Carriage Services Inc (CSV) 2008 Q2 法說會逐字稿

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 open for questions. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Friday, August 8 2008. At this time, I would like to turn the conference over to Ken Dennard of DRG&E. Please go ahead, sir.

Thank you. Good morning, everyone. We appreciate you joining us for Carriage Services' conference call to discuss second quarter 2008 results.

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 list or fax list for future Carriage Services releases or you have technical problems and didn't receive your copy yet this afternoon, please call our offices at DRG&E and we'll be happy to assist you. That number is 713-529-6600. Additionally, due to the fact the financial tables are very long and are wide for formatting for the wire services, to have it on one-page formatted correctly, we recommend that you download the PDF of the table that is on the Carriage website or it could be on my e-mail I sent you yesterday.

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. It will be available 24 hours a day for the next week. The replay and access code are in the release yesterday afternoon. Please note that information reported on this call speaks only as of today August 8, 2008. Therefore you are advised that any time sensitive information may not be accurate as of the time of any replay listing.

Also as you know, certain statements made today on the conference call or elsewhere by or on behalf of the Company that are not historical facts, are intended to be forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended in Section 21-E of the Securities Act of 1934 as amended. These statements are based u[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 31, 2007, and any subsequent SEC filings, could cause the Company's results in the future to differ materially from the forward-looking statements made today or in other documents or oral presentations made by or on behalf of the Company. A copy of the Company's Forms 10-K and 10-Q, news releases and are other information are available for free on the Carriage Services website. With that, I would like to turn the call over to Mel Payne, Chairman and Chief Executive Officer. Mel?

Thank you, Ken. I would characterize our second quarter as the perfect storm of reported underperformance. And once again, I find that perfect storms are very interesting. You don't know how bad they are until they are passed, but that's my main point. This perfect storm has been passed and will not be repeated.

After six straight quarters of excellent year-over-year performance starting with the fourth quarter of 2006, we had a very weak quarter with zero earnings per share. This underperformance was broad across our portfolio and reflected poor execution of our standards operating model in too many businesses in our portfolio, but also a difficult economic environment.

Some of the issues related to our under performance were controllable. For example, salaries and benefits where it managed to the actual weaker revenue. And some of the issues were not. For example, the spike in cremation rate.

We are moving fast to take specific actions to improve performance and have total confidence that our performance will improve sequentially in the third and fourth quarter, and position 2009 for a return to positive revenue and margin trends. Because of the weakness in the second quarter, however, we have lowered our rolling fourth-quarter outlook ending June 30, 2009 to reflect a reduction of $0.10 a share in the EPS range to $0.38 to $0.42 from $0.48 to $0.52 and reduction of about $3 million in the consolidated EBITDA range to $39.5 million to $42.5 million from $43 million to $45 million. However, I want to emphasize that within the next 12 to 18 months, we fully expect our performance to improve to a degree that our rolling four-quarter outlook will return to the $0.48 to $0.52 per share and $43 million, $45 million consolidated EBITDA.

Let me now walk you through some details of our trend reports to give a little more color. While I think we adequately cover the details of the quarter in the press release, what I would prefer to cover is the recent performance using the annual trend reports so that I can crystallize the path of improved performance expectations over the next 12 to 18 months much more specifically. When looking at our annual trend, and we always show the annual trend report first in our press release and the quarterly second. It's only when you look at the longer-term trends, can you truly understand the dynamics of our performance.

If we look at same-store funeral volumes, for the trailing four quarters ending June 30, 2008, our volumes are actually up almost 1%. In our business, which is a strong operating leverage business, if you have the volumes, you have something to manage. Notwithstanding other issues like cremation rate and so on; averages.

The same thing -- that's the first increase in same-store volumes that we've had since 2004 on a trailing four-quarter basis. We are very positive about that. And July continues to show good volume strength.

If we look at same-store funeral revenue, because of weakness in our averages and an uptick in the cremation rate, we only increased revenue 0.6% but yet it was positive, not negative. Where we have a problem in the second quarter was in our margin. But if you look at the trailing four quarters in same-store funeral operations, we only declined 40 basis points from 38.1% to 37.7%. If you look at how the model has been executed over the last 4.5 years, we went up every year from 34.8% to 35.6% in '05, to 36.8% in '08, to 38.1% in '07 and we dipped down 40 basis points only, notwithstanding a very weak second quarter.

The reason for that is we outperformed in the first quarter. Our same-store field EBITDA margin in the first quarter was 42.5%. That is not a sustainable margin.

