Carriage Services Inc (CSV) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Carriage Services Third Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, the 29th of October, 2009.

I would now like to turn the conference over to Karen Roan. Please go ahead.

Thank you, Luke, and good morning, everyone. We appreciate your joining us for Carriage Services' conference call to discuss third quarter 2009 results. Before I turn the call over to management, I have the normal housekeeping details to cover. If you'd like to be on the e-mail distribution list for future Carriage Services releases or if you had any technical difficulties and did not receive your copy of the release yesterday afternoon, please call our offices at DRG&E. 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. 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 seven 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, October 29, 2009, and therefore you are advised that any time-sensitive information may not be accurate as of the time of any replay listening. Also, 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 on this call today by management are based on 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 31, 2008, and all subsequent SEC filings could cause the Company's results in the future to differ materially from those forward-looking statements made today and/or in other documents or oral presentations made on behalf of the Company.

A copy of the Company's Form 10-K and 10-Q, news releases, and other information are available for free on the Carriage Services website. Now I'd like to turn the call over to Mel Payne, Chairman and Chief Executive Officer. Mel?

Thanks, Karen. Since the start of 2009, we and the rest of our industry and the country really have been challenged by the weakest revenue environment since Carriage was founded almost 20 years ago. In our case, this environment was caused by low death rates, higher cremation rates, and the worst economic and financial crisis since the Great Depression.

Yet our managing partners, sales managers, and employees have been able to keep our nine month revenues essentially flat compared to 2008 while working extraordinarily hard and effectively to reduce operating costs without sacrificing the quality of our services. This amazing effort by our operational leaders and their employee teams has enabled Carriage to actually increase our profitability to $0.29 per share for the nine months of 2009 versus the comparable $0.26 last year. I salute each one of our people and turn the call over to Terry for more color.

Thank you, Mel, and good morning. In this year's third quarter, we continued to successfully navigate through a challenging operating environment with adverse economic conditions and a low death rate. As Jay and I will discuss further, with the end of the third quarter and this conference call, it's now been a year since we articulated and implemented strategies for our three focus areas that were aimed at improving company performance and improving the consistency of our operational and financial performance.

As we've reported our progress and results over the last four quarters, it is clear that these efforts have proved successful and we're confident that these changes are now embedded in the day-to-day operations of Carriage.

As highlighted in our third quarter earnings press release, diluted earnings per share was $0.05 in the third quarter of 2009. That compares to $0.01 per share for the same quarter of last year. Excluding special charges we incurred in the period a year ago, adjusted diluted earnings per share was $0.03 for Q3 2008.

As Mel mentioned, for the nine months ended September 30, 2009, diluted earnings per share was $0.29 compared to diluted earnings per share from continuing operations of $0.18 in the same period last year. Again, excluding the special charges in the nine months of 2008, adjusted diluted earnings per share was $0.26 as Mel mentioned. There are no discontinued operations or unusual items to report in the 2009 periods.

Looking back to the third quarter of 2008, we were really concerned about the depth and length of the economic recession, and we announced the following areas to maximize revenue and profitability. One, to increase the number and quality of sales staff at our larger cemeteries in an effort to stimulate pre-need cemetery sales, primarily property, and increase profits. Two, we needed to convert direct cremations to cremations with services so that we could increase our average revenue for cremation service. And three, we wanted to reduce cost and expenses across the board. These are three significant areas that we can actually manage unlike the death rate, which we don't have any control over, and each of these contributed greatly to our success in 2009.

For the third quarter of 2009, we reported total revenues of $42.2 million compared to $43.2 million in the third quarter a year ago, a decrease of $1 million or 2.4%. The majority of the revenue decline was due to a 3.9% decline in our funeral volumes in this year's third quarter as compared to the 2008 third quarter.

Despite the lower volumes and the challenging economic conditions, we did increase our average revenue for funeral contract by 1.1% in the quarter, and that was led by 6% increase in the average cremation contract. The strong growth in our cremation average is due to our success in increasing the percentage of cremation contracts with services relative to those direct cremations.

