Carriage Services Inc (CSV) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Carriage Services first 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, Thursday, May 7th, 2009. I would now like to turn the conference over to Ken Dennard with DRG&E. Please go ahead, sir.

Thank you, Brandy. And good morning everyone. We appreciate you joining us for Carriage Services' conference call to discuss first quarter of 2009 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you'd like to be on the email distribution list for future Carriage Services releases or if you had any technical difficulties and didn't receive your copy of the release yesterday afternoon, please call our offices at DRG&E and that number is 713-529-6600.

Also, Carriage Services has posted supplemental financial tables and information on its website. It can be found by going to www.carriageservices.com, regarding its recent financial results. And the Company encourages you to review that information at your convenience. If you'd like to listen to a replay of today's call, one will be available via webcast by going to Carriage's website. Additionally, in a few hours there will be a telephonic instant replay of this call. It will be available 24 hours a day for the next 7 days. The replay number and access code for the call are found in the news release distributed yesterday.

Please note that information reported on this call speaks only as of today, May 7th, 2009. Therefore, you are advised that any time-sensitive information may not be accurate as of the time of any replay listing. And 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 27A of the Securities Act of 1933, as amended, and Section 23-21E of the Securities Act of 1934, as amended.

Statements made today on this call by Management are based upon assumptions the Company believes are reasonable. However, many factors that are discussed under forward-looking statements and cautionary statements in the Company's annual report on Form 10-K for the year ended December 31st, 2008 and all 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 form 10-K and 10-Qs, news releases and other information are available for free on the Carriage Services website. With that, now I'd like to turn the call over to Mel Payne, Carriage Chairman and Chief Executive Officer. Mel?

Thank you, Ken. At the end of our last conference call in February, I challenged the managing partners and sales managers of our funeral homes and cemeteries to seize the moment of the current economic crisis and to use their 4E Leadership skills to execute our Standards Operating Model more effectively than ever before. I now have the honor of reporting to you that they rose to this challenge and produced excellent results during the first quarter.

Words cannot adequately express my thanks to them and their teams for their dedication and hard work. But I can express our pride in their achievements, especially in the midst of the worst financial and economic crisis since the Great Depression. Simply put, their achievement is what our mission of being the best is all about.

Now, I'll turn the call over to Terry Sanford, our CFO, and to Jay Dodds, our COO, to cover the particulars.

Thank you, Mel. And good morning. Diluted earnings per share were $0.13 in the first quarter of 2009 compared to diluted earnings per share of $0.17 in the first quarter of 2008. For the first quarter of 2009 we reported revenues of $45.8 million, compared to $47.1 million in the first quarter a year ago, a decrease of only 2.8%. The income statement in our press release includes not only the first quarters of 2008 and 2009, but also the fourth quarter of 2008 because management and certain investors are evaluating sequential changes and activities.

As we have discussed on the past two calls, we have been focused on three particular areas to improve performance and financial results. And we will discuss those because they are really making a positive difference.

From a macro level, we're facing a tough comparison in this year's first quarter versus last year's first quarter. Last year's funeral volumes were unusually high due to an active flu season. This year we did not expect to have, and as time unfolded we did not have, the same flu environment in the first quarter of this year. Additionally, the weak economic circumstances, as Mel highlighted a second ago, have created difficulty for people in our industry selling pre-need products and services. You can refer to our press release to obtain the breakdown between our same-store and acquired portfolios. We've operated both portfolios for each of the entire quarters presented. We separate the two because we have different expectations related to their growth in earnings and margins.

In our funeral home segment, comparing the first quarter 2009 to the first quarter of 2008 total funeral revenues declined 5.9% because funeral contract volume decreased 9% overall. Our average revenue overall for funeral contracts increased 3.8%. Historically, deaths have not fluctuated very much over long periods of time, like a year, but are volatile over short periods when events such as a severe flu contraction occur. We expected a significant decline in our volumes in Q1 simply because the flu last year caused a strong spike up in volume a year ago.

Realizing that volumes would be lower in what is a relatively fixed cost business, that prompted us to focus on one of our initiatives, cost and expense management. We were able to reduce costs year over year in all of our controllable cost categories and in total in our funeral segment.

