Carriage Services Inc (CSV) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you so much for standing-by and welcome to the Carriage Services Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today on Thursday the 9th of August 2007.

I will now turn the conference over to Mr. Ken Dennard of DRG&E. Please go ahead Ken.

Thank you Michael, and good morning everyone, we appreciate you joining us for Carriage Services conference call to review yesterday afternoon's earnings release. Before I turn the call over to management I have the normal housekeeping details to go through. If you'd like to be on the e-mail distribution or fax list for future Carriage Services news releases or if you had a technical problem and didn't receive your copy of the release yesterday, please call our offices at DRG&E and 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 Carriage's website at www.carriageservices.com. Additionally, in a few hours there will a telephonic instant replay made available for the next 7 days. The replay number and access codes are in yesterday's release. Please note that information reported on this call speaks only as of today August 9, 2007, 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 of the Securities Act of 1934 as amended. These statements are based upon assumptions that the Company believes are reasonable; however, many factors that are discussed under forward-looking statements and cautionary statements in the Company's Annual Report on 10-K for the fiscal year or calendar year ended December 31, 2006, 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 documents or oral presentations made by, or on behalf of, the Company. The copies of the Company's Form 10-K, Form 10-Qs and other information and news releases are available on the Carriage website.

Also as a heads-up, management will be [marking], we will be getting out to the Midwest and the West Coast mid-to-late September, so we will be calling many of you out there to setup meetings later this month or even call us at DRG&E if you have interest in meeting with management during these road shows.

With that behind us now, we will introduce Mel Payne, Carriage Services Chairman and Chief Executive Officer and Joe Saporito, Carriage's Chief Financial Officer. Mel?

Thank you, Ken. Carriage Services had another good quarter, our third quarter in a row. The highlights were easy to spot in our press release. A 12% increase in revenues produced a 26% increase in consolidated EBITDA dollars which produced a 333% increase in EPS. Our consolidated EBITDA margin of 23% would have been 24% except for the 400,000 of nonrecurring variable overhead. What's not to like about our financial performance in the second quarter.

While these are the results, there was a lot of hard work on execution that produced these results and I would like to briefly comment on that. These results are the result of execution of our three models. We talked about it a lot, I won't talk about it a lot today. You are seeing the fruits of the labor, the standards operating model, the 4E leadership model, the strategic portfolio optimization model. Those models are in place, they are getting traction across the board broadly and they're working. If you haven't already, I encourage you to closely review our most recent Company and Investment profile because it goes into detail for the first time about the leveraging impact on our earnings momentum of good execution of these three models.

Secondly, I would like to give special recognition for the performance in this quarter of our central region. There was a short time ago I was asked whether we could sell the central region. We are proud of the central region and they are contributing immensely to the performance of the company. Rolling Hills, our fifth largest cemetery in California had a great quarter. They are in the early innings of taking that business to another whole level under strong new leadership. I would also like to single out our eastern region cemeteries who had habitually been underperforming over the last few years and are showing real life in momentum.

Now, those were the incremental contributions that stood out the greatest in the second quarter, but there were also performance in our Western funeral operations and Eastern funeral operations where death rates were weak in the quarter. But yet, these businesses maintained their margins and made an incremental contribution to the company's performance in the face of weak death rates. And I think out of all of our operations stood out and in alignment with our theme for 2007 "being the best and there are no excuses," I commend them greatly.

On the acquisition landscape, we have been shocked, pleased and honored that we have been considered alone for affiliation by some really top independents. There has been no competition and no brokers and the price has been something that works for them and works for us over the long term.

We also acquired two tuck-ins recently from Service Corp that were part of their disposition program. Those will work great for the operations that we had in those markets, our brands were best in market brands and these tuck-ins will be immediately accretive and will make a material difference in the acquisition portfolio performance for the rest of the year.

We do see activity continuing in the acquisition area; whether we can close any acquisitions for the rest of the year, I couldn't say and wouldn't say at this point; we will report that at the appropriate time.

With that I will turn it over to Joe.

Good morning everyone. I just wanted to remind you that if you are having difficulty in viewing the trend reports, I think you may be if you are trying to pull the trend reports out of the newswire. You should go to our investor home page where we have put a link now to the press release that have the properly formatted annual and quarterly historical trend reports.

During the second quarter, our same store revenue increased 3% notwithstanding a 2.1% decrease in same store funeral contracts compared to the second quarter of 2006. Since implementing our funeral standards operating model in 2004, our same store funeral revenues have increased steadily by $6.5 million from $108.5 million to $115 million for the trailing four quarters ended June 30, 2007. That's a compound annual increase of 2%.

We expect to achieve at least a 2 to 2.5% annual revenue increase in the future from our same store portfolio as volumes stabilize and our average revenue for funeral increases over time.