And at the end of the third quarter of 2008, 35% of our cremation contracts included services. At the end of this year's third quarter, that had moved to 42%, 700 basis points, of our cremation contracts including services.

A consistent theme in our financial results over the past three quarters has been excellent and consistent expense management across all areas of our business. That theme continued in the third quarter of this year as we reduced our field level expenses by 4.8% from $30 million in last year's third quarter to $28.6 million in this year's third quarter, an improvement of $1.4 million.

Our success in reducing cost and expenses outweighed the decline in revenues, yielding a 2.9% increase in field level EBITDA to $13.6 million this year, up from $13.2 million in the same quarter last year. Our field EBITDA margin increased 160 basis points to 32.2% in the quarter compared to 30.6% last year.

In our Funeral Home segment, revenues declined 3.2% in this quarter to $30.6 million from $31.6 million in the same period last year, again a decline of $1 million. The decline in funeral revenues was largely due to the lower number of deaths, which caused our funeral contract volumes to decline to 3.9%. But we experienced an increase in our average revenue per funeral contract, as I've discussed previously, it wasn't quite enough to offset the decline in contract volumes.

Our cremation rate in the third quarter was 42.6%, up from 41.8% in the second quarter of 2009, and up from 39.8% in the third quarter of 2008. We would note that the 280 basis point increase in our cremation rate over the last year illustrates why we believe it is so important for Carriage to increase the percentage of cremation contracts with services. The rising cremation trend is not going away. So it's important for us to provide as many options for our client families who chose cremation, which in turn will increase the cremation contract averages.

Now focusing on expenses within our funeral operations, controllable expenses declined 5.8% in the third quarter of this year compared to the third quarter of last year. This is the third consecutive quarter that funeral operations controllable expenses have declined versus the comparable period the previous year. In each of those three quarters, they were able to bring down those costs approximately 6%.

Total funeral field EBITDA increased 3.2% from $10.1 million in the third quarter a year ago to $10.4 million in the third quarter of this year. Funeral field EBITDA margin increased 210 basis points this quarter to 34% as compared to just less than 32% a year ago in the third quarter.

Our cemetery business did well in this quarter despite economic headwinds and after coming off an all time company record performance in the second quarter. Cemetery revenue totaled $11.6 million, equal to that in the third quarter of a year ago. The amount of pre-need property sold in the third quarter this year actually increased 18% over the third quarter last year and the average price of pre-need cemetery property sold in the third quarter increased 19% over the same period a year ago, which resulted mostly from selling higher end property that we built during 2007 and 2008. Now the reason why cemetery revenues did not noticeably exceed last year was because the prior year period included additional revenue recognized from construction projects that had been pre-sold at certain cemeteries.

Stable cemetery revenues coupled with the 4.1% decline in controllable cemetery costs led to a 1.9% increase in the cemetery field EBITDA to $3.2 million, up from $3.1 million the same quarter last year. Cemetery field EBITDA margins increased to 27.6% compared to 27% in third quarter a year ago.

Financial income was roughly unchanged in total compared to the prior year, as our higher trust fund earnings offset lower finance charges on the pre-need receivables.

Total overhead was flat in the third quarter as compared to last year at $4.8 million. Consolidated EBITDA in the third quarter increased 4.3% to $8.7 million versus our adjusted consolidated EBITDA of $8.4 million in last year's third quarter.

Consolidated EBITDA margin increased in the third quarter of this year by 130 basis points to 20.7% compared to adjusted consolidated EBITDA margin of 19.4% in the third quarter last year.

We adjusted the 2008 consolidated EBITDA numbers for litigation costs, termination charges, and a few other costs that we believe are non-recurring in nature and we've shown those as special charges in the 2008 income statement.

Moving to capital expenditures, they totaled $2.3 million for the quarter and of that $600,000 was spent on growth projects in our cemeteries. For the full year 2009, we expect CapEx to be approximately $8 million, and about half of that is maintenance CapEx and half of it is growth CapEx.