We never had a margin that high before. It was almost too good to be true. And is now followed by very a very weak quarter that will also be too bad to be true in the next quarter and the next quarter. So you have to look at the longer term trends.

We do not have fundamental problems in our funeral home portfolio. Let me make it straight. We do not have fundamental problems, we have selective location issues. We do have some issues related to the mix and we are working on how to improve our average. But that is something we can control and will control and have actions to do so.

Where we have -- on the same-store cemetery, our volume decline for the 12 -- for the four quarters ending June 30 was only 0.7%. We are pretty flat on interments -- same-store interments. That's the first time we have had flat interments for awhile. We have had fairly serious declines in '07, in '05, and we are pleased that we have flat interments.

Where we had a problem with our same-store cemetery is all revenue. And primarily that was related to same-store preneed property sales. We had weak performance in the first quarter. I covered that in some detail.

I can tell you that the weakness has continued in the second quarter, but I am already seeing life in the top seven or eight cemeteries. We've made a lot of progress with sales leadership, building sales teams. Between now and the end of the year, I expect to see that continue to improve so that we head into 2009 with our larger cemeteries fully staffed with sales leadership, and teams and product. So that 2009 ought to look materially different than 2008.

At what point we returned to the level of 2007, I don't know but I do think we will reach that level sometime on an annualized basis in 2009. The acquisitions are not as integrated as we would have liked at this point. But I want to point out that our acquisition revenue for the trailing four quarters of $22.7 million will increase once we have owned these properties for a full year. We did make some acquisitions in the second half of last year that is not reflected.

I would expect annualized acquisition revenues of what we own today to be in the $26 million to $27 million range. And I would expect the margin -- the field EBITDA margin of the acquired revenue to get up to 36% which is about what our same-store field EBITDA margin is today, even with the second quarter performance. And I would expect that to happen over the next six to 12 months.

The other issue that has hurt us in the second quarter is continuing litigation expense on three or four cases that we do expect to be resolved in the next 12 months. Plus we had separation expense on Joe Saporito.

Now, if I walk you down to the bottom, the trailing fourth quarters, we earned $0.30 a share compared to $0.38 for all of '07. If you look at where we really got hurt, it's not that complicated. We did not get hurt materially on same-store funeral performance, comparing the trailing four quarters to 2007. We only dropped about $200,000 something in field EBITDA which is about a half $0.005 a share. We do not have a problem in our same-store funeral home operations that won't be repaired within the next six months.

Where we really had a problem in lost EPS was on the same-store cemetery performance where we dropped about $0.09 a share, looking at the trailing four quarters compared to 2007. As I said earlier, we are making a lot of progress. We do expect to return to the 2007 level of performance sometime in 2009. We will pick up that $0.09 on an annualized basis at that point.

On the acquisitions, if you look at 26%, 27% annualized revenue and bring the margin up to 36% equal to our same-store portfolio, we will pick up another $0.06 per share. If you eliminate the litigation expense which will be nonrecurring when we settle these cases, and eliminate the overhead related to Joe's separation, you pick up another $0.05 a share. Down at the bottom where you have $0.30 a share for the trailing four quarters and pick up $0.09 on the cemetery, $0.06 on the acquisition portfolio, and $0.05 on variable overhead, you are now adding $0.20 to the $0.30 and you're in the mid-range of what we believe is the sustainable earning power of our existing portfolio of operating assets.

This is not shooting the moon. This is real. And we will do it.

At this point, I'd like to introduce Billy Dixon. Billy joined our company about a month ago, and he is already making a difference. I'll turn the call over to Billy to make some remarks. Billy?

Thanks, Mel. I am very excited to be part of the Carriage team. The reason I joined Carriage is because I was very impressed with Carriage's being the best model and their standards operating model. I really think that is an excellent model that only needs to be refined in order to deliver the value that Mel has already explained is available for our shareholders. I really see a lot of potential in Carriage and expect great things from the future of Carriage. I'm just very excited to be part of the team and look forward to delivering shareholder value in the future.

Thank you, Billy. I think one thing the second quarter certainly pointed out is that the consolidation platform that we call Carriage is sensitive. The leveraging dynamics that we have covered in our company investment profile, we have covered in press releases, it works both ways. We can get small increases in revenue, small increases in margins on the upside and it creates a lot of earnings momentum, but the reverse is true.

