from Cs. There will always be a place for Cs in our portfolio, but there's Cs that you can stabilize and grow a little bit, and there are others that you can't. And now we know the difference.

Secondly, the organizational structure. After much evolution in our thinking, we believe the optimal structure for operations organization is a geographic organization, which includes both funeral and cemetery operations. Notwithstanding the natural culture difference between a dominant service business like the funeral business and a dominant sales business like the cemetery business.

As of July, we collapsed all of our operations into three geographic regions headed by Regional Partner and supported by director of support. We have two DOSs in the west, three in the central, and three in the east. We initially collapsed funeral and cemetery operations only in the west. And the experience during the first half of this year was very positive. A lot of synergies because of the strong leadership that brought the two sides together. We see no reason why that cannot occur in the central and eastern regions, as well.

And third, to begin the year we formed an operational analysis and planning group, a group we never had before. We have great systems on the funeral side increasingly good system, which was rolled out recently on the cemetery side and a lot of data. In order to properly use this data to execute the model, we formed this group, Staff by Financial and Operational Analyst, one assigned to each region.

Since the beginning of the year, the duties and responsibilities in how this group works with the regional corporate leadership has been evolving and changing and since the middle of this year we've had a new leader in charge of this group and in the last few months, they've really come into their own and are adding a lot of value for our field leadership so that when they go to see someone they're not coming with questions, they're coming with analysis and solutions. So that the business can achieve its standards.

The third major area of change has been responsibilities and duties. We have seen now that the Regional Partner is responsible and this is a change starting at the beginning of this year for two major areas. The market share growth of each business, not just the portfolio as a whole. And then secondly having the right leadership, the Managing Partner in place at each business to accomplish that goal of growth.

The DOS is responsible for assessing with the Management Partner of a business the quality of every person on the staff and then developing the right quality of staff over time. And secondly, for helping the Managing Partner achieve their standards. Working on a few at a time.

The Operational Analysis and Planning Group is responsible for operating and financial analysis, but in particular, detail market share analysis for each business, reporting on the progress of action plans on a realtime basis, standards reporting each quarter, and our league tables which every quarter shows the standards from the top to bottom of every business in our Company.

The fourth major area of change this year has been leadership. We have learned that a decentralized operating model works best with the larger businesses, not with the smaller ones. And the leadership required for a larger business is very different than for a smaller one. In order to grow our businesses, we have had to also go to a different type of corporate leader. As I mentioned, their main job is to hire the right leadership at the location and then help them grow their business. That's a different kind of leader as opposed to a manager.

To begin the year, we adopted the 4E Leadership Model developed by GE. On March 31, 2006, we had the strategic rankings of every business, we also assessed every Managing Partner and compared that Managing Partner to the strategic ranking of that business. For the strong businesses, the A's and B's we needed a Managing Partner that could grow the business. We found that for the weak B's and the C's, we needed a Managing Partner who could manage the business under very firm direction and controls.

We developed a plan at -- in April to replace a large number of Managing Partners with the right quality of leadership according to our analysis. We hired an outside recruiter and implemented a rigorous testing and interviewing discipline. Since the beginning of the year,or 12 months, we have replaced approximately one-third of the Managing Partners on our funeral homes. And we're about 75% done. We have some open positions that are still yet to be filled.

On the cemetery side, we have replaced about a third of the Managing Partner and Sales Managers within our portfolio. And we're not done. We will replace another third by the end of the first quarter. Those are mostly open positions as we speak.

As far as Regional Partners, we have two out of three that are new to their regions, the west and the central. That job in our view is a 75% leadership job and a 25% management job. We have replaced four of eight DOSs this year. That job in our view is a 50% leadership job and a 50% management job. And as I mentioned, the Manager of our Operational Analysis and Planning Group is also new since mid year and doing a great job.

As far as acquisitions, we are using the strategic ranking to look at acquisitions. Therefore, we will be considering only As and strong Bs, not Cs for acquisition purposes. We recently announced the acquisition of a big business in Corpus Christi named Seaside. It is an A business that has the dominant brand in the market. Serving over 750 families through two funeral home facilities, including a combination.

We are highly optimistic that Carriage will become the consolidator of choice for these kinds of large, quality, businesses. Including starting in 2007.