During the third quarter of 2009, we did continue buying back our shares. We purchased 108,000 shares of our common stock at an average cost of $3.77 per share. Through September 30, we had repurchased a cumulative total of 2,862,000 shares at an average cost of $3.14. The amount available to spend in the future as approved by our Board is now less than $1 million.

As of September 30, 2009, Carriage had $3.3 million in cash on hand. There is nothing currently outstanding on our bank credit facility, which matures in April of 2010. Our capital structure includes $94 million of 7% deferrable coupon convertible preferred securities maturing in 2029, and $130 million of the 7.875% senior notes, which mature in 2015.

And with respect to our bank credit facility, we are in the process of amending and extending our bank credit facility with our lenders. As mentioned in the press release, our current facility in the amount of $20 million expires in April 2010. The proposed facility will expand the size and extend the maturity of the facility. The primary purpose of the bank credit facility is to provide financial flexibility for potential acquisitions in the future. Jay will discuss our acquisition activity in a few minutes. We expect to publish a news release and file the appropriate SEC filings disclosing the terms of the new bank credit facility once it's been executed by all parties, which we expect relatively soon.

If you reviewed our earnings release, you will have noted that we provided some financial details regarding the performance and condition of our trust fund portfolios. We've included this information because we've received numerous inquiries from investors regarding the investments, mainly because of the significant losses in the capital markets earlier this year. Over the last 12 months, we substantially repositioned the holdings in each of our trust fund portfolios in order to capitalize on opportunities to increase both the income and potential capital gains from our holdings. The last six months show a remarkable recovery in the value of the trust funds.

Future funeral home and cemetery results should increasingly benefit from the portfolio as we recognize the realized revenue in the cemetery perpetual care trust funds each period as they earned and we recognized the accumulated realized income that accumulates over the life of the pre-need contracts at the time that they turn at-need.

We've not revised our rolling forward four quarter outlook as disclosed in the earnings releases. Some of the selected metrics in our outlook include expectations that the revenues will be in the range of $177 million to $182 million over the next four quarters, our consolidated EBITDA will be in the range of $41 million to $42.3 million and consolidated EBITDA margin will be in excess of 23%. And our diluted earnings per share should be in the range of $0.38 to $0.42. Now those numbers don't include the effects of any potential acquisitions.

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

Thanks, Terry and good morning, everyone. The third quarter is our seasonally slowest period. Considering the seasonality, tough economic conditions, and lower death rates, we are very pleased with the way we performed.

As discussed on our previous three conference calls, we have been focused on three areas -- better managing costs and expenses, increasing the percentage of services with our families that choose cremation, and increasing the number and quality of our cemetery sales staff to improve cemetery operating performance. We have been focused on these areas because we believe these are the key areas we can control that will drive sustainable growth in revenues and profitability and yield those results in a more consistent manner than we have delivered in the past.

We have now completed a full year focusing on and implementing strategies around these three areas. As Terry discussed in his comments, our attraction in these three areas continues to take hold and generate consistent and positive results.

Despite this year's challenges, we have significantly improved the profitability and earnings power of the company. Importantly, we believe that these initiatives are no longer just initiatives, but have become ingrained and systematized within the company and our employees. This does not mean we relax and let up. We continue to focus on these areas, but believe that they are now a permanent part of our day-to-day thinking.

Here is where we are within our ongoing focus on these initiatives. It is clear from our ability to grow our field and consolidated EBITDA and margins that our expense management remains excellent across our funeral, cemetery, and corporate operations. And the important aspect of this execution is that it is not coming from just one line item within these areas. We are seeing consistent gradual declines in all areas of expenses at both the field and corporate level.

You may recall that in the first quarter of 2009, we implemented a goal for our managing partners to reduce their controllable costs to a range of around 40% to 41% of total revenue. These controllable costs are costs that our managing partners have direct control and responsibility over. We believe this focused attention is one reason we are having such success with cost and expense management.