When we have a weak revenue environment and our expenses are not managed as tightly as they should. Our platform is sensitive. We need to have more scale. We intend to add more scale over time so that it is less sensitive, but still has its same dynamics working for us. With that, I would like to open it up to questions.

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.) Our first question is from the line of Jamie Clement from Sidoti & Company.

Good morning.

Good morning.

Mel, I'm not sure if this is in the press release. Do you have an estimate on how much the cremation spike hurt you from any guess perspective?

Yes. I think that's about $0.03 a share.

$0.03, okay. What I would love to hear is a little bit more about it and you alluded to this in your prepared remarks. Of the things on the funeral side that I think you alluded to, certain aspects of the standard model not being executed properly. The things that you feel you have control over in the near term, can you give us a little bit more color on that? What you actually have control over? What went wrong and what you're doing to fix it right now?

When you look at a quarter and isolate the quarter, it looks terrible but when you blend it with the first quarter, we stand by the margins for our same-store funeral portfolio for the six months. They're pretty awesome. If I told you three years ago, we were going to have 37.7% same-store funeral field EBITDA margin for that period of time that would be a pretty awesome result.

The problem is the volatility in it. And we had strong volumes in the first quarter. Did he have a spike incremation rates, so it ran the margin way up in the first quarter. I said at the time, it wasn't sustainable and now it yo-yoed back down the other way. This is not radical surgery.

What we had was weak revenue in some parts of our portfolio, not all parts of our portfolio. The east did extremely well. The west was the most underperforming region in the second quarter. Their volumes were way down. Their cremation rates were up, but they were also the outperformer in the first quarter. Their margins in the first quarter were almost sinful.

When you look at it across the Company by region by location, this is not a company in crisis. And I want to make that point. And it's a very important point.

There are things we can do to improve expense control, but a lot of our places are running really well. When you have a stabilization of volumes, you don't want to overreact. That's the worst thing you can do with a model like ours. But we got some businesses in every region that need some attention. They are getting it, believe me, already. We didn't have to wait and see the result.

They are getting a lot of attention. And it won't stay this way.

Okay. Mel, what I'm getting at is you've got a rolling four-quarter outlook, right?

Yes.

Anomalies, i.e., strength in first quarter, weakness in second quarter, shouldn't really impact that much really one way or the other. I know you don't have a lot of shares outstanding, but you still are talking about a dime reduction. In terms of the outlook, is that -- is a third of that time reduction just the assumption of a cremation rate? I'm just trying to understand the drivers.

I think the main thing on the dime is the cremation rate is definitely something that has caught us offguard. It spiked in the first quarter and I mentioned at the time it cost us $0.02 to $0.03 a share in the first quarter. It spiked in the second quarter; cost us a similar amount. We've confirmed that this is the kind of experience -- let's say the casket companies are having as well. And so I don't know -- we have never had a spike like this that's sustained itself through six months.

Yes.

I've looked back over the portfolio, and our cremation rate in the portfolio same-store has gone up 100 basis points a year.

Okay.

I can't know why that is. I don't think it is related to the economy,but after six months I'm a little more cautious on saying --

Mel, that's what I'm getting to. Nobody knew it. It seems like people are whispering about that.

Yes.

But nobody is really -- nobody is willing to say that actually may be going on here. And candidly, I'm starting to wonder that myself a little bit. Just changing gears a little bit.

But the other part of the ten steps, Jamie, it is only two things. It is the cremation and it's how long it would take the cemetery performance to get up. It's not a question of if. It's when. And in the next 12 months I can't guarantee that it will be back to the level of 2007. Although I can guarantee, it will be a lot better than it has been this year.

And, Mel, that was my follow-up question. Just a little bit of an update on specifically where you are stand on -- has the new talent been identified? Do you have the people in place on the cemetery side? Also what I'm wondering is the general economy -- maybe after the first quarter, considering the work you're doing on the cemetery side. Just maybe a little incremental economic deterioration pauses you to be a little more cautious on the cemetery operations turn around? Is that a driver here, reading between the lines?

We have asked the question here internally. What I saw in our numbers and I don't quite understand it. I'm just being honest. I have never seen our at-need averages tick down year-over-year. Which they did. It wasn't much. I think just a little bit. I think $50.

I come in -- the guys across town, their averages were strong. I don't know why our's ticked down. I don't think they will stay down. Whether that has anything to do with the economy, I couldn't say. I doubt it. I can't know that.