And the real news is that during the same period, our same store funeral field EBITDA increased $5.9 million, so almost dollar per dollar from $37.6 million to $43.5 million, which was a compound annual increase of 5.2% primarily because our funeral field EBITDA margin increased by 320 basis points during this time from 34.6% to 37.8%.

This multi-year increase in same store funeral field EBITDA margin trend has not only continued in the first two quarters of 2007, but is accelerating and illustrates the impact of the standards operating model on improving the sustainable earning power of our portfolio of funeral businesses.

Our same store cemetery financial performance from 2003 through 2005 was characterized by increasing revenues, but slightly the comp declining field EBITDA margin. However, we've only recently implemented our cemetery standard operating model and it's really too early to assess the long-term trends. Same store cemetery revenue increased approximately $600,000 from 2006 to the trailing four quarters ended 6/30/07. However, cemetery field EBITDA increased $1.4 million because our field EBITDA margin improved 340 basis points.

The second quarter 2007 increase in our same store cemetery field EBITDA of $932,000 and our field EBITDA margin of 660 basis points was primarily attributable to the continued excellent performance at Rolling Hills which Mel cited and our Eastern region cemeteries.

We continue to expect at least $2 million field EBITDA increase for Rolling Hills over the entire 2007 and we believe are more broadly balanced and less volatile same store cemetery revenue and financial performance will be evident and positive quarterly trend comparisons during the balance of 2007.

Our total field EBITDA steadily increased each year from $49 million in 2004 to $57.3 million for the trailing four quarters ended 6/30/2007, a compound annual increase of 5.6% over this period. We expect our total field EBITDA growth trend to accelerate over the next few years because of a gradual increase in same store revenues improving field EBITDA margins and the increasing contribution of acquisitions.

For the second quarter of 2007, 7% of our total revenue and 6.2% of our total field EBITDA was from acquired businesses. Our 2007 quarterly total field EBITDA margin trend has turned materially positive compared to 2006 as we achieved a 340 basis increase in the total field EBITDA margin in the second quarter compared to 2006. We expect to continue positive total field EBITDA margin trend comparisons for the balance of 2007.

Overhead was essentially flat when compared to the first quarter of 2007 and included an unusually large amount of leadership recruiting and relocation costs, non-recurrent project consulting fees, and new directors' stock compensation that aggregated approximately $400,000 for the quarter. Because of improved same store operating performance and the addition of accretive acquisitions, we achieved a consolidated EBITDA margin of 23% in the second quarter of 2007 compared to 20.5% in the second quarter of 2006. We expect positive quarterly consolidated EBITDA margin trend comparisons to continue for the balance of 2007 because of improved same store operating results and acquisitions. As we add acquisitions, incremental acquired field EBITDA should substantially fall to consolidated EBITDA and pretax free cash flow and be accretive to EPS as well.

As we leverage this growth over our mostly fixed cost platform, we expect our consolidated EBITDA margin to increase to within our annual sustainable earning power range of 24 to 26%. Free cash flow was $4.8 million for the second quarter and #4.6 million for the 6 months ended June 30th 2007. Year-to-date cash flow from operating activities increased by only $900,000 to $10.1 million and was negatively impacted by working capital items such as preened activities where certain trust withdrawals were delayed until the second half of 2007.

For the year, we continue to believe that working capital will have a neutral effect on cash flow. Year-to-date, cash used for capital expenditures totaled $5.6 million compared to $2.4 million in the prior year.

Growth capital expenditures totaled $2.2 million for the first six months of 2007 and include amount spent on new funeral home properties, cemetery property development and improvements to the businesses acquired in 2007.

Maintenance capital expenditures totaled $3.4 million year-to-date, which is approximately one-half of our $6.5 million estimate for 2007. During the second quarter of 2007, we closed on two standalone acquisitions Conejo Mountain Funeral Home and Memorial Park in Camarillo, California and that occurred on April 1st of 2007 and Cloverdale Funeral Home and Memorial Park in Boise, Idaho, which occurred on June 12th, 2007. Conejo Mountain performs approximately 390 cemetery interments and 275 funeral services annually. This acquisition represents our entry into Southern California and positions us to pursue other opportunities in the greater Los Angeles market, where we are interested in acquiring a group of high performing businesses.

Cloverdale performs approximately 600 funeral services and 400 cemetery interments annually. This acquisition will complement our existing funeral operations in Boise and the adjacent markets of Caldwell, Meridian and Nampa, which together perform a little over 1000 funeral services annually. As Mel said, we have also reasonably closed on two tuck-in acquisitions, which complement our existing businesses in Santa Fe, New Mexico and Springfield, Massachusetts.