In August of 2008, we rolled out a company-wide cremation strategy and training program. As Terry commented, the rising cremation trend is not going away. To provide a high level of service to our client families that choose cremations, we realize we need to be able to provide them with a wide variety of memorialization services and other options to celebrate the life of their loved one.

We are not intentionally trying to grow the cremation percentage, but rather execute at a higher level with families that choose cremation. We also realize that by providing a higher level of service, we can increase our average revenue per cremation contract. Since direct cremations generate less revenue than a traditional burial service are embraced with the cremation trend -- embraced our cremation trend rather than ignoring it and hoping for the best, enables us to provide better service options to our client families to generate higher revenues and profitability to help offset the negative revenue impact of the rising trend.

We believe Carriage is an industry leader in how we are embracing the cremation trend and improving service experience, which after all is our real value to the customer. The percentage of our cremations that also include one or more services has increased from 35% at the end of the third quarter last year to 42% at the end of the quarter this year. In many markets outside of the United States, over 90% -- over 80% or 90% of their cremation funerals include services. In that light, we view our relatively low penetration of cremation with services as a significant opportunity for Carriage to distinguish itself to families with a high level of customer service and innovative offerings.

We also believe it provides us with a growth vehicle to enhance cremation revenue and profitability. We have been pleased with the progress we have been making with our cremation initiatives. However, we still have some ways to go since the cremation trend has been ignored for so long within our industry.

To further improve our efforts and to ensure our success, we just rolled out a new cremation merchandising program for our funeral homes that are still getting up our cremation enhancement curve. We estimate about half of our funeral homes will participate in this program. Considering the strong growth in our average cremation contract since this time last year and that about half of our funeral homes still have work to do with this initiative, we view this as a great opportunity for operational and for financial improvement over time.

Our third area of focus is improving the performance and consistency of our cemetery operations, especially sales. If you reviewed our second quarter of 2009 results and listened to our conference call three months ago, you may recall that our cemetery group had a record performance that quarter despite significant headwinds in the economy. While we did not break company records in the third quarter like we did in the second, our cemetery operations performed extremely well considering continued economic challenges.

As Terry noted, our cemetery revenues in the third quarter of this year were flat as compared to the same quarter last year. However, the number of pre-need properties we sold and the average price of the properties we sold in the quarter posted solid increases of roughly 18% and 19% respectively.

Despite flat revenues, our cemetery operations increased field level EBITDA by 1.9% quarter-over-quarter and increased field EBITDA margin by 60 basis points to 27.6% in the third quarter of this year. As I mentioned earlier in my comments, cost and expense management is ingrained in all areas of our company, which enables us to generate profits despite challenges that are impacting our revenues in the near term.

All of this tells us that the caliber of the cemetery leadership and sales people that we have added over the last year has and continues to improve, which going forward positions us to generate more consistent and profitable results from our cemetery operations than we have done in the past.

Before I conclude my formal remarks, I'd like to provide some color on our acquisition efforts. We remain in active discussions with leading private funeral and cemetery companies in selected markets and areas of the country that we believe offer attractive growth opportunities. We currently have two signed LOIs on two very nice funeral businesses that will create some good synergies with other existing properties. With all transactions, the exact timing of when the acquisition will be completed is not yet known, but we would like to close both of these by the end of the year. We expect to fund these acquisitions -- we expect to fund the acquisitions with these two companies with existing cash on hand.

We remain in various stages of discussion with other high quality companies that we believe would be a great addition to the Carriage family of companies. We believe selectively acquiring quality companies like the ones we are talking to is an excellent use of our capital, which will generate near and long-term growth and profit opportunities while de-levering the company over time. We believe successfully executing our measured acquisition strategy will generate superior shareholder value over time as a result. Ongoing acquisitions will also mitigate periods such as 2009, where revenues are lower due to the declines in the death rates. We will update you on our progress with respect to the acquisitions as developments warrant.