On the cemetery side, we've made great progress. We've hired -- our structure is such that we only have four cemeteries in our east. We have three of four -- three in our western region. We have two or three in our central that are mid-sized and big and can make a material impact on our performance. We only have a few spots now that are not filled with good outstanding sales talent, including we have a full compliment now at Rolling Hills for the first time in a long time. Talent is just A-plus so I think that alone will start to make a difference in the latter part of this year.

We have talent coming into the eastern region that we didn't have before. I think that will begin to make a difference in the latter part of the year. In the central, it is the same thing. We have some new talent there that will make a difference.

I'm beginning to see those differences manifest in pretty property sales, for example, in July. I don't think -- I just think we had a perfect storm. The litigation expense, I can't know when that will go away. If will go away. The earning power of this company with what we own today, it should be $0.48 to $0.52 within the next 18 months.

Thank you. Our next question is from Clinton Fendley from Davenport. Please go ahead.

Good morning, Mel. Welcome aboard, Billy.

Thank you.

Mel, when we look at other companies in the market that have a higher cremation rate than you do, some have essentially priced themselves out of this low-end cremation market. If I hear you correctly, are you now following a similar strategy here?

No I don't -- we are working really hard on providing tools and training to lessen the -- to serve cremation families who might come in and they don't really know what they want. And they may say something like, we just want a cremation. We are trying to train our people that when they say something like that, that doesn't mean they want a low price direct cremation. It means they don't want to be buried in the ground. They may want all the services. They may want products.

You don't know what they want unless you present them all the options. We are doing a lot -- we just went through a brand-new tool kit that will be rolled out in August, this month. Doing a lot of training because I think this -- I don't know if it is here to stay at the level it is for the increase, but we need to do a better job with it. We are not trying to run them off.

Would your decentralized strategy that you have -- would it prevent you from making any broader pricing changes if you wanted or were so inclined?

What do you mean by that, Clint?

The fact that you have the strategy of let's hire the top notch A-players. Let's put them in charge in the local market and let them make a lot of pricing execution decisions on a local level.

We are not going to change our model because of one bad quarter. We had six straight good quarters and the model was working. We are not just going to throw it out the door because we had one weak quarter.

If you looked across your portfolio, Mel, would you say that you higher exposure to a customer base that is perhaps more price sensitive than maybe the market as a whole? Or some of your other competitors?

That's -- that would be an excuse I would offer up. I couldn't generalize by saying anything like that.

Okay. I didn't hear much at all with regards just commodity cost pressures in the quarter. What was the hit in the current quarter just from commodity costs? How are you planning on dealing with this on a go-forward basis here?

I don't think that was the main reason we had low margins. I think it was weak revenue. People didn't react to the weak revenue by keeping their expenses low, not everywhere, but in too many of our locations on the funeral side. Then we just didn't have the pretty property sales on the cemetery side. Simple as that. It is all about execution.

We do expect, however, to get some escalating merchandise costs on our caskets and some escalating costs in our cemeteries, because the annual supplier increases come in the third quarter. Our people will react to those by adjusting their prices and so on, because their standards require that they grow their business at sustainable margins. We have that well defined. They will have to make adjustments to be able to operate their business within the margin range that have been defined by the standards.

Thank you. Our next question is from Alan Weber from Robotti & Company.

Good morning. A few questions. One is when you talked about the rebuilding key cemetery sales leadership, are there still a certain number of cemeteries that need changes? Or that's been done? I'm not that clear on that.

We have good strong operating leadership in all of our cemeteries. We have been working on the sales leadership over the last six to seven months. We only have three or four places, maybe two to three places, where we lack the sales leadership being in place.

We are in real good shape as far as having the sales leadership in place. What we are not as far along doing because a lot of that sales leadership is new is having the complete teams recruited, trained, developed, and enough of them, enough sales counselors selling the right product at the right prices. That will happen over the next five months.

Okay.

Incrementally.

Then a little more general question. You put out something that I'm not really clear on. When you put out -- you put out the June report or outlook which was in June and then when you put out that you were authorized to repurchase stock, that was dated I think June -- middle of June or late part of June. And you talk about confirming or reconfirming your long-term outlook. And yet here -- the June report is put out two months into the quarter. Your comments about the stock repurchase -- the quarter is almost done. And yet you have this fall off. I can't really understand how you could be caught off guard like that.

We were surprised. I can't remember when we put that outlook out, but I think it was in May.

We still haven't changed our long-term outlook, though. The only thing that changed in our press release was our rolling four-quarter outlook. We haven't changed our long-term outlook.