The Cloverdale, Santa Fe and Springfield acquisitions are expected to add materially to our new acquisition portfolio performance during the four quarter outlook period ended June 30, 2008. So, we have increased our outlook performance accordingly. In addition, we increased our estimate of capital expenditures for this period to $9.7 million, which includes $2.7 million designated for growth opportunities. So, our revised outlook now for the year ended June 30, 2008 would peg revenues in the range of $168 to $172 million, consolidated EBITDA would be $40 to $42 million, diluted earnings per share will be in the range of $0.43 to $0.47 and free cash flow will be in the range of $13 to $14.5 million. With that, I will turn it back to Mel.

Thank you, Joe. Well, Carriage is an exciting place to be these days, I can tell you. I get pumped everyday I get up and come to work. You can feel the energy, you can sense the momentum all through the company, the trend is truly our friend, as I said in the press release and we've realized and I think everyone in our company realizes that our success and destiny as an enterprise is in our control. And I can tell you that we all intend to make the most of it. To put it mildly way, our executive team, our field operations leadership teams, and our people in-charge of the businesses that's where the value is created, we support them, they will do the work. Many of them are new, but they are pumped, primed and along with the rest of us, ready to continue to produce sustainable results over time. Joe and I have the good fortune in the role of presenting these results to you each quarter. With that, I will open it up for questions. Michael?

All right, thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Jamie Clement with Sidoti & Company. Please go ahead.

Hi, good morning gentlemen.

Hey Jamie.

Good morning.

Hey, Mel, here is a quarter where, you know, we see evidence of the acquisition program, those businesses EBITDA flow into the bottom line, you all have a new reporting format. Here is a question for you. None of us have any idea the field level profitability of independent companies out there, why would we? The other public companies do not report their numbers the same way that yours do, so doing a little calculation here based on your quarterly numbers, it looks as if the acquired funeral field level EBITDA margin was about 34% and the cemetery margin what you acquire was about 30%, so couple of 100 basis points less than, your other businesses. Is this level of [profitability] is that representative of what's out there in the market because we don't know. So, can you help us understand that a little bit better?

Yeah, I -- well, I will give it a good shot. What changed our company was going to a standards operating model where we defined the sustainable and the language has really changed to align with the model. It's all about growing your business on the funeral side because it's a high fixed cost business. But, at some point you should -- if you have a stable business, you should have sustainable gross margins. We don't report that in our public numbers; what you see here, is the top, the volumes, the revenue, and the field EBITDA, but in between there should be sustainable gross margins depending on the size of the business, but especially the mix, burial versus cremation. And our standards define the sustainable gross margin within a range for each size and mix in our company. We have enough data over 10 years to do that. Those standards are within a range and then we have [SNB] as a percent of revenue as a standard within a range, so people can maneuver within the range and then the other percentage range is the field EBITDA margin which is the result.

We don't manage field EBITDA margin. What our people do is work on the business on the other standards, which include volumes, market share, average, people, quality of people, continuos upgrading of your people; training, hiring the strong ones, firing the weak ones. This is what we work on all the time to produce sustainable profitability margins. Now, what we find in the rest of the world is that typically an independent when they see what we are doing, the best ones are doing great business, but they may not be hitting achievable or achieving sustainable margins. So, I can't say for sure, we see great independents that have very high profit margins, we see weaker independent managers, they may have a good franchise that have lower profit margins, what we do is apply our standards to that size and mix of business and figure we can integrate it into our portfolio over a period of the year with the right leadership in place. So, that the margins on that business should reach attainable sustainable levels within 12 months equal to the rest of our portfolio.

Okay, okay.

And I don't know about the other the public companies, I don't know anybody else, all I know is what we are doing is working.

Yeah -- no, and really my question was about, I think there isn't a whole lot of data out there that really discusses what field level EBITDA of your industry really is and--?

This is what I call bikini reporting.

Yeah -- no, absolutely, absolutely. So, I am just -- just to understand, the businesses that you had during the quarter that are in here, over time, might we expect their EBITDA margin to start to pickup and approximate the average of the rest of your businesses or is it just, you can't even generalize because it is on a location by location basis?

That is a great question and here's my response. If you look at the strategic portfolio optimization model that we describe in our profile, it lists six strategic ranking criteria. We use those criteria to qualify acquisition candidates and the reason we do is that we want to be buying, in general, there will always be exceptions, larger, stronger brands in larger markets where there are positive demographics. So, you have the opportunity to grow your volumes, your average, and your margins over time. So, that after a few years, I would expect this portfolio to achieve a higher sustainable margin than the rest of our portfolio.

Interesting, okay. Okay, thank you very much. I'll get back in the queue.

All right, thank you. (OPERATOR INSTRUCTIONS) Mike Scarangello with Merrill Lynch. Please go ahead with your question.

Hey good morning guys.

Hey good morning Mike.