Another of our initiatives is to increase the average revenue for our cremation contracts because cremation customers are becoming an increasingly larger percentage of the industry's business. The methodology to achieve the increase is to convert what had been direct cremations to cremations with services. We achieved an increase in the average revenue per cremation contract of 4.6%, compared to the first quarter of 2008. Cremations with services as a percentage of total cremation increased from 34.7% in the third quarter of 2008, that's roughly the time that we rolled out this initiative, to 40.4% in the first quarter of 2009. We believe a lot of the hard work in converting those cremation contracts resulted in the nice increase in the average for our cremation customers. The Company's overall cremation rate was 41.4% for the quarter. Jay will discuss this initiative and why it is working in more detail.

We're not seeing any impact during these difficult economic times on the amount people are spending on funerals, as the average revenue per burial service increased 3.2% year-over-year, which is above higher historical norm. Looking ahead, the month of April came in at approximately a 4.5% increase.

Cemeteries are much more of a sales organization than a service organization, as our funeral homes are. In referring to the cemetery results, same-store cemetery operating revenue increased $1 million in the first quarter versus the prior year because of higher revenues from pre-need property sales. Jay will discuss our success in selling during these difficult times.

Cemetery financial revenue from our trust fund investments and finance charges were fractionally higher in total compared to the prior year's quarter at $1 million. As I mentioned in the press release, earnings from our trust funds were higher. We're very pleased with the composition, cash flow and earnings from the trust fund investments. In fact, the market value of our trust funds has increased 27% since March 31st, 2009. And now the market value is back up and equal to cost.

Total field EBITDA for the Company was $16.5 million in the quarter, compared to $18.3 million in the first quarter of last year. And the field EBITDA margin was 36.1% versus 38.8% the same period last year. Both of those are historically strong margins at the business location level.

Our total overhead expenses increased $275,000 in the first quarter of '09 to $5.1 million from $4.9 million in last year's first quarter. However, our overhead expenses declined sequentially by approximately $630,000 from the fourth quarter of 2008. We have implemented a number of cost saving initiatives beginning in December of '08 that we expect to result in lower comparable overhead expenses through the remainder of the year. Consolidated EBITDA was $11.4 million, equal to 24.9% of our revenues compared to adjusted consolidated EBITDA of $13.4 million or 28.4% of revenues in the first quarter of last year.

Special charges totaled $752,000 in Q1 of the prior year. We had no special charges of any kind to report in the first quarter of this year.

Total depreciation and amortization increased slightly to $2.6 million from $2.5 million last year and was flat compared to the fourth quarter. Interest expense is comparable to both first quarter of 2008 and the fourth quarter of 2008, as our debt is fixed [with] long maturities.

Free cash flow was a negative $1.2 million in the first quarter of this year versus a positive $2.1 million in the same quarter of '08. The semi-annual interest payments on our senior bonds in the amount of $5.1 million are payable in the first and third quarters and therefore negatively impact our cash flow in the first quarter. Additionally, we funded the $3.1 million litigation settlement that we reported in the fourth quarter. Now if you exclude the litigation settlement and the related legal fees, our cash flow would actually have increased year over year.

Capital expenditures totaled approximately $1.7 million for the quarter, the majority of which, about $900,000, was related to mausoleum construction in our cemetery segment. We continue to believe that CapEx for 2009 will be approximately $9 million and of that about $6.5 million will be maintenance CapEx. There were no acquisitions or dispositions during the current quarter. We are currently evaluating acquisition opportunities, but none are to the state that we would comment.

During the first quarter we repurchased 349,000 shares of our common stock for approximately $722,000 and that works out to about $2.07 a share. As of today, the authorized capacity for future repurchases is just under $3 million.

On March 31st, 2009 Carriage had $2.7 million in cash. Today we have $4.8 million in cash. There is nothing currently outstanding on our bank credit facility which matures in April of 2010. We recently lowered the size of the credit facility from $35 million to $20 million to save on loan commitment fees. Our cash typically builds nicely in the second quarter and we don't expect to have financing needs in the near term. We have also recently had meaningful talks with our banks to put a new credit facility in place.

Our capital structure includes $94 million of 7% deferrable coupon convertible preferred securities maturing in 2029 and $130 million of 7.875% senior notes maturing in 2015. So you take that together with our free cash flow and the credit facility, we've got ample financial liquidity and flexibility, both to operate our business on a day-to-day basis, as well as pursue strategic capital initiatives in the current capital and credit constrained environment.

Now, I'd like to turn the call over to Jay Dodds, our Chief Operating Officer, to provide color on our business and our focus areas. Jay?