Okay. But even the four-quarter, when you put out a June report, it is just surprising that two months are done. That you wouldn't see signs of the EBITDA decline.

I covered this with Jamie earlier. When we did the analysis of why our revenues were weak and saw that it was pretty wide cremation spike; I have been surprised that that has continued to be the case. I don't know if that will change. Become more conservative by predicting it will go back to 100 basis points which is what it has been over the last four years. On the cemetery side, I said at the end of the first quarter that we expected to rebound but I didn't know exactly what the timing was. But that we weren't changing our outlook until we knew more. After the second quarter I think it's clear that it is going to take a little longer, but it will be sustainable.

Out of -- and then what really surprised me, to be honest, was the fact that these averages declined. Which told me that something was different, can't quite put my finger on it. Out of a degree of caution, we don't want to keep having the same outlook when we are not exactly sure whether the economy is having an impact, why the cremation rates continue to be high. So we brought it down. It is nothing more mysterious than that.

It was just the timing. Okay. My follow-up, when you talk about sustainable earning power of $0.48 to $0.52 in the existing portfolio. Can you actually explain more what that means? Does that mean if there were no acquisitions that you -- $0.48 to $0.52 would be what it would peak at or -- ?

No. That means in the near term, and when I say near term, we generally have been talking about 12 to 18 months. We believe that we can have a portfolio performance -- an overhead performance that will be in the $0.48 to $0.52 per share EPS range. But that is with our cemetery performance returning to the '07 level which we think is possible given the sales leadership and everything else has has been going on.

Our funeral home operations return to a more normal trend and don't say stay down where the second quarter was. And we get rid of the litigation expense that so far this year equals $0.05 -- no, $0.03 a share. $0.03 a share. That's a nonrecurring-type litigation on a few cases that we don't expect to reoccur.

If you put all those things back, you add $0.20 to the trailing four quarters which is $0.30, you get up to $0.50 a share. We think we can do that in the next 12 to 18 months. In other words, our rolling fourth quarter outlook will go back up to that level which we think is sustainable with our existing portfolio of assets without any more acquisitions.

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

Good morning, guys. You touched on this earlier, Mel, about cremation and your ability to try to increase the averages there. Do you know what your cremation average is today? Can you give us some perspective as to how that has in the last couple quarters?

You have that, Billy?

Yes, we've got it. Our cremation averages have stayed the same in total from a rolling Q2 '07 to the Q2 '08. The preneed have actually got up quite a bit and the [at-need] came down just slightly. That's what Mel was talking about earlier that we have seen the at-need cremation and burial averages come down slightly 1% or 2% year-over-year. But actually our averages in total once you include preneed have stayed the same on the cremation side.

We have seen some success already from some of the training that we have done to increase sales productivity on serving the cremation customer. We don't believe a customer is somebody you want to turn away which may be a strategy that other people have. We would rather serve them and sell them more products they may need.

What is that cremation average as a dollar amount?

About $2800.

Okay. Mel, do you get the sense that people are pushing back on price as you try to add services to a cremation? I think we have always thought that that wasn't the driver of cremation, it had more to do with traditions and thoughts about burial; that most of the time it wasn't price. Do you get the sense it is more and more becoming about price?

No. I coudn't say at all if the spike in cremation has anything to do with the economy. That's a stretch. I don't believe that to be the case. People make that decision based on disposition method, not price. I don't know that any one else could say any different.

Okay. You think you can get that cremation average up despite what's going on in the economy?

Absolutely.

With regard to the acquisition segment, I'm not sure how to read that. Those acquisitions are fairly new so we had a really good first quarter with them. We had a fairly -- or weaker second quarter. How do we read that? Are they doing well or not?

No, the volumes are doing great. I think -- we need some integration. We've had a lack of leadership in some cases. We recruited some people.

In a couple of cases, we still have an open spot. Unless you have the right leadership in place, you not going to get the margins. I wouldn't say our integration is as far along on the funeral side or the cemetery side. It is selective. It is not a matter of whether it will happen, it will happen. It is just taking a little longer, maybe six, nine months longer than I would have liked, but I think it will happen in the next six to 12 months. Those plans are well underway.

Thank you. Our next question is from Chris Sim from Shankman Capital Management.

Good morning, guys. I know you mentioned at-need or cremation averages. What was the total at-need pricing up or down year-over-year? Percentage wise?

Yes. It is 2.5% total.

You are just asking about at-need?

At-need, yes.

