Carriage Services Inc (CSV) 2007 Q4 法說會逐字稿

Thank you so much for standing by, and welcome to the Carriage Services fourth quarter and full year 2007 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today on Friday, the 7th of March 2008. I'll now turn the conference over to Mr. Kip Rupp, Managing Partner with DRG & E. Please go ahead.

Thanks, Michael. Good morning, everyone. We appreciate you joining us for the 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 run through. If you would like to be on the e-mail distribution or fax list for future Carriage Services news releases, or if you had any technical problems and did not receive your copy of the news release yesterday afternoon please call our offices at DRG&E and we will be happy to help you out. That number is 713-529-6600.

Also, if you would like to listen to a replay of today's call one will be available via webcast by going to Carriage's website at www.carriageservices.com. Additionally, in a few hours there will be a telephonic instant replay available that will be available for the next seven days. The replay access number and code are in the press release that was released yesterday afternoon.

Please note that information reported on this call speaks only as of today, March 7, 2008 and, therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay listening. As you know, certain statements made today in the conference call or elsewhere by, or on behalf of, the Company that are not historical facts are intended to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E in the Securities Act of 1934 as amended.

These statements are based upon assumptions that the Company believes are reasonable. However, many factors that are discussed under forward-looking statements and cautionary statements in the Company's Annual Report on 10-K for the year 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.

A copy of the Company's Form 10-K and 10-Qs and other information and news releases are available for free on the Carriage Services website.

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

Thank you, Kip. Well, how does everybody like our bikini reporting after one year? Because we worked out a lot in the gym before rolling it out about one year ago, and our results for the year show that we are a very fit Company. More seriously, our reporting is the most transparent in the industry, and the most transparent probably in most companies, no matter what the industry.

There is simply no place to hide from our field operating and acquisition results, and beneficially our managing partners can see the impact their individual business is having on Carriage's total performance. We like it that way and they like it that it way. Our Company theme for 2007 was 2007, the year of being the best, no excuses. And I am extremely proud that our employees and leaders lived up to the promise of that theme with consistently broad and deep execution of all three of our models.

It was truly a breakout year for Carriage in numerous ways which got reflected on a stock price increase of 73% to $8.80 per share on December 31, 2007. And while the stock is backed up quite a bit in the current market correction, we do not concern ourselves with that. We're not buying any stock back in, as the stock should follow the progress of the Company over time, and I can tell you our Company continues to get better.

We made seven great acquisitions during 2007, each of which was consistent with our 10-year vision for Carriage. As part of that vision, we have established five and 10-year goals to grow the financial performance contribution from our acquisition portfolio by focusing our capital investment in 10 to 15 strategic markets where demographic trends are positive and strong independent brands that fit our six strategic criteria are available for expansion and consolidation.

Our trend reports isolate the impact this growing acquisition portfolio is having on our performance over time. We believe that our commitment to making the individual experience of our client family is highly valuable and unique within a decentralized framework of being the best entrepreneurial culture offers an attractive succession planning solution to the remaining large quality independents in our industry.

Specifically, we want to be known for hiring and retaining only the best talent and for acquiring only the best operations in large demographically attractive markets. A being the best, not the biggest, reputation and culture is a compelling vision for our Company and reflects our view of the very serious and noble nature of our work -- taking great care of the deceased while serving the celebration of life, grief of loss and memorialization needs of the living.

Our direction and strategies are clear, and our dedication to this vision is strong and unwaivering. Now it's all about execution. With that I would like to turn it over to Joe for some brief remarks about our year.

Good morning, everyone. I wanted to remind you that if you're looking at the version of the press release that appears on the wire services, the trend reports are not properly formatted on those versions. Therefore, we will post, as we have in prior quarters, the press release on our website, and you can go there to get properly formatted trend reports.

Many of you have told us that you have a much better understanding of our annual and quarterly trend reports. Rather than step you through the reports, like I've done in the prior three quarters, I would like to focus my comments on a dynamic that we have discussed in our Company investment profile and press releases for almost a year, and now is becoming very apparent in our annual trend reporting. That is our ability to leverage smaller revenue increases into much larger earnings increases.