In summary, we are currently addressing the two weak areas in 2006. The funeral homes and the central group in Rolling Hills. And I can tell you that we're highly confident that those issues are not only fixable, they will be fixed by year-end. But we're also positioning every business to perform up to its earning power as defined by our standards. And at this point, it's all about execution, not trying to figure out how to do the execution.

We will provide an annual estimate for 2007 when we report our full-year 2006 results in February 2007. We will most likely split that estimate between existing operations and acquisitions that have closed. And I am, along with the executive team and the leadership of Carriage, have never been more confident that 2007 will be the first year of a new and highly successful period for Carriage.

And with that, I'd like to turn it over to Joe.

Thank you, Mel. Good morning, everyone.

I'd just like to review our third quarter and year-to-date results with you. For the third quarter, we reported revenues from continuing operations of 35.5 million and EBITDA of 5.2 million, which represents no change in revenues and a 28% decline in EBITDA when compared to the second quarter of 2005. We reported a loss from continuing operations of $0.03 per share because cemetery segment earnings declined 2.1 million or $0.07 per share compared to the prior year quarter.

The cemetery segment results for the quarter were negatively affected by charges of $700,000 for environmental remediation costs, $200,000 for severance and the ongoing operational issues at Rolling Hills. On a year-to-date basis, we reported revenues from continuing operations of $114.8 million, a 1% increase over last year. Adjusted EBITDA from continuing operations declined 10% to 23.9 million. Earnings per share from continuing operations totalled $0.13 for 2006.

Excluding the effect of special charges in both periods, diluted earnings per share from continuing operations equalled $0.21 in 2005 compared to $0.14 for 2006. This quarter we focused our efforts on improving results of the underperforming businesses in the cemetery funeral segment and the Rolling Hills Cemetery.

In the central region businesses, we initiated a turn around program by reducing staff and other controllable expenses and increasing prices and limiting discounts, which should result in increased average revenue per contract going forward. In addition, to date, we have replaced nine Managing Partners in this region.

As we monitor this group for the remainder of 2006, we may take additional action to ensure that earnings return to an acceptable level for all of 2007 on par with the rest of our funeral operations portfolio. The turn around of Rolling Hills has taken longer than expected because of leadership, staff quality, and process issues discovered to date have been more extensive and complex than we anticipated.

We are focused on recruiting a new Managing Partner and restoring this business to its historical level of profitability in 2007. We believe the turn around will be evident starting in the first quarter of 2007.

Carriage reported negative free cash flow from continuing operations of 2.8 million in the third quarter compared to negative 3.8 million in the third quarter of 2005. In addition to being the seasonally weakest quarter of the year, we made the semi-annual interest payment on our senior notes of $5.1 million in the third quarter. Free cash flow from continuing operations totalled 4.3 million for the nine months ending September 30, 2006, compared to 1.4 billion in adjusted free cash flow for the comparable period of 2005.

Cash and short-term investments equalled 34.4 million at the end of the quarter compared to 31.2 million at the end of last quarter. We were pleased with the 4.1% increase in funeral same-store revenues for the quarter. We experienced a decrease of 1.5% in the number of contracts and an increase of 5.7% to $5,136 in the average revenue per contract.

Performance was strong in the eastern region where the number of contracts increased 6.2% and the contract average increased 4.9%. The western region experienced a 7% decrease in the number of contracts while the contract average increased 6.7%. The central region experienced a decline of 1.2% in the number of contracts and an increase of 2.8% in the contract average.

Total funeral same store gross profit for the quarter decreased 150 basis points, primarily because of increases in funeral operating expenses and adjustments to incentive compensation. The cremation rate increased 160 basis points to 34.9%. The average revenue for burial contracts increased 6% to $7,103, and the average revenue for cremation contracts increased 8.1% to $2,574.

Our cemetery operating results for the third quarter were negatively impacted by the operating issues at Rolling Hills which we've previously discussed. Weaker sales of interment rights, the severance charges and remediation charges that we also previously discussed.

In addition, by year end, we will have new operating and sales leadership in place at several of our mid-sized cemeteries, which should position these operations for a higher level of sales and profitability in 2007.

I'd also like to just briefly comment on our 2006 revised outlook. For the fourth quarter of 2006, we estimate revenues to range between 38 and 40 million, EBITDA to range from 8.5 to 9 million. Diluted earnings per share from continuing operations to range from $0.06 to $0.07 cents. And free cash flow to be approximately 5.5 million.