We reported on at-need burial and at-need cremation.

At-need burial was down less than 1%. And at-need cremation is down a little over 2%.

Okay. And then second question. I know we touched on a lot of points here. But Q1 '08, obviously very strong EBITDA, about 10% year-over-year. You had the cemetery issues in Q1 as well as the spike in cremation rates also, but you had the stronger volume. I think it was about 3.5% up year-over-year.

This time around is the same factors, but you're flat year-over-year in volumes. I just really am not grasping how just a flat volume down from -- up 3.5% in Q1 to flat this year -- this quarter, generates down 25% in EBITDA. I know the pricing was down a little bit also, but the math just doesn't make sense to me. If you could comment on maybe some other issues that are going on that contributed to that.

If you look at our performance by region, the large underperforming regions were the west to the greatest degree. Then the central. Then the eastern the least. And then you look business-by-business and that's how we look at our company.

The west was really a total outperformer in the first quarter with extraordinarily high margins, volumes way up. In the second quarter, it was just the reverse. That tends to be the way our industry goes, but it is not typically as volatile as that. I come back again to saying, if we had had everything go right in the first quarter without the cremations spike and without the extra litigation expense and all that. We would have earned $0.21, $0.23 a share.

I don't know what we will earn next year. I don't know if all those things will be there or not. If we get the cemetery back performing and we get a break on our revenue on the funeral side, we can control the cost. The volatility and the volumes by region, by area, there is not a lot we can do about that except play the best cards -- play your cards the best you can. We didn't play our cards in the second quarter as well as we could. It is selective.

There is no portfolio sickness here. I repeat. Look at the trailing four quarters. You have to look at this business that way. It's not accorded -- in our company, it is very sensitive to these shifts and it doesn't mean we are broken. We are not.

I think if you look at -- you're switching from a volume increase in the first quarter to really an average decrease in the second quarter. But the net effect of those is you're swinging almost $2 million of EBITDA just from that. Variable expenses are another $1 million. $3 million right there. If we would have been $10.1 million instead of -- and $7.1 million.

It makes a big difference. Because of the way our operating model works, these small swings sometimes can have a large impact, especially when they happen quarter-to-quarter when you are way up in volumes in one quarter and then flat volumes, but then your averages go down.

Thank you. Our next question is from Robert [Colsowski] from OSI Institutional Asset Management. Please go ahead.

Good morning, Mel and Billy.

Good morning.

I was wondering if you could give us some detail as to the mostly revenue trends of the second quarter and whether or not you saw the revenue being weaker and weaker, and you were hoping the costs would come in quicker than they did. Also -- comment into the July month, too.

I think the first quarter, of course, we had strong revenue that got stronger as the quarter went on. The flu season seemed to hit the west harder, so their volumes were way up, way up. The east was the weakest in the first quarter and -- I mean the -- yes, the weakest on volumes and revenue.

In the second quarter it seemed to get weaker. It was weak in April. It gets weaker in May and weaker in June. It just tailed off in the second quarter by month and of course, that's on a revenue basis.

The volumes were driving that. The volumes got weaker. And the cremation rate stayed up. We were surprised at the weakness in revenue over the quarter.

We have been pleasantly surprised by the strength in revenue in July. Don't know if that's an uptick that will be sustained, but we are up. We are up.

Okay. The quarter is basically a function of just revenue declining sequentially and costs not really having a chance to react?

That's exactly what it was. When you have a quarter like the first quarter where volumes are real high, and your margins go real high. Then you have the opposite occur, people don't adjust their variable costs as quickly, given our model. It is selective. It is not portfolio-wide. We got a number of businesses that didn't do a good job as their revenues tailed off quickly in the second quarter, and there is some corrective action going on there. I don't expect the margin in the second quarter to be repeated, put it that way.

Okay. Then as for the cremation increase. If it is not a function of the economy, do you think it is maybe a function of who your salespeople are targeting? Like a particular demographic? There might be a drift?

I think on the cremation mix on our funeral side, because 80% of our business is at-need, it is just choices being made by the consumer in terms of how they want to be disposed -- disposition method. It is not related to our preneed sales.

Thank you. Our next question is from Mark [Affriosiabi from Penco]. Please go ahead.

How are you doing?

Good morning.

Thanks for taking my call. I'm a little newer to the Company, to the story here, following Service Corp more closely. Just some questions here on results. Cremation. What was the general story on why you had such a materially lower cremation rate than the national average or your larger -- your publicly traded peers like Service Corp at 42%. You guys were at 33% now spiked to 36%. What's the underlying backdrop there?