Ultimately, we believe this will drive superior investment returns as we continue to benefit from the consolidation growth cycle that is just beginning. We benefit from operating leverage whereby modest increases in same-store revenue and field EBITDA margins result in greater increases in same-store field EBITDA. The increases in same-store revenue and field EBITDA is driven by our outstanding and consistent execution of our standard operating model which we experienced in 2007.

As a result, we were able to leverage a 2.6% increase in same-store revenues and a 230-basis-point increase in field EBITDA margin into a 9.4% increase in same-store field EBITDA. Same-store revenue increased $3.9 million in our same-store field EBITDA increased $4.9 million, which means our controllable same-store field earnings increased 126% over the increase in same-store revenues. Substantially all the earnings improvement came from our Central Region and Rolling Hills Memorial Park.

We also benefit from consolidation platform leverage whereby acquired field EBITDA is fully accretive to both consolidated EBITDA and EPS. In 2007, our seven acquired businesses generated an incremental $4.5 million of field EBITDA and a 32.1% field EBITDA margin. As we fully integrate these businesses, we expect their field EBITDA margins to eventually exceed the average of our same-store portfolio because the acquired businesses tend to be larger, higher margin businesses, which is consistent with our strategic optimization model.

Finally, we benefit from organizational overhead leverage and capital structure leverage. Organizational overhead leverage results from our relatively fixed cost regional and corporate organizations. Approximately two-thirds of our $2.8 million increase in total overhead resulted from increases in variable costs such as incentive compensation, recruiting fees and legal expenses related to four specific lawsuits. Our fixed regional and corporate overhead increased 5.7%, or approximately $900,000, slightly higher than inflation because we upgraded our capabilities in several corporate departments this year.

Capital structure leverage results from our low cost, fixed rate debt and a low number of common shares outstanding. As a result, we leveraged an 11.6% increase in total revenue from continuing operations into a 17.8% increase in total field EBITDA, a 20% increase in consolidated EBITDA, and a 95% increase in diluted EPS. We expect these trends to continue in 2008, even without additional acquisitions.

Based on our 2008 outlook, which assumes no acquisitions, we expect to leverage a 7.9% increase in total revenue from continuing operations into an 8.8% increase in field EBITDA, a 12% increase in consolidated EBITDA and a 28% increase in diluted EPS.

We would expect any incremental acquired revenue to enhance the leverage effects on our 2008 financial results. Mel?

Thank you, Joe. I want to make one comment before opening it up for questions. As many of you know, we put out a release awhile back that Joe would be leaving Carriage and the death care industry, and I wanted to express my sincere thanks and those of the rest of the leadership team at Carriage and all the employees and our board for his five and a half years of service in our Company.

He came at a time when we needed some really deep thinking, and we would it not be where we are today without Joe Saporito. I personally want to thank him and wish him the best wherever he winds up, and his friendship will be missed, but it will also continue. With that, I'd like to open it up for questions.

Thank you, Mel.

Thank you. Ladies and gentlemen, at this time we will begin our question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question will be coming from Jamie Clement with Sidoti and Company. Please go ahead.

Mel, Joe, good morning.

Good morning.

Joe, first of all, on behalf of the Wall Street community, thanks very much for over the years helping us better understand the Carriage Services story and for all the work you did.

You're quite welcome, Jamie. Pleasure.

Mel, with respect to -- looking at some of the overhead expenses in the quarter, I think your press release refers to the variable line item as an anomaly, or an aberration. Can you give us a little bit more feel on why that number came in a little higher than it has in previous quarters?

Yes, we've got -- we've always had litigation, but we've got four cases that popped up during 2007 that we have separated from the rest of what I call recurring type litigation, which we've always had. Two of these are class action in nature. Some of the other companies have suffered from some of these type suits.

We were blessed until 2007 in avoiding that. Some of this relates to past leadership and issues, and we think it will be resolved. We don't think these four, based on how we're organized today and the strong leadership we have in place will occur in the future to the same degree, so we've separated them into variable overhead. They are there now. They will pass. And after they pass, I think you will see that trend down materially.

Okay.

The other -- so I don't see this -- and this is the language we use around here. I don't see the variable overhead increase as a sustainable overhead hit against the sustainable earning power of the Company, which we define as consolidated EBITDA margin.

I hear you. Mel, in looking back at 2007, I think, did you close seven acquisitions? Is that the right number?

Seven.

Seven. Heading into 2007, was the number seven, was that a lot higher than you thought would you end up with, or did you have enough visibility that that was the number you expected? In other words, was this a -- I think you all have said publicly you don't expect any deals to close in the first half 2008, so was there anything -- was there anything unusual about the circumstances of 2007?

I think it was a little unusual. I think there had been seven or eight years of no consolidation to speak of, and so some of the large independents had succession planning on their mind, and as I've explained on these calls before, unless there are a true seller with proper motivations, health, age, other interests, unless the motivations align, they're not a true seller and the price expectations, therefore, won't be in range for what we're willing to do.

In these cases, I was a little surprised, to be honest, at how much activity there was and how little competition there was for it. Now, three of these acquisitions were for places that Service Corp. sold, so one of those we knew about going into '07, but the other two we didn't, because they weren't FTC divestitures.

The other four were independents, and they're all fantastic businesses. So we feel very honored with those affiliations, and we think there are more out there like that.

Mel, how long do these deals in your industry take to come together? Like in other words, if you all have said that you don't expect anything to close in the first half, I mean, are there properties that you're kind of taking a look at right now you think could be second-half deals, or you -- can you give us a sense of how long the process takes and how these things kind of come together?

With the right businesses, and I paint a picture in here of our vision, and so we're not interested in just buying places. We did in that the '90s, and it didn't turn out very well.

So we want to build relationships, and be there and be explaining what our Company has become, the culture, the framework, our models, and what we find is that the large independents still remaining in the country relate very well to what we have invented, what we have perfected. Their issues are how to deal with leadership, how to deal with people house, to grow their business, how to take care of their client families, and our models all speak to that kind of alignment.

And so we're finding a kinship, so to speak, in what we have done and how we do it with some of the best, highest quality independents. So you build a relationship, and you wait for the motivations to align. And we're building those relationships.

Okay.

To say that the second half or this or that, all I can tell you is we put out a plan with some ranges through 2012, and we will do that. Now, the timing, I couldn't -- I'm not going to get into quarter, half, or this or that, but we will do that.

Okay. Mel --

Put it in the bank.

No, I hear you. It was just, it's -- some industries, deals come together pretty quickly, and if you say, okay, well, nothing in the first half, I want to make sure that just doesn't mean, oh, there's no pipeline. You know what I mean? And I think the way you answered the question, you explained it 100%.

There's a pipeline, but we're not out turning over rocks looking for deals.

I hear you loud and clear. Thank you all very much for your time.

Thank you, Jamie.

Thank you. Our next question is coming from Clint Fendley with Davenport & Company. Please go ahead.

Good morning, gentlemen, this is Drew [Gaputis] for Clint. Just a question here about, it looks like in 2007 you guys benefited some from preneed cemetery property sales. I was wondering what your thoughts on that was going forward, and especially in light of an environment with less consumer discretionary spending?

Yes, we hear that is an issue. We read the papers. But will you have to understand, I can't predict would the consumer is going to do, but in our Company, and in a high performance culture, there are no excuses. If you have A players in your parks running them and they have an A-player sales organization with the right kind of maintenance and the property looks great, I mean, there are no excuses.

So I'm not into predicting consumer behavior. We're into hiring the best talent and putting them in the right spots to be successful. How that will affect us in the short term, what happens with the economy and the consumer, don't know and don't care.

All right, thank you, gentlemen.

Thank you. (OPERATOR INSTRUCTIONS) Next question is coming from the line of Alan Weber with Robotti & Company. Please go ahead

Good morning, just two quick questions. When you talked about the '08 assumptions, and you talked about maintenance CapEx of $9 million, can you just kind of explain, is that like a -- what does that really mean in your case?

Well, what we term maintenance CapEx would primarily be capital expenditures that we make to maintain our facilities and fleet. It's a little bit higher than what you've seen in the past from us because there will be some what we term maintenance CapEx. In other words, CapEx that we expect to spend to maintain facilities and what not related to some of the acquisitions we made this year.

For example, we acquired some businesses in the Massachusetts market. We'll be making some improvements to some of those facilities, but those improvements will allow us to close two or three of those facilities and sell them, so that we'll be doing more business through fewer facilities when we get through with that.

So that's the kind of thing we call maintenance CapEx, versus something like spending money to build cemetery inventories or to build new facilities, which, we will likely be doing some of that in '08. At this point, though, we couldn't really give you a hard dollar figure.

Let me give you a little more color on maintenance CapEx and what that means. We have a language now in Carriage that is obviously very different than accounting language. What we want to do is to maintain the sustainable earning power of our operating businesses wherever they are. That's not growth. That's maintain the sustainable earning power, which we define in our standards operating model. Every one of our managing partners knows what that means.

The amount of CapEx required to maintain the sustainable earning power of our operating businesses is going up in part because of what Joe just said. However, there are some places that we have that had been shorted on maintenance CapEx because our managing partners, and there were only a few, ran the business to maximize short-term profits and not to build it for the long term. And so we're going to do a little catch-up.

Most of this is in the Western Region, which has new leadership in the middle of 2007, and those managing partners who did that, we knew they would not make the cut. Those are what we call [budget-meisters.] What we're looking for are business builders that build it over time with the best people and it is built to last so that the earning power is sustainable. So it's a temporary uptick for the one reason Joe mentioned and the other I just mentioned.

So just curiosity then, when you talk about your five-year kind of goals, is arbitrarily just assuming some small increase to $9 million a year kind of a reasonable assumption?

I think it's -- I don't know that I would do that on a permanent basis. I think it's -- it's what we need to do in the short term. And by the way, we are a budget-free Company. Freedom at last. We have no budgets.

We do have capital plans. We have no budgets at the location level, we have no budgets in the home office, we have no overhead budgets. But we do have capital plans that are three-year plans. And they're all prioritized, and what you're seeing is short-term priorities. I don't even know what the maintenance CapEx looks like if you went out to 2009, but it could drop a little bit.

Okay. Fair enough. My other question, can you just quickly update on your cash tax expenses? I just forgot how far out kind of your NOL goes on like that?

Yes, our cash taxes this year were about $300,000 -- I'm sorry, in 2007 our cash taxes were about $300,000. This year our estimate is about $1 million. Substantially all that difference is because of state income taxes in some of the states that we operate.

We have an NOL that we would expect to last at least through 2008 at this point. It could it go beyond that. But, obviously, we firm that up each year as we file our tax return. But you can certainly expect it to go through at least 2008.

Okay. Great. Thanks very much.

You're welcome.

Thank you. Our next question is coming from the line of Darnell Azeez with Lord Abbett.

Hey, guys, just one quick question. In regards to acquisitions, I know we did a lot last year, and not going to be pushing it in '08. In terms of how confident are you guys in financing, your own financing that you will be able to finance an attractive deal or multiple deals that come along?

We are 100% confident that we can finance anything that comes along. We have a lot of free cash flow. We've estimated $15 million to $17 million this year. And we have a $35 million undrawn line of credit. And unlike what you read in the papers, we actually have people that want to lend us money.

That's always good.

We have great relationships with our creditors. Always have. We're proud of that relationship, throughout, thick and thin, we've never been in default of a covenant.

I think our credit profile speaks for itself. I don't know how our high-yield bonds are trading these days with all this turmoil in the market, but the last time I looked, while the spread had widened over treasuries it was only about 500 basis points.

I think one thing I didn't mention in my comments, but is certainly true, I think if you look at our credit profile and look at it, say at the end of last year, at the end of 2007, and project out what it's going to be at 2008, another benefit of the leverage that we're seeing in our business is a significantly improving credit profile.

And I think that's important for everyone to keep in mind. As we grow the business and grow our consolidated EBITDA, our credit profile is just going to continue to improve and I think, as Mel said, our banks are very happy with our performance and are very supportive.

Okay. Well, great job, guys, and that's all I had. Thank you.

Thank you. Our next question is coming from the line of Igor Lotsvin with Soma Asset Management. Please go ahead.

Yes, thank you. Thank you for taking my call. And I'm somewhat new to the story, so forgive me if the question is too basic. In terms of the performance of the trust investments, maybe can you give us a little color on that? Thanks.

Okay. We basically have three categories of trust investments, and the -- two of those categories of trust investments relate to funeral products and services and cemetery products and services, and the third is something we call perpetual care, which is related to -- essentially you could think of it as an endowment for the benefit of the maintenance of our cemetery properties.

We basically use independent advisers to help us set the allocation strategies and investment policies for those portfolios and we've had very good performance over the last year. The investment policies are set up so that we minimize and want to minimize our downside risk in those portfolios.

We're not necessarily looking for every basis point of return that we could possibly get out of those portfolios, because the objective there is for us to at least cover inflation and cover our price increases, and if we do better than that, that's gravy, as far as we're concerned, but we're not set up to milk every basis point out of that. On the contrary what we're trying to do is protect our downside risk.

So the portfolio, the cemetery portfolios, which probably the largest, our returns last year were right around 8%. Our funeral portfolio was a little bit lower than that. It was probably in the 6% range. But we're very, very pleased with that performance. It certainly meets our objectives.

And how have they been doing kind of year to date?

January is the only month we have data on right now. And basically, our cemetery portfolios were close to break even. They were slightly negative. I think they were very close to break even. So, again, consistent with our policy, our strategy, we want to protect the downside risk, and I think our advisers are doing a good job of that.

Our view of the investment side of this is we're in the operating business, not the investment business. Even though we have a large investment trust fund, just like Joe said, we are very conservative in how that gets managed. We're not trying to beat the market. But we want to make sure we get steady returns that allow us to live up to our obligations and then have some return left over for us.

Now, this is great and very helpful, but so I understand, who manages the trusts for you? Is it several advisers? Is it internally managed?

Look, we're not smart enough to internally manage. We know what we're good at, and we try to get better at it, but we turn it over to outside advisers. Joe, I don't know, is that public?

Well, we don't normally talk about the specific advisers, but the cemetery trust funds are managed by one adviser, and then we have the funeral trust funds are under several different investment scenarios, but in all cases, most of the money is discretion -- it's discretionary as to the investment allocations.

We obviously work side by side with the advisers in looking at the investment policies and the investment allocations. There is a portion that is non-discretionary, but that's definitely the minority of the funds that we have.

It's managed by professionals, pros.

Okay. Got it. Thank you very much.

Names you would recognize.

Thank you. (OPERATOR INSTRUCTIONS) The next question is coming from the line of Frank Bianco with Argent. Please go ahead.

Hi, good morning. Forgive me, I got on the call late. Can you reiterate what your CapEx spend plans are for '08 and '09?

For '08 what we're saying basically is we'll spend about $9 million primarily of maintenance CapEx. We haven't really published anything with respect to '09 at this point.

Let me comment, because I don't know that we said a whole lot about this in the press release. We do have some internal investment opportunities, growth opportunities. And since '06, in rolling out a new set of standards for our cemetery business, we've really gone to school on the cemetery business, and we like it.

However, we're looking at it completely differently than what we used to with much longer term strategy, master planning, demographics, product planning to meet those demographics, then building a sales organization that's customized to sell unique products to those customers. That takes a little longer. And we acquired three large combinations last year, and then we have some already, so we're doing a lot of work on our cemetery side that is much longer term strategic.

It will take some time, and it will take some investment in new inventory to really reach some of the upside potential, sustainable potential, in our cemetery side. But it's a side that we're really excited about. What you saw in '07 was really the low hanging fruit.

What you will see, and it's beginning now in '08, '09, 2010, I think you will see sustainable increases in our sales, no matter what the environment in the country, and it will be good, and it will be sustainable. So we're telling our people, do it right, and make it last. Now, we're also looking at internal opportunities to expand some existing funeral brands in some really strong markets where we have existed, but have not capitalized on that before.

So we paused, number one, to integrate what we bought last year, to recruit A players where we're missing them, and then to look at some of these internal investment opportunities, which are timely.

Okay. Just so I understand this, so all in, the CapEx, the number for '08 should be around $9 million, or is there going to be a growth?

No, all-in, the CapEx number would likely be higher than $9 million. We're saying that $9 million would be the maximum for what we term maintenance CapEx, but anything else above and beyond that would be clear growth opportunities, like Mel described. New facilities, new markets.

Inventory for cemeteries.

Inventory for cemeteries, which, obviously, will produce incremental revenues. So we view those as investment opportunities just like we would view an acquisition, and it has to meet the return on investment criteria that we have set for our capital.

And we're going to do a better job of segregating the CapEx into pure maintenance CapEx to maintain the existing sustainable earning power of our operating businesses versus cemetery inventory and the expansion of funeral brand opportunities. We'll make that real clear.

Can you give us a range as to what you think CapEx might be?

Nope.

No?

Not ready to do that.

Okay. Will it be materially different than '07?

Yes, it could be materially different than '07, because '07, we didn't really look at any internal growth prospects.

So directionally, it's going to be higher, right?

Directionally, it's going to be higher, but if it's higher, it will be because we expect growth and/or incremental revenues.

Okay. And then along those lines, when will you be publishing the 10-K?

Next week.

Okay. And then lastly, in terms of leverage, where are you guys comfortable going with your leverage number and -- I'll just leave it there.

Leverage?

Yes, like your total leverage.

We're comfortable -- we were comfortable before, we're comfortable now, we he'll be comfortable in the future.

It's going down as we continue to grow our consolidated EBITDA, and I think that from our perspective, that's a good thing, but as Mel said, we'd be comfortable taking on additional leverage if there was an appropriate growth opportunity out there that would provide the kinds of returns that we would expect on our capital.

Yes, there's still, I think, sometimes is a misperception about our balance sheet, because our book equity, a little better than $100 million, compared to our total debt of $230 million or so, includes $94 million of the convertible preferred debentures, which the banks and all of our lenders, senior lenders, view as equity like security, because of the features related to that.

So the Company's credit profile is strong. We have the estimate for '08 is $44 million of consolidated EBITDA. That's pretty much all cash. You look at the coverage of -- we have no principal maturities until 2015. So we're just paying interest. What's not to like?

This is not a book leverage deal. This industry is a really strong cash flow industry. It carries leverage. If you want to ask me what bothers me, might keep me up at night, it's not -- it hasn't been leverage. It's not leverage, and it won't be leverage. It will be finding the best talent.

Okay. Great. Thank you.

Thank you. We have a follow-up from the line of Jamie Clement. Please go ahead.

Hey, Mel, I'm sorry I have to ask this question. Just listening the last couple questions I just wanted to kind of make sure that I wasn't getting confused here or anything like that. I think, I assume investors saw you, you spent a big number on acquisitions in 2007. But you also acquired a lot of companies and you had some cash on the balance sheet.

My understanding, in terms of like your long-term acquisition program or goals for the next four or five years was that really, to hit your numbers, you're really talking about funding acquisitions out of free cash flow. Am I wrong about that?

No, we could hit -- we could do $10 million in annualized revenue a year out of free cash flow through 2012. That would put us up to about $240 million, $250 million in annualized revenue over next five years, all out of free cash flow.

If we do that, and we're in our sustainable earning power range, which we've defined as 24% to 26% consolidated EBITDA margin, I would think it would be on the high side of that. We'd have $60 plus million in consolidated EBITDA by 2012, and we wouldn't have any more debt than we have today. So we'd be, in my view, probably underleveraged, from a shareholder point of view.

Thank you very much. I appreciate it.

Thank you. Management, there are no further questions. Please continue with any closing comments.

I have no closing comments. It was one great year, but I think it was the first of many to come. So we appreciate your support.

Thank you, ladies and gentlemen, this does conclude the Carriage Services fourth quarter and full year 2007 earnings conference call. At this time, you may disconnect. We thank you very much for using ACT Conferencing. We wish you a very pleasant rest of your day and a wonderful weekend as well.