Excluding the effects of acquisitions or dispositions, cash and short-term investments are expected to equal about $40 million at December 31, 2006. For fiscal year 2006, we estimate our revenues to range between 153 and 155 million. EBITDA to range from 33 to 33.5 million, diluted earnings per share from continuing operations to range between $0.20 and $0.21, and free cash flow to be approximately 9.8 million.

The difference from Carriage's original estimates are primarily related to the underperforming funeral and cemetery businesses as we have previously discussed.

Mel?

Thank you, Joe.

With that I'd like to open it up for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Our first question is from James Clement with Sidoti & Company.

Good morning, guys.

Hi, Jamie.

Mel, I -- I'm going to take the directness of the language in your press release yesterday to maybe ask a couple of blunt questions. I hope that's okay.

You bet.

You basically, you started with the standards model, I guess, it was what about three years ago or so?

Three years ago, beginning '04.

And I'm assuming, I'm just sort of looking at your guidance for the fourth quarter. I'm sort of assuming you hit rock bottom here in Q3.

Why do you think -- why do you think it took this long to hit this point? And I guess the follow-up question would be -- I mean is what has fundamentally occurred here is that you all have a new operating model.

In various places in the organization you did not have the right basically the -- you found out later you didn't have the right personnel in place to carry this model out?

Jamie, if we had known the changes in the organization that it would take for proper execution of this model, looking back on it, I'm not sure we would have done it. Because it has been totally profound. And we did not know when we rolled this out that it would lead to a complete change in basically all the leadership. Not only at the corporate level, but many of the leadership at the local level.

Yes. And actually, that was really more focused on the local level. And I don't want to pick on Rolling Hills or anything like that. But, I guess, what I'm sort of wondering here is, I mean did you have a situation over the last couple of months where -- I mean -- did things get ugly from a morale standpoint.

Were people pushing upwards? "Hey, I've been doing this for 15 years, and who is Mel Payne to tell me how to do my job now?"

Are you talking Rolling Hills?

Yes. Maybe in general.

I'll tell you what happened at Rolling Hills. Rolling Hills, of course dominates our portfolio. And it had performed well over the period we've owned it since 1997. A lot of revenue growth, a lot of profit growth.

But at the end of '04, I think I'm right about this. We had a general manager now called a Managing Partner leave the Company. And we had had a couple of Managing Partners at the park since we bought it. Both very good. And we've had -- we've had good sales leadership there, but the sales leadership needed a strong boss. No doubt.

A decision was made at the end of '04 to hire a Managing Partner because the guy that was there left and moved to the east where he was from. And the guy who took that spot is a nice man, but he was totally overwhelmed in the job. And therefore, things began to occur that led to the problems that we've had and they were deeper, related to processes and sales and different things. He was overwhelmed in our view.

And that occurred all through '05. And we didn't see it in the numbers. And in December -- in the last quarter of '05, it began to be evident. And at the end of '05, of course, we changed the leadership in the west. Now we didn't have any regional leadership in the west all during '05. And it was a major problem because we couldn't recruit somebody for the west. The person who was trying to do that couldn't find the qualified candidate.

And so Rolling Hills was left alone. And while it was left alone and other things were tended to, things began to occur beneath the covers that we didn't know about until the end of '05. And when we put the new, the new Regional Partner in place who has a cemetery and sales background, he'd began to discover the problems were very deep starting in the first quarter.

And as he got more deeper into it, it just became evident that we're going to have to break this thing down and build it over. Because a lot of the processes, a lot of the staff was just not doing their job and weren't up to the standards that we were used to. So it took a while for that to occur, it will take a while to fix it.

I can tell you that the guy we have in charge is an A player. And I just got a note from him this morning about Rolling Hills. There's -- it's only -- how soon does it return to its natural earning power, not if. And what I told you is exactly what happened, that's why I changed the cemetery leadership and collapsed everything together in '06.

I wasn't happy with a number of things on the Cemetery side. I wasn't happy with the way the cemetery operations were being run. It was very sales oriented. And we have two positions on a cemetery, unlike the funeral home.

We have a Managing Partner in charge of the business. The business boss. And what we found is that we had Managing Partners that were mostly salespeople. They were not operating people. Therefore, they didn't pay attention to the detailed operations, the grounds maintenance, the administrative, the processing side.