It is the footprint of our portfolio. We've got quite a few places in the Midwest. Some places in the southeast, Tennessee, where the cremation rate is very low. Single digits in some cases, low double-digits in many cases.

We do have a concentration in California and our acquisition portfolio has a higher cremation rate than our same-store portfolio. Because we made some acquisitions in some high cremation areas. It's just a matter of how we built the Company in the 90s. Quite a few places in the northeast that traditionally had a much lower than national average cremation rate, Connecticut, New Jersey, so on.

Just in those particular areas with these single-digit or low double-digit rates, what's your sense of why that is? Is it religious reasons? What's really driving that?

I would say it's just been customary. Cremation tends to be highest in urban areas, in major metropolitan areas in the west and in some cities. Florida, for example, high cremation rates. We had quite a few places in smaller markets like Chattanooga, some places in Kentucky, Ohio that weren't high cremation rate areas.

That's very helpful. Thank you. I have a few more questions if you don't mind.. The margins -- I was looking at your margins. You have very impressive EBITDA margins, 25% kind of zip code which is actually the same as really Service Corp which is basically ten times your size in revenue and EBITDA. I'm just wondering how actually 8% -- you guys are 8% of their revenue. I'm trying to figure out why you would be able to have that kind of margin. What drives that? Given what would intuitively be a scale of economy that something over ten times your size -- presumably offer maybe a margin advantage, operating leverage advantage.

I'll have to tell you, your question is a breath of fresh air. I have been wanting to go get that question for a long time. If you were to read our company investment profile, I think you would probably learn a lot about why our consolidated EBITDA margin has been historically higher at least over the last couple of years. I think Service Corp has done a great job of integrating Alderwood so their footprint has been leveraged. I think their EBITDA margin is increasing.

The reason ours has historically been high is because we have a very decentralized organization and it's very empowering for the local operator. We rolled out a standards operating model in '04 on the funeral side. We are just now doing that on the cemetery side and perfecting it. But you put in place some local more entrepreneurial managers and empower them to make decisions to run their business.

It can cut both ways. In the second quarter it hurt us a little bit. But over the last few years, it's improved our margin substantially. Where we have been hurting ourselves over the last four years, and that's why we put out the longer-term trend reports, is we have been billing the platform support overhead organization so that when we started growing we could integrate and grow these businesses. And the operating leverage would kick in.

The whole theme here for Carriage is to have a platform that is very leveragable over time and to grow the local business, have the operating leverage kick in, have the platform leverage kick in on the capital structure, have the overhead leverage kick in so that we get an earnings momentum which we've had for six quarters until the second quarter. It went the other way.

We will get that back. There is no doubt about it. And our people -- what I find about being a public company is you get a bad quarter like the second quarter and the market gets pretty distressed. But if you were to go around and talk to our people, there is a lot of excitement especially on the cemetery side where we have hired a lot of new talent. It is not a matter will we get this consolidated EBITDA margin back up into the 24% to 26% range.

It's not a matter of if, it's a matter of when. We will do that and that's what we consider our sustainable earning power range of the total platform in all of the operating companies we have. It's all because we don't have many layers. We incent our people at the local level very generously. We don't try to eat up the hard work and the field EBITDA performance by having too much regional overhead.

I think we are well done in terms of a total platform organization, so our total overhead ought to be flat and very leveragable. We get rid of this litigation expense and some extra stuff, we are good to go. But that is a great question and I appreciate it.

Thank you. I may follow up with more on that particular question later, but moving on to just the -- going back to cremation really quick. What is your company's thoughts on annual [creath] here, in terms of the next five years perhaps? If you have a forecast of how you think the national cremation rate will move?

We follow CANA. CANA is the Cremation Association of North America. All the casket companies are now doing lots of forecasting on cremation rates of course, and they are getting into the cremation business. We have a lot of input.

We tried to forecast in our outlook both near term, which is the rolling four quarters, and the longer term through 2012, about a 1%, 120 basis point increase. Frankly, we have been surprised at the spike in the fact that it lasted through the first half. We have never seen anything like that before.

I don't know that we can see it has reached a new plateau in our footprint, although we are cautious to say that it hasn't. I think right now in terms of forecasting the future mixed change, we want to wait and see a little more data. We are very data driven, and see if this higher level of cremation sticks and what is the pace of increase from here.