Good quarter, definitely good quarter, I don't have all that much to ask you. I had a couple of questions around funeral averages. I guess kind of you implied that your funeral averages were up maybe about 5%, but I actually couldn't find it, maybe you can confirm and then tell me how that's going. Some of your competitors are talking about segmenting their customers and they are getting funeral averages up that way and bundling product and services to get cremation average up, I'd just like to know what's going on there?

Well, let me first, we don't have any idea what anybody else is doing. We have a standard on our averages and people are trying to achieve their standard; we have a standard on our burial average and we have a standard on our cremation average. That is weighted 10% out of a 100. People are working on it all the time. We don't have any other initiative other than -- our people know that to achieve sustainable margins they have to have an increase in their revenue over time to cover the cost. Now, Joe can give you some details on what the average was.

Yeah, for the quarter Mike, the burial average was up 4.5%, so our burial average now sits at $7,335. The cremation average was up about 0.7% and it is at $2,708 and then our overall average was up, you hit it pretty close, it was 4.6% and stands at $5,406.

Okay, all right. Little suggestion from the peanut gallery, I would love to see volume and averages on that front page at some point, I know your press release has got...?

You won't see it Mike. You have to look at the trends. We don't look at it, I don't worry about it and we don't talk death rates, averages any more around here, it just happens in the field.

All right. I got to go through the 28 pages then is what you are telling me?

Yep. But if you look at the trends, you will quit worrying about those details.

Okay.

Those details are in MD&A and the 10-Q Mike.

All right. You have got to give us a chance to catch up now. I'll get there?

I know, you'll get there, we are still adjusting too; my Board still thinks it's kind of a crazy idea, but that's okay.

I have to put new toner on my printer before I printout out your press release. Let me just ask you Joe, just on debt needs, I mean, in the past you've said you think your acquisition pace is sustainable without borrowing, I mean it sounds like it's getting more robust by the conference call here. So, I just want to check to see if that's the case and then because you have been performing so well, your leverage is starting to come down nicely. Is there some target that you get to where you say, "Okay, I don't want to be less leveraged than X, so at that point I may add or consider adding debt to my capital structure?"

Well, we said what we said and we meant what we said. We don't want any more debt. We want to buy great businesses that we can grow overtime. If we make a few more acquisitions a little faster than our long-term plan says we'll pause, take a breather and make sure we have got the right leadership and operating and catch our breath. We like to produce our own cash. We don't want to ask anybody for any more. That doesn't mean we wouldn't dip into our line of credit if a great deal came along, but only for a little bit.

Yeah, it would be a temporary borrowing if we did that Mike and the other thing we don't want to do and will not be doing is issuing more [equity]. So, as Mel said, this growth program is going to be self financed and that's -- we've committed to that and that's what we are going to stick to. And the great thing is we have the luxury of being able to a certain extent control the pace. I mean we don't have to grow at a certain rate. I think what you have seen in the last two quarters is we have a lot of momentum coming out of last year in terms of discussions we were having with potential sellers and happened to line up closing those deals in the first half, but to a large extent we control that pace.

And Mike, what is interesting is that clearly over the last seven years, there has been a backlog of independents who have succession planning issues that are real and we didn't know, because we didn't have any visibility even nine months ago what it would like, but it's pretty good. Now, we can time that so that we don't get ahead of ourselves and we don't intend to get ahead of ourselves.

Okay. Fair enough, thank you guys.

You bet.

We have a follow up from Jamie Clement. Please go ahead.

Hey, Mel just regarding the acquisition pipeline. You know, you mentioned that no brokers that sort of thing, I mean has the tightness in the credit markets recently, I mean arguably that could you help you, couldn't it?

I am not sure, I get your--

Oh, I guess what I was saying was in terms of, I know that there has been some private money that has sort of poked around your industry a little bit over the last year. And what I was basically insinuating was if you are a cash buyer, the situation in the credit markets right now may actually arguably help you out a little bit?

Well, I will tell you my personal view of that, I mean there can be some new money that comes under our industry. At one point in our life, we were new money in the industry. I can tell you we had to build our own track record and reputation and it didn't happen in a year or two years or five years or even ten years. It's been 16 years. We were the new kid on the block once and we couldn't get to the table with the best independents and the new money will not be able to get to the table with the best independents either because they are not selling just for money. We don't -- if someone is auctioning their business, we are literally not interested.

Okay, okay. Thank you very much for your time.

(OPERATOR INSTRUCTIONS) Management there are no further questions. Please continue with any closing comments.

Well, we appreciate you tuning in today. It is another quarter, but again, just a quarter. We will continue to report our results over time. Thank you very much.

Thank you. Ladies and gentleman, this concludes the Carriage Services second quarter earnings conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 303-590-3000 and enter the pass code 11094377. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter the pass code 11094377. You may disconnect. Thank you very much for using AT&T Conferencing. Have a very pleasant rest of your day.