And all of that is very important in a cemetery in terms of your margins of profit on different goods and services. Your bad debts, your collections. It was all sales oriented in very short terms. And so we had enough of that and Rolling Hills was the best example. So now -- you know we've changed that and we're well underway to putting Managing Partners in charge of our cemeteries that are operating people and have sales managers that are A players building A player teams beneath them.

That's the model. And we were not using that model prior to 2006. In fact, prior to the middle of 2006 when I collapsed the central and the eastern. That's the background.

Okay. Thanks very much for the time. I think if you guys have time a little later maybe we can follow-up offline.

Yes. Okay.

Thank you. Our next question is from Bill Burns with Johnson Rice & Company.

Good morning.

Mel, you laid out a plan to have all of these operational issues fixed by year end. And you're occupied with all of these turn around issues, you also made a couple acquisitions. As an outsider, I would have probably sought solved the internal issues first before I started taking on acquisitions. You obviously think the timing was right. And I was just hoping that maybe you could help me see this from your point of view.

Absolutely. Great point, Bill.

When the central division is the one that's really hurt us on the funeral side and it's the region that has the smaller operations, it's the region that has had turnover in the regional management and at the DOS level for the last three years. We've just been not able to get the strong leadership that would stay and execute this model. And so I could tell that the trends in the central were not good heading into '05. We moved the guy to the central who had been in the west and did a great job. He's in charge of the central beginning -- beginning of '06.

And he put in place in particular one new DOS in charge of a lot of the underperforming businesses that we knew. We knew him from past experience, a really great guy. And so the central, this Regional Partner wanted to wait. He wanted to wait and see if the volume declines that we've seen since the middle of '05 would continue because when he wanted implement solutions, he wanted to make sure that they weren't reactionary.

We really could see that we had lost market share, that volumes had stabled, this place, that place, so that when he made his turn around plan it was a plan that would stick. And it was one that was deep and broad. So he waited for the first 6 months to make sure. In my view, that was probably 3 months too long.

Now, all the turn around plans have been implemented in the central effective September 30th. And I mean detailed. I don't want to get out ahead of us, but I've already seen the October results this morning in the central. And all I can tell you, Bill, is that there is a dramatic change that has already occurred. The tweaking will happen over the next two months, before year-end so that when we enter 2007, this group's going to be on the par with the other regions, which by the way have been doing great.

They're not -- they're not troubled regions. The west and the east are doing great. It's really the central and it's very concentrated. So this is not a complicated business. We've moved fast in the last three months and made a lot of changes there and I see it in the numbers. It's dramatic is all I will say.

Okay.

It could be tweaked between now and year end, but there's absolutely no reason we shouldn't be making an acquisition now because -- and I know that we've lost some credibility based on the performance this year. I know that.

And all I'm saying is watch out because when we hit 2007 it's going to be a different-looking company. And this model, I'm telling everybody while I'm not sure we would have done it if we'd known what we had to go through. It is absolutely a model that will work.

And we are -- we have just learned how to execute it and we put in place the leadership. And it's going to show in 2007. Count on it.

Okay. I guess the details you put out on the acquisition, that's where you're going to leave it? Are you --

Well, it's a big business. It's the business brand in Corpus Christi. We already had a presence with a cemetery there. And it fits us like a glove. And it's the kind of acquisition we're looking at in other markets.

First where we already have a presence and can add a leading brand. And we think we're going to be a very attractive company for those leading brands and the bigger businesses to join. And I can tell you that this operating model and I've been around the country over the last six months, showing people beneath the covers what this thing looks like and how it works in detail, it is a very attractive model to the larger independent operators. Very attractive.

Okay. Thank you, Mel, and you too, Joe.

Welcome.

You want to comment on that, Joe?

Well, I was just going to tell Bill that we will likely have a little more detail financial information disclosed once the transaction closes in the first quarter in connection with some of the disclosures we'll be doing in our filings. So if that's what you were asking about. There'll be more information forthcoming but not until after closing --

I will say this. And without saying too much. Any transaction we're looking at in the near term will be highly accretive compared to holding cash.

Thank you. Our next question is from Mike [Scarengela] with Merrill Lynch.

Good morning, guys.

Morning, Mike.

Mel, while you're on the topic you'd expressed some interest in the SCI properties in the past. Any updates you can give us there on how that's going and what your interest level is?

Yes, we're not allowed to say a whole lot about it because we signed some confidentiality agreements. But we did put some preliminary interest in and then some final bids in. And we used these five strategic criteria to look that the properties. And I can tell you that we're doing -- we've hired a demographer to look at markets in great detail.