In summary, we are pleased with the progress we have made over the last year. The three areas that we have been focused on have been well executed by our employees and are generating tangible results. Importantly, we believe the changes we have made are more than initiatives and are now part of our everyday operations. We've set the stage for the company to generate sustainable and consistent revenue and earnings growth going forward. We remain focused on these key areas and look forward to continuing to report our progress in the future.

With that I'd like to turn the call back over to Karen.

Luke, we are ready to take questions.

Thank you ma'am. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Clint Fendley with Davenport. Please go ahead.

Good morning, gentlemen.

Good morning, Clint.

Good morning, Clint.

You guys have made some really nice progress in recent quarters on the average revenue per service. A lot of that clearly has been attributable to the cremation strategy. Wondering if you could just update us on the traditional funeral, where that might be trending on the average revenue outlook here?

As far as the outlook goes for our traditional funerals, we are planning on between a 2.5% to 3% annual increase there.

Okay, very nicely. And then on -- I am not sure if you have this metric or not, but any idea of what percentage of your cremations results in a cemetery purchase?

We don't really track that Clint. We have so many funeral homes that aren't tied to a cemetery. That's a good thing to look at. We don't necessarily track that though.

Okay. And for those that might be tied, I mean any idea as to maybe the opportunity on that front as far as addressing the cremation opportunity, I mean what kind of percentage could you look at for those properties that do have a dual footprint?

I think there is a huge opportunity there. If I were -- I would feel pretty safe that probably 30% to 40% of our cremation families are going into some type of permanent memorialization. So as you can see, there is some good upside on that.

Okay. Great. Thank you, guys.

Thank you.

Thank you. Our next question comes from the line of Mike DeRop with Robotti and Company. Please go ahead.

Hi, guys. Thanks a lot for taking my call.

Sure. Good morning, Mike.

Good morning, Mike.

Hi. Just -- we know the company has bought back stock and has no maturities for sometime. Can you give us a little bit more information about your thought process on why the overall environment is better today for acquisitions versus buying back your own stock and what kind of multiples you are looking at in terms of acquisitions?

This is Mel. The landscape on the acquisition front has never been better. It's taken us this many years, 18 years to position the company with this reputation we have a very different operating model. People in the industry are aware of that, and I think our strategy to grow is very focused, and we are looking at businesses that we can grow over time. You cannot just look at the front-end multiple of EBITDA versus the front-end comparison of (inaudible—technical difficulty) as a good comparison because what we learned over the years was we want to get into only 10 or 15 strategic markets, attract a platform if we don't have one with the high reputation, #1 and #2 standing and then that attracts the other quality operators to a grouping where you have friends of the family that can help each other. And we can grow those businesses where there are positive demographics and it gives you multiple ways to grow revenue over a 5 or 10 year period so that at the end of that period your return on invested capital is a lot higher than the initial underwriting. And that's the kind of value creation process we are looking at with an acquisition program.

It doesn't mean we wouldn't selectively also buy our stock in, if the relative comparison of capital -- the return on invested capital is better on the stock side, which is what we've been doing. We made no acquisitions since November of 2007 and we bought almost 3 million shares. So we are looking at that comparison constantly, but right now there is not a lot of competition in the industry, and there are more and more candidates who have a succession planning issue.

And the key with our company is the platform itself we've developed, doesn't need more cost in it and overhead in it. So whatever we layer on goes essentially to the bottom line. So you get modest revenue growth and more powerful EBITDA and even more compounded powerful EPS growth over time. So we believe we can create the most value by executing that kind of strategy with acquisitions, while at the same time always looking at whether we believe our stock is undervalued from an intrinsic point of view.

Okay. Thanks a lot, good luck.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Kyle Smith with Jefferies & Company. Please go ahead.

Hi, good morning gentlemen.

Good morning, Kyle.

I just wanted to get a better handle around what's going on in the cemetery. The trends there are a little bit erratic, up 8% in the first quarter and then 20%, which was fantastic, in the second quarter, now flat in the third, even bigger swings if we look at the field EBITDA. Just in terms of thinking about what that trend is going to look like on a year-over-year basis going forward, any commentary or color that you've got, are these sort of temporary items that impacted your third quarter last year are going to recur in the fourth quarter and how should we be thinking about that trend?