Thanks, Terry. As previously mentioned, we experienced very strong operating and financial results in the first quarter of 2008 due to a more favorable economic climate and a strong flu season. It was a home run quarter in many respects. As we touched on during our last conference call, we did not expect to have those same tailwinds in this year's first quarter, which was consistent with what we experienced.

Based on industry sources, we understand that deaths in the first quarter of 2009 were down meaningfully as compared to the first quarter of 2008, largely due to a weak flu season in this year's first quarter as compared to a strong flu season in last year's first quarter.

While we can't control the economy or the flu season, there are things in our business that we can control. On our previous two conference calls we have highlighted three areas that we are focused on that we believe would result in improved financial and operational performance as a result of various initiatives we put in place. Those three areas of focus are expense management, cremation service execution and cemetery operation.

On our conference call to discuss our third quarter of 2008 results, we highlighted these three areas and discussed some of the steps we were implementing to achieve improvements. On our conference call to discuss fourth quarter of 2008 results, we reported on the progress that had been achieved so far in these three areas. On this call, I am happy to report that our determination, initiative implementation and hard work put in by our managing partners and committed employees have resulted in the improved performance that we have been striving for. And we believe that the improvements we have made are sustainable. I'll touch on each of these three areas and what we experienced during the first quarter.

The first initiative is expense management. In the first quarter we experienced cost benefits from the initiatives we had previously put in place in the fourth quarter of '08, including a Company-wide wage freeze, an overall focus on smart cost containment and the removal of a certain amount of operating autonomy from underperforming businesses.

In the first quarter we implemented a goal for our managing partners to reduce their controllable costs to a range of 40% to 41% of total revenue. These controllable costs are costs that our managing partners have direct control and responsibility over. The types of costs that are considered non-controllable from a local operating perspective are property taxes, insurance, data processing and accounting fees. We began to see positive results from this effort mid-way through the first quarter and continue to believe that our cost management efforts will allow us to manage our costs effectively over the course of the year.

Our second focus area is cremation execution. In August of 2008 we rolled out a cremation service program across our company to better educate and train our service counselors on cremation options that are available for families to memorialize and show appreciation for the unique life of their loved one when using cremation. In conjunction with the service program, we continued to develop a cremation merchandising system to help assist our service counselors with the merchandise aspect of cremation. In addition, we have made the increase of the average cremation contract a more significant piece of our Standards Operating Model and related incentive program for our managing partners. These initiatives were put in place to convert more direct cremations into cremations with services, which would provide our client families with more options and increase our average cremation contract.

We are seeing the benefits of these changes. As Terry mentioned, our average cremation contract increased 4.6% in the first quarter of '09, as compared to the same quarter last year. And while the results so far are positive, we see additional opportunities to improve our cremation sales skills and related services that will benefit our client families and our cremation average.

We believe increasing our average cremation contract is important, as cremation trends continue to increase, which we view as an opportunity for Carriage. Our cremation rate increased to 41.4% in the first quarter of this year, compared to 40.1% in the first quarter of 2008.

And finally, our cemetery performance initiative. The performance of the cemetery operations was inconsistent and disappointing in 2008 due to a lack of the right leadership in both business management and sales at several of our key cemeteries. We also realized we needed more sales counselors to better execute on pre-need cemetery sales.

Last year we recruited and hired a number of 4E Leadership quality sales and business leaders and began to significantly increase both the number and quality of our pre-need sales counselors. Also, we enhanced our cemetery standards model by adding criteria that relates to the ongoing improvement and proper staffing level of our sales personnel. We began to see favorable results in the fourth quarter of 2008 as a result of these actions. We have reached our minimum staffing target during the first quarter by hiring approximately 90 pre-need sales counselors.

We have also added creative programs and sales tools to drive sales in this challenging economic environment, such as 0% interest financing on pre-need purchases for a period of time and the ability for our clients to temporarily suspend monthly payments should they lose their job. The sales leaders have been onboarded and are up to speed, which, combined with having more pre-need sales counselors and creative selling tools, has resulted in Carriage experiencing higher pre-need cemetery sales activity levels.

We saw meaningful improvement in our cemetery operations in the first quarter of this year that was broad-based across our cemetery operations. Total cemetery revenues increased 8.3% on a period-over-period basis and increased 5.9% sequentially as compared to the fourth quarter of '08. Sales of pre-need property increased 12.4% in the first quarter of this year as compared to last, driven by a 10.4% increase in sales units at a slightly higher average selling price. Our total cemetery field EBITDA increased 5.4% to $3 million and our total cemetery field EBITDA margin was 27.4%

We are also seeing good results from expense management efforts at our cemeteries. More frequent communications with our customers and working with them during these tough economic times are preventing bad debts from increasing. The overall results and trends we are seeing in our cemetery operations are encouraging, but we continue to see much higher room for improvement.