And the demographic information caused us to withdraw on some markets and be more aggressive on others. And we can't -- we hope to get something out of the packages. And if we do, it will be a -- it will be an A business. And it will be a good one for us. At this point we don't have anything signed and so we're still in discussions.

Your comment earlier that you would only by A businesses or kind of upper B's also implies to me you're going to pay a little more for them. Do you still think you can stay within your historical multiple range and maybe remind us what that is these days?

Yes, we have developed a detail return on invested capital model. We never did this in the '90s. We were paying EBITDA multiples and sometime not achieving the EBITDA.

And this time we're doing with the demographic information, we're using -- we're primarily buying businesses and markets where the population is growing and the older population is growing that have very strong competitive standing, number one or strong number two. Stable or growing market share in addition to the demographics.

So we want to buy businesses where the volumes will grow over the next 10 years. Either because of the demographics, just more deaths in the market, market share increases, and also the ability to -- because of the leading brand you don't have the low end price competition taking away your market share. These are strong brands that have, you know, good pricing power.

So those are the things we're looking at. And we developed a 10-year model forecast. We discount the future cash flows back to a present value using our cost of capital of about 10%. And look at the return on invested capital and we're primarily looking at a return on invested capital requirement in the 14 to 16% range. But never lower than 12.

Okay.

Now, those also -- we also look at the EPS, the incremental EPS beyond invested cash. And we also look at the EBITDA multiple and the revenue multiple. Making sure that those are within the ranges we've discussed, but we've also learned that you can pay a little bit more for an A.

Because if you look out five years and when we did the analysis on our existing portfolio, what we found is that the A's grow volumes modestly, grow revenues a little more modestly but also grow margins because of the operating leverage. And in the EBITDA, grow substantially over a five-year period. All of the A's in our company have done that. And so when we're looking at the criteria, we're looking at that possibility so that five years from now the multiples are a lot lower.

And just remind me what's the multiple range on a trailing basis that you're focused on?

We're looking at B's in the 5 to 6 range. An A property would go 6 to probably 6.5. And then if we were to entertain a C, it would probably be a tuck-in, something certainly less than 5. Closer to 4.

Okay. Just one for Joe. Joe, given the softer results this quarter and it sounds like a bit of a ramp-up next year until you get back to where you were, any covenant issues that you are concerned about in the next four or fiver quarters?

No, not really, Mike. On the public debt we just have incurrence covenants, so those really only would restrict future borrowings if we needed any. We have plenty of room under those covenants right now to borrow money.

The bank covenants we're not concerned about at this point. We're closer than we have been, but we're still in good shape in terms of the covenants. And as you know, we don't have any money borrowed on those facilities nor do we anticipate any borrowing in the foreseeable future.

Okay, thanks very much.

Thank you, our next question is from Alan Weber with Robotti & Company.

Good morning.

Good morning, Alan.

Just kind of a general question. One of the things that's not clear to me is you've talked for a while about your computer systems and how up to date and some of that stuff.

And yet when I looked at your website, in late October you made a presentation and at that time you were talking about EBITDA higher than you reported today, and I guess it's not clear to me what took so long for you to determine? It's not like a huge dollar amount, but what took so long for you to determine that the EBITDA would be less than you originally forecasted?

Well, in terms of the forecast, I mean we've traditionally been updating those every quarter. In terms of the results for this quarter, if you look at the $0.03 loss in earnings for the quarter, most of that was related to charges remediation charges and what not.

And we had obviously internal forecasts done for the quarter and we've, thought we were relatively close to those absent those charges. As it turned out from an operating standpoint, that didn't turn out for the quarter. And then we decided to make the adjustment for the year. But our practice has been to adjust these numbers basically on a quarterly basis.

Alan, I didn't hear about the 700,000 environmental remediation until after that October. I mean that's pretty new. And then I think the other big hit to EBITDA for the quarter was -- I think it was in addition to bad debt, probably a Rolling Hills primarily. And so those two things were after the quarter end and certainly not on the radar when we made the presentation.

I don't think that had anything to do with our systems.

Okay. That makes sense. That makes sense. Okay, because it was kind of -- that makes sense, okay. And the acquisition -- you have not discussed kind of the revenues and what you're paying like that, correct? the actual dollar amounts?