Yes, Kyle those are good questions. The unusual items that we have in the 2008 period, I've got to tell you I mean that's the kind of thing that we are real focused on keeping out of our financial statements from here on out. We are working toward creating a much more stable growing profitability of the organization without any of these types of fluctuations. Relative -- so we don't expect any of those types of items in the fourth quarter of 2009 number one.

To go back to your first question related to the cemeteries, it all -- we still have been in a state of transition there. We hired a little over 90 new sales counselors back during the winter and early part of 2009, and it took a little while to get them up to speed, but when they got up to speed in the second -- by the second quarter of 2009, they had some very impressive results. Now, we have continued that. Our sales weren't quite as high in the third quarter as they were in the second quarter. Seasonally, cemetery sales are the highest in the second quarter. Memorial Day has a big impact on selling during that particular period. But we do believe at this point with the sales staff that we have and the improvement and the quality, some of that quite frankly came because of the recession and people that were looking for jobs. Great sales people that had never really worked in this industry have now moved into it. But we do believe going forward that you will see much better stability and consistency at least on a seasonal basis in our cemeteries.

Now, on a seasonal basis too, I'll tell you this. Our funeral business is always very strongest in the first quarter, then in the fourth quarter, third in the second quarter, and weakest in the third quarter of the year. Now, cemeteries are different. Their seasonality typically is the strongest in the second quarter, then in the third quarter, then the first quarter, and the weakest typically in the fourth quarter of the year. So we do have a seasonal pattern that we do observe and monitor too, but we have been very pleased with what we are selling. The quantity of property has been increasing, the average price of the cemetery property that we've been selling is increasing, the focus on higher-end property with customers that do have the financial capacity to buy those is having a positive effect, and we expect to see that continue over the long-term. But sometimes it's easier to look at our results over a longer period of time like the trailing four quarter basis than it might be looking on a quarter-to-quarter basis, because of some of the seasonality. I hope that's helpful.

No, that's definitely helpful. And if I could maybe just recap that, so what you are saying is, you hired all these new counselors. When you first let them loose there was a big initial pop in the sales, and then in the third quarter we saw maybe it settle down to a robust trend, but not that initial pop. We had an unusual effect in the year-over-year comparison affected that, but going forward we should see those noise items go away and there will be a stronger trend than historical, maybe not quite as dramatic as we saw in the second quarter. Is that sort of a fair way?

Absolutely, you nailed it.

Okay. And then just one other one here. Controllable operating costs, I think your target is 40% to 41% of revenues. Can you tell us where you are as a percentage of revenues at this point so we can gauge how much progress is left to be made?

Kyle, we are on our same-store basis right around at 43% and on our acquisitions maybe a little bit of behind that at 44%.

Okay, great. I will hop back in queue.

Thank you. (Operator Instructions). Our next question is a follow up question from the line of Kyle Smith with Jefferies & Company. Please go ahead.

Okay. Great. You made a comment that the acquisition landscape has never been better. Is that creating a sense of urgency on your part to strike while the iron is hot, and if so, how quickly can we see that your integration team geared up and capital start flowing into some tuck-ins, assuming that there are no snags with the revolver process?

Good question.

That's a good question, Kyle. We are definitely seeing activity and a lot of interest with the acquisition side of the company now. Some of this is natural. There hasn't been much consolidation since 1999, so you've had 12 -- 11 years go by. Some of this is natural. Succession planning issues have been building. I don't know to the extent what the financial and economic crisis has had to do with people being interested, probably some, maybe a looming tax increases coming, probably some people are more interested because of that.

We are not in a sense of urgent push so that we do anything stupid. But we are -- we are beefing up our corporate development staff in Houston under Brad Green and getting very active -- proactive in going to certain markets and building relationship with those key independents that really have the reputation in that area, and we are getting a wonderful reception from them in terms of Carriage and how we are different. We are small compared to some of the big guys. They can make a difference with their business. They know it will be important to us. And so I think the reception is better than I've seen it in 18 years, and the competition is way down just because of the overall climate.