In summary, we are happy with the progress we have made over the last six months in these three areas of focus and the trends we see are encouraging. However, we are still focused on and will continue to strive for improved expense management, cremation service execution and cemetery operations. With that, I'd like to turn the call back over to Ken.

Brandy, we're ready for Q and A.

Thank you, sir. We will now begin the question and answer session. (Operator instructions) One moment, please. And our first question comes from the line of Clint Fendley with Davenport. Please go ahead.

Good morning, guys. So, are you guys mostly done now with the rollout of the cremation merchandising system then?

No. I would say we're right in the middle.

There's still upside.

Okay. So, I mean, the average contract price being up 4.6%, we could expect further improvement from here then?

Yes.

And have you essentially stopped offering the direct cremations from your homes?

No. Not at all. We believe in serving every family and having the direct cremation families in our funeral home gives us an opportunity to upgrade them into services of which, you know, that's what we do is the service part. And if they're not in the seat then we don't have the opportunity to do that. So, it's very important for us to see every family face to face and that's our strategy.

Clint, this is Mel. We don't make needs for the customer. We try to recognize their needs. What this cremation service training program does is simply provide options for every family. They do the choosing. We can't choose the fact that they want a direct cremation. So, we want to build heritage with every family. So, we don't try to turn business away.

Okay. Thanks. That's helpful. And a final question. Do you think that you've seen an accelerated up-tick in the cremation rate as a result of the economy?

No.

Okay. Thanks, guys. Nice quarter.

Thank you. And our next question comes from the line of Alan Weber with Robotti and Company. Please go ahead.

Good morning. When you just made the comment about the cremation, I think you said on the call it was 40% had some kind of a service? What do you think -- is there some form of a goal that will [realistic] -- or what that might end up at?

Yes. Our long term goal would be to have an immediate cremation to be similar to an immediate burial, which is a very small percentage of our company, of our services. An interim goal that, I'd say, the next couple of years would be 35% of our families choosing an immediate cremation. Currently it's almost twice that.

Okay. And then there was a comment made about costs that were controlled. And I guess I missed some of the numbers that you were talking about, maybe it was a percent?

Yes. In our standards operating model, Alan, we break down the reporting into controllable costs by business. And then there's just a few costs that are not controllable. Those are real estate taxes. I forget what the other ones are.

Data processing.

Data processing.

Accounting fees from the home office.

And accounting fees, which we allocate some of that to uncontrollable. And in the standards model, they are judged according to margins of various categories of costs. What Jay was explaining is the total controllable costs also add up to around 41%.

41% of your total costs?

And I think that's in the funeral side.

On the funeral side. Yes.

And then I guess the question is what amount of cost savings do you hope to accomplish?

That's not. That's total operating costs. That's not merchandise costs.

And within the controllable costs category, looking at it a year-over-year basis, and controllable costs, you think about the cost that we have in our business, primarily our service business. And a lot of that is salaries and wages, the maintenance of the funeral home and facility itself, transportation costs, promotional and some G&A. But on a year-over-year basis, those costs were down in our funeral segment 5.2%.

Okay. All right. And now what is the goal there then?

The goal was 41% of revenue.

Right. 41% of revenue.

For our operating costs, controllable operating costs.

Terry Sanford. Yes. For those controllable costs it was 41%. We came in at 40.1%, slightly underneath that.

Okay.

We achieved our expectation with respect to managing down these controllable costs --

But let me --

-- in the funeral segment.

Let me make something clear. That is a goal that is relevant, not withstanding the death rate. That's just built into our operating model. That's not a new goal because the death rate was down. That's just focus on an existing margin goal, which all of our businesses have, just additional focus on it and support to get it down.

Okay. Thank you.

Thank you. Our next question comes from the line of Kyle Smith with Jefferies and Company. Please go ahead.

Yes. Hi. Good morning and congratulations on some of the progress with your various initiatives. I wanted to ask about the revolver. I think you mentioned that you're looking to address the maturity that's coming up in, I guess, a little under 12 months. Is this something where we should expect action to be taken in the immediate term? Or is it just something that you're working on with the banks and it might be six months, nine months?