No, we have not. That disclosure or that press release was based on a agreement in principal and as I said earlier, once we close the transaction, there'll be more financial information made public about the acquisition.

And then my last --

I will say this, Alan, and to everybody else. We waited a long time and we didn't do any acquisitions in all of -- well we did one small tuck-in. We do have a number of discussions underway with candidates.

And yet I don't want to get into talking about specific prices and all that. We'll announce them when we sign an LOI, we've decided to do that as a matter of policy. But we won't be doing any that won't -- that won't matter, they will all be material because they tend to be larger.

Okay. And then, and then, just in general, when you're looking at kind of integrating the acquisitions and I don't mean it like in a negative way. But really a major part of what you're looking to do the idea of a family-run business kind of over time has internally, they may be good at certain things, a lot of inefficiencies that maybe there's extra personnel that are there, friends of the family that you can just kind of get rid of over time?

"Get rid of" is pretty harsh.

That is a nature of a family-run business. Certain costs do stay there. And it's their dollar to spend, so there's nothing wrong with that.

Well, we look at the personnel and we try to staff them right, but we're sensitive to a taking care of people and family-run businesses. So we don't want to give the impression.

And you know, there's some -- there's some fears we have to overcome in these acquisitions that we have a team of people here in Houston that sweep in and everybody's fired, which is not the case at all.

But, Alan, I think the approach is going to be to operate these businesses longer term according to our standards base model. So over time you'll see these businesses come into line with our standards base model and and the integration in terms of things like systems and what not will be from day one.

There'll be some changes from how things used to happen in the past. But as Mel said on a personnel standpoint, we have to do a thorough evaluation of the people that are there and the business that they have and how it really integrates with other businesses we may have in that market already.

Like in the case of Corpus Christi, we have an existing business there and we've got to look at how it fits with the business that we're acquiring. Lots of things that go into that equation.

Thank you, our next question is from Sanjay Ramakrishna with ING Clearing Capital.

Thanks for taking my question.

One thing I've noticed over the last few conference calls is, especially repeated concerns with Rolls Hill. And as you said, it does bring up an issue regarding management credibility as well as how much visibility you have in terms of the performance of operation because we have heard this before in terms of further implementing your model, making some management changes there. Perhaps switching out some personnel.

What I'm wondering is do you see yourselves losing market share there? Is some -- your competitors stepping in? Are they aware? Do they sense there are some personnel issues, and perhaps do you think it's just not a function of your operating model, but something else in the competitive environment?

No, I don't. It's -- we're not losing market share there. The -- it may be that we're not gaining market share that we should, especially in the Asia market. Because of some weak leadership issues. But we're not losing market share.

And certainly we know the competitors and they aren't capitalizing on anything. It's just a matter of getting the leadership right and execution at this point. And the guy we've got in charge of this will get it done. Taken longer and I know we've lost some credibility on it because we mentioned it and we thought we'd get it done before this. But when you have a big cemetery, it's a really, it's one of the probably one of the larger ones in the country.

What percentage of your revenues is --

It's running 8 or 9 million in revenues, which is about what a quarter of our total revenues?

And in terms of the individual management, do you think it's a matter of finding the right person? Or is it training? Because one concern that I could have is what is the status of employee morale here? Are you getting any push back from some of these operators?

We're getting, you're talking Rolling Hills or in general?

In general including Rolling Hills.

I think in general, we've been hiring the best people in the history of the Company. The best. And we've been lucky because of the Alderwoods FCI combination. A lot of folks are looking for jobs because in order for them to make that work, they're having to cut a lot of people and so we're getting some really good talent. Both from that side of it, and also from the independents.

And I know we've talked about this before, but we never had a recruiter before. We've lacked -- we've lacked multiple candidates for each job, now we're looking at multiple candidates. We have the pick of the litter in terms of many of the positions that we've been looking at and especially on the larger businesses where the model is very attractive and the incentives are very attractive. The leadership is upgrading very rapidly in Carriage over the last 6 months.

It's not in the numbers yet, and all I'm asking is that you wait until the first quarter. I don't know what the fourth quarter is going to look like. And to be honest, we haven't been very concerned about it. We've been only concerned about positioning the Company to maximize earnings power, which we now have defined, using the model.

And the earnings power of this Company is a lot higher than what we've done this year. And we've even defined what it is. And there are a lot of people here trying to hit that earnings power number in '07. Will we hit it? Probably not. Will we get close to it? Yes.