So it's not exactly striking while it's hot, but if you look at our articulated strategy to grow the company, we believe we can get up to $250 million in revenue over the next five years, mostly funded out of free cash flow. Selectively maybe we will do a big transaction here or there to advance the ball. But we believe we can really increase the earning power of the company while at the same time de-levering it by just executing the strategy we've already laid out there. And we see it. It's very visible now compared to a year or two or three years ago.

All right, great. That's helpful. And then, is there a sort of sweet spot in terms of target geographies, types of neighborhoods, urban or rural, that sort of thing, in terms of what you are looking for in your acquisitions?

Absolutely. If you look at we have six strategic criteria that we use to look at a business, and we've learned that these six really are long-term criteria that let's you know whether you can grow revenues. And if you can grow revenues in this business, which is a very high operating leverage business, then you can grow your profit at a faster rate. So we look at the size of the business -- in each of these criteria we have a formal ranking system and we grade them A, B, C plus or minus -- So we look at the size of the business, we look at the size of the market. We want a bigger business and a bigger market. We look at the demographics. We want a market where demographics are positive, especially the older population. Then we look at the barriers to entry, regulatory, real estate, and so on. I don't want to say too much about that, but less -- more barriers are better than fewer.

We look at the dependence of that business on an individual, and then we look at which we call, we either look at it being institutional, in other words the owners wouldn't matter a bit to that community or a metropolitan area whether they are there, in most cases or not, versus a business where it's totally dependent on the owner and if something happened it could hurt your market share -- we look at that.

And then, the last one. We look at the competitive positioning of the business, like a bigger business and a bigger market, but we wanted to be the number one or strong number two. Getting a distant number two or three, four or five, we would look at those as tuck-ins, but we would never look at them to get into a new strategic market. And then we would do an overall ranking A, B, C plus or minus that tells us how attractive that is over a long period of time and whether -- what we should pay for it. When we do this it's always with our standards operating model in mind and attracting what we call a [4E] leader, more entrepreneurial type person to really grow that business.

And so we are very disciplined. We turned down lots of deals and it's working.

Great. That was an excellent summary there. And then what about mix of funeral versus cemetery with your acquisition dollars?

We don't actually have any kind of ratio that we are targeting. We like the funeral business of course. We started in the funeral business, we know it. Our model was really built for the funeral business and we've since gone for the cemetery business. We are looking for combos. We like those and it would look at a large cemetery where a combo is possible. And what we wouldn't do is buy smaller cemeteries or standalone cemeteries where you really couldn't add a funeral business to it. So it's the quality of the individual business that we are looking at based on those criteria -- and the markets.

We have isolated certain markets that we like and they tend to be in and around major urban centers like New York and the Connecticut, Boston, we like LA, we like the San Francisco market, we are in both of those markets. We like some of the big markets in Texas, and we want the -- we want to go where people are going and especially older people, and getting in front of the flow of the baby boomers and the demographic moves in the country, and there are just more ways to win.

Okay, wonderful. Congratulations on all the success you have had so far and that covers all my questions.

Thanks, Kyle.

Thank you. There are no further questions in the queue at this time.

Mel Payne will make some final remarks.

I want to thank each of our managing partners, sales managers, and your employee teams for your contribution toward our progress this year under very difficult conditions and to once again challenge you to finish the year strong and get off to a good start in 2010. While we can't be certain of the overall economic environment in 2010, we are absolutely certain that our reputation as a quality consolidator of strong funeral and cemetery businesses is growing, and we have never been stronger as a company or better positioned for future opportunity than we are today. Thank all of you for listening. That ends our call.

Ladies and gentlemen, this concludes the Carriage Services third quarter earnings conference call. This conference will be available for replay after 1 PM Eastern Time today through November the 5 at midnight. You may access the replay system at anytime by dialing 303-590-3030 and entering the access code of 4173929. Thank you for your participation. You may now disconnect.