We really don't have a particular timeframe right now, Kyle. We're going to take our time and visit with our banks and put together a credit facility that works well for us over the long term. We're quite comfortable right now with where we are simply because we don't really have any financing needs in the near term. And this time of year our cash builds nicely. So, it will be probably before the end of the year. But we don't have any particular timetable on that.

Kyle, this is Mel. We have many banks wanting our business. We are very bankable. Our balance sheet is to dream for in this environment. Our cash flows are strong. So, we don't have any problem. We did want to wait until the banks got a little more less stressed. We don't have an urgent need. If we had an urgent need we'd have no problem knowing that they would be there. So, it's just one of those things where we don't consider it really much of an issue of urgency.

That's good to know. And you had mentioned in the 8-K that the maximum senior leverage ratio was amended. Was this completely removed or is there a new limit that you're subject to?

It was removed for the short period, for the quarter. But it will be 3.75 going forward through the term of this credit facility.

Okay. Fantastic. And then last question. Your guidance was left unchanged despite the weak year-over-year comparison, which I know is in line with what your expectations were. Does that confirm that you did indeed perform according to plan in the first quarter? And since the trailing number I think is at the low end of your forward guidance, that we should be expecting flat to positive quarterly comparisons, moving forward?

Last year we had a great first quarter. We said at the time it wasn't sustainable because of the flu and the funeral volumes and margins. What we didn't expect is that we would go flat in performance and have a lot of what we call expense noise for the balance of the year. This year we believe, if you look at our five-year trends on volumes, that we will get the calls back over the course of the next nine months on the funeral side. And so, we're not changing our guidance. We think things are going well. We think we will perform for the next nine months.

Fantastic. Thank you very much.

(Operator instructions) And our next question is a follow-up question from the line of Alan Weber with Robotti and Company. Please go ahead.

Just a quick question on the buyback. How many shares outstanding do you currently have?

17,900,000.

Okay. And what are the thoughts now on the buyback?

I'm sorry; what?

What are the current thoughts on the buyback?

We missed that. Current what? Thoughts?

Thoughts.

Current thoughts?

Is it current thoughts?

Yes. I mean, because your stock has gone up recently a little bit. I was just curious.

Yes. We do a constant analysis of that, Alan. And allocation of capital is critical. We feel great about the Company. So, at this price we would still be buying in our stock.

Okay. Great. Thank you very much.

Thank you. And our next question is a follow-up question from the line of Kyle Smith with Jefferies and Company. Please go ahead.

Yes. Just two small housekeeping items. One, I see the count of funeral homes was down two in the quarter. Are there any further closures planned for the near term?

No.

And then, did I hear you correctly that you said you're back to fully funded status in the pre-need and perpetual care trusts?

The market value of our trust funds, as of the close of business yesterday, was right at our cost. So, yes. And our annual income from those trust funds is right at twice what it was a year ago.

Kyle, this is Mel. We looked -- we got very proactive with our trust funds back in the fall. I covered this in the annual shareholder letter. At the March 6th, March 9th low we were way down, of course. But we've come back about 44% since the March low. And as Terry said, we're up 27% since the end of the quarter. But we view our portfolio repositioning as having a lot of upside over the next five years, while we get paid a lot of interest and dividends. So, we don't expect any decline in financial revenue through funeral trust or cemetery. On the contrary, we expect increases.

Excellent. Well, thank you so much for the answers to my questions.

Thank you. And at this time there are no further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

While the first quarter was a good quarter, it was only a quarter. However, we do believe we will build upon the performance momentum of the first quarter and the remaining quarters of 2009. So we stand by our rolling fourth quarter outlook.

But let me speak to the big picture, which was the theme of my 2008 shareholder letter which I encourage you to read if you haven't already. Included in this press release is our long term outlook through 2013. We began providing a long term outlook in 2007. I call your attention to our company and investment profile, which includes a more detailed financial performance outlook by year through 2013. The difference is that this performance forecast has been now been converted into a long term plan to achieve EPS of $1.00 per share by 2014. So between the first quarter of 2009 and 2014, we must prove up the sustainable earning power of Carriage by executing our models and producing consistent results over time in our existing portfolio, while selectively adding only high quality funeral and cemetery franchises along the way.

We are excited about this long term plan and we intend to execute it successfully. We appreciate your support and look forward to our next quarterly progress report.

Thank you. Ladies and gentlemen, this concludes the Carriage Services first quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000, followed by pass code 11129295. ECT would like to thank you for your participation and you may now disconnect.