You would say the source then, the major issue here is just finding, is also number one tweaking the plan. Tweaking of the plan in terms of you underestimated how difficult it would be for your operators to adjust to it. And also making sure that the focus there is just not completely on sales.

You know, running a decentralized structure, it would have to be a combination of sales as well as looking at the operations of the organization, whether it be Rolling Hills or not.

We did have a big complicating factor at Rolling Hills and in our cemeteries this year. We rolled out a new system called HMIS. It had bugs just like our funeral system did when we rolled it out a few years ago. And that's complicated the information flow so that a lot of this could be addressed on a more realtime basis. And that's hurt us a little bit.

And that system is a software system? What is HMIS?

It's an application system in the cemetery segment that handles all of the contract and transaction -- transactions we do in the cemetery business.

So then, going forward your strategy's that you put in what you believe to be the right Management Partner there? You've tweaked your plan accordingly. And now it's just a matter of you've communicated to them your goals and you believe these employees are aware of it. It's just a matter of execution, would you say?

It's all about execution at this point. It's no longer learning how this operating model should be worked. And it's all about execution.

And in the larger businesses, you've got to have a Managing Partner who has certain competitive skills that are more entrepreneurial. And the smaller -- and he has some leadership skills. On the smaller businesses, you have to give them very strong direction. And that's not what we were doing the first two years in the central because we had leadership that kept turning over.

Now that's fixed. And the fix when you finally make the changes is very quick. And you're going to see that fix starting in 2007. Without any doubt.

And then finally, just moving to other things concerning M&A. I know you haven't detailed your plans regarding the financing of this deal. But should we presume then as you continue to build cash that the source of acquisitions would primarily be off the balance sheet verses drawing on your revolver?

That's correct.

Thank you. Our next question is from Matthew [Starchino] with Deutsche Bank

Hi, guys. Just a quick follow up on those last points about Rolling Hills. It sounds like now that you have the right manager in place and the salespeople are there. I mean, is it a question where the expense base is in place meaning you have enough salespeople right now? Do you need -- do you envision having more or they need to penetrate the market better?

We don't, number one, we don't have the Managing Partner in place. We have the Regional Partner overseeing the business.

Right. Okay.

We do have the sale manager in place. But there's a lot of work that has been done so far this year on processes that are the guts of a cemetery operation where with all of its moving parts especially with a new system.

So a lot of work's been done on the process side, which includes expense controls, what commissions to provide on sales of different products and services, and also collections and keeping up with the receivable portfolio. And that's what kind of got out of control under the prior management.

The sales team has performed in the past. And under a new Managing Partner and under the oversight of the Regional Partner, we expect that to return to what it used to be. But it will occur gradually from here. We don't think it will occur overnight.

On the other hand, the business is down $2 point something million this 700,000 of that is the environmental hit, a big number in that number has been additions to the bad debt reserve. All of that is behind us.

Okay.

So this business will return to a high level of profit in 2007. And, I got an e-mail from our Regional Partner this morning telling me I could say that. So he's put his reputation on the line as saying that will occur. And I have total trust in him.

So it sounds like the sales force is there and in place and executing and it's more --

Beginning to execute.

Right. On a scale of 1 to 10, 10 obviously being very pleased, where do you see yourself in penetrating the Asian community out there? You have a tremendous facility sitting near Oakland.

Absolutely.

Where do you kind of gauge? Is there a lot more work to be done there?

I think there's a lot more opportunity there. I honestly do. I think this part could have an incredible opportunity over the next five years with the right leadership in place. And the right strategy. And I would find it very hard to say where we are on 1 to 10, but I think we're probably somewhere in the middle. We're not close to 10, I can tell you that.

Okay. That's all, thanks, guys.

You bet.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is from Jason Stankowski with Castle Peak.

Hi. My questions have been answered, thank you.

Thank you. At this time, I'd like to turn the call back to management for additional remarks.

Well, we don't have any additional remarks. We appreciate those very good questions and candid questions. I hope you were satisfied with the answers. We appreciate your interest in Carriage.

And I just want to end by saying we are very excited about the progress we've made this year beneath the -- beneath the numbers. And we think the numbers will reflect that progress starting first quarter of '07. We look forward to reporting it at the time.

Thanks so much.

Thank you, sir.

Ladies and gentlemen, this concludes the Carriage Services third quarter earnings conference call.

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