Thank you. Our next question is from Gerry Heffernan from Lord Abbott and Company. Please go ahead.

Good morning. Gentlemen, I've got to tell you I'm obviously a very disappointed shareholder, but I'm also very surprised at the way this conference call has gone here. A lot of this talk -- the cremation spike, yes, it was a spike in the second, but it was also a spike in the first quarter. I fail to see how that is any surprise for this reporting period that it should not have been addressed earlier.

The expenses being out of control. Very surprised no one up to this point has brought the fact that your CFO left in April. It seems that whoever was left at top management just simply missed it. Just wasn't keeping their eye on the ball. In the first quarter, we were willing to make the statement that the very high margins at the same-store funeral level were due to the increasingly talented group of four EA player managing partners. But where were they this quarter?

Where was the expense management? Where was the ability to change to the changing environment? The perfect storm metaphor, I'm ready to gag on it. Thus far I don't have any confidence that you have nailed down what it was you missed. And for that matter, why is it going to take a couple of quarters to correct when it seems to have all gone bad in one quarter?

I'm sorry you're that disappointed and I'm sorry you dislike the call so much. We were surprised at the revenue weakness and it accelerated during the quarter. We don't try to control the operating expenses in Houston in each one of our businesses. That goes against the model. Either you accept that or you don't.

You may just think it is a ridiculous model. I can't help the way you might think about it. We've got some work to do. We are doing the work.

Expenses were higher than they should have been, but it wasn't where we have the A-player people. We don't have A-players everywhere. We do have some performance issues in the portfolio and we are addressing them. But it will get back to where it should be.

We are not a centralized top down model. Some people like that, some people don't like it, but it is what it is. I'm not going to apologize for it because until this quarter, we were doing fantastic on the same-store funeral performance. If you look at the four quarter trailing, we are still doing relatively great on our funeral operations. It is the cemetery performance where we really lost the earnings per share and the acquisition integration. I'm disappointed about that. But we are doing something about that.

We are doing it quickly and we will have it done over the next six to 12 months. The cemetery and I've said this repeatedly, we didn't know that business as well as we knew the funeral business. We are getting to know it real fast. We are bringing in great talent. We reorganized that in 2006. We went to school on it in '07.

We have learned enough to know we've got to get it right and we are getting it right. The earning power of the Company will get back to where I said it would within the timeframe I said it would. If I have no credibility on that, I'm sorry.

Thank you, sir. At this time, we have time for one additional question and the final question is from Mitch Almy from McAdams Company. Please go ahead.

Good morning.

Good morning.

On June 18, you announced a share buy back, roughly $5 million. Today of course, we have a stock price that's materially lower than that. Should it afford the Board a different view as to the capital allocation going forward? I would like to know if you can tell me how many shares were bought in the quarter? Or whether it is your intent at the current valuation to possibly increase and act on that?

We bought very few shares.

We only bought 17,900 shares, less than $122,000.

We abided by our own policy of -- what do you call it? Trading policy.

Which we are in a blackout period right now.

We have been in a blackout period. At this point, I think we are in no hurry to buy shares. There is activity in the industry. We want to see how that goes as well.

We will just -- we want to get our performance up. That's the main thing we are working on, and then we will see how it goes after that.

Would you at least agree that authorizing share buy back and yet not acting on it is a little bit misleading for us? If at this point, you feel uncomfortable repurchasing shares, you should probably issue a press announcement that the Board has changed their mind and does not see it as an appropriate use of capital or act on it when the window does open which I think is in two days.

There are a number of reasons why we are just watching what goes on in our industry. Of course, I don't have to tell you if you are following the other companies that there is possibility that there could be some consolidation amongst the consolidators. If that happens, we would have a history of making acquisitions out of consolidation of consolidators. We don't want to be using up our capital until we see how that works out.

Thank you, sir.

That's a change in the environment that wasn't there when we announced that buy back.

Thank you, sir. At this time, I would like to turn the call back over to Ken Dennard for closing remarks.

We are a few minutes over, so if you could give your final comments.

Yes. I'm disappointed in the second quarter, but appreciate those of you who might understand and we will do better and are doing better. Look forward to reporting our progress during the balance of the year. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Carriage Services second quarter earnings conference call. This conference will be available for replay after 10:30 a.m. Eastern Time today through midnight Eastern Time. You may access the replay system at any time by dialing 303-590-3000 and entering the access code of 11118040 followed by the pound sign. Thank you for your participation and at this time, you may now